If you want to sound terribly "in" at a cocktail party, or if you're an incurable gambler, or if you just need some shelter from the tax storm, try oil drilling programs. They're big and getting bigger and because they could play a large part in supplying future energy requirements, Congress may continue to treat them kindly.

Introduction

An oil drilling program is a joint venture, partnership, or other vehicle formed by a management company or sponsor for a joint effort with investors in the exploration, drilling and development of oil and gas. A common characteristic of drilling programs is that prospects to be explored or drilled are not specifically prospects to be explored or drilled are not specifically defined at the time the program is formed. The sponsor (operator or management company) furnishes the organization and know-how; investors supply most of the capital. Costs and revenues are allocated between management and investors according to a specified sharing arrangement. The word "program" in the title of the paper is preferred to "fund" to avoid possible confusion with mutual funds, which invest in ordinary securities. Publicly offered drilling programs involve the following phases:

  1. The program vehicle is formed and the program registered for public offering. The sponsor, whose function is to manage program activities, may be an oil operator or merely a financial agent.

  2. On receiving registration clearance, participation units in the program are offered and sold participation units in the program are offered and sold to investors.

  3. Program funds are invested in line with program objectives. After subscribed capital is spent, subsequent development may be financed by assessment of investors, from net operating income, by borrowing through pledge of program properties, or by other means. program properties, or by other means.

  4. Results are reported to investors. These include drilling and completion reports during the exploration and development phase; year-end financial statements for income tax reporting; and statements of reserves, future net revenue, or cash liquidation value, as specified.

  5. Net operating income is credited or distributed periodically per the program agreement. periodically per the program agreement.

  6. Investors may be offered an opportunity to sell their interests for cash or exchange them for stock.

Growth and Importance of Drilling Programs Programs Participation in early drilling ventures by individuals Participation in early drilling ventures by individuals outside the oil industry typically consisted of the purchase of undivided fractional interests in single purchase of undivided fractional interests in single lease prospects. Such deals, common through the 1930's, were sold by independent operators or promoters using supporting geologic reports, maps, logs, etc. A cocktail atmosphere was frequently part of the scene. Ordinarily, only a few investors participated in each venture; however, in some instances, small fractional interests in a well were sold to many people. A few had their own consultants or advisors and could be considered sophisticated investors. In the 1940's and 1950's "drilling syndicates" were organized to undertake privately offered programs. A drilling syndicate consists of several investors who pool their funds to invest in a single well or a package pool their funds to invest in a single well or a package of several selective drilling projects.

JPT

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