LNG-EXCLUSIVE Sellers Seek Letters of Credit as Soaring Gas Prices Extend Credit Limits


Band Jessica Jaganathan

SINGAPORE, October 4 (Reuters)Liquefied natural gas (LNG) sellers are asking for letters of credit from the companies they deal with to ensure they can pay as the global spike in gas prices pushes them beyond their credit limits, officials said. industry sources.

Defaults have been rare in LNG, which has typically relied on big players with deep pockets, but over the past two to three years, around 20 to 30 companies have entered the market, at least doubling the number of relatively small players. .

These companies have been attracted by soaring demand, particularly in Asia, spurred by relatively low gas prices and a global energy transition that has seen countries like China switch from coal to gas.

Now credit limits are being exceeded due to soaring global prices, as demand recovers from the COVID-19 crisis and supply tightens, seven industry sources told Reuters.

In Asia, home to the LNG trade, spot prices for LNG LNG-AS hit a record high of $ 34.47 per million British thermal units (mmBtu) last week, up around 100% from a month ago and more than 500% from the same period last year.

A typical LNG cargo of 3.4 trillion British thermal units is worth between $ 100 million and $ 120 million, compared to less than $ 20 million at the end of February.

As a result, sellers of super-refrigerated fuel seek letters of credit when selling cargoes to trading companies, and even some end users, to ensure that buyers’ banks have supported the purchases.

The sources asked not to be named because they are not authorized to speak to the press.

Banks issue letters of credit on behalf of buyers as a guarantee that they will pay the seller a certain amount of money within a certain period.

Open credit, which is how most LNG cash transactions have been conducted, usually involves pre-approved loans between the bank and the borrower that the latter can use repeatedly up to a certain limit.

Unlike oil, LNG cargoes tend to be sold on open credit, as buyers are typically large companies with assets.

However, some buyers or traders are strained in the current pricing environment, the sources said. They said credit limits vary from company to company and if they were covered for example up to $ 150 million in total it would mean they could now only buy one cargo, rather than several.

This year’s price spike is an extreme rally from record lows of less than $ 2 per mmBtu in May of last year when lockdowns reduced consumption and some buyers declared force majeure or requested delays in deliveries of cargoes for which there was no demand, but they were contracted to buy.

Sellers are wary of any future volatility, a source familiar with contract negotiations told Reuters, adding that the companies were asking for letters of credit (LCs) to be included in master sale and purchase agreements for transactions in the United States. cash.

“Previously, only buyers who had a low credit score were asked for LCs, but now it is requested at all levels, except perhaps for companies with an excellent credit rating,” the source said.

A Singapore-based LNG trader said even larger letters of credit were being requested from traders, which could dampen appetite for trade and exacerbate the tight supply.

Reuters contacted six major trading houses for comment, but none received an immediate response.

Main LNG prices https://tmsnrt.rs/3usru5q

(Reporting by Jessica Jaganathan; editing by Barbara Lewis)

(([email protected]; +65 6870 3822; Reuters messaging: [email protected]; Twitter: https://twitter.com/j3ssi3))

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