WATCHING GOVERNMENT MEET PADDIE MAC

Feb. 20, 1995
With Patrick Crow from Washington, D.C. The U.S. Department of Energy is floating the idea of creating a federally chartered corporation to help the oil and gas industry raise capital for field development projects. The Petroleum Development Investment Management Corp., nicknamed Paddie Mac, would be similar to other federally chartered, privately owned, publicly traded corporations like Fannie Mae, Sallie Mae, and Freddie Mac.

The U.S. Department of Energy is floating the idea of creating a federally chartered corporation to help the oil and gas industry raise capital for field development projects.

The Petroleum Development Investment Management Corp., nicknamed Paddie Mac, would be similar to other federally chartered, privately owned, publicly traded corporations like Fannie Mae, Sallie Mae, and Freddie Mac.

DOE has been discussing the Paddie Mac concept with industry associations. After refining the idea, it plans to propose the plan to Congress for hearings and possible legislation.

The only federal money required would be a $5-10 million start-up loan, which would be repaid within 5 years. DOE said over the long term the corporation would generate higher royalties and taxes for the federal government.

PADDIE MAC'S TASK

Paddie Mac would be a federally chartered but privately owned corporation that would standardize use of financing mechanisms for field development. All transactions would be limited to proved reserves.

Paddie Mac's aim would be to help the industry gain access to lower cost capital. It would diversify risk by servicing large numbers of producing properties.

Paddie Mac would facilitate oil and gas price hedges, provide production rate sureties, and establish a secondary market for hedged, surety covered loans for industry. Its revenue would come from fees on processing applications for hedges, sureties, and loans, from premiums for hedging and surety services, and from the interest spread on loans.

DOE said Paddie Mac could use hedges to mitigate the risk that production prices will decline during the life of a field.

And it said the corporation could reduce the risk that a field's production would drop prematurely by providing a production surety, a guarantee to lenders of specific monthly production volumes.

It said, "With price hedges and production sureties, lenders/investors are willing to lower the cost of capital and increase the amount of capital available to the oil industry."

DOE pointed out there are several barriers to the wider use of hedged, production backed financing.

Few oil and gas banks offer hedging, few hedge dealers can evaluate oil and gas reserves, and there are problems with crude quality price differentials.

Producers often lack sophistication for hedges and production sureties, investors (particularly institutional investors) perceive oil and gas production as being risky, there are no standardized production backed loan agreements, and there is no secondary market for such loans.

INDUSTRY'S CONCERN

Paddie Mac is an idea that could have merit and particularly could benefit medium size oil companies. Congress would be likely to approve such a program.

But some Washington lobbyists are worried that DOE might push for Paddie Mac in lieu of other relief measures that industry wants-tax credits for marginal and deepwater production, for example.

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