Take-or-pay contracts

Consider a coordination agreement in which the retailer pays w for each unit purchased as well as r per unit of leftover unused capacity. Such contracts are termed take-or-pay contracts and are found commonly in many Just-In-Time contexts. For example, it is reported ([52]) that Toyota guarantees that its actual orders will deviate by no more than 10% around forecasted offtakes and will pay for any deviations. In the transportation industry, Reynolds commits to minimum volumes to carriers and will pay if observed demand falls short of these minimum volumes. Eppen and Iyer [29] describe a backup agreement in the apparel industry, which consists of a payment of w per unit taken and a payment of per unit not taken. 

The manufacturer profit can then be written as (tr — c)E fnin defnand, K)) -f TE max K— demand, 0)) — c K. The corresponding retailer profit can be written as (r — w)E min demand, K)) TE max K— demand, 0)). Given these profit structures, the manufacturer will choose a capacity 

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The prime customer is BOTAS, the gas and oil pipeline entity of Turkey, which is scheduled for privatisation. Turkey will buy Shah Deniz gas on an 80% annual Take or Pay contract with daily swings at the buyer s option. The sale point for Turkey is at the Turkish frontier. 

Both natural gas as well as gas transportation service have traditionally been traded under take or pay contracts. In the gas transportation industry, deregulation typically brings along a transition from bilateral long term contracting to transparency and non-discriminatory behavior. Transportation suppliers typically offer a menu of often short-term transportation contracts with different degrees of priority and flexibility. In some systems shippers may also bid for capacity rights. 

First, the only new coal mines which are going to be developed will have to be financed on the basis of take-or-pay contracts with prices sufficiently high to attract the capital needed for the investment. Profits as high as 10 per ton are required to finance new deep coal mines today. 

Second, the take-or-pay contracts which are required to finance these mines have to be for long enough periods to amorize the investment in the mine, so 20-year or longer contracts have to be entered into. 

For some countries the cracking operation is based entirely on ethane and petrochemical operators enter take or pay contracts for ethane. Often there is a fixed-variable component in the contract linking ethane price to the prevailing price of crude oil. Obviously this limits the benefits to the operator in times of rising oil price with some or all of the benefit passed on to the ethane supplier. 

Table 2 also presents some of the other cost elements, to be met in the production of Synfuel gasoline. The costs are in 1987 cents per litre of gasoline produced, for the years 1987, 1996 and 2000, on the assumption that the plant produces its nameplate capacity of 570,000 tonnes per annum at design levels of process efficiency. Note that 1987 will be the first full year of commercial operation of the plant, with full loan repayments, whereas the years 1996 and 2000 are representative of the situation after 1995 when all loans are repaid. Also note that the price of Maui gas falls in real terms over the life of the take-or-pay contract. 

The above conclusions derive from Table 2 where the net costs to the Crown are equivalent to about US 45, 18 and 14 per barrel of gasoline in the years 1987, 1996 and 2000 respectively. Adding the cost of gas raises the above figures to US 55, 25 and 20 per barrel for the years in question. Here it should be observed that under the take-or-pay contract, the Crown is required to pay for the gas independent of the operation of the Synfuel plant. Also it is important to note that the above costs are for a barrel of gasoline and must be reduced by around US 7 per barrel to obtain equivalent crude oil costs. Finally these conclusions could be affected if, in the future, the Government follows through with its stated intention to take over and refinance the Synfuel debt. 

Notice also that for any take-or-pay contract there is an equivalent capacity reservation contract. Setting p = T and w = w — T generates exactly the same manufacturer and retailer profits as the payback contract. 

For the LNG shipping industry, contracts and sales is a relevant factor. Traditionally, piped natural gas is sold on contracts involving some sort of a Take-or-Pay contract, see e.g. (ECN 2003 lEA 2007b), while LNG is sold on long term (often 20 years) fixed contracts. 

EM-02 Specify Energy Efficiency Requirements for Equipment in Contract Agreements EM-03 Develop Energy Performance Contracting Partnerships EM-04 Enter into a Green Power Purchasing Agreement EM-05 Evaluate "Take or Pay" Contract Provisions... 

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