SINGAPORE: According to industry sources, sellers of liquefied natural gas (LNG) are requesting credit letters from firms they do business with to ensure they can pay since the global rise in gas prices has pushed them over their credit limitations.
Defaults have been unusual in LNG, which has traditionally relied on large firms with significant finances, but in the last two to three years, about 20 to 30 new companies have joined the market, more than tripling the number of relatively small participants.
A surge in demand, particularly in Asia, was enticed by relatively low gas costs and a worldwide energy revolution that saw nations like China switch from coal to gas.
Credit restrictions are now being violated as demand rebounds following the COVID-19 issue and supplies tighten, according to seven industry sources cited by Reuters.
Last week, spot LNG prices in Asia reached a new high of $34.47 per million British thermal units (mmBtu), up over 100 percent from a month before and more than 500 percent from the same period the previous year.
A typical 3.4 trillion British thermal units LNG cargo, is worth between $100 million and $120 million compared with less than $20 million in late February.
Sellers of the super-chilled fuel as a result are seeking letters of credit when they sell cargoes to trading firms, and even to some end-users, to ensure the buyers’ banks have backed the purchases.
The sources asked not to be named because they are not authorised to speak to the press.
Banks issue letters of credit on behalf of buyers as a guarantee they will pay the seller a certain sum of money within a certain period.
Open credit, which is how most LNG spot trades have been conducted, typically involves pre-approved loans between the bank and the borrower that the latter can use repeatedly up to a certain limit.
LNG cargoes are generally sold on open credit, unlike oil, because purchasers are typically major corporations with assets.
In the present price situation, however, some buyers or merchants are being stretched, according to the sources. They said that credit limitations differ from business to company, and even if they were protected by a total credit limit of $150 million, they would only be able to buy one shipment rather than numerous.
The price increase this year is a dramatic increase from the record lows of under $2 per mmBtu in May of last year, when lockdowns slowed consumption and some buyers declared force majeure or requested delays in deliveries of cargoes for which there was no demand but for which they were contractually obligated to buy.
According to a source involved with contract talks, sellers are worried about potential volatility, and firms are seeking letters of credit (LCs) to be integrated in master sales and buy agreements for spot purchases.
“Previously, only purchasers with poor credit scores were requested for LCs,” the insider explained, “but now it’s being required of all buyers, with the exception of firms with great credit ratings.”
Even bigger merchants are being requested for letters of credit, according to one Singapore-based LNG dealer, which may stifle trading and worsen supply shortages.
Reuters contacted six large trading houses for comment, but none had any immediate response.