Appendix 2: 2005 Pre-Budget Report and 2006 Budget

Crude Oil Valuation

The changes introduced by HM Revenue & Customs on North Sea crude oil pricing are intended to reduce tax-motivated commercial behaviours. The new measures relate to the following operations:-

• Oil traded in non-arm’s length operations (i.e. internal trading of crude oil between businesses within a single company). For these operations and where a published price from price reporting agencies is readily available, crude oil will be valued by taking the daily average of the quoted prices on the day of delivery or appropriation, and two days either side of that day (known as the 2-1-2 method). For crude oils with no published prices, the valuation will be agreed with HM Revenue & Customs based on actual arm’s length sales (i.e. sales to non-associated companies). In the previous regime, values for crude oil in non-arm’s length operations were obtained monthly by taking the average of daily prices in actual arm’s length sales over a six week period.
• Oil traded in forward contracts at arm’s length (which does not relate to a specific cargo of oil and where the contract may be booked out, as in the case of the current Brent forward market). For this type of operation, the Government decided to tighten up the scheme used to nominate oil sales (the Nomination Scheme) by changing the previous limit of 5.00 pm on the day after the transaction to within 2 hours from the time the transaction is agreed. The new scheme allows for nominations outside office hours.
• Sales of blended equity and non-equity oil – cargoes of blended oil will be allocated to source fields, pro-rata to the company’s monthly production from those fields. Such change will override, for tax purposes, the field or fields the cargo is actually lifted from, as determined within the complex web of commercial agreements between different field, pipeline and terminal owning companies. In the previous regime, companies had the option to choose the onshore terminal or offshore loading point from which field blended oil was deemed to be lifted.