What is the “Take-or-Pay” Clause?
The take-or-pay clause is a contractual provision in energy supply contracts which secures that the buyer purchases a minimum amount of energy agreed for a certain period and undertakes to pay its price regardless of whether the buyer actually takes delivery of this amount or not [1].
In contracts containing this clause, the buyer undertakes to either make a purchase of the minimum amount of energy envisaged in the contract in a certain period (generally one year), or to pay its price even if such amount is not actually taken delivery of. At the end of the period, if the buyer fails to reach the committed minimum purchase amount, the price corresponding to the unpurchased amount is paid to the seller within the framework of the principles determined in the contract [2].
Why Has This Clause Been Needed?
Energy production, supply, transportation, and storage projects require long time and large-scale capital investments [3]. Within the scope of the establishment and operation of energy infrastructure, significant financing must be provided for production facilities, transmission and distribution networks, storage facilities, and other related infrastructure components. These high investment costs lead energy suppliers, in many cases, to establish long-term financing relationships with credit institutions.
Over time, sellers have started to include provisions in energy supply contracts in order to limit demand risks that may arise due to buyers not purchasing or not taking delivery of the quantities stipulated in the contract, which provide that the buyer undertakes a minimum amount of energy purchase. In this direction, “take-or-pay” clauses, under which the buyer undertakes to pay the price of a certain amount regardless of whether the energy is actually taken delivery or not, have started to be widely used [4]. Today, this need maintains its importance not only in pipeline projects but also in liquefied natural gas (LNG) terminals, storage facilities, and other energy infrastructure investments.
What are the Functions of the Clause?
A. Providing a Regular Revenue Stream
Credit institutions financing energy supply projects require a regular revenue stream for the repayment of their loans. Therefore, with long-term contracts in which take-or-pay provisions are included, the seller obtaining regular income is secured [5].
B. Providing Supply Security
The buyer, due to having a long-term contract, does not have to search for a new seller when demand increases. Since the seller will exert all efforts to deliver the committed quantity, the supply security of the buyer is also ensured.
C. Distribution of Risks
The take-or-pay clause distributes production and sales risks in a balanced manner between seller and buyer [6]. The seller bears production-related risks, while the buyer bears the risk of decrease in market demand. Through the clause, risks arising from market price fluctuations remain on the buyer side.
D. Price-Reducing Effect
The take-or-pay clause, by guaranteeing a regular revenue stream, also reduces the financing costs of the seller. This may reduce unit prices; since the seller will receive the price of the minimum quantity in any case, it may determine more competitive pricing.
What is the Legal Nature of the Clause?
With regard to the legal nature of the take-or-pay clause, different views have been put forward in doctrine. Although it is likened to a minimum purchase undertaking, there are also views that it constitutes liquidated damages, penalty clause, optional obligation, and unjust enrichment [7].
A brief summary of why each of these views is incorrect is as follows [8]:
- It is not a minimum purchase undertaking: In a minimum purchase undertaking, the payment obligation is determined according to the amount of energy actually taken; whereas the take-or-pay clause creates a principal payment obligation not dependent on performance, therefore it is not correct to consider it as a minimum purchase undertaking.
- It is not liquidated damages: Liquidated damages always require the occurrence of damage, whereas in the take-or-pay clause, which includes an unconditional payment undertaking, the buyer is obliged to pay even if no damage occurs.
- It is not a penalty clause: A penalty clause creates an accessory obligation dependent on non-performance or improper performance of the contract, whereas the payment undertaking in the take-or-pay clause is unconditional and is the principal obligation of the buyer.
- It is not an optional obligation: Although the conjunction “or” in its name creates the impression of more than one performance, the obligation is single; the buyer is in any case obliged to pay the price of the committed amount of natural gas.
In our opinion, the take-or-pay clause is not a structure that can be fully explained by existing law of obligations institutions. Therefore, in accordance with the prevailing view in doctrine, it would be more correct to accept this clause as a sui generis contractual provision regulated within the framework of the principle of freedom of contract.
What is the Situation in Türkiye?
Türkiye, being a country with a high level of foreign dependency in energy (especially natural gas), is generally in the position of “buyer” in long-term international supply contracts. This situation makes the take-or-pay clause, for Türkiye, an economic and financial burden with high risks.
An academic study on the topic indicates that Türkiye was faced with take-or-pay payments exceeding 4 billion USD between the years 2008–2011[9]. However, in the statements issued by the Ministry of Energy and Natural Resources, it was noted that the payments made for quantities falling below the take-or-pay commitment could be offset against natural gas to be received in subsequent periods within the framework of the compensation mechanisms stipulated in the contracts, and that therefore these payments were in the nature of advance payments [10].
In this context, it may be assessed that the fundamental risk posed by take-or-pay provisions from Türkiye’s perspective is not so much the outright loss of payment for gas not consumed, but rather the making of advance payments in the event that demand forecasts are not met, the resulting impact on cash flow, and the fact that the right of compensation can only be exercised subject to the time limits and conditions stipulated in the contract.
A similar economic logic can also be observed in the usage or demand guarantees envisaged in certain public-private partnership projects outside the energy sector. Vehicle passage guarantees in bridges and highways, and usage guarantees in city hospitals, bear economic similarity to the take-or-pay mechanism in that, where the determined levels are not achieved, they may give rise to payment obligations on the part of the guaranteeing party.
Solutions and Strategies for Reducing Türkiye’s Take-or-Pay Burden:
Expansion of Storage and Infrastructure Capacity: Increasing the capacity of underground natural gas storage facilities such as Silivri and Tuz Gölü, and FSRU (Floating Storage and Regasification Unit) vessels, in order to create flexibility in the system and to be able to physically withdraw gas.
Source Diversification and Spot Market: Reducing dependency on rigid long-term pipeline contracts and turning towards more flexible Spot LNG purchases from the global market.
Domestic Resources and Energy Efficiency: Increasing the share of domestic/alternative sources such as Black Sea gas, renewable energy (solar, wind), and nuclear energy, thereby reducing structural dependence on natural gas and reducing consumption need through energy efficiency projects.
Renegotiation of Contract Terms: In existing agreements that expire or are renewed, reducing take-or-pay ratios in favor of Türkiye (increasing flexibility margin) and effectively using price revision rights.
Re-export Right: Including provisions in new or updated agreements allowing Türkiye to export surplus gas to third countries, and making Türkiye an energy hub.
Comparative Law Situation: How Did the USA and the EU Proceed?
USA Example
First time included in American natural gas contracts in the 1960s, take-or-pay clauses were widely used until the mid-1980s. With the 1981 economic recession, a sharp decrease in natural gas demand created a supply surplus called the “gas bubble,” and pipeline companies faced large-scale take-or-pay claims [11].
To deal with these issues, parties resorted to two main legal defenses:
- Force majeure: American courts interpreted force majeure claims raised by buyers in long-term take-or-pay contracts narrowly; market fluctuations and price increases were generally not considered force majeure.
- Commercial impracticability: In many cases, buyers argued under UCC 2-615 that the decrease in natural gas prices made their obligations commercially impracticable; however, courts largely rejected these arguments.
EU Example
Before the liberalization process starting in the 1990s, long-term natural gas contracts of 15–20 years containing take-or-pay clauses were concluded between member states. EU directives did not completely prohibit this clause but adopted a balancing approach [12]:
- Article 25 of Directive 98/30/EC granted pipeline companies facing serious economic difficulty due to take-or-pay obligations the right to temporarily refuse third-party access requests.
- The EU considers long-term take-or-pay contracts as a fundamental part of European natural gas supply security; however, it ensures that these contracts do not create barriers to market entry and do not distort competition.
CONCLUSION
The take-or-pay clause is a risk-allocation mechanism developed in response to the high investment costs and supply security requirements of the energy sector and is widely used in international energy supply contracts. Given that its legal nature cannot be fully explained through existing concepts of the law of obligations, it is more appropriate to characterize the clause as a sui generis contractual provision established within the framework of the principle of freedom of contract.
The practices of both the United States and the European Union demonstrate that take-or-pay provisions serve an important function in maintaining the stability of energy markets. From Türkiye’s perspective, however, such clauses may impose significant financial burdens due to the country’s dependence on imported energy. Therefore, expanding storage capacity, ensuring diversification of energy sources, and negotiating more flexible contractual terms are of great importance in reducing the risks arising from take-or-pay obligations.
Frequently Asked Questions (FAQ)
How is the take-or-pay amount calculated?
The annual take-or-pay amount is calculated as a certain ratio of the annual contract quantity. In Shah Deniz Phase I and Phase II contracts, this ratio is set as 80%; i.e., the buyer is obliged to either take or pay at least 80% of the annual quantity envisaged in the contract.
If the buyer has paid more than it has taken, can it get its money back?
Yes, but subject to conditions. If the buyer takes gas in subsequent contract years above the committed quantity, it has a right of compensation corresponding to the excess quantity taken.
Can unused take-or-pay carry-forward be used without limit?
No. In practice, the use of unused take-or-pay carry-forward rights is limited between two and five years. The buyer must use this right within this period.
Is there a legal regulation regarding the clause?
There is no regulation of this clause in domestic legislation; only detailed provisions exist in international contracts, and these are kept within the scope of commercial confidentiality.
Endnotes
[1] Burak Kepkep, “Doğalgaz Dağıtım İhalelerinin 10. Yılında Doğalgaz Tedarik Sözleşmeleri (Toptan Satış – Spot LNG İthalat – Abonelik)”, Legal Yayıncılık, Istanbul, 2013, p.40.
[2] Mustafa Fadıl Yıldırım, “Doğalgaz Tedarik Sözleşmelerinde Asgari Alım Yükümlülüğü ve ‘AL ya da ÖDE’ Kaydının Hukuki Niteliği”, İnönü Üniversitesi Hukuk Fakültesi Dergisi, Vol. 2, No. 2, 2011, p.29.
[3] Beverly M. Barrett, “Oil and Gas: Roye Realty v. Watson: Are Royalties Owed on All Take-or-Pay Settlements in Oklahoma?”, Oklahoma Law Review, 1993, p.746.
[4] Anna Creti and Bertrand Villeneuve, “Long-term Contracts and Take-or-Pay Clauses in Natural Gas Markets”, Energy Studies Review, Vol. 13, No. 1, 2004, p.77.
[5] Mustafa Fadıl Yıldırım, “Doğalgaz Tedarik Sözleşmelerinde Asgari Alım Yükümlülüğü ve ‘AL ya da ÖDE’ Kaydının Hukuki Niteliği”, İnönü Üniversitesi Hukuk Fakültesi Dergisi, Vol. 2, No. 2, 2011, p.33.
[6] Anna Creti and Bertrand Villeneuve, “Long-term Contracts and Take-or-Pay Clauses in Natural Gas Markets”, Energy Studies Review, Vol. 13, No. 1, 2004, pp.79-80.
[7] Mustafa Fadıl Yıldırım, “Doğalgaz Tedarik Sözleşmelerinde Asgari Alım Yükümlülüğü ve ‘AL ya da ÖDE’ Kaydının Hukuki Niteliği”, İnönü Üniversitesi Hukuk Fakültesi Dergisi, Vol. 2, No. 2, 2011, pp.34-35.
[8] For more detailed information see Sara Aliyeva, “Al Ya Da Öde (Take or Pay) Klozu in Natural Gas Contracts in Comparative Law”, Published Master’s Thesis, Ankara University, Institute of Social Sciences, Ankara, 2014, pp.84-94.
[9] Sara Aliyeva, “Al Ya Da Öde (Take or Pay) Klozu in Natural Gas Contracts in Comparative Law”, Published Master’s Thesis, Ankara University, Institute of Social Sciences, Ankara, 2014, p.109.
[10] https://enerji.gov.tr/haber-detay?id=115
[11] Sara Aliyeva, “Al Ya Da Öde (Take or Pay) Klozu in Natural Gas Contracts in Comparative Law”, Published Master’s Thesis, Ankara University, Institute of Social Sciences, Ankara, 2014, p.97.
[12] Sara Aliyeva, “Al Ya Da Öde (Take or Pay) Klozu in Natural Gas Contracts in Comparative Law”, Published Master’s Thesis, Ankara University, Institute of Social Sciences, Ankara, 2014, p.104.
