Abstract
Traditionally, the gas industry is characterised by long-term take or pay (TOP) clause. It is the basis upon which gas is brought out of the ground. However, the absence of an established international gas market and the capital intensive nature of gas infrastructures quite often do discourage investors from committing funds to gas projects. Thus, a well-structured TOP mechanism serves as a guarantor for investors for the recovery of capital investment and favourable return on investment. TOP obligation, therefore, commits the buyer to take or pay for certain minimum volume of gas over the duration of the contract, usually 20 – 25 years.
This paper examines the risk exposure an off-taker can bear under a TOP obligation and how these risks evolve with liberalisation within the contest of the emergence of global spot markets for gas. Empirical evidence tends to suggest that in order to mitigate volume and price risks, sufficient flexibility in the form of renegotiation clause should be introduced into the TOP obligation. This is to enable parties to adjust the long term Gas Sales Agreement in order to accommodate changing market conditions. Further, transition towards shorter term contract has the capacity to reduce the risk faced by the off-taker under a longer term TOP obligation.
