Makeup Gas

What Is Makeup Gas?

Makeup gas (also spelled make-up gas) is natural gas that a pipeline seller delivers to a buyer, or that a buyer has the right to receive in future periods, to correct an imbalance arising under a take-or-pay gas supply agreement. The term is used in two related but distinct ways in the industry. In the seller's perspective, makeup gas is gas delivered to compensate a buyer who paid for volumes that were not available during a shortfall period. In the buyer's perspective, makeup gas represents volumes the buyer is entitled to receive in future contract years at no additional charge to offset take-or-pay payments already made for gas that was not delivered or not taken. In either reading, makeup gas is the contractual mechanism that restores volumetric balance between what was agreed and what actually flowed, and it is a central feature of long-term gas supply agreements, pipeline tariffs, and LNG sale and purchase agreements (SPAs) worldwide.

Key Takeaways

Makeup gas arises when volumes actually taken or delivered differ from the annual contract quantity (ACQ) specified in a take-or-pay gas supply agreement.
If a buyer fails to take the minimum take-or-pay quantity, the buyer still pays for those volumes but earns the right to receive equivalent makeup gas volumes in a future makeup period, typically spanning 5 to 10 years.
Makeup gas must usually be taken before the end of the makeup window or the right lapses, making it a time-limited banked gas entitlement rather than a permanent credit.
In LNG sale and purchase agreements, makeup cargo provisions interact with destination restrictions and diversion rights, creating complex negotiations over where and when makeup cargoes can be discharged.
Force majeure events may suspend take-or-pay obligations but do not always reset the makeup clock, making the interaction between force majeure and makeup gas provisions a key point of contract negotiation.

How Makeup Gas Works in Take-or-Pay Contracts

A take-or-pay gas supply agreement obligates the buyer to either take a minimum volume of gas during each contract year or pay for that volume regardless of whether it is taken. The minimum volume is expressed as the take-or-pay quantity, typically 70 to 90 percent of the annual contract quantity (ACQ). If, in a given contract year, the buyer takes less than the take-or-pay quantity, the buyer owes a deficiency payment equal to the contract price multiplied by the unlifted volume. In exchange for making this payment, the buyer earns the right to receive makeup gas: an equivalent volume of gas in future years at no incremental charge beyond the contract price already paid. The buyer in effect pre-purchases gas from future production and banks it as a credit against future deliveries. The makeup period, the window during which the buyer can call on these banked volumes, is defined in the contract and commonly extends 3 to 10 years beyond the deficiency year.

Makeup gas provisions are subject to several contractual conditions that determine when and how the banked volumes can be drawn. Most agreements require that the buyer first take the full ACQ (or at least the current year's minimum take-or-pay quantity) in any year before drawing on banked makeup gas, a condition known as a current-year priority rule. This prevents buyers from perpetually deferring purchases and accumulating unlimited makeup gas entitlements. Additionally, the total volume of makeup gas that can be taken in any single year is often capped at a percentage of the ACQ, commonly 10 to 20 percent, to prevent sudden large withdrawals from exceeding the seller's production and delivery capacity. At the end of the makeup period, any unused makeup gas entitlement lapses and the buyer forfeits the right to those volumes, meaning the take-or-pay payment effectively becomes a non-refundable minimum revenue guarantee to the seller.

The distinction between makeup gas and make-good gas is important but often confused. Makeup gas, as described above, is the buyer's right to future volumes in exchange for take-or-pay deficiency payments. Make-good gas is the seller's obligation to deliver additional volumes in a future period to compensate the buyer for volumes the seller failed to deliver when they were requested: a failure of supply rather than a failure of offtake. Where makeup gas corrects buyer underperformance, make-good gas corrects seller underperformance. Both are types of banked gas but they arise from opposite directions and may have different pricing, makeup periods, and priority rules within the same contract.

Fast Facts: Makeup Gas

Contract context: Take-or-pay gas supply agreements, pipeline tariffs, LNG sale and purchase agreements (SPAs)
Trigger: Buyer takes less than the take-or-pay quantity (typically 70-90% of ACQ) in a contract year
Makeup period: Typically 3 to 10 years after the deficiency year; varies by contract
Annual drawdown cap: Often 10-20% of ACQ per year to protect seller's delivery capacity
Priority rule: Buyer must usually satisfy current-year take-or-pay obligations before drawing on banked makeup volumes
LNG context: Makeup cargoes in LNG SPAs interact with destination restrictions and may require seller consent to divert to alternative ports
Make-good gas: The mirror concept, seller must deliver additional volumes to compensate buyer for seller delivery shortfalls
Force majeure: FM events may suspend take-or-pay obligations but their interaction with the makeup clock varies by contract; often heavily negotiated

Field Tip:

Gas buyers and traders managing a portfolio of take-or-pay contracts should track banked makeup gas entitlements alongside physical inventory positions. Makeup gas volumes that are close to the end of their makeup window represent "use-it-or-lose-it" value that should be prioritized in dispatch scheduling, even if spot market gas is temporarily cheaper. A spreadsheet tracking each contract's deficiency year, makeup period expiry, current banked volume, and annual drawdown cap is an essential tool for commercial gas management teams and is far simpler than trying to reconstruct the position from contract documents alone during a price spike or supply disruption.

Makeup Gas in LNG Sale and Purchase Agreements

Makeup gas provisions in LNG sale and purchase agreements (SPAs) are structurally similar to pipeline take-or-pay contracts but add complexity because of the physical nature of cargo delivery. Under an LNG SPA, the buyer commits to an ACQ expressed in MMBtu or million metric tonnes per annum (MMTPA) and a take-or-pay quantity of typically 80 to 90 percent of ACQ. If the buyer fails to take a scheduled cargo, it owes the deficiency payment and earns makeup cargo rights, though delivery is subject to seller convenience and liquefaction plant availability rather than on demand. Destination restrictions in older Asian LNG SPAs require makeup cargoes to be discharged at the designated receiving terminal unless the seller consents to a diversion, which may require a profit-sharing arrangement. More recent LNG SPAs, particularly those from US liquefaction projects, have liberalized destination clauses, reducing but not eliminating this constraint. Force majeure events affecting the seller suspend delivery obligations and make-good liability; events affecting the buyer may suspend take-or-pay obligations, but whether makeup gas entitlement accrues during buyer-side force majeure is heavily negotiated and varies by contract.

banked gas -- the accumulated volume of makeup gas entitlement that a buyer holds against future delivery; the total of all take-or-pay deficiency payments made but not yet recouped as physical volumes
make-good gas -- the mirror of makeup gas; additional volumes a seller must deliver to compensate the buyer for volumes the seller failed to make available during prior periods, arising from seller underperformance rather than buyer underperformance
deficiency payment -- the payment a buyer makes when it fails to take the minimum take-or-pay quantity; triggers the buyer's right to makeup gas in a future period
take-or-pay (TOP) -- the foundational contract structure under which makeup gas rights arise; requires the buyer to either take a minimum volume or pay for it, with a right to future delivery offsetting the payment

Frequently Asked Questions About Makeup Gas

What happens to makeup gas entitlements if the contract expires before they are used?

If a long-term gas supply contract expires before the buyer has drawn all banked makeup gas entitlements, the outcome depends entirely on the contract terms. Some contracts include a survival clause allowing the buyer to continue taking makeup gas under the expired contract's terms for a defined period after expiry, typically one to three years. Others simply cause unused entitlements to lapse at contract expiry, with no compensation to the buyer for the deficiency payments already made. This risk is a significant issue in markets where gas demand has declined due to fuel switching or economic contraction, leaving buyers with large banked makeup gas positions that they cannot consume before contract end. Buyers in this situation sometimes negotiate early contract termination with sellers to crystallize the makeup gas value as a cash settlement rather than a volumetric credit.

Can makeup gas be assigned or traded to a third party?

Most traditional take-or-pay and LNG SPA agreements treat makeup gas as a personal right of the named buyer and do not permit assignment, sale, or transfer to a third party without seller consent. In some liberalized gas markets, buyers have negotiated assignability as part of portfolio optimization arrangements, but these are the exception. Where assignment is permitted, the receiving party takes the entitlement subject to all original conditions, including expiry dates, annual drawdown caps, and destination restrictions.

How does makeup gas interact with swing provisions?

Swing gas and makeup gas are distinct: swing gas is a built-in volume flexibility mechanism for normal delivery, while makeup gas is a remedial entitlement arising from a prior deficiency payment. When a buyer wishes to exercise upswing rights and draw makeup gas in the same year, the combined request may exceed the seller's delivery capacity. Most contracts specify a priority hierarchy in which current-year ACQ volumes take precedence over makeup drawdowns, with the specific treatment of upswing volumes varying by contract drafting.

Why Makeup Gas Matters in Oil and Gas

Makeup gas provisions are a fundamental risk allocation mechanism in long-term gas supply contracts, determining how the economic consequences of volume imbalances are shared between buyers and sellers over the life of a contract that may span 20 to 25 years. For sellers, the take-or-pay structure and its associated makeup gas obligation provides revenue certainty that justifies the capital investment in upstream production, pipelines, and liquefaction plants; without the guarantee of minimum revenue regardless of buyer offtake, the economics of major gas infrastructure projects would be far more difficult to finance. For buyers, the makeup gas right transforms a take-or-pay payment from a pure penalty into a prepayment for future supply, limiting the financial loss from periods of demand contraction. In an era of energy transition, LNG market liberalization, and volatile gas demand, the treatment of makeup gas in contract renegotiations, arbitrations, and force majeure disputes has become one of the most commercially significant areas of gas contract law, with billions of dollars of value hinging on how makeup periods, drawdown caps, and seller convenience provisions are interpreted and applied.