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Borrowing bases

### Borrowing Bases

The term “borrowing base” refers to the amount of money a lender is willing to lend to a company, typically a producer in the energy sector, based on the collateral provided by the borrower. In the context of energy commodities trading, the borrowing base is often determined by the value of the company’s proved reserves of oil or gas, which act as collateral for the loan. Lenders conduct periodic reviews and audits of the reserves to ensure that the value of the collateral remains sufficient to cover the loan.

This borrowing base calculation allows lenders to adjust the credit limit available to energy companies according to the fluctuating value of their reserves, thus mitigating the risk associated with changes in commodity prices or production levels. As the market value of these commodities can be volatile, the borrowing base provides a flexible platform for financing that can expand or contract in tandem with the underlying assets’ worth.

Energy companies often use borrowing base facilities to fund exploration, development, and production activities. They are essential instruments for managing liquidity and financing growth in the capital-intensive energy sector. By tying credit directly to the value of physical assets, borrowing bases help align the lenders’ and borrowers’ interests, offering a tailored approach to financing that reflects the unique characteristics of the energy industry.

For further information about borrowing bases, here are two sources which can provide more detailed explanations:

1. Investopedia – Borrowing Base:
This page offers a broad overview of what a borrowing base is and how it applies to various industries, including energy.
(https://www.investopedia.com/terms/b/borrowing-base.asp)

2. The US Energy Information Administration (EIA):
Although not specific to borrowing bases, the EIA website provides extensive data and information about energy production and reserves, which are critical determinants of borrowing bases in energy financing.
(https://www.eia.gov/)

Please note that direct sources focused exclusively on borrowing bases, specifically within energy trading, might require access to industry reports or academic journals that may not always be freely accessible to the public. However, the two links provided offer a starting point for understanding the financial concepts and the energy market context that underpin these financial instruments.

This A.I.-generated glossary is intended to provide a convenient means to understand terminology used on this website in the context of physical commodities trading. Some terms may have alternative and/or expanded definitions that may not be relevant here and thus not included. Sources provided are for reference and not intended to be an endorsement of the broader content on that website. Suggestions, questions, or corrections can be provided in the comment box on definition pages.