Cogito

Offtake Contracts

Posted in Uncategorized by qmarks on February 25, 2012

An offtake contract provides a predictability for sales and sometimes eliminates the volume and price risk.

6 types of offtake contracts are

  1. Take or Pay Contract
  2. Take and Pay Contract
  3. Long term sales Contract
  4. Hedging Contract
  5. Contract for Differences
  6. Throughput Contract

Take or Pay Contract: Offtaker must purchase the projectco’s product no matter what based on an agreed price.

Note that such contracts are seldom on a hell or high water basis.

In this type of contracts immediately check the availability clause and force majeure because usually the Project company is only paid if it can produce the output. For unexpected reason if the product is not available, the offtaker will not pay a dime.

That contract brings revenue predictability to the projects

Take and pay contract: Offtaker pays if only it purchases the product on a pre agreed price.

That type of contract is usually used for input supplies, for example fuel or raw materials.

Long-term sales contract: In this case the offtaker agrees to take agreed upon quantities of product but price is based on market prices at the time of purchase or an indexed price. Therefore demand risk is mitigated but the price risk remains, even if it is indexed to CPI, then the possibility of deflation will cause a drop in revenue.  One can find examples of LT sales contract in mining or oil & gas projects.

For Deflation risk, some contracts may have a floor price for the product. For example in LNG projects

Hedging Contract: Hedging contracts are found in mainly in the merchant power sale markets and mining projects. For example Barrick Gold (TSX:ABX) had put option for sales contracts. If price of Gold rises above $1500 the price of output (gold) were capped at the agreed price. Sometimes it can be a collar (a call and a put option) therefore the price can only fluctuate in a narrower band then the market high/low.

Contract for differences: under CfD structure is the same as hedging contract except the project co sells the output into the market and not to the offtaker. It is also similar to take or pay contract with an agreed tariff. Long term CfDs are used in the electricity market.  For some countries if the electricity must be sold within the country’s electricity pool, it is CfD instead of PPA (power purchase agreement)

Throughput Contract: that type of contract is found in pipeline projects.

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