Abstract The independent oil and gas producer frequently finds it advantageous to borrow against the value of his hydrocarbon reserves. This paper considers the requirements for a production based loan and the calculations that a bank would perform to arrive at a revolving credit/term loan will be discussed. A typical outline for each type of loan is presented. Finally, a comparison of major considerations in the three financing techniques is shown. Introduction The need for additional capital for drilling, acquisition, refinancing of existing debt, or general corporate purposes is an ongoing activity for most oil and gas companies, particularly the smaller independent producers. Traditionally, funds can be raised as producers. Traditionally, funds can be raised as debt based on the strength of the company's balance sheet. However, the largest asset of a producing company, its reserves, does not appear on the balance sheet at a realistic value because of traditional cost based accounting practices. The Reserve Recognition Accounting system proposed by the Securities and Exchange Commission is meant to rectify this situation. In the meantime, many energy orientated banks are fully aware of the value of reserves, and are able to structure loans to fit the needs of a producing company with repayment to be derived from the proceeds of the sale of future production. All of these loans are based on an production. All of these loans are based on an engineering appraisal of the reserves, the cash flow available for debt service, and the particular circumstances of the borrower. This paper discusses the engineering and financial appraisal, three of the basic types of production based loans, and typical covenants and conditions that are required for production loans. ENGINEERING AND FINANCIAL APPRAISAL An evaluation of the reserves backing a production loan is of utmost importance to a bank. In virtually all cases a bank will require an appraisal report by a well recognized independent engineering consulting firm. This report will be reviewed by the technical staff of the bank at which time any necessary adjustments will be made to comply with bank practices, and a loan value will be calculated. The most important considerations reviewed by the bank are: Engineering Basis of reserve estimates - a judgment will be made on the probable accuracy of the reserve figures. Estimates based on well established production performance will be given the most credibility with estimates derived from volumetrics, analogy with similar reservoirs, or a computer simulation of new producing zones given lesser weight. Classification of reserves - Generally, only proved producing reserves are acceptable collateral for a bank. This is basically because only producing reserves provide cashflow for debt service, and only the provedcategory are certain enough in magnitude. In particular instances, proved non-producing or proved undeveloped reserves are includedif wells are simply awaiting a sales outlet, or there is a firm development commitment from the borrower. Geologic considerations - The bank engineer will evaluate such geologic condition as sand continuity, faulting, reservoir energy, spacing, well productivity, and history of the formation to arrive at a judgment on the quality of the reserve figures.

Introduction The purpose of this paper is to review certain investment aspects of the offshore petroleum development that started with such a flurry early this year, after what seemed am interminable delay, in opening one of the world's remaining great prospective areas to exploration. This development will be placed in the perspective of the legislative changes that have been effected or are contemplated in Washington; and the impact of these changes on future offshore development in the United States will be assessed. The progress of United States offshore development then progress of United States offshore development then will be related to progress in other parts of the world. Based upon a hypothetical calculation of the investment incentives presently available in the Atlantic offshore region, conclusions will be drawn on the reasons for the sluggishness of U.S. offshore development, and the possible cures for this condition. Fig. 1 shows the location of the most prospective offshore Atlantic areas. Its importance is to stress the scale of these areas — none of them yet developed. At the beginning of this year, a proposal to lease certain Georges Bank tracts was indefinitely deferred because of a court action that the Dept. of the Interior chose not to contest. The Blake Plateau Trough also is due to be opened for leasing, Plateau Trough also is due to be opened for leasing, but on a time schedule that is even more remote. The area of most immediate interest to this audience is the Baltimore Canyon Trough. Early results — three dry or nearly dry holes out of three at the time of writing — have not been encouraging. But the fact is that this area is known to contain structures much larger and potentially more attractive than those to the north (including the Canadian offshore areas) and than those typical of the Gulf of Mexico. Enthusiasm was encouraged further by the stratigraphic tests conducted by a consortium of 31 companies at a cost of $18 million for test drillings undertaken early in 1976. "Organic-rich potential source rock" between 9,400 and 13,900 ft was reported. Industry opinion, as evidenced by the payments of hard cash shown in Table 1, was that this payments of hard cash shown in Table 1, was that this area might represent one of the few great oil provinces remaining to be discovered outside the provinces remaining to be discovered outside the control of OPEC. The significance of the figures given in Table 1 often has been regarded as the proof that it gives that only the major companies can participate in the present phase of offshore development. Considering present phase of offshore development. Considering that offshore production typically costs at least three times as much as onshore production, this hardly seems surprising. What is surprising is that the major companies, although barred since 1975 by the Dept. of the Interior from submitting joint bids, nevertheless entered high bids totaling $870 million for acreage in totally unproved territory. Equally surprising is that companies not listed among the 19 shown in the table, many of them relatively small, made successful bids totaling $266 million—23% of the total of $1.136 billion offered by the oil industry at the Aug. 1976 sale. Surprise at the diversity of the bidding is also in order on account of the factors indicated in Fig. 2. This map of the Mid-Atlantic area shows that the leased tracts lie more than 53 miles from the New Jersey shore, many of them adjoining the 600-ft sounding. These are not the worst conditions in the world. The North Sea is more demanding. But leasing conditions there, as I have stressed in an earlier paper, are entirely different. If present paper, are entirely different. If present legislative and cost trends prevail, the Baltimore Canyon bidding of 1976 may prove to be the last great fling in offshore development in any of the world's areas where natural conditions are so much less favorable than in the Mid East. LEGISLATIVE CHANGES The reasons for this pessimistic conclusion are to be found in the generally restrictive direction of new legislation affecting offshore development. The Coastal Zone Management Act, passed in 1972 and amended in 1976, was doubtless am inevitable addition to the regulatory framework, given the extent of uneasiness among state authorities concerning the direction of offshore development.