Laggard loans

A year ago, as small US oil producers were suffering from rock-bottom oil prices, Sen. Pete Domenici (R-NM) had an idea.

A year ago, as small US oil producers were suffering from rock-bottom oil prices, Sen. Pete Domenici (R-NM) had an idea.

Legislation had been proposed to help steel producers get loans. Why not apply the concept to oil companies too?

Congress passed the bill in August (OGJ, Aug. 23, 1999, p. 36), and President Bill Clinton signed the Emergency Oil and Gas Loan Guarantee program into law.

Under the law, the federal government would guarantee 85% of a qualifying bank loan to a producer, making it possible for the banks to lend more readily than before. Individuals or firms could borrow up to $10 million each, until the total loans reached $500 million.

It took the Department of Commerce several months to draft regulations for the program, and when they did, independent producers said the rules made it too hard to get the loans.

Results

It appears the independents were right.

The loan board had to extend the application deadline because it received too few applications for the guarantees. Even then, it received only 23 applications totaling less than $68 million.

Another extension isn't planned, and the first of the loans could be approved within the next few weeks.

Jerry Jordan, Independent Petroleum Association of America chairman, said "While the congressionally imposed restraints on the program make it complicated to implement, the interpretation of the law by the Loan Guarantee Board has so limited the program that it has scared off many potential banks and producers from seeking the financial assistance.

"At the same time, many independent producers are frustrated that, while Congress was delaying action on this program and making it too constrained, and while the administration was further limiting its application, the US was sending funding to Mexico and Russia to enhance their oil production operations during the depths of the oil price crisis."

Next steps

IPAA recently surveyed banks and its members about the program.

It asked them about problems they encountered when seeking the guarantees. If they had not applied, it asked them to explain why not.

IPAA did not release the results of the survey. However, a spokesman said, "The returns tended to confirm IPAA's earlier concerns about the program and how it works. They confirmed that our members applying for the loans found the process to be very bureaucratic."

Commerce officials have blamed the lack of response on commercial banks' reluctance to become involved in an unfamiliar federal loan guarantee program.

And of course, oil prices have more than doubled from a year ago, substantially lessening industry interest in the program.

Meanwhile, Sen. Domenici has another idea to help producers. He plans to file a bill soon to create the US Petroleum Development Investment Management Corp. (Paddie Mac). It would package qualifying oil loans for resale, operating much like federal corporations such as Fannie Mae, Sallie Mae, and Freddie Mac (OGJ, Apr. 27, 1998, p. 26).

Domenici says Paddie Mac could help US producers in good times and bad.

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