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HMRC internal manual

Oil Taxation Manual

PRT: valuation of crude oils and products - category 1 oil value calculation mechanism

The Oil Taxation (Market Value of Oil) Regulations 2006 (SI 2006\3313) - effective from 1 July 2006

Overview

The principle behind each calculation is to produce, for each Category 1 oil, a series of daily market values based upon price assessments of three Price Reporting Agencies (PRAs); Platts, ICIS and Argus. From this daily series, a series of 5 day rolling averages is then calculated which are the market values. These daily values mirror the way oil of that kind is normally sold in contracts having the characteristics of the hypothetical contract.

The mechanisms for calculating market values are complicated; the reason lies in the way that the pricing clauses in contracts for delivery of real oil work (that is physical delivery as opposed to some kind of derivative contract such as a futures contract).

All statutory values are based upon a “North Sea reference price”. This is calculated using daily Dated BFO assessments of three PRAs. To this North Sea reference price an “adjustment factor” is added to give the market value for any particular grade. Note that adjustment factors can be positive or negative, so adding them to the reference price will give the desired result.

From 8 June 2007 the BFO contract was extended to include Ekofisk blend crude oil and became the BFOE contract. For deliveries from June 2007 the North Sea reference price was calculated using PRA BFOE assessments.