OT05400 - PRT: valuation of non-arm's length disposals and appropriations - gas - valuation of light gases from 1 January 1994 - swing

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).