Offtake Agreement
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Offtake Agreement are long-term contracts in which one counterparty commits to delivering certain volumes/quantities of a good or service. The other, called the offtaker, agrees to pay predefined sums of money or a set fee for a certain period of time in exchange for a good/service. The price the offtaker pays in indexed to parameters that trends in the rate of inflation for production prices and consumer prices[1].
Three main types of offtake agreements
Offtake agreements can take various forms[2][3]:
- take-or-pay contract- the purchaser is obliged to pay for the output of the project whether or not the purchaser takes delivery. If the purchaser does not take delivery, payment is still required. These payments are credited to future delivery. If te project is unable to deliver the service or produce the product, the purchaser does not have to pay.
- take-and-pay- offtaker only pays for the product taken, on an agreed price basis. Clearly this has limited relevance for an offtake agreement in a project financing, as it provides no long-term certainty that the product will be purchase.
- long-term sales contract- offtaker agrees to take agreedupon quantities of product from the project, but the price paid is based on market prices at the time of purchase or an agreed market index. This type of contract is common only used in, for example, mining, oil and gas and petrochemical projects.
What may include offtake agreement ?
An off-take agreement may consist of provisions relating to matters such as[4]:
- quantity and quality of the output to be delivered, purchase price and delivery timetable
- escalation or adjustment formulas for the purchase price in accordance with certain appropriate indices for local and foreign costs
- pass-through purchase price adjustment formulas intended to compensate the project company for certain increased costs, including taxes, costs of complying with changes in law, and interest rate fluctuations
- incentive payments and low performance penalties in order to encourage a project to operate efficiently
- a term of at least equal to, and preferably two to three years longer than, the term of the debt financing
- conditions of effectiveness establishing that the obligation of the project company to deliver the output shall commence at a date certain, which date must be consistent with the completion date established in the construction contract with a reasonable cushion time for contingencies
- a well-established mechanism for notice of a contract breach and a reasonable cure period
- scheduled outages and overhauls of the plant
- liquidated damages provisions
- dispute resolution mechanisms
Footnotes
References
- Buljevich E.C., Park Y.S. (2011), Project Financing and the International Financial Markets, Springer Science & Business Media, Boston.
- Crundwell F. (2010), Finance for Engineers: Evaluation and Funding of Capital Projects, Springer Science & Business Media, London.
- Gatti S. (2007), Project Finance in Theory and Practice, Academic Press, New York.
- Yescombe E.R. (2002), Principles of Project Finance, Elsevier, California.
Author: Ewa Szczyrbak
