Take Or Pay Purchase Agreement

Large projects with long-term returns use long-term contracts to assure the lender that payments are made on a predictable and reliable basis. A long-term contract is usually a contract with a duration of 20 to 30 years. Alternatively, the world price of gas is falling during the contract, Company A could try to take the gas delivery and instead buy gas from another supplier, Company C, at the new lower price and instead pay the fine agreed to Company B. It is in the interest of Company A to do so when the total cost of Company C`s gas, plus the penalty, is less than the price originally negotiated for Firm B`s gas consumption. Given this vital importance, most readers would be surprised at how often a so-called “take-or pay” contract is actually not written as such. , the commercial result being much less desirable than what the seller and its lenders intended to do. This error is not limited to inexperienced negotiators and their advice. In a recent infrastructure project with a capital cost of more than $1 billion, the parties were surprised to find, rather belatedly in the development schedule, that the so-called “take-or pay” contract was not really the case, although it was described as such in the sponsor information memorandum on the project and signed by project lenders and a highly respected project finance firm. In another example, a buyer was able, under a long-term gas sales contract, to reduce his “take-or pay” commitment by a drop in market demand, which made the contract a “demand contract” (more detailed below) despite the take-or pay nomenclature. Only the use of the phrase “take or pay” in an agreement does not necessarily make it that way. The take-pay clauses in a contract are intended to facilitate financially predictable results, particularly when it comes to debt. If a supplier needs a loan to finance the establishment of a buyer`s contract, the lender may not be willing to provide the necessary funds without a take-or-pay scheme in the contract. This provision ensures that the supplier can pay the loan as planned.

Due to the unpredictability of energy markets, where prices can fluctuate due to demand and supply, sellers rely on variable-price contracts to ensure that their revenues are safe and consistent. For energy suppliers who use pipelines, oil or natural gas to generate electricity, the huge overheads require some certainty that they will receive long-term revenues, as expected. (a) their losses are such that the seller cannot compensate for his deficit by the quantities of gas and the profits provided to other customers; In determining the seller`s loss and profit, the supplier considers possible positive adjustments in the selling prices of natural gas quantities to the seller.