Application of the Petroleum Engineer's Report to Financing
Authors: Dodson C.R. 
Published: December 2007

Abstract
One of the most important and vital requirements in the financing of oil and gas, whether for operations, sales, mergers or security issues, is the petroleum engineering report. To be satisfactory, the report must include oil and gas reserves and a forecast by years of production and net operating revenues. The report is the basis for the estimates of fair market value of the properties and the amount of money which can be repaid by the future income in a given time.
Introduction
This article is written primarily for petroleum engineers who prepare reports on oil and gas reserves and future revenues. Its objectives are to discuss the basic requirements of financing, to emphasize the importance of theoretical and practical experience in oil and gas production and economics, to show how the report is used for various aspects of financing and to review some recent examples of oil and gas financing.
General Comments on Financing
Although complete figures are not available, the petroleum industry throughout its history has obtained a substantial portion of its financial requirements from outside sources. It is expected that this will be true in the foreseeable future. It is clearly apparent to financial people that the present-day demands for capital to support the escalating budgets for exploratory efforts, development wells, transportation, refining and marketing, as well as research and acquisitions including bonus payments for concessions and leases, have already reached unprecedented billions of dollars per year and will continue to rise. Basic reasons for this trend are the vital needs for reserves, refining capacity, transportation and marketing; but competitive bidding for desirable prospects has also exerted significant upward pressure on capital demands. In addition, operating costs continue to increase without proportionate improvement in gross income. This has been especially evident in the exploratory and production segments. Consequently, even the major integrated and most of the producing companies have not been and do not expect to be independent of outside funds to either maintain position or attain growth. The most conservative estimates of the near future demands for crude oil and gas are enormous compared to current production which make this problem increasingly serious. Recently, several integrated companies have broken all precedent and are raising money for overseas activities by the sale of securities in Europe. For many years, many of the smaller producers have relied entirely on loans, investors or contributions (dry hole or bottom-hole) for their operating funds. Since World War II, most companies, large or small, have relied on financing by the A-B-C transaction for purchase of production. Further, the sale of carve-outs has become popular and has the added advantage of making future cash available for current needs as well as maximizing depletion. As previously indicated, this article is concerned primarily with financing for the production segment of the petroleum industry. This area has the biggest demand for funds and provides the raw material or inventory in the form of oil and gas reserves. But unlike inventory in a warehouse, such as casing where every joint can be counted and is available for sale now or later, oil and gas reserves are not subject to an exact count and instant sale. They represent a petroleum engineer's estimate of the economically recoverable oil and gas producible at limited annual volumes using current and acceptable production methods. In many cases, the estimates show that 80 to 90 percent of the reserves are to he produced in 15 years or less. However, this would not be the case for most gas fields and many oil pools where reserves are large and producing rates are relatively low due to proration by regulatory authorities.
Credit: Basis for Financing
In the language of the financial world, financing depends on credit. In its simplest terms, credit is the amount of debt that a prospective borrower can support and pay back as promised. Therefore, if a company can show by means of a petroleum engineer's report that it has, for example, reserves of 1,000,000 bbl of oil of which 500,000 bbl will be produced in 6 years with a net revenue of $1,000,000, it is quite likely that a bank would extend up to $800,000.
JPT
P. 187ˆ