Planning the Formation Evaluation Program for Development Financing
- Harold Vance (Bank of the Southwest)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- February 1961
- Document Type
- Journal Paper
- 115 - 117
- 1961. Original copyright American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc. Copyright has expired.
- 5.6.4 Drillstem/Well Testing, 5.6.2 Core Analysis, 4.1.5 Processing Equipment, 5.5.2 Core Analysis, 1.6 Drilling Operations, 4.6 Natural Gas, 5.6.1 Open hole/cased hole log analysis, 4.1.2 Separation and Treating
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During the drilling of a well, certain data must be obtained and interpreted to permit the operator to decide whether or not it will pay him to set pipe in this new well. The money already has been spent to make the hole; if the operator can recover enough production to more than pay completion costs, he probably will set pipe and complete the well.
The purpose of this paper is to show how this same information obtained during drilling can be and is being used to help determine the amount of money a bank will lend the operator, depending upon the income from future production to pay off the loan.
The Banker's Viewpoint
A bank makes most of its money by charging interest on the money it lends. The bank cannot recoup many losses on a 5 to 6 per cent return on the money; therefore, a bank cannot afford to take risks. It should not be expected to take the risks of business because it receives none of the business profits. Some lending agencies do lend money for interest plus an interest in the business after the loan is paid out.
The term "oil and gas loan," as generally used, means a loan secured by a mortgage on a producing property capable of producing future net income from the production of oil and/or gas, with this income being used in whole or in part to payoff the loan while leaving a residue to the borrower. Thus, the primary security is the expected income from the properties; the secondary security is the net worth of the borrower who signed the note.
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