Netback is the gross profit per barrel of oil produced by an oil and gas company. It is calculated by subtracting all the costs of delivering a barrel of oil to market from all the revenue produced by the sale of oil or hydrocarbon byproducts. Costs included in the netback calculation may include search and mining costs, refining and production costs, and distribution costs.
The term netback refers to the gross profit per barrel of oil produced by an oil and gas company. A company calculates a netback by subtracting all the costs of delivering a barrel of oil to market from all the revenue produced by the sale of oil or hydrocarbon byproducts. Oil and gas companies use net worth to compare costs with competitors and strategically plan product exploration and production. Costs included in the netback calculation may include search and mining costs, refining and production costs, and distribution costs. Other costs associated with delivering oil to market include taxes, royalties, and marketing costs.
For example, ABC Company incurs a total cost of $135 United States Dollars (USD) to produce and deliver the final products of one barrel of oil. If the company sells those products for a total of $160 USD, the netback is $25 USD. According to the Energy Information Administration (EIA), nearly 75 percent of the total cost of hydrocarbon end products is related to exploration and extraction costs. Refining costs account for an additional 10 percent of costs, and marketing efforts and transportation expenses account for approximately five percent of the total.
Oil exploration involves highly sophisticated technology and personnel. Widely considered a high-risk venture, hydrocarbon exploration has become an extremely expensive operation with the potential for little or no return. Typical onshore oil wells cost approximately $100,000 USD, but offshore drilling increases costs considerably. Shallow offshore wells can cost up to $30 million dollars, and deep offshore wells can cost a company up to $100 million dollars or more.
Production costs associated with raising oil to the surface depend on a myriad of factors. Accessibility, well depth, and reservoir pressure are among the variables involved. These characteristics, which vary considerably with geographic location, determine the equilibrium price levels for oil and determine the overhead costs included in the netback. A company can pump a barrel of oil in Kuwait for around $17 USD, while in the Canadian oil sands, the same barrel of oil costs $33 USD to lift. The EIA indicated that the cost of offshore lifting per barrel of crude oil in the United States was, on average, $63.71 USD in 2008.
Refined hydrocarbon products include gasoline, diesel, home heating oil, and kerosene. A barrel of oil consists of approximately 42 gallons (158.98 liters) of crude oil, which generally converts to anywhere between 19.74 to 27.72 gallons (74.72 to 104.93 liters) of gasoline; The exact amount of gasoline that can be refined from crude oil depends on the type of crude oil and the refining process. If a refinery pays $90 for a barrel of oil, it pays $4.55 per gallon (3.78 liters) for gasoline, assuming crude oil only yields 19.75 gallons (74.72 liters) of gasoline. A gasoline pump price of $5.99 per gallon includes refining costs, taxes, and distribution costs, totaling about 92 cents. The net profit for the company is approximately 52 cents per gallon, with an average profit per gallon in the United States between 30 and 60 cents per gallon.
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