Oil Drilling Funds as a Sophisticated Investment
Authors: Dauber Milton A. 
Published: December 2007

This paper was prepared for the 40th Annual California Regional Meeting of the Society of Petroleum Engineers of AIME, to be held in San Francisco, Calif., Nov. 6–7, 1969. Permission to copy is restricted to an abstract of not more than 300 words. Illustrations may not be copied. The abstract should contain conspicuous acknowledgment of where and by whom the paper is presented. Publication elsewhere after publication in the JOURNAL OF PETROLEUM TECHNOLOGY or the SOCIETY OF publication in the JOURNAL OF PETROLEUM TECHNOLOGY or the SOCIETY OF PETROLEUM ENGINEERS JOURNAL is usually granted upon request to the Editor PETROLEUM ENGINEERS JOURNAL is usually granted upon request to the Editor of the appropriate journal provided agreement to give proper credit is made.

Discussion of this paper is invited. Three copies of any discussion should be sent to the Society of Petroleum Engineers office. Such discussion may be presented at the above meeting and, with the paper, may be considered for publication in one of the two SPE magazines.

Public participation in oil Public participation in oil exploration originally consisted of investment in fractional shares of single well projects, usually with one man operating companies. During the early 1950's a number of large independent oil exploration companies, including McCulloch Oil Corporation of California, conceived the idea of giving the public the opportunity to invest in public the opportunity to invest in oil on a more sophisticated basis. They accordingly began offering the public blanket participation in all public blanket participation in all of their drilling activities for a given year. It is hard to say whether the motivating concept for this blanket participation was the idea of diversification itself, or whether it was merely the avoidance of conflict of interest which might arise in selection of specific projects for the public. In any event, projects for the public. In any event, the key concept of the drilling fund reduction of risk through diversification of investment - thus arose.

At the end of the 50's there appeared on the scene the independent drilling fund which was not sponsored by an operating company but instead was sponsored by a management company whose principal function was to organize the fund, collect its capital, and select a program of investments on a joint venture basis with a number of independent operators. Prudential Funds typified this concept. Because of high tax rates and because of the inherent glamour of oil investment, the drilling fund concept was accepted by the investing public. Over the past several years there has been an exponential growth in the number of funds and in the amount of capital within the industry which they control. As an example, registrations with the SEC amounted to $84,900,000 in 1964. However, in 1968, registrations amounted to over $695,500,000; and in the first half of 1969 alone, they were at about the same figure. Hence, the indicated registration for 1969 as a whole may exceed $1,000,000,000. The oil and Gas Journal itself has recognized that the larger drilling funds have more rigs running annually than any of the United States majors. Thus, these Funds, today, represent far and away the largest available source of financing for independent oil exploration; and, indeed, through farmouts they may well represent a significant factor in the exploration programs of major companies themselves. programs of major companies themselves.