Throughput Agreement

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 debit contract is an agreement between two parties in which a service or property is provided by one of the parties for a specified period of time. A small business can use support as an indirect form of project financing by providing access to materials rather than real funds. Debit contracts are also called debit agreements. The conclusion of a contract with such strict restrictions has its drawbacks, but there are also advantages for these restrictions. By entering into a debit contract with the pipeline, the oil company has a form of transportation guaranteed at its discretion for one year; The pipeline has a form of guaranteed payment for one year.

Regardless of the actual use of the pipeline throughout the year, this is a win-win situation for both parties, as equipment and funding are provided for both parties. 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. 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. 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.

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