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An Overview of Sources of Capital and Structuring Investments in Oil and Gas

Jane Fleck Romanov and James L. Irish, Proceedings of 34th Annual Rocky Mountain Mineral Law Institute (1988)

The oil and gas industry has relied on a variety of sources of capital over the past two decades to fund its exploration and development activities, the investment vehicles becoming increasingly more imaginative as they have evolved side by side with the economy to meet the industry's needs. The 1970s and early 1980s were marked by the emergence of such mechanisms as income and drilling funds, the short-lived penny stock market, the royalty trust, and the master limited partnership. In the late 1980s, the industry has been compelled to seek new funding avenues in reaction to the combined effect of changes in tax laws, confusion among investors brought on by depressed oil prices, a fickle stock market, and commercial banks, long a staple of oil and gas financing, made reluctant from the 1986 oil price collapse.

The need for oil and gas financing is viewed by some as critical. Lower oil prices have decreased the United States output of oil. Producers have shut in marginal wells and have severely slashed exploration and development budgets, causing [13-4] a decline in production many analysts predict will take years to reverse.2

Replenishment of reserves is fundamental to the survival of the industry and although the majority of companies have trimmed their capital investment budgets, some analysts have urged immediate upstream expansion, citing the availability