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Take-or-Pay Contract

Trading Term

A take-or-pay contract is a long-term agreement commonly used in the energy and natural gas sectors, where the buyer agrees to pay for a fixed quantity of product regardless of whether it is actually taken. These contracts provide revenue certainty for producers and reduce the risks associated with infrastructure investments like pipelines and liquefied natural gas (LNG) terminals.

While the buyer is obligated to pay, they usually retain the right to take the undelivered product at a later date or receive a credit. These contracts can introduce complexities in balance sheet and cash flow management but also promote market stability. They are particularly prevalent in capital-intensive industries where supply commitments span decades.

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