Offtake agreement – definition and meaning
An offtake agreement is an agreement that a producer makes with a purchaser. They agree to sell or buy a specific amount of future production. An offtake agreement typically occurs before the construction of a production facility. For the producer, the offtake agreement is a guarantee for the project’s economic future.
Offtake agreements also improve the chances of obtaining a loan to complete the project. If the lender knows that you already have firm orders, it is more likely to approve your loan application.
This type of agreement is common in natural resource development projects. The capital cost to extract the resource is considerable. Therefore, the company needs firm orders to make sure that the investment is worth it.
In a business with few buyers, the producer needs to be sure that the product will sell. The lender, before approving a loan, also needs to be sure.
We call the party who is purchasing the product or service the offtaker.
The offtaker can usually back out of an agreement. However, it will probably have to pay a fee.
We can write the term either with or without a hyphen – ‘offtake agreement‘ or ‘off-take agreement’.
Offtake agreement – different types
Depending on the nature of the producer’s project, the agreement may take the form of a service contract or purchase agreement.
For example, a power station would have a power-purchase agreement. However, a pipeline builder would have gas or oil transportation agreement.
In some cases, offtake agreements may be leases.
According to Practical Law, an offtake agreement, as used in project finance:
“[Is] an agreement to purchase all or a substantial part of the output or product produced by a project.”
CanadianMiningJournal.com says that operational mining companies and commodity purchasers commonly sign offtake agreements.
The mining company wants to secure future sales, while the purchaser needs to satisfy demand for a specific commodity. For example, the purchaser may have customers who are refiners or smelters.
Offtake agreement – advantages for the buyer
Offtake agreements also offer advantages for the buyer. They secure a set price before production. In other words, the agreement functions as a hedge against future price fluctuations.
The buyer also has a guarantee that the supplier will deliver the goods.
Put simply; the buyer has secured the price as well as the delivery of the goods.
Offtake agreements are common in project management, especially project financing.
Video – offtake agreements
This Altech Chemicals Ltd. video explains why an offtake agreement is important in project financing.