BOOK REVIEW
BY GREGORY DL MORRIS
Oil Capital: The History of American Oil, Wildcatters, Independents, and Their Bankers
By Bernard F. Clark, Jr., 2016, $ 89.00, with extensive footnotes, source notes and index
Buddy Clark is to be commended first for taking on this task, and second for doing yeoman’ s work in relating a completely overlooked aspect of finance and big business that is existentially important to the US and world economy. Of the major sectors of the economy, the two that are most widely known and least understood are oil and banking. Even for readers with an interest in recent financial history, but not specifically the energy industry, the book provides compelling insights into new aspects of the Savings & Loan Crisis of the 1980s and subsequent economic shocks.
Clark is chair of the energy practice at the law firm of Haynes & Boone. His father was CFO of Mitchell Energy, the firm that pioneered unconventional development in the 1980s, and Buddy himself is front and center with one of the largest law firms in the oil patch.
It is essential to note that the US and Canada are the only major global producers of oil and gas where the hydrocarbon resources are not owned by the government. Also, small independent firms dominate domestic exploration and production. The global majors left domestic development decades ago and only tiptoed back in the last few years to buy out or form partnerships with a handful of the most successful independents.
That means that from the earliest days private operators have had to gather capital to back their ventures, from a single wildcat well to multi-billion-dollar drilling programs. In this book, Clark has related in diligent detail from the earliest days how oil men( they were all men), bankers and attorneys developed the present system of reserve-based lending through trial and error. There were few actual trials, but many many errors.
The first and biggest was treating oil( gas was almost always an afterthought) as a resource subject to the feudal right of capture. That lead to what has been variously called a race to the bottom or the tragedy of the commons. There is incentive to produce as much as possible as soon as possible to preclude others from doing the same. The result is permanent damage to the reservoir and recurring damage to commodity markets.
Clark writes cleanly and clearly, if not vigorously. That is high praise for an attorney. Even when telling exciting stories, and there are quite a few of those, he maintains his equanimity, which may, ironically, detract from his cause. Clark in no way has set out to challenge Dan Yergin, the reigning monarch of sweeping narrative non-fiction in energy writing. But there are good stories told here and a little more zip would not have been out of place. There are also whole sections, notably Chapter 4, Elements of Energy Lending, that make for slow drilling. But overall the pace and writing are approachable and sustainable.
The most important concepts are the development of pooling and proration, sometimes forced, to limit production to what the market and reservoir can sustain. The other is reserve-based lending with semi-annual redeterminations by banks. That arose in the’ 70s and became common in the’ 80s. The method essentially gives oil and gas developers a credit limit based on the net present value of their reserves— notably not based on their assets. It has proven to be an adaptable and effective approach for both lenders and borrowers.
With ultra-deep offshore and unconventional on-shore development costing many millions of dollars per well, capital requirements will only go higher. In geological terms, hydrocarbons are a limited resource. But for all practical and economic means, the only limits are what consumers are willing to pay at the pump, and what bankers are willing to lend against. This is that story.
Gregory DL Morris is an independent business journalist, principal of Enterprise & Industry Historic Research( www. enterpriseandindustry. com) and an active member of the Museum’ s editorial board.
36 FINANCIAL HISTORY | Summer 2016 | www. MoAF. org