In an off take contract, there is an agreement between the project company and the buyer. It is negotiated much before the construction of the facility in order to make the market secure for the future output of the facility.
This contract provides the project company stable and sufficient revenue which helps in paying its project debt obligation, covering the operating costs and providing certain required return to the sponsors. This contract is used mostly in natural resource sector.
Off take agreements have benefits for both the sellers and buyers of resources and services. They give sellers the guarantee that they can sell their resources in the future and can earn a profit on their investment.
This often helps them obtain financing to build plants and production facilities as it shows lenders that they have future purchasers in place. Buyers fix a price in advance and can use the agreement as a hedge against price changes in case of a future supply shortage. Additionally, their offtake agreements give them a guaranteed supply if there are any future shortages in the market, which may raise their profits
Some major types of off-take contracts are as follows:
In this contract, the buyer has the obligation to pay for the product on a regular basis even if the buyer is not buying the product.
Power purchase contract
This contract is mostly used in power projects in emerging markets. The buyer is usually a government sector power distribution company.
Take and pay contract
In this contract, the buyer only pays for the product taken on the basis of agreed price from the project company.
Long-term sales contract
In this contract, the buyer takes agreed-upon quantities of the product from the project. It is mostly used in mining, oil and gas and petrochemical projects in which the project company wants a kind of assurance that its product can easily be sold in international market.
This contract is generally found in commodity markets such as in an oilfield project.
Contract for differences
In this type of contract, a project company does not sell its product to the buyer but in the market. However, if market price is less than the agreed price, then the difference is paid by the buyer to the project company and vice versa if it is more than the agreed level.