BC - 215
EXAMINING ISSUANCE
Comptroller of the Currency
Administrator of National Banks
Type:  Banking Circular
Subject:  Guidelines for Collateral Evaluation and Classification of
          Troubled Energy Loans

TO:	Chief Executive Officers of all National Banks


The Office of the Comptroller of the Currency has recently issued a
supplement to examiners on the treatment of troubled oil and gas
production loans. This circular is attached for your information.
Questions or comments may be directed to the Deputy Comptroller for the
District in which the bank is located or the Deputy Comptroller for
Multinational Banking, Washington, D.C. 20219.


Robert J. Herrmann
Deputy Comptroller of the Currency

Date:  June 18, 1996

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EC - 223
Supplement #1
EXAMINING ISSUANCE
Comptroller of the Currency
Administrator of National Banks
Type:  Examining Circular
Subject:  Guidelines for Collateral Evaluation and Classification of
          Troubled Energy Loans

TO:  All Examining Personnel

On August 24, 1984, OCC issued EC-223 containing guidance regarding the
evaluation and classification of troubled loans where collection was
solely dependent on collateral consisting of oil and gas reserves. The
guidelines have generally led to greater examination consistency in an
area where previously there had been no formal direction. We are
concerned, however, that their use in some cases has evolved into a
non-discretionary process supplanting examiner judgement and diminishing
the flexibility needed to assess each loan based on all pertinent credit
factors.

The suggested approach to classifications contained in the guidelines was
not intended for rigid application. As the guidelines indicate, there is
no substitute for a specific, case-by-case analysis of applicable credit
and collateral factors pertaining to each individual loan.

With specific regard to the percentages contained on pages 2 and 3, the
guidelines state: "A lesser percentage or less severe criticism may be
appropriate in cases where a reliable means of repayment exists for a
portion of the debt." For example, the entire outstanding balance of an
oil or gas production loan does not necessarily become "troubled" or
shrunk, especially if there exists sufficient dedicated cash flow to
service all or part of the loan. In other cases, a more severe criticism
than that suggested by the guidelines may be appropriate.

Concerns have also been expressed with respect to the prices being used in
estimating the value of oil and gas reserves. Obviously, the simplest
approach is to observe spot or posted prices, or the prices being received
at the wellhead. However, this approach carries with it the potential for
distorting quarterly financial results by requiring frequent
re-evaluations of collateral and adjustment of the ALLL during periods of
interim swings in longer term price cycles. For this reason, banks may
rely on the advice of in-house or independent petroleum experts to project
longer term pricing scenarios on which to base estimates of collateral
values. As there can be considerable differences of opinion on how prices
will perform, examiners must analyze closely any pricing assumptions that
are inadequately documented or incongruous with the general body of
information available from recognized industry sources.

As with other types of credit, the determination of an adequate ALLL for
energy loans depends on a thorough analysis of the true risk of loss in
each loan or group of loans, regardless of ratings or classifications.
Banks and examiners should refer to Banking Circular #201, dated May 31,
1985, when assessing adequacy of the ALLL.

Examiners should continue to review closely the systems and procedures
each bank has implemented to monitor internally the quality of its energy
loan portfolio. Weaknesses in a bank's approach to recognizing and
providing for problem oil and gas production loans that might result in
significant charge-offs and/or provisions should be communicated to the
appropriate supervisory office.

Robert J. Herrmann				     Dean S. Marriott
Deputy Comptroller of the Currency	     Senior Deputy Comptroller

Date:  June 18, 1986