What is a take-or-pay contract?
A deal in which the buyer pays for a minimum volume every year, whether it collects the product or not.
Nobody builds a gas pipeline or an LNG plant on the hope that customers will turn up. The seller wants a buyer committed for years before it spends the money. A take-or-pay clause provides that commitment: the buyer agrees to take a minimum quantity each year or pay for it anyway.
The clause moves volume risk to the buyer and leaves price risk to be shared through the pricing formula. In exchange the buyer gets guaranteed supply. Contracts normally let the buyer collect, in a later year, gas it paid for but did not take. That is called a make-up right.
These contracts are the reason lenders will finance projects that take five years to build. They are also the reason disputes get expensive when demand collapses and a buyer is left paying for cargoes it cannot use.
- Buyer's obligation
- Pay for a minimum annual volume
- Make-up right
- Take the paid-for volume in a later period
Explainers describe how things generally work. They are not advice for a specific project or country. See our editorial policy.