OT05202 | PRT: the nomination scheme - why the scheme was introduced

Background

The nomination Scheme is an anti-avoidance measure introduced in 1987 to combat the manipulation by oil companies of prices returned for PRT purposes. Companies were taking advantage of the very fluid spot market that had developed for North Sea Crude, with its continually changing level of prices, to deliver their equity crude into low priced contracts and satisfy their high-priced contracts with bought-in crude. In the sophisticated Brent market, the number of contracts made for sale and purchase of crude was many times the number of cargoes ultimately delivered, giving great scope for such choice.

Overview

The Scheme works by reducing the element of hindsight (and thus the ability to pick and choose the lowest prices for PRT). It does this by guaranteeing the actual price paid in an arm’s length deal as the price for PRT purposes only where the producer nominates the contract within one day of the deal being struck and then actually supplies equity oil as nominated. So for arm’s length deals a company has to commit itself before hindsight can come into play, or risk the possibility that it will be taxed, broadly, on the statutory market value if that is higher than the actual price achieved.