Commercial Bank Financing for Petroleum Producers - 1972
Authors: Evans Richard L. 
Published: December 2007

This paper was prepared for the 47th Annual Fall Meeting of the Society of Petroleum Engineers of AIME, to be held in San, Antonio, Tex., Oct. 8–11, 1972 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 paper is presented. Publication elsewhere after publication in the JOURNAL OF PETROLEUM TECHNOLOGY or the SOCIETY OF PETROLEUM ENGINEERS JOURNAL is usually granted upon requested to the Editor of the appropriate journal, provided agreement to give proper credit is made. 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 discussions may be presented at the above meeting and, with the paper, may be considered for publication in one of the two SPE magazines.

The oil industry is entering a period of unprecedented demand for outside capital. Corporate financial officers are consequently under pressure to plan for the most effective possible use of credit resources. Considering possible use of credit resources. Considering the alternatives, it appears that important applications will be found for "off balance sheet" financing methods. Commercial banks, meanwhile, have developed new dimensions of versatility which enable them to design complete off balance sheet financing packages to fit many situations that are likely to occur, particularly in development of large, closely particularly in development of large, closely held projects. For the benefit of engineers involved in project and financial planning, the paper reviews a number of financing configurations incorporating carved out production payments, and "cost company" financing, production payments, and "cost company" financing, with particular attention to the after tax costs of credit.

INDUSTRY SITUATION

The latest major bank study 1 of the U. S. energy situation estimates an internally generated capital short-fall of $55 billion through 1985 in the domestic petroleum producing sector alone. This is 40% of expected producing sector alone. This is 40% of expected requirements. The study is only the most recent of several emanating from institutions, industry, and government that differ, if at all only in degree.

A prominent element of the apparent problem is that much of the required capital will problem is that much of the required capital will be for individual projects of large dimensions. The second largest financing in history, and the largest private placement, closed in September, 1972 for $966 million to develop and transport petroleum from a single field owned by a single company. The Gulf of Mexico, the North Slope, and the North Sea generate such projects because large lease tracts tend to projects because large lease tracts tend to concentrate control of large reserve deposits in a single company of joint venture syndicate.

The problem of closing the capital gap is readily understood from a financing standpoint by reference to a representative major company balance sheet, Table 1. The public provides most outside business capital, either as debt or as equity. The "Long term debt" item reflects mostly publicly owned bonds and debentures, with some direct obligations to financial institutions.