Financial History Issue 118 (Summer 2016) | Page 38


Oil Capital : The History of American Oil , Wildcatters , Independents , and Their Bankers

By Bernard F . Clark , Jr ., 2016 , $ 89.00 , with extensive footnotes , source notes and index
Buddy Clark is to be commended first for taking on this task , and second for doing yeoman ’ s work in relating a completely overlooked aspect of finance and big business that is existentially important to the US and world economy . Of the major sectors of the economy , the two that are most widely known and least understood are oil and banking . Even for readers with an interest in recent financial history , but not specifically the energy industry , the book provides compelling insights into new aspects of the Savings & Loan Crisis of the 1980s and subsequent economic shocks .
Clark is chair of the energy practice at the law firm of Haynes & Boone . His father was CFO of Mitchell Energy , the firm that pioneered unconventional development in the 1980s , and Buddy himself is front and center with one of the largest law firms in the oil patch .
It is essential to note that the US and Canada are the only major global producers of oil and gas where the hydrocarbon resources are not owned by the government . Also , small independent firms dominate domestic exploration and production . The global majors left domestic development decades ago and only tiptoed back in the last few years to buy out or form partnerships with a handful of the most successful independents .
That means that from the earliest days private operators have had to gather capital to back their ventures , from a single wildcat well to multi-billion-dollar drilling programs . In this book , Clark has related in diligent detail from the earliest days how oil men ( they were all men ), bankers and attorneys developed the present system of reserve-based lending through trial and error . There were few actual trials , but many many errors .
The first and biggest was treating oil ( gas was almost always an afterthought ) as a resource subject to the feudal right of capture . That lead to what has been variously called a race to the bottom or the tragedy of the commons . There is incentive to produce as much as possible as soon as possible to preclude others from doing the same . The result is permanent damage to the reservoir and recurring damage to commodity markets .
Clark writes cleanly and clearly , if not vigorously . That is high praise for an attorney . Even when telling exciting stories , and there are quite a few of those , he maintains his equanimity , which may , ironically , detract from his cause . Clark in no way has set out to challenge Dan Yergin , the reigning monarch of sweeping narrative non-fiction in energy writing . But there are good stories told here and a little more zip would not have been out of place . There are also whole sections , notably Chapter 4 , Elements of Energy Lending , that make for slow drilling . But overall the pace and writing are approachable and sustainable .
The most important concepts are the development of pooling and proration , sometimes forced , to limit production to what the market and reservoir can sustain . The other is reserve-based lending with semi-annual redeterminations by banks . That arose in the ’ 70s and became common in the ’ 80s . The method essentially gives oil and gas developers a credit limit based on the net present value of their reserves — notably not based on their assets . It has proven to be an adaptable and effective approach for both lenders and borrowers .
With ultra-deep offshore and unconventional on-shore development costing many millions of dollars per well , capital requirements will only go higher . In geological terms , hydrocarbons are a limited resource . But for all practical and economic means , the only limits are what consumers are willing to pay at the pump , and what bankers are willing to lend against . This is that story .
Gregory DL Morris is an independent business journalist , principal of Enterprise & Industry Historic Research ( www . enterpriseandindustry . com ) and an active member of the Museum ’ s editorial board .
36 FINANCIAL HISTORY | Summer 2016 | www . MoAF . org