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2017-05-31 10:49:00

Bank guarantees in gas companies

I would like to know in which areas are oil and gas companies utilizing financial guarantees such as performance bond or parent company guarantee. The experience at other Major Oil companies is that these are mostly used for Major Capital projects where there is construction of facilities. For oil field services I have not seen it used that widely so looking to see if you have any supporting data/experience. It may also be region specific...i.e. European companies utilize them more than US based companies.

• What else do companies usually use apart from 'performance bond' or 'parent company guarantees'?
• What type of risks do these guarantees cover? In which circumstances?

Thanks in advance.

 •  Aggreko LLC  •   2017-05-31 23:25:02
Hi Alicia, My experience with financial guarantees including performance bonds and/or parent company guarantees, have been in services. That, from my perspective, includes subcontracts for services and/or owner/operator services. Both major capital projects and turnarounds may include a bond or performance guarantee. It may also include performance damage clauses or liquidated damages.
There is a trend to pass along these risks from the owner to the contractor.

If you are in contracts management, have your risk management department review the language to make sure that it is within your company's policy..
 •  Freeport LNG  •   2017-06-01 20:12:04
Hi Alicia!

First off, there's a big difference between parent company guarantees and performance/surety bonds / bank guarantees (in whatever form or name).

Parent company guarantees should be requested when contracting with an underfunded subsidiary regardless of the type of contract if you fear the subsidiary might not be able to meet its potential liabilities (including its possibly significant indemnity obligations) under the contract. The purpose of the PCG is to ensure that the contracting entity has the financial capability to meet all of its potential liabilities under the contract.

Performance bonds, however, are secured to ensure that the contracting entity will be capable of performing its performance duties under the contract. These are often made in an amount equal to a percentage (e.g. - 10%) of the revenues under the contract. These are frequently used in construction contracts. They are often also required in the oil & gas entity when operating in a PSC regime where the PSC tendering requirements or the local NOC procurement practices require it. But performance bonds are seldom used for ordinary service contracts in the US or other similar operating environments.

Hope this helps, but feel free to call anytime.
 •  Saudi Arabian Oil Company (Saudi Aramco)  •   2017-06-02 15:00:12
HI Alicia

Although I think both Patricia and Robert have done an admirable job in answering your question, I thought I would drop my two pence in, for additional perspective.

I would echo the comments you yourself have made, in that a number of different performance related mechanism can be put in place, but most often for capital projects, not services. For example, Bank Guarantees and Retention can be employed in concert with each other, in addition to a Parent Company Guarantee. The latter is often put in place as a form of surety against the parent company, should the subsidiary get into financial difficulty, but in reality, in my experience it is of little value and does not reduce the overall rate of contractors failing to complete works due to financial difficulty.

As a mechanism for improving overall contractor selection, performance bonds and PCG's are a poor and lagging indicator for proper evaluation of a contractor's resources, cash flow and overall capacity and capabiltiy to conduct the works. If you have to resort to such mechansims, then there was probably poor contractor pre-qualification/selection and no amount of "performance bonds" are going to resolve cost and schedule issues, as a result.
 •  Abu Dhabi National Oil Company  •   2017-07-04 07:42:30
Many companies ask for these out of convention and practice forgetting to go back to address the fundamental principle of why you request such guarantees which is for a risk mitigation. Is the risk real for what your contracting for and with ?

In previous role challenged need for such devices for service contracts being executed with parent company/large subsidiaries who had a A + financial rating and contracts were based on day rates . As part of the final negotiation we wanted to understand what was the cost as these generally have a price. Supplier provided their quotes to provide provide guarantees from their banks which was six figures. Management decision was to overrule previous convention as these costs were not good value versus the relative risk.

The reverse may apply where the entity offered even from a large multinational is only a trading entity or financial due diligence highlights issues.
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