At SmartCapitalMind, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
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 of the costs of delivering a barrel of oil to the marketplace from all of the revenues produced from the sale of oil or hydrocarbon byproducts. Oil and gas companies use the netback value to compare costs against competitors and to plan strategically for exploration and production of products. Costs included in the netback calculation may include finding and extraction costs, refining and production costs, and distribution costs. Other costs involved with delivery of oil to the market include taxes, royalties, and marketing costs.
For example, Company ABC incurs a total cost of $135 US Dollars (USD) to produce and deliver the end 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), almost 75 percent of the total costs of hydrocarbon end products relates to the costs of exploration and extraction. Refining costs account for an additional 10 percent of costs, with marketing efforts and transportation expenses making up about 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 possibility of little or no return. Typical onshore oil wells cost approximately $100,000 USD, but offshore drilling increases the costs considerably. Shallow offshore wells may cost as much as $30 million USD, and deep offshore wells may cost a company as much as $100 million USD or more.
Production costs associated with lifting the oil to the surface depend on a myriad of factors. Accessibility, depth of the well, and pressure in the reservoir are among the variables involved. These characteristics, which vary considerably with geographic location, determine the break-even price levels for oil and determine the overall costs included in the netback. A company can extract a barrel of oil in Kuwait for about $17 USD, while in the Canadian oil sands, the same barrel of oil costs $33 USD to lift. The EIA indicated that the offshore lifting cost 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. One barrel of oil consists of about 42 gallons (158.98 liters) of crude oil, which is usually converted 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 refiner pays $90 USD for a barrel of oil, it pays $4.55 USD per gallon (3.78 liters) of gasoline, assuming the crude oil only yields 19.75 gallons (74.72 liters) of gasoline. A gasoline pump price of $5.99 USD per gallon includes refining costs, taxes and distribution costs, totalling about 92 cents. The netback for the company is about 52 cents per gallon, with the average profit per gallon in the United States running between 30 and 60 cents per gallon.