OT05394 - PRT: valuation of non-arm's length disposals and appropriations - gas - valuation of light gases from 1 January 1994 - timing of the disposal

Having identified the disposal, there will be a point in time when a price for a similar disposal may have been fixed. There are a variety of alternatives here and much depends on the pricing structure used in the contract as well as such factors as the duration of the contract.

In the case of most long term contracts, those of one or more years duration, it is arguable that there is a point in time before the signing of the contract when all the terms are agreed and the parties are committed to going ahead. Internally we refer to this as the handshake date. We are not looking to an exact and fixed date but LB Oil & Gas would try and identify a period within which other similar contracts were negotiated and use those for the purposes of identifying a handshake date for the non-arm’s length sale.

Other methods may be appropriate. For instance the gas may be being sold to a marketing affiliate which sells mainly into the industrial and commercial market. If the affiliate enters into a large number of one year contracts, commencing in October, and begins to re-tender for those in, say, July then it may be appropriate to look at May to July as an appropriate period for the valuation of the up-stream non-arm’s length sale.

The time or point of valuation depends both on the circumstances of the sale\disposal and the current market practice. The LB Oil & Gas would not seek to impose one valuation point on another sale if it was clearly inappropriate. So, for example, the time of valuation for a monthly sale is likely be very different to that of an annual sale.

At a meeting with UKOITC on 5 July 1993, it was suggested that this matter could be determined by a company writing to the LB Oil & Gas to notify the intention to sell gas to an affiliate and thus fix the handshake date. At that time the LB Oil & Gas agreed that this was a sensible answer. With the changes in market practices since then it is, probably, now an inappropriate way to determine the handshake date.