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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 - published prices

Published prices\ICE futures from April 2005 (formerly the International Petroleum Exchange or IPE)

ICE = Intercontinental Exchange

The LB Oil & Gas has considered two approaches to the use of published prices or IPE quotations as a basis for inter-affiliate sales where the proposed contract is other than for a flat supply. The first gives pricing certainty ahead of the contract year and the second varies throughout the year being based on the prices in a specified period before a known period of delivery.

The pricing certainty approach is more suitable to mature fields or those where the pattern of production is well established. In effect the value of the gas is determined in advance of the contract year by reference to weighted quotes during the previous year, or possibly a shorter period.

Example:

Assume that the daily contract quantity is 100,000 therms a day, with a swing factor of 150%.

Delivery 
Month  Expected Deliveries  Quarterly Deliveries\Total Supply  Average Quarter ahead prices in period July-Sept  Weighted Price   
           
  October 3,720,000      
  November 4,050,000      
  December 4,185,000 0.32753 14.377 pence 4.70889
  January 4,650,000      
  February 4,200,000      
  March 4,650,000 0.36986 15.891 pence 5.87745
  April 3,000,000      
  May 2,345,000      
  June 1,250,000 0.18068 12.97 pence 2.34342
  July 1,250,000      
  August 1,250,000      
  September 1,950,000 0.12192 11.71 pence 1.42768
  Resulting Price        14.35744 pence 

With a variable pricing methodology the published prices or IPE prices for the period of delivery in a preceding period are used to determine the value of the gas. For instance the published quotes for a calendar quarter’s deliveries in the preceding quarter can be used to determine the value for those deliveries. Alternatively the published prices in Month-1 can be used to value the deliveries in the next month.

LB Oil & Gas has no preference between quotes from one publication to another or the use of the futures prices. In terms of the period from which quotes should be taken to determine the price\value of the gas sale LB Oil & Gas will not accept a period of less than one month for valuations for a month’s or quarter’s deliveries. If the supply to be valued is such that day ahead or balance of month quotes may be appropriate then their use will be considered by LB Oil & Gas.