My purpose here is to explain the position and viewpoint of the oil lenders and to tell you the broad basis on which Citibank makes oil and gas loans. My remarks will be directed principally towards the non-recourse, ABC type oil loan. When I refer to oil loans I am including gas, distillates, and plant products.
What makes those bank engineers so conservative? How many times have we all heard that query?
Let me quote from Shakespeare's Hamlet: "Neither a borrower nor a lender be; for loan oft loses both itself and friend".
The economy of our country would still be back in the colonial stage if this quotation had been adhered to by our ancestors.
Let me rephrase the quotation in what I believe should be the modern version: "Neither an UNSAFE borrower nor an UNSAFE lender be; for an unsafe loan oft loses both itself and friend".
Banks are service oriented organizations and when we try to meet a customer's loan request our problem is fairly simple in concept. We must design an oil loan that will permit the customer to accomplish his purpose, profitably, and we must make sure that the loan is a safe loan for the bank.
This can be a delicate position to be in. In acquisition financing if the loan size is too small the customer may not be able to make his purchase in a competitive situation. If the loan is too large the bank may lose money. If, to accommodate a customer, a bank makes a loan that is too large, this may make the customer happy initially but usually will make both the customer and the bank unhappy in the long run. Management of both the bank and the customer company always want to know how specific loans or purchases are performing compared to their forecast. If a loan (and purchase) gets very far behind the original forecast it becomes a matter of embarrassment to the banker and the customer. When this happens the customer is usually more comfortable doing his banking business where the atmosphere is less embarrassing. In other words, a bank cannot always win doing what the customer desires.