Calculating Differentials

A Brief Tutorial

Globe Icon Separator Gold
The data, opinions, interpretations, and guidance provided herein are for general information purposes only. NSAI accepts no responsibility for the accuracy of any such information or for any reliance made on it. The precision of estimated differentials depends on a number of factors, including the data available, the experience and judgment of the evaluators, and the methodology used.

 

Terminology

Benchmark or Index Price – Reference price of oil or gas, chosen because it is both familiar in the industry and relevant to the properties being evaluated.

Spot Price – “The price for a one-time open market transaction for immediate delivery of a specific quantity of product at a specific location where the commodity is purchased ‘on the spot’ at current market rates.” [EIA]

Posted Price – An established price for which a buyer is willing to purchase oil or gas for a period of time, usually at a major oil or gas pipeline interconnect location or at a refinery.

Futures Price – A price established on a futures exchange based on trading of contracts to buy/sell oil or gas for delivery at a future date; generally refers to the “near-month” futures price.  The “Futures Strip Price” is the price of futures in sequential delivery months, e.g., a 12-month strip price is the average futures price over the next 12 months.

Field Price or Realized Price – The price actually received for oil or gas sold from a given lease or field (sometimes referred to as the “wellhead price”).

Price Differential – The difference in price between an established benchmark and what is actually received at the lease or field (inclusive of adjustments for quality, energy content, transportation fees, and regional/local differentials).

 

Common Industry Benchmarks

 

Term 
Oil
Gas
FuturesNYMEX Light Sweet Crude
IPE (London) Brent Crude
(generally near-month, or front-month, trading)
NYMEX Henry Hub Natural Gas
IPE (London) Natural Gas
(generally near-month trading)
SpotSpot trading as documented by Platts Oilgram or Oil Daily is typically not for outright sales but for trading for near-month delivery so it is not the same as posting data.
Some daily spot trading is identified as same/next day trading, but prices are much higher than equivalent day posted prices.
Numerous pipeline companies in many different gas-producing or pipeline interconnect locations, reported in Platts Gas Daily
   - Daily Spot Prices
   - Monthly Index Prices
e.g., Houston Ship Channel, Dominion South Point
PostingsNumerous refining companies in many different oil-producing locations
e.g., Plains Marketing WTI Posting (West Texas delivery)
Most people consider the Gas Daily daily spot prices to be equivalent to oil postings.

 

Calculating Differentials Compliant with SEC Regulations

 

It is our understanding that the SEC’s intent is for the prices used in an evaluation to be the prices the Company could have received if it marketed/sold its gas/oil on the first day of each month within the 12-month period prior to the end of the reporting period.

 

Data Used
  • Gas/oil sales and transportation contracts (or summaries of contract terms) that cover the 12-month period.
  • Monthly lease operating statements (LOS) showing prices and revenue, by production month, for the 12-month period.
  • The previous 12 months of monthly index prices. The monthly index prices are different than the first-day-of-the-month SEC prices.
  • The 12-month unweighted average of first-day-of-the-month prices for the appropriate regional index.

 

Shown below is an example of both monthly index prices and first-day-of-the-month prices for the most commonly used indices.

 

Monthly Index Prices and First-Day-Of-The-Month Prices
Oil Prices ($/Barrel) - WTI Posting
Oil Prices ($/Barrel) - WTI Spot
Gas Prices ($/MMBTU) - Henry Hub
Monthly
1st-Day-of-Month
Monthly
1st-Day-of-Month
Monthly
1st-Day-of-Month
SEC
Reference
Price
As Of:

Mo-Yr
Index
Price
Posting
Date

Price
12-mo
Avg
Index
Price
Trans.
Date

Price
12-mo
Avg
Index
Price
Flow
Date

Price
12-mo
Avg
Oct-14
80.94
10-01-2014
87.25
94.63
84.40
10-01-2014
90.73
98.13
4.040
10-01-2014
4.135
4.290
Nov-14
72.12
10-31-2014
77.00
93.46
75.81
10-31-2014
80.54
96.96
3.770
11-01-2014
3.840
4.313
Dec-14
55.52
12-01-2014
65.50
91.48
59.47
12-01-2014
69.00
94.99
4.300
12-01-2014
4.235
4.350
12-31-2014
Jan-15
44.46
12-31-2014
49.75
87.71
47.27
12-31-2014
53.27
91.22
3.190
01-01-2015
2.995
4.238
Feb-15
47.35
01-30-2015
44.75
83.60
50.61
01-30-2015
48.24
87.12
2.870
02-01-2015
2.675
4.043
Mar-15
44.24
02-27-2015
46.25
79.21
47.78
02-27-2015
49.76
82.72
2.900
03-01-2015
2.770
3.882
03-31-2015
Apr-15
50.60
04-01-2015
46.50
75.06
54.45
04-01-2015
50.09
78.58
2.610
04-01-2015
2.625
3.728
May-15
55.95
05-01-2015
55.75
71.71
59.28
05-01-2015
59.15
75.22
2.530
05-01-2015
2.565
3.543
Jun-15
56.24
06-01-2015
56.75
68.17
59.81
06-01-2015
60.20
71.68
2.820
06-01-2015
2.650
3.390
06-30-2015
Jul-15
47.93
07-01-2015
53.50
64.15
50.90
07-01-2015
56.96
67.65
2.770
07-01-2015
2.775
3.253
Aug-15
39.67
07-31-2015
43.75
59.94
42.86
07-31-2015
47.12
63.42
2.890
08-01-2015
2.765
3.171
Sep-15
41.91
09-01-2015
42.00
55.73
45.45
09-01-2015
45.41
59.21
2.640
09-01-2015
2.685
3.060
09-03-2015
Oct-15
42.90
10-01-2015
41.25
51.90
46.25
10-01-2015
44.74
55.37
2.560
10-01-2015
2.475
2.921
Nov-15
39.23
10-30-2015
43.00
49.06
42.76
10-30-2015
46.59
52.54
2.030
11-01-2015
1.965
2.765
Dec-15
33.77
12-01-2015
38.25
46.79
37.23
12-01-2015
41.85
50.28
2.210
12-01-2015
2.095
2.587
12-31-2015

 

Methodology
It is the SEC’s intent, although it is difficult in practice, for the prices used in an evaluation to be the prices the Company could have received at the well or field if it marketed/sold its gas/oil on the first day of each month. Said another way, what happens in February or later should not affect the well- or field-level SEC price for January 1st. In practice, there are a few different methods to determine this price, including but not limited to:
  1. Obtain gas/oil sales and transportation contracts that cover the 12-month period prior to the end of the reporting period and use the differentials set out in those contracts with the appropriate regional hub spot/posted price index.
    • Recognize it is not always possible, or practical, to get contracts for every property.
    • Assumes that month-to-month contract terms are representative of the “price the Company could receive”.
    • Note that often times not all of the contractual arrangements that affect the net price received are well known or documented (which is why it is best practice to validate contract data with actual LOS).
  2. Use the monthly index prices and the monthly LOS to determine the average differential to the indices and then apply that average differential to the 12-month average SEC index price (average of first-day-of-the-month prices).
    • Assumes that the 12 months of the monthly differential is a close approximation of the differential in effect on the first day of each of the 12 months.
    • Used to verify contracts/contract terms or as a proxy or in lieu of obtaining month-to-month gas/oil sales contracts.
    • Recognize that LOS data over the same period as the SEC pricing indices may not be available, so you may be limited to using the average for the first 9 or 10 months rather than the 12-month average. The evaluator should use good judgment to determine the appropriate differential, reflecting his/her estimate for the missing months.

 

Example

Cautionary Notes
  1. Be careful to use the appropriate index prices when determining differentials for your price case.
    • The above example uses WTI posted oil prices. If using a WTI NYMEX or spot price forecast for a non-SEC report, be sure to factor in the difference between NYMEX and posted prices. For example, if you use the Bloomberg spot oil price with differentials determined from comparing historical received oil prices to posted oil prices, you will calculate a price that is too high. For 2015, the NYMEX vs. posted delta is $3.45 ($48.80 – $45.35).
    • Note that the difference between first-day-of-the-month prices and monthly index prices can make a difference in the differential calculation. For instance, for 2015 the average Plains WTI Posting oil price was $45.35, whereas the first-day-of-the-month average price for 2015 was $46.79, which if used incorrectly could lead to using a SEC wellhead/lease price that is $1.44 too high.
  2. Gas is typically sold on a $/MMBTU basis, so the example above assumes the BTU factor is known and is factored in before the differential is calculated. In some cases, where the BTU factor is not known, gas differentials are expressed as a % (or multiplier) of the index price rather than a $/MCF difference.
  3. The example shows differential calculations for the 12 prior months where LOS data are available at the time the estimates are made; some estimators limit the differentials to just the current calendar year and some estimators use the current year plus estimate the differentials for the missing months. For SEC reports, the estimators use their judgment to determine which differential best represents the full 12 months prior to the as-of date. For non-SEC reports, the estimators use their judgment to determine which differential best represents the expected future differential.