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It is no secret that banks have had excellent experience with loans secured by oil and gas properties. Their competition for these loans creates a constantly changing environment, largely encouraged by increasing recognition of, and reliance on, the ability of the engineer to evaluate the security.
Two by-products of this trend prompt this paper: First, the accumulation of literature on economics, evaluation and banking becomes increasingly fragmented and burdensome for engineers acquainting themselves with the field. Second, engineers serving industry eventually confront bank engineers in supporting loan applications, and it is important that they know what to expect if the work is to be done quickly and well a This paper attempts a comprehensive survey of current petroleum production financing from the bank's standpoint: Its attitudes, engineering practices, and standards, together with a brief survey of the available kinds of bank loans.
For those who are not acquainted with commercial banking economics, the starting point for a discussion of bank attitudes is a bank balance sheet. (Fig. 1) The important features are identified by asterisk.
On the Liability side, reflecting the source and ownership of resources, the principal item is deposits. These funds are entrusted to banks for a variety of reasons, but the most important reason is safety. They are placed in this bank, as opposed to other banks, for the interest paid on savings accounts and the services offered to checking account customers. Interest and services are the main elements of the cost of doing business, and are largely determined by competitive forces.
The Asset side reflects the bank's deployment of funds for income, after providing for current obligations and cash reserves required by law.
