A tolling agreement is a common contract type in the crude oil industry and is used to facilitate the refining process of crude oil. Under a tolling agreement, a party (the toller) agrees to process crude oil owned by another party (the tolling customer) for an agreed fee. The toller provides the facilities required to refine the crude oil into petroleum products, such as gasoline, diesel, and jet fuel.
Crude oil tolling agreements can be highly complex, as they involve many moving parts, including transportation, storage, and refining. The terms of the agreement may vary widely, depending on factors such as the quality of the crude oil, the refinery`s capacity, and market conditions.
One critical aspect of a tolling agreement is the allocation of risk between the parties. The tolling customer may assume more of the risk associated with transporting the crude oil to the refinery, while the toller may assume more of the operational risks associated with the refining process.
Another essential consideration in a tolling agreement is the pricing mechanism. Crude oil prices are notoriously volatile, and the parties need to agree on how the tolling fee will be calculated. Typically, the toller will charge a fee that covers the cost of refining the crude oil plus a markup. The markup may be based on a fixed percentage of the crude oil`s value or a benchmark price, such as the West Texas Intermediate (WTI) crude oil price.
In recent years, the crude oil industry has seen an increase in tolling agreements as refineries have sought to maximize their utilization rates. By entering into tolling agreements, refineries can process more crude oil than they would otherwise be able to with their existing facilities. This is particularly relevant in regions where there is a surplus of crude oil and a shortage of refining capacity.
In conclusion, tolling agreements are a critical part of the crude oil industry, enabling refiners to maximize their capacity and customers to access refining capabilities without investing in their own facilities. The terms of these agreements can be highly complex and will depend on a range of factors, including the quality of the crude oil, refining capacity, and market conditions. The allocation of risk and the pricing mechanism are key considerations in any tolling agreement.