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Canadian Institute of Mining, Metallurgy and Petroleum, Journal of Canadian Petroleum Technology, 01(29)

DOI: 10.2118/90-01-11

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An Overview Of Bank Security For The Oil And Gas Professional

Journal article published in 1990 by Michael J. Laffin
Distributing this paper is prohibited by the publisher
Distributing this paper is prohibited by the publisher

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Abstract

Introduction Initially involvement by banks in the oil and gas industry was limited to production loans. However, in today's climate of mergers, takeovers, megaprojects, relatively low oil prices, and because of the need for external financing, banks are becoming increasingly involved in financing oil and gas undertakings. Therefore, it is incumbent on well-informed and interested engineers and geologists to be aware of what security banks will request before they lend money to an oil company, and the advantages and disadvantages of each type of security. This paper presents an overview of the various types of security that banks request from an oil company before they advance money to that company, in an effort to provide technical professionals with a working knowledge of concepts and documents they may encounter when dealing with banks. The first section of this paper examines debenture security with a view to explaining what is a debenture, the various types of debentures, and what happens should a borrower default under the terms of a debenture. Section 177 security is addressed in the second section of this paper. This type of security, while once the only type of security taken by lending Institutions when dealing with oil and gas properties has given way to the debenture and is now used primarily as a corollary to debenture security. Section 177 security raises several questions and has numerous potential uncertainties, some of which will be examined in this section. In addition to debenture security and Section 177 security, banks often request that borrowers execute assignments that allow a specific revenue stream or several revenue streams received by the borrower to be diverted to the bank. Section 3 of this paper examines a few of these types of assignments. Debenture Security In almost every commercial transaction, whether it be a loan by a bank to a company or a sale of shares and/or assets from one company to another, certain basic documentation is used to secure repayment of the loan or the payment of the purchase price for the shares or assets - one of the most fundamental documents used to secure repayment is the debenture. What is a Debenture? The broad definition given to the term "debenture" is that it is a written document evidencing the indebtedness of the company issuing the debenture, which is either secured or unsecured and which may be negotiable. A debenture is "secured" if it gives the holder of the debenture a mortgage or other security on the assets of the company issuing the debenture that may be used should the debtor fail to make payment. An "unsecured" debenture is merely evidence of the debt, and upon default by the borrower the lender has no recourse other than to sue on the debenture. A document is "negotiable" if it is legally capable of being transferred by endorsement or delivery, for example, cheques, stocks and bonds, and promissory notes are usually negotiable in that they can be transferred or sold freely and without notice from one corporation or person to another.