OT05319 - PRT; Valuation of Crude Oils & Products- Category 1 Oil Value Calculation Mechanism

The Oil Taxation (Market Value of Oil) Regulations 2006 (SI 2006/3313)- effective from 1st July 2006

Overview:

The principle behind each calculation is to produce, for each Category 1 oil, a series of daily market values based upon price assessments of three Price Reporting Agencies (PRAs); Platts, ICIS and Argus. From this daily series, a series of 5 day rolling averages is then calculated which are the market values. These daily values mirror the way oil of that kind is normally sold in contracts having the characteristics of the hypothetical contract.

The mechanisms for calculating market values are complicated; the reason lies in the way that the pricing clauses in contracts for delivery of real oil work (that is physical delivery as opposed to some kind of derivative contract such as a futures contract).

All statutory values are based upon an “average reference value”. This is calculated using daily Dated BFO assessments of three PRAs. To this North Sea reference price an “adjustment factor” is added to give the market value for any particular grade. Note that adjustment factors can be positive or negative, so adding them to the reference price will give the desired result.