Refining Processes Handbook
Filled with handy process flow diagrams, this comprehensive reference covers the technologies and operations of petroleum refineries and provides material on operating a jointly owned and operated refinery.
TABLE OF CONTENTS Refining Processes Handbook
Chapter Fourteen: Pricing Petroleum Products
NETBACK AND FORMULA PRICING FOR CRUDE OIL
The netback pricing of crude oil set a crude oil price on the basis of the product market. Netback and other formula techniques seek to provide reduced market risk and reasonable return to the refiner during extreme market fluctuation, and they make long-term contracts between crude producers and refiners possible.
In the past, violent price fluctuations created huge trading losses for some companies; and this accelerated the shift to netback and other formula pricing as a tactic to minimize risk in place of outright sale at a negotiated price.
There are four basic components of any netback deal: yield of the finished products from refining the crude in question, product prices, timing, processing fees, and transportation cost.
YIELD
The yield is the portion of each refined product that, when combined with refinery fuel and loss, adds up to the whole barrel of crude. A specific spot product price reference point (as monitored by an agreed-on published source) is selected for each portion of yield to determine the total value of crude oil. The processing fees include refining cost, freight, and other elements that are deducted to arrive at a net value of the crude back at the point of origin (i.e., the netback). The basic method of calculating the netback price follows.
PRODUCT PRICES
Spot prices quotes from any reporting service can be used, although Platts spot price quotes are most popular. The netback price reference is based on the high, mean, or...
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