Paper: Bank Financing For Independent Oil Gas Producers

Banks have been making loans secured by oil and gas production since the 1920"s. The nature of oil reservoirs was not understood very well at that time, and the early oil bankers were handicapped by a lack of reliable oil- and gas-reserve reports. The problem was compounded by wildly fluctuating oil prices. The development of instruments for obtaining bottomhole pressure and temperature, cores, and reservoir fluid samples and the development of the ancillary laboratory equipment for measuring the core and reservoir fluid properties paved the way for the development of reservoir engineering. These developments occurred primarily in the early 1930"s, and led to greatly improved reserve estimates. For the first 7 1 years after 1859 when oil was discovered in the United States, oil prices increased sharply during periods of shortage, but often plummeted when a major new field was discovered. The price of oil was $2.44 per barrel in 1920 but had declined to $1.10 per barrel in 1930. Then the East Texas Field was discovered, and the price of oil dropped to 10 cents per barrel. There was economic chaos, and this brought about "market demand" proration. There was surplus producing capacity in this country for the next 43 years, but the prorationing system led to reasonably stable oil prices. These two developments, the accurate estimation of oil reserves and stable oil prices, made widespread bank oil loans feasible. From a slow beginning in the 1920"s, oil loans have grown to be a major part of many bank loan portfolios. Banks have recently experienced difficulties with loans in some industries, such as cattle feedlots and real estate developments. Bank oil loans, however, have performed extremely well, with the help of the large oil and gas price increases that have occurred since 1973. Oil loans are attractive to banks because of the presently favorable economic climate, and because of the normal self-liquidation of oil loans through monthly oil and gas sales.