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HMRC internal manual

Oil Taxation Manual

From
HM Revenue & Customs
Updated
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PRT: valuation of non-arm's length disposals and appropriations - gas - valuation of light gases from 1 January 1994 - swing

Although gas is increasingly sold on the basis of no swing and 100% take or pay it is not uncommon to find different provisions in longer term contracts. As the inclusion of swing gives the buyer greater flexibility we consider that a higher price should be paid for gas sold under a contract containing a provision for swing. The value of swing can, in theory, be determined in a number of ways, but the most common ways that LB Oil & Gas has seen are comparing the alternative costs of storage and the use of forward prices. The Transco storage booklet contains a computation of the cost of swing determined by comparison to the costs of using the Rough storage facilities.

Example:

The example below shows how published prices can be used to value swing. It is based on the assumption of sales of 500,000 therms a day, on the basis of 130% swing which will be fully utilised in the period January to March and the need to balance sales at 500,000 therms a day over the whole of the year. The prices are purely illustrative.

Gas Year Nominations  1Q  2Q  3Q  4Q 
         
  500,000 Th\day +30%    

=

650,000 500,000 -30%

=

350,000
Published prices  Annual  2Q  4Q 
       
  18 p    
per therm 22 p
per therm 14 p
per therm
Cost of gas  Buy Annual  Buy 2Q Swing  Sell 4Q Surplus  Total cost 
         
365 days X 18 p\Th x 500k Th\day £32,850,000      
90 days X 150,000 Th\day X 22p\Th   £2,970,000    
90 days X 150,000 Th\day X 14p\Th     £1,890,000  
1+2-3       £33,930,000

Value of 30% swing = £33.93m \ 500,000 Th\day\ 365 days = 18.592p\Th

Less

Cost of annual flat gas at 18p\Th

30% swing costs 0.592 p\Th

It can therefore be inferred that 10% swing costs 0.197 p\Th (that is, 0.592\3).