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Understanding counterparty credits in natural gas industry

When companies buy, sell, or transport natural gas, they make agreements with other companies, called counterparties. Counterparty credit risk is the chance that one of these companies fails to pay or doesn’t deliver gas as promised.

For example:

  • A gas supplier sells natural gas to a local distribution company (LDC). If the LDC doesn’t pay on time or at all, the supplier loses money.
  • A gas buyer signs a contract to purchase gas from a producer. If the producer fails to deliver, the buyer may have to find gas elsewhere at a higher price.

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How do companies manage this risk?

To reduce the risk of financial loss, companies take several precautions:

  1. Check creditworthiness

    • Before making deals, companies check if the counterparty has a good credit history and a strong financial background.
    • They look at credit ratings (S&P, Moody’s, Fitch), financial statements, and past payment behavior.

  2. Use financial protections

    • Prepayments – Some companies ask for payment before delivering gas.
    • Letters of Credit (LCs) – A bank guarantees the payment if the counterparty fails to pay.
    • Parent Guarantees – A larger, financially stable company guarantees the payment.
    • Collateral & Security Deposits – Some contracts require a company to provide cash or assets as a backup.

  3. Set credit limits

    • Companies set a limit on how much business they do with a single counterparty to reduce risk.

  4. Monitor and review

    • Companies regularly check if their counterparties are still financially stable.
    • If a counterparty starts struggling, companies may adjust contracts or ask for additional financial protections.

Who faces counterparty credit risk?

  • Producers and marketers: They risk losing money if buyers don’t pay.
  • Pipelines and storage operators: They risk financial loss if customers don’t pay for transportation or storage services.
  • LDCs: They face risk when customers don’t pay their gas bills.

Why is this important?

Managing counterparty credit risk helps companies avoid big financial losses, keep gas flowing smoothly, and prevent business disruptions.