Letters of Credit in Oil Trading — L/Cs, SBLCs and Bank Verification

What is a documentary letter of credit in oil trading?

A documentary letter of credit (L/C) is a bank's undertaking to pay a seller who presents documents that comply with the credit's terms. In oil trading, it lets a seller release a cargo to a buyer whose credit it cannot fully assess. The International Chamber of Commerce (ICC) rules for these credits are the Uniform Customs and Practice for Documentary Credits, 2007 Revision (UCP 600). They apply when the credit expressly says so ^[1].

Three principles follow. A credit is irrevocable even if it does not say so. It is separate from the sale contract. And "Banks deal with documents and not with goods" ^[1].

The buyer (applicant) asks its bank (the issuing bank) to open the credit. An advising bank passes it to the seller after satisfying itself as to its apparent authenticity ^[1]. A confirming bank can add its own "definite undertaking" on top of the issuing bank's, and is irrevocably bound once it does ^[1]. Confirmation lets the seller rely on a bank it knows rather than only on a foreign issuer.

Oil companies' general terms and conditions (GTCs) set the bar. Repsol's 2017 GTCs require an irrevocable documentary credit, or payment supported by a standby letter of credit, from or confirmed by a first-class international bank acceptable to the seller. The amount is the mean contract value plus at least 10%. For FOB, CFR and CIF sales it must be opened by 16:00 on the fifth working day before the loading laydays, or the seller may terminate ^[2]. Where TotalEnergies' 2007 crude terms call for an L/C, it is due ten calendar days before the loading date ^[3].

How are documents examined under UCP 600?

A complying presentation is one that matches the credit, UCP 600 and international standard banking practice ^[1]. Banks examine "on the basis of the documents alone", and each bank has a maximum of five banking days after the day of presentation to decide ^[1]. Where an original transport document is required, it must be presented within 21 calendar days of shipment and never after the expiry date that every credit must state ^[1].

If a bank refuses, it must send a single notice listing every discrepancy by the close of the fifth banking day ^[1]. Words such as "about" allow a 10% tolerance, and quantities may vary by 5% unless stated in packing units or items ^[1]. International Standard Banking Practice (ISBP 821) is read alongside UCP 600, and Trade Finance Global notes that a large share of documents are refused on first presentation ^[4]. Banks take no responsibility for the genuineness of documents ^[1].

In April 2026 the ICC Global Banking Commission said the Middle East conflict does not alter how ICC rules apply. It stressed that banks' force majeure protection covers only interruptions to their own business, not commercial difficulty, and that parties may agree alternatives to paper originals, such as scanned copies or the eUCP rules for electronic presentation ^[5]. Under UCP 600, a bank whose business was interrupted will not honour a credit that expired during the interruption ^[1], so expiry dates need headroom.

Which documents does an oil cargo L/C call for?

For FOB, CFR and CIF sales, Repsol's terms require the seller's commercial invoice, 3/3 original bills of lading (B/Ls) made out or endorsed to the buyer's order, and copies of the certificates of quantity and quality issued at the loading port. For DES or DAP sales by vessel, a B/L is needed only if customs at the discharge port require it ^[2]. TotalEnergies' CFR terms add a certificate of origin, CIF sales add an insurance certificate, and ex-ship sales need the discharge inspector's report ^[3]. Under UCP 600, a B/L must name the carrier, be signed and show the cargo shipped on board ^[1]. The ICC recommends making IMO ship numbers mandatory on B/Ls ^[6].

If the original documents are not available when payment falls due, both companies' terms require the buyer to pay against the seller's invoice and a letter of indemnity (LOI) in an agreed format ^[2,3]. TotalEnergies' LOI is signed by the seller and expires once the seller presents the shipping documents ^[3]. Because banks pay on documents alone, the L/C must list the LOI as an acceptable document if the seller is to be paid against it ^[1]. A separate indemnity covers discharge without B/Ls: BP's amended 2015 terms make a buyer that orders discharge without them indemnify the seller ^[7].

Standby letters of credit and ISP98

A standby letter of credit (SBLC) is a back-up. It supports the applicant's obligation, and the presentation needed may be no more than a demand for payment ^[8]. In oil, it lets a seller sell on open account and draw only if the buyer fails to pay, an option Repsol's terms allow ^[2].

Standbys can be issued under the International Standby Practices (ISP98), developed under the Institute of International Banking Law & Practice and published by the ICC as Publication No. 590. ISP98 took effect on 1 January 1999 ^[9], after the ICC Banking Commission adopted it on 6 April 1998 ^[10]. Demand guarantees have their own ICC rules, URDG 758 ^[5]. The fraud exception that lets a bank refuse a compliant demand is available only "in narrow circumstances" under US law, and ISP98 itself does not deal with fraud defences ^[8].

SWIFT MT700 and MT760: what a real credit looks like

Banks issue credits over SWIFT, the interbank messaging network. An MT700 is sent by the issuing bank to the advising bank, and SWIFT's standards say a credit advised this way is the operative credit instrument unless stated otherwise ^[11]. UCP 600 says the same of any authenticated teletransmission ^[1]. An MT707 amends a credit, an MT734 refuses discrepant documents, and an MT760 issues a demand guarantee or standby ^[12].

The SWIFT standards release of November 2021 banned the use of MT700 for standbys and gave MT760 dedicated fields for parties such as applicant and beneficiary ^[13,14]. By contrast, an MT799 is a free-format message for unstructured correspondence between banks ^[12]. It is not a credit or a guarantee.

A "pre-advice" is not a credit either. Under UCP 600 a bank may send a preliminary advice only if it is prepared to issue the operative credit ^[1]. Until that credit arrives at the seller's bank, there is nothing to ship against.

Why screenshots and "proof of funds" are not proof

SWIFT warns that scammers fabricate payment confirmations, letters of credit and other financial documents, often emailing forged message scans or printouts as PDFs. It also warns that genuine messages are misrepresented. SWIFT advises checking with the institutions named in a message, which can confirm whether they sent or received it ^[15]. A screenshot of an MT760 proves nothing; an authenticated message received by your own bank does.

Common fraud patterns include:

• Forged instruments and SWIFT printouts sent by email as evidence of a credit or payment ^[15].
• Genuine messages misrepresented, for example a free-format MT799 presented as if it were a binding undertaking ^[12,15].
• Fraudulently issued undertakings or falsified documents for goods that do not exist or are poor quality ^[16].
• Deceptive shipping practices that banks screen for, including ship-to-ship transfers, manipulation of automatic identification system (AIS) signals and false flags ^[6].

Checklist: practical checks before you ship or pay

Insist that the credit reaches you through your own bank as an authenticated MT700, or MT760 for a standby. Ask for confirmation by a bank you accept where issuer or country risk is a concern. Look up each bank's identifier code (BIC) in the online BIC directory and contact it using details you source yourself ^[15]. Check the amount, expiry, latest shipment date, documents, LOI wording and rules (UCP 600 or ISP98) against the GTCs. Screen the vessel and its IMO number ^[6]. As Trade Finance Global warns, an offer that looks too good to be true usually is ^[16].

Alupetra supports KYC and due diligence on oil, LPG and LNG counterparties from its Istanbul, London and Dubai offices.