Evaluation Problems as Related to Appalachian Area Bank Financing
Authors: Redic John G. 
Published: December 2007

In the Appalachian area many of the more common engineering techniques are not applicable in evaluating oil and gas reserves for bank financing, principally because of a simple lack of necessary reservoir data. The principally because of a simple lack of necessary reservoir data. The empirical methods discussed here have shown themselves to be reliable when used with judgment and discretion.

Introduction

In recent years, the Appalachian area has experienced a remarkable resurgence of oil and gas drilling and development activity. The impetus has come primarily from small independent operators who typically must rely on borrowed capital to sustain their activity. For the most part, however, these funds have not been provided by commercial banks with oil and gas loan provided by commercial banks with oil and gas loan departments as generally would be the case in other producing areas of the country. Banks have been producing areas of the country. Banks have been reluctant to make loans for Appalachian development for several reasons, the foremost of which is a lack of satisfactory reserves appraisals. It also appears that, for the same reason, companies such as gas purchasers and oil refiners have also had reservations about capital investments.

Bank Considerations in Financing Oil and Gas Development

When considering the making of a so-called petroleum loan, any commercial bank must be guided by basic principles that apply to bank lending in general. The principles that apply to bank lending in general. The credit worthiness of the borrower is particularly important. This does not mean that to borrow $100,000 one must put up $200,000 in cash collateral. It does mean, however, that the borrower should have established a record of being responsible for his debts and be financially solvent. It also means that the borrower should have proved himself capable of making a profit in his particular field of endeavor and that the bank can look forward to a lasting and mutually beneficial relationship. Particularly in the Appalachian area, the typical borrower interested in obtaining bank credit for oil and gas development is the small independent producer whose financial statement or balance sheet producer whose financial statement or balance sheet does not warrant unsecured credit. The bank, therefore, must look to assets or collateral not appearing on the financial statement. Ideally, this collateral exists in the form of developed oil or gas reserves that will provide the source of funds for loan repayment provide the source of funds for loan repayment When considering a petroleum loan, most oil banks require an engineering report containing reserve and producing-rate forecasts, as well as both an producing-rate forecasts, as well as both an undiscounted and a discounted cash flow. Dodson has stated that a primary requisite for acceptable reports is that they be prepared by experienced engineers of proven ability who are known to the parties proven ability who are known to the parties responsible for decisions on financing. In theory this is excellent; in practice something less than the ideal usually exists, particularly in the Appalachian area. Reports are found to have been prepared by both qualified and unqualified engineers, by exploration geologists who are far outside their field of specialization, and by sundry other ill-qualified individuals. It is our practice to accept all reports on the assumption that they were prepared in good faith and might contain some prepared in good faith and might contain some information useful to the bank in its own independent appraisal.

JPT

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