What Is A Netback Agreement

The most recent data show that the total net return price (or value) of total natural gas on the LNG facility GAS counter at prevailing natural gas and LNG prices in June/July 2019 is essentially negative, with a fluctuation margin of approximately USD 4/MMBtu. For comparison, the price of Henry Hub is currently 2.40 USD/MMBtu. The image below shows the estimated July liquefaction contribution margins for alternative trades on JKM`s last trading day in June (not cleaned for Asian spot day prices). Such marketing agreements are of concern to some members of the energy industry, who recall that in the 1980s, similar agreements by oil-producing countries that wanted to sell crude oil in an excess market led to a catastrophic drop in prices, with net return pricing formulas encouraging refiners to maintain the race regardless of oil prices. Analysts may be confused by the observation that current low prices still fundamentally reflect a Henry Hub « Cost Plus » model. It is only by chance that this happens on a competitive marginal cost basis. It is a phenomenon of normal duality of economic theory. The price picture becomes even more complex when netback prices and end-user market price index price models work. This means that the current price floor could be lowered to about USD 1.50/MMBtu. The advantage is that such a marginal change, partly related to higher emission costs, will lead to an increase in demand for natural gas in the energy sector, which supplants coal outside the United States. In fact, this is the limit of the only real LNG growth segment. However, between dry Marcellus shale gas and the rapid growth of permissive shale gas, a schism of interest is created. As long as the U.S.

market and Henry Hub prices are protected, many producers will be willing to accept lower netbacks for international gas sales, as long as shale oil production is unfettered and can generate the necessary returns. These price differences are also a classic feature of international trade, which is sometimes claimed to be unfair competition. The impact on the global LNG market is considerable and the logic of setting up Apache shale gas in the Basin Permian and accepting market netback prices will likely be widely copied. Many buyers are also shifting their focus on sourcing to Texas and Permgas. At the international level, this means that a new price level and a new global concept of post-Henry Hub convergence could emerge. In this context, Apache Corp. recently signed a contract with Cheniere for the 15-year delivery of 0.85 Bcf/day of natural gas to Corpus Christi LNG Train 3.