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.
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|
|per therm||22 p|
|per therm||14 p|
|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|
Value of 30% swing = £33.93m \ 500,000 Th\day\ 365 days = 18.592p\Th
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).