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Damn the Torpedoes: Continuing to Finance U.S. Oil and Gas Operations in Tumultuous Times

John T. Bradford, Jennifer Mosley, Proceedings of 55th Annual Rocky Mountain Mineral Law Institute (2009)

The U.S. oil and gas industry finds itself operating in a credit crunch, brought on in part by the crash in the subprime loan and housing markets beginning in 2006-2007.1 At nearly the same time, oil and natural gas prices began their march to unprecedented levels, with oil rising to over $140 per barrel in mid-2008 and natural gas rising to almost $14 per MMBtu in mid-2008. With these price increases, financial institutions made oil and gas reserve-backed credit readily available. Private equity [22-2] jumped into the market as well, helping to fuel a boom in exploration and development operations across the country.
Commodity prices began to tumble later in 2008 at a time when the stock markets also began their historic decline. Financial institutions, reeling from the substantial losses on subprime mortgages and other loans, significantly tightened their lending standards or withdrew from the market entirely. As 2008 drew to a close, many smaller oil and gas companies were left with declining values for their reserves and little or no access to capital for their operations. As far as these companies were concerned, the credit crunch was in full force.
One of the first signs of a thaw in the credit markets for oil and gas operations came at year-end 2008. Chesapeake Energy Corporation (Chesapeake) closed a $412 million volumetric production payment (VPP) transaction