SolvedOT05400 | PRT: valuation of non-arm's length disposals and appropriations - gas - valuation of light gases from 1 January 1994 - swing
From HM Revenue & Customs · Oil Taxation Manual
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 pence per therm | 22 pence per therm | 14 pence 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).