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HMRC internal manual

# 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).