What Is a Tolling or Leasing Contract?

Tolling contracts are often used by oil and gas companies.

Tolling contracts are used in the manufacturing business. Commonly used by gas and oil companies, there are also tolling contracts in other fields, such as chemical processing, automobile construction and other manufacturing.

Function

A tolling contract specifies that Company A will provide raw materials to Company B. Company B will process or modify the product and return it to Company A, which will pay a processing fee for the finished product. Therefore, Company B does not have to pay for raw materials, and Company A does not have to build a processing facility.

Examples

One industry that uses tolling contracts is the gas and oil industry. A company that owns oil rigs and a pipeline, for example, will deliver 100 million barrels of oil to a company that owns a refinery but no pumps. The refinery delivers 100 million barrels worth of gasoline and natural gas to the first company, and the first company pays the refinery a processing fee, then is free to sell the finished product.

Benefits

Tolling contracts benefit the companies involved by allowing them each to specialize in one area of the manufacturing process. This focus allows them to spend their resources on perfecting one aspect of a system while reaping the benefits of another company's efforts to perfect a different aspect of the process.

References

• Teach Me Finance: Tolling Arrangement
• Business Dictionary: Tolling Contract
• East-West Journal of Economics and Business: Tolling Arrangements in the Russian Industries: An Institutional Perspective