Bank financing can significantly influence the economics and feasibility of purchasing producing oil and gas properties and the ability of a company to develop its existing oil and gas properties. The most: frequently used and conventional method of financing in the Petroleum Industry in Canada is through Section 82 of the Bank Act.

The purpose of this paper is to briefly review the powers of the Bank under Section 82, the method of milking application for credit, the supporting data required and the type of interests that quality for Section 82 loans. Appraisal techniques for establishing loan values, repayment schedules and interest rates employed by Banks will also be presented.

Section 82 OF THE BANK ACT

In 1954, the Bank Act was amended by the addition of Section 82 Which empowered Banks to lend against the security of hydrocarbons in, under, or upon the gound in place or in storage. The security may also include the rights, licences, or permits to remove or s ell hydrocarbons and equipment and facilities used in producing and storing any hydrocarbons.

Section 82 Security which can only be registered by a Canadian Chartered Bank (no other lending institution qualifies) is in a form prescribed by the stature and charges the borrowers interest in the hydrocarbon property. Assignments made under Section 82 are registerable by Caveat at the Land Titles Office if it relates to a mineral title or at the Department of Energy and Natural Resources for Crown leases.

For reason of nonpayment of the loan or for failure to take care of, maintain, protect or preserve the property registered, the Bank may take possession 0f, seize, care for, maintain, use, operate or sell the property covered by the security. The Bank would return to the title holder any surplus proceeds of any such operation or sale remaining after payment of all loans and advances with interest and expenses.

Project That Quality Under Section 82

To qualify for registration under Section 82 of the Bank Act, any interest in a property must contribute an interest in land. This rarely presents a problem for holdings of freehold mineral titles. Frequently, however overriding royalties and net profit and revenue interests are simply contractual agreements and not being an interest in land, will not support a statuary mortgage under Section 82 of the Bank Act. It is advisable that, when negotiating and preparing these agreements, they be structured so as to represent an interest in hydrocarbon thereunder rather than result solely in a contractual obligation to pay a sum of money.

Production loans made against Section 82 of the Bank Act are designed to the self-liquidating from income of the properties pledged. Accordingly, only proven producing reserves are generally considered acceptable as security for Section 82 loans. No loaming value is given for probable or speculative reserves such as those that may be of a secondary recovery scheme or from stimulation of existing wells.

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