WASHINGTON - A proposal under consideration by the administration to create a secondary market for energy loans could allow banks to breathe easier when lending to petroleum product producers.
The Department of Energy is mulling over the creation of a "Petroleum Development Investment Management Corp.," or Paddie Mac. Much like the Federal Home Loan Mortgage Corp., or Freddie Mac, the proposed government- sponsored enterprise would aim to cut the cost of loans by standardizing them and reducing risk to lenders.
"It should certainly be of prime interest to banks here in the Oil Patch," said Frank Harrison, a director of Premier Bank, a $5 billion-asset lender based in Baton Rouge, La. "There are not that many oil and gas loans being made right now, mainly because of the price volatility."
Premier currently holds about $25 million in energy production loans.
Price risk, coupled with reserve risk - the chance that there will be less oil in a field than predicted - exposes energy lenders to the possibility of loan defaults.
Many lending institutions are still gun-shy when lending to the energy sector because of the plunge in oil prices in the 1980s. Banks suddenly were left holding large portfolios of nonperforming loans.
Oil and gas prices have not gotten any more stable. Natural gas last year was priced at about $2 per 1,000 cubic feet, or mcf, while it is currently hovering around $1.35 per mcf, "for no particular specific reason other than price volatility," Mr. Harrison said.
This inherent riskiness drives up the cost of loans to oil and gas companies, putting an especially tight pinch on smaller petroleum product producers in search of capital.
"More and more banks are requiring hedging on these loans," said Scott Epenshade, director of economics and information services for the Independent Petroleum Association of America. "A lot of the smaller producers just cannot afford to get into that."
Paddie Mac would provide hedging programs for producers to manage the risk of price fluctuations. The proposal would leave energy lenders holding only 15% to 20% of the risk, with the remainder of it pushed out to a secondary market, according to Mr. Epenshade.
The concept may be especially attractive to the Department of Energy because Paddie Mac would require minimal federal budget support, which has come under increasing scrutiny by lawmakers searching for ways to cut government spending.
"It's just in the early drafting stage, and has not been transmitted to the White House," said Department of Energy spokesman Bill Wicker. "But a fair amount of careful thinking has gone into Paddie Mac."