Offtake contracts—key issues for project finance lenders

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Offtake contracts—key issues for project finance lenders
  • What is an offtake contract?
  • Key provisions in an offtake contract
  • Key issues for lenders in connection with offtake contracts
  • Duration of the contract
  • Take or pay obligations and pricing
  • Pass-through of increased costs
  • Force majeure and termination events
  • Assignment by the parties

Offtake contracts—key issues for project finance lenders

Most projects are underpinned by a complex web of contractual relationships between all the parties involved in the project (eg the project company, equity investors, contractors, sub-contractors, offtakers and suppliers). These documents are generally referred to as the 'project documents'.

In projects involving the production or exploitation of a product (eg a power project or a mine project), the offtake contracts are some of the principal project documents.

What is an offtake contract?

An offtake contract is a contract under which a third party (the Offtaker) agrees to buy a certain amount of the product produced by a project at an agreed price. The product is often a commodity such as oil, gas, minerals or power.

The purpose of an offtake contract is to:

  1. secure a predictable revenue stream for the project, and

  2. ensure that there is a guaranteed buyer for project production (particularly where demand for the product is likely to fluctuate)

It is not always necessary for the project company to enter into offtake contracts. Whether or not they are required will depend on the nature of the project and the nature of the product from the project (if any).

Where demand for project production is high (eg a highly-tradeable commodity such as gold, oil or gas) the project company may consider that it will achieve a better financial outcome by conducting

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