Paris Energy Series No. 7: Take-or-pay Conditions in Gas Supply Agreements

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I. Introduction -

Take-or-pay provisions are now fairly common in long-term offtake and supply agreements in the energy sector, a notable example being gas supply agreements.

In essence, take-or-pay provisions provide that a buyer must pay for specified quantities of energy (gas, for example) from a seller, even if the buyer is unwilling or unable to take such quantities. At the most basic level, take-or-pay clauses require the buyer either to purchase and take delivery of certain quantities of gas, or to pay for the gas regardless of whether it takes delivery.

The aim of these provisions is to ensure that the seller will receive a guaranteed stream of revenue under the agreement, irrespective of the quantities actually taken by the buyer. They often operate where the supplier has had to undertake substantial debt and capital commitments in order for the project to get off the ground in the first place. (At the same time of course, Buyers have themselves often had to undertake commitments as well; consider regas facilities in an LNG project.)

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