Credit Issues in International Oil & Gas Transactions
The purpose of this paper is to give an overview2 on how to get paid on oil and gas transactions. Credit departments have a critical rule in the extension of credit and successful collections. This requires an understanding of the role of the credit department and the role of the lawyer. This presentation is principally from the viewpoint of service providers and working interest owners.3
The basic steps in the credit and collection process are as follows:
I. CREDIT DECISION
Credit risk management is predicated on the existence of risk and uncertainty. Credit risk arises whenever a party is exposed to loss from a borrower, counterparty, or an obligor who fails to honor their debt obligation as they have agreed and contracted.4 A more varied but also descriptive definition of credit is given by the Economist Dictionary of Economics, which states that credit is the “use or possession of goods or services without immediate payment,” that “credit enables a producer to bridge the gap between the production and sale of goods,” and that “virtually all exchange in manufacturing, industry and services is conducted on credit.”5
Any transaction which does not involve immediate payment in cash has a credit decision - whether conscious or not. On the next page is the credit information checklist used by one of the leading service companies.
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