Throughput Agreement Definition

A start-up refinery, founded by former Mississippi oil industry managers, intends to use funding funds from state-backed projects to build a refinery. The founders form their contacts to meet several medium- to large-scale oil producers on their projects. After discussions with a number of producers, the refinery`s founders entered into an interim flow agreement to process a minimum amount of gallons of oil at a specified price as soon as the refinery is built. The refinery`s founders are using this interim debit contract to begin financing the refining project. A flow contract takes its name because a contracting party undertakes to move a minimum amount of liquid or gas through a pipeline or processing plant for a specified period of time. Specifically, for the oil and gas industry, a group of oil and gas producers enter into a contract agreement with a processor to transfer a minimum amount of crude oil, refined oil or natural gas through a refinery, pipeline or processing plant. The parties agree to do so for a month, a quarter or a year. Once the debit contract is signed between the oil company and the pipeline owner, the oil group has the right, in this example, to pump its oil through the pipeline for the duration of the contract. The pipeline company guarantees the oil company a form of pipeline transportation for a certain fee and therefore provides the oil company with equipment — the pipeline — to produce its fuel. A debit contract is a kind of take-or-pay contract. This means that the buyer is fully obliged to pay, that the buyer accepts the goods or services. For example, a regional energy company in India or Nicaragua may agree to pay a fixed charge for electricity generated by a power plant built by a U.S.

company, even if a hurricane or tornado interrupts power supply. Take-or-pay contracts are generally used to facilitate project financing, as these contracts have guaranteed payments and both protect buyers from commodity price increases, while protecting sellers from price declines.

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