OT05450 | PRT: valuation of non-arm's length disposals and appropriations - gas - gas substitution within an allocation agreement

Generally, gas substitution occurs where an agreement is in place between participators in two or more fields (together, in many cases, with the buyer of gas from those fields) for the buyer’s nominations from one field (‘the borrower’) to be met in whole or in part by the production of another field (‘the lender’). The gas borrowed is subsequently repaid to the lender from the production of the borrower. In effect the parties to the substitution agreement are swapping the production entitlements from their fields to meet their current sales requirements in the event of operating difficulties.

Gas substitution agreements normally (but not invariably) occur between fields within a commingled system, and usually:

• allow borrowing to take place only if the borrower would otherwise be unable to meet its buyer’s nominations as a result of production and delivery facilities being temporarily out of action,

• impose limits on the amount of gas which can be borrowed,

• require borrowings to be repaid by the end of the gas year.

Depending on the facts of each case, there are two possible ways a substitution agreement may be dealt with for PRT purposes.

The first possible approach is that gas borrowings and repayments constitute disposals of gas otherwise than in sales at arm’s length. The argument is that gas which the participators in the borrowing field sell is not won from that field and is therefore not assessable to PRT in their hands. It is however production from the lending field, the participators in which have disposed of it otherwise than in a sale. The lenders are therefore assessed on the market value. Conversely, when the gas is repaid the gas is assessable in the borrowing field at market value.

The second possible approach applies only to fields within the same pipeline system, see OT05455.