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Free On Board

This article may proof helpful. Free On Board (FOB), is a logistics term that specifies when the ownership of goods transfers from the Seller to the Buyer. However, in the Oil & Gas sector, many misinformed Buyers attempt to u s e i t a s a purchasing tool, believing that they can reliably buy f u e l w i t h o u t providing a payment guarantee. This is an urban myth. In the extremely rare occurrence of an authentic fuel allocation reaching tank storage, without a buyer already attached to it, it will virtually always sell to a Buyer with a guarantee within seconds of becoming available. If you were the Seller and had multiple offers, would you choose the Buyer with a banks promise to pay or the buyer who refuses to provide one? The only way to consistently gain access to fuel is to have an Instrument such as an SBLC or DLC ready. This Instrument ensures that the Buyer is committed to the purchase and provides a payment guarantee to the Seller. Then, the terms of the sale may be FOB or CIF. Attempting to purchase fuel without an Instrument is not a reliable business strategy; it's a prayer. However, it's essential to note that not all SBLCs are unconditional forms of payment. An SBLC is a Standby Letter of Credit, which is a financial Instrument used to guarantee payment to a Seller if the Buyer fails to fulfill the terms of the contract. In the Oil & Gas space, the SBLCs used are different from commonly used SBLCs, as they are not unconditional forms of payment. Instead, they are performance-based, meaning specific performance obligations must be achieved before the SBLC can be drawn down by the Seller. Without an Instrument, the Seller takes on significant risk in investing in the production of the fuel without any assurance that the Buyer will fulfill their end of the contract. As a result, Sellers who agree not to require a payment guarantee are, at a minimum, not as reliable as those who do. The most successful Sellers offer fuel that is made to order. In this instance, proof of product cannot be provided until the refining process is complete. The Seller would’ve had to make the monetary expenditure for the cost of the product, making a buyer payment guarantee essential. In conclusion, understanding the imp o r t a n c e of using payment guarantees in the Oil & Gas sector is critical to success. Attempting to purchase fuel without an Instrument is not an effective game plan. The only consistent way to access fuel is to have it refined per each order, which requires a performance - based payment guarantee. The cost of the Instrument should not be a significant factor, as the potential gains far outweigh the investment and the lack of it makes failure a virtual certainty. Educating clients on the importance of payment guarantees will increase their chances of success in the industry.