OT05392 - PRT: valuation of non-arm's length disposals and appropriations - gas - valuation of light gases from 1 January 1994 - identifying the disposal

The first step is to identify the disposal to be valued. We look to the disposal that has been agreed between the two parties, for instance a whole field production, or part of a field, and consider this in the light of current market practices. At this point the actual contract of sale between the parties may be used to provide the basis of the notional contract between the parties for the purpose of providing a framework within which the valuation can be considered.

For instance, if the actual contract was for the sale of all the producer’s gas from a field for a period of one year then LB Oil & Gas may consider that the notional contract would be based on the sale of all that gas for the same period. Such acceptance is dependent on contracts of similar duration being found in the arm’s length market. If the gas in question could be sold under contracts of a different duration then LB Oil & Gas will not seek to impose one duration of sale in preference to another, if both are appropriate to the proposed supply.

Where the actual contract is accepted as providing an appropriate framework then the length of the actual contract will serve to limit the duration of the notional contract and the length of any valuation for the purposes of OTA75\SCH3\PARA3A. However, the identification of the disposal is not always straight-forward and an extreme case may be seen in the example below.

Example:

A company seeks an agreement to a contract price based on quoted year ahead prices on the basis that the gas is being sold on a flat, 100% Daily Contract Quantity (no swing)\100% Take or Pay basis.

-	1Q	2Q	3Q	4Q
Price pence\therm	14	16	12	10
Annual Price	13	13	13	13

As will be seen later it may be acceptable to value this sale on the basis of published prices for sales of one year’s duration. However, in this example, further examination of the contract reveals that the gas is not, in fact, being sold on a flat basis, as the Take or Pay in the contract is set at 50% of the ACQ. Looking at the forward prices for gas it seems obvious that the buyer would cease to nominate at the end of the second quarter, as the price of available gas in the market would then be below the annual price in the contract. In this situation we would take the view that what is to be valued is a 6 months’ supply and that the use of a published annual price is inappropriate.