capSpire Blog — The Challenges of Netback Pricing and Today’s Dynamic Market:
New pipeline capacity. New extraction plays. Historically low natural gas prices. It can feel like the Wild West as shale gas operations disrupt what has traditionally been a conservative natural gas market. These changes are not only influencing how companies buy, sell, refine and store natural gas and NGLs, but also create challenges to the traditional netback equity pricing structures used by so many gas marketing operations. Netback pricing is a technique that is leveraged as a way for gas processing and marketing companies to pay equity producers for their product. Rather than negotiating a price for raw gas with the producers (that is independent of the price marketers negotiate on their sales) the netback model often relies on a “percent of proceeds” technique. This technique provides a set payment for raw product based on what the refined gas and NGLs are sold for, less incurred fees. These fees often include processing and fractionation fees, as well as transport fees and storage fees. Since netback pricing means the purchase price of raw product is usually not known until after sales are executed, it requires accurate tracking and transparency into the physical flow of natural gas along with the costs associated with each step in the process.
Historically, these calculations are done in spreadsheets, and while spreadsheets are manageable in normal scenarios, it’s the atypical scenarios that often cause problems. The introduction of new pipelines, supply disruptions, refinery bottlenecks, and ever-changing store vs. sell strategies — lead to unanticipated fees, changes to planned flow paths, and price/volumetric corrections can wreak havoc on a spreadsheet and create a lot of manual work to drive these calculations. In capSpire’s experience setting up netback processes, we’ve seen the most success structuring netback calculations on top of a commodity trading and risk management (CTRM) system. The CTRM system provides physical modeling of gas and NGL transactions, which we then leverage to create robust and flexible netback calculations that can trace through physical flows and capture every cost incurred. The benefit of using a CTRM system is that regardless of corrections or on-the-fly changes to flow paths to account for supply disruptions, the netback calculation is automated and full transparency into each of the costs and adjustments is visible.
capSpire has extensive experience defining and building net back pricing modules on the industry’s leading CTRM systems. Our approach for building netback pricing modules allows customers to take advantage of the flexibility of a CTRM’s system logistics and trade modules. A CTRM system provides physical modeling of gas and NGL transactions, which we then leverage to create robust and flexible netback calculations that can trace through physical flows and capture every cost incurred. The benefit of using a CTRM system over excel based approaches is that regardless of corrections or on-the-fly changes to flow paths to account for supply disruptions, the netback calculation is automated and full transparency into each of the costs and adjustments is visible.
Do your netback processes stand up to the tests of today’s dynamic market? If not, please contact capSpire to learn more about how we may help your organization.
capSpire is a global consulting and solutions company serving the Commodity Trade and Risk Management sector of the energy industry. Headquartered in the growing technology hub of Fayetteville, Arkansas, with an office in Tulsa, Oklahoma, capSpire has served over two dozen clients across North America and Europe. capSpire provides its clients with deep business and system expertise to simplify and streamline its commodity management functions for crude, natural gas, refined products, NGLs, coal, iron ore, agriculture and freight. Chief among its service offerings are IT strategy and planning, system selection, bespoke software development, implementation services, systems integration, complex enterprise content management and ongoing support.