This paper was prepared for the California Regional Meeting of the Society of Petroleum Engineers of AIME, to be held in Santa Barbara, Calif., Nov. 17–18, 1966. Permission to copy is restricted to an abstract of not more than 300 words. Illustrations may not be copied. The abstract should contain conspicuous acknowledgment of where and by whom the paper is presented. Publication elsewhere after publication in the JOURNAL OF PETROLEUM TECHNOLOGY or the SOCIETY OF PETROLEUM ENGINEERS JOURNAL is usually granted upon requested to the Editor of the appropriate journal, provided agreement to give proper credit is made.
Discussion of this paper is invited. Three copies of any discussion should be sent to the Society of Petroleum Engineers Office. Such discussions may be presented at the above meeting and, with the paper, may be considered for publication in one of the two SPE magazines.
Production payments have become increasingly important within the oil and gas industry. Acquisitions of producing companies, acquisition of developed properties, development of existing properties or generation of cash income to a company can all entail the use of production payment financing. The author presents a nontechnical discussion of the tax and financial problem areas and industry practice relating to the use of oil and gas production payments.
Most petroleum engineers at one time or other are asked to prepare an engineering report to be used as the basis of a production payment transaction. While most engineers can describe a production payment, not all understand its important position in the financial community in buying, selling or developing oil or other mineral properties.
Production payments since the end of World War II have become increasingly more important within the oil and gas industry. Acquisitions of production companies, purchases of producing oil or gas properties, development of existing properties or accelerating cash income to an existing company can all entail the use of production payment financing.
In fact, it is interesting to speculate that the acceptance of the ABC oil payment transaction by the Internal Revenue Service, as well as the banks and insurance companies, has been largely responsible for the sell-out and demise of many small, medium and even large production companies.
With our high income tax structure and high costs of finding new oil, many oil operators have found it to their advantage to sell producing properties at capital gain rates rather than produce them over a period of time and pay taxes at regular rates as well as high operating and overhead costs. Conversely, certain other companies have found it more economical to purchase proven reserves than explore and developed new reserves by the rare conventional methods. Production payment financing has created the happy solution whereby both the seller and buyer receive maximum tax and financial advantage.