PRT: Valuation of Crude Oils & Products - Category 2 - Valuation of LPGs
LPG in this context means butane and propane and this section does not cover the valuation of condensates, methane or ethane.
The quality specifications of propane or butane from different fields in the UKCS are substantially the same and there are no pricing differences for LPGs delivered FOB at different terminals. A single monthly market value for each of propane and butane is computed by LBS Oil & Gas but where LPG does not accord with the accepted specification for that product, for reasons of contamination or other factors, the values calculated under these rules are not applied.
The methodology was devised in early 1988 and discussed at meetings with companies and UKOITC. A review of the methodology was commenced in late 1993 and after discussion it was agreed that the methodology remained appropriate given the nature of the LPG market. This was confirmed in a letter to UKOITC of 24 May 1994.
LPG is an inevitable by-product of both crude oil and gas production and storage and transport is both specialised and expensive. Companies’ primary concern is to ensure continued production of crude; bottlenecks caused by LPG can be costly and most producers seek to ensure security of offtake by arranging term contracts with companies who can afford the investment in infrastructure required to trade actively.
Term contracts are almost invariably priced by reference to the ANSI (Argus North Sea Index) and often include a discount, or more commonly, a premium to the base price. Contracts have also in the past been priced by reference to the BP agreed Price BPAP. BP stopped producing decision the BPAP index in 2006. Pricing is at the rate prevailing at the time of delivery.
The contrast between the predominantly term LPG market and predominantly spot crude market is the major difference between the two markets. There are however other differences including, inter alia,
- no multiple trading of cargoes (as in Brent, especially)
- no forward trading in LPG
- only minor paper market in LPG
For these reasons there is insufficient data to compute a daily average and valuation under PARA2(2C) is neither appropriate nor practical. Therefore to arrive at monthly values for butane and propane, LPGs are valued under PARA2(2D)(b).
The information reported to the LBS Oil & Gas consists of actual prices under spot and term contracts for LPG delivered in the chargeable period. The LBS Oil & Gas accepts that spot deals may reflect distress sales and that prices may not be representative. For this reason spot deals are excluded from the database. Most non-equity trading is done on CIF terms and, as the trading may include the margin in freight and geographical exchanges to take advantage of differing availability in various locations; these are excluded from the data base as are any prices relating to non-specification product also.
From the database a volume-weighted average of prices is compiled. This is based on all transactions in the product delivered in the month where the price is fixed by reference to the date of delivery. The average is rounded to the nearest half dollar (up or down) and this is the LBS Oil & Gas value for the product for that month.