American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc.
I have great empathy for those of you who are daily engaged in the valuation process. It hasn't been long since our process. It hasn't been long since our principal concern, aside from the reserve principal concern, aside from the reserve estimates, was the MER and predicting the allowable days for Texas and Louisiana. Crude prices were easy, for we all expected prices would ultimately increase. In prices would ultimately increase. In addition, financial institutions were eager to lend their money for reasonably long terms at exhorbitant fixed rates of 5 1/2 % to 6 %. Certainly the Rip Van Winkle engineer of the sixties arriving on today's scene would be more than a little confused.
While theoretically the financing of estimated reserves has improved substantially, along with the computer programs and hardware, the specter of controlled prices, rollbacks, FPC expansion or prices, rollbacks, FPC expansion or contraction, inflation, taxation, tight money, and OPEC, tends to fog the crystal balls of the heretofore competent prognosticators. I am sure that many of you have become as proficient in hedging your evaluations as proficient in hedging your evaluations as economists propounding future economic events.
Regardless of today's uncertainties, oil and gas will be the dominant energy sources for some time to come, and national priorties require an economic framework which encourages accelerated development of oil and gas reserves. The current outlook indicates that the sustained investment required to develop new reserves will substantially exceed the internally generated cash flow of the industry. Increased debt will be required to fund a good portion of the shortfall. We will unquestionably be called upon with more frequency to provide economic projections related to financial requirements.
The type of financing you are most likely to be concerned with is project financing, where the funds are borrowed for development of a specific project, and repayment is based solely on revenues resulting from the completed project. Project financing has come into much wider use in the past few years for several reasons, not the least of which is the favorable balance sheet treatment it affords.
