While the subject which I have been invited to discuss today enjoys no particularly novel aspect, it would seem both applicable and feasible to consider briefly a few important evolutionary steps within the petroleum industry which have created the availability of this type of credit.
Although challenged now by foreign production, since the Lucas discovery at Spindletop in January, 1901, the United States has produced the major portion of the world's output. Yet, it was only with the adoption of sound conservation and proration practices arising from the discovery of the East Texas Oil Field that financial facilities became available to the oil man. Hence, it may be said that it was not until the early 1930's that banking institutions interested themselves in what is commonly known as "production loans". Only in recent years has natural gas come to the fore and, in general, the same pattern of lending is applicable to that phase of the industry.
The perennial controversy over the 27 ½ per cent depletion allowance is one to which I refer only in that it has such a telling and significant effect upon the subject at hand. This allowance was a compromise between the House and the Senate in 1926. It has been estimated that 81 per cent of exploratory wells are dry, and that 36 per cent of all wells drilled are failures. Congress was not unaware of the risks inherent in drilling and accordingly offered an incentive to the oil man toward the development of natural resources. This tax feature of the oil and gas industry has been a stimulus to the operator whose development program has appealed for years to the constructive oil banker. Even so, it has become quite patent that tax pressure and the increasing cost of finding oil have precipitated a tendency, if not a necessity, for the independent operator to sell out. In many instances the capital gains provision is the wiser course to follow, particularly if further advantageous intangible drilling costs seem remote. Should the depletion allowance be reduced or eliminated reason dictates that this tendency would be greatly accentuated.