Economic Factors in Bank Loans on Oil and Gas Production

As is now well known, oil producers borrow from banks for operating and capital purposes, including the development and purchase of producing properties. Sound bank loans on oil and gas producing properties depend on a thorough analysis and correct evaluation of numerous credit considerations. These can be segregated, for convenience, into five major groups: management, engineering, legal, regulatory and economic. All are important to banks. Heretofore, only management and engineering, and to a lesser extent, legal and regulatory considerations have been popular topics for analysis. Purely economic considerations appear to have received too little publicity. Consequently, our purpose here is to remedy this situation in part by the discussion of several of the important economic considerations and to explain why we think they are important. However, before proceeding we should first review the nature and requirements of commercial banking in order to understand why lending officers must consider these economic factors. Banker's Point of View Bank officers are prudent and enterprising business men, capable of evaluating potential loans in the light of the bank's lending and liquidity policies. Bankers respect and honor the requests and needs of their customers who have established banking relationships; i.e., those who have used credit, deposit and other bank services. In the case of loan applications from new customers, the banker is interested in the long-run potentiality for a growing relationship in regard to deposits and use of bank services as well as future loans. A banker has in mind not only his obligations to stockholders and depositors, but also the legal requirements and the relatively low rate of return on loans. Further, the bank must help the borrower to avoid difficulties and accomplish efficiently his financial objectives. Frequently, businessmen do not fully appreciate these obligations and restrictions or realize that these are applicable to oil loans. The petroleum industry is a complicated giant composed of many interrelated segments - producing, transportation, refining and marketing - which are vital to our economy. As we hope to show later, the industry regardless of its huge size is not independent of or isolated from the national economy. If this is true then sound loans in the oil producing segment require not only a thorough and current knowledge of the industry, but a "feel" for economics as well. This is equally important to the borrower in order to tailor a loan that properly fits his needs and capacity to repay as promised.