Published 23 April 2020
Many large natural gas projects, including LNG projects, are financed on the basis of long-term contracts containing take-or-pay provisions. These contracts help provide the backbone of the financing structure for projects with high capital costs and long payback periods where financing is tied to project revenues because the promise of de-risked long-term revenues on the basis of such take-or-pay provisions comforts investors. The take-or-pay provisions in these long-term contracts are intended to mitigate pricing and demand volatility as well as other market risks by setting a “floor” - both in terms of price and volumes - for the offtake of gas by the counterparty-customer of such a project. Today, the market uncertainties created by COVID-19, and the related negative demand shock, are one example of a situation where take-or-pay provisions in long-term contracts shore-up the continued viability of debt service of certain ongoing LNG or gas projects to existing lenders in the face of such a situation.
A take-or-pay clause in a long-term LNG or gas contract typically obligates the buyer of LNG or gas to take and pay for such LNG or gas, or otherwise pay an agreed price on a heat-content or volumetric basis for any LNG or gas not taken. Take-or-pay obligations are typically pegged to a daily, monthly, quarterly or annual timeframe, but is also sometimes on a cargo-by-cargo basis in the LNG context.
Take-or-pay clauses are typically not absolute and may include flexibility mechanisms that allow the buyer to adjust the contracted volume or quantity in a limited way. For example, this flexibility may obligate the buyer to only 70% to 90% of the applicable contract quantity. Take-or-pay clauses often also include certain agreed situations where the buyer is excused from its performance of the take-or-pay obligation. These may include force majeure, non-delivered gas volumes (where the seller is responsible for the non-delivery) and gas or LNG refused for quality reasons.
Footnotes omitted from this introduction.