Natural gas basis differentials in business contracts

Define both ends of the comparison

Identify the benchmark, local pricing point, publication, settlement month or day, and units. Basis can be positive or negative and can change with regional supply, pipeline capacity, storage, and demand. A difference between unlike periods or units is not a clean basis comparison. Ask the supplier how its quoted basis connects to the utility delivery point and whether transport, fuel, and other adjustments sit inside or outside that figure.

Benchmark and basis can move independently

Henry Hub reflects a particular U.S. benchmark location. A constrained region may become more expensive during cold weather even if the benchmark moves less. Conversely, a producing region can have a discounted local price. Fixing one component therefore does not necessarily protect the other. Review whether the agreement fixes commodity only, basis only, both, or neither. A supplier adder can also bundle services beyond a pure market-location differential, so obtain a component description.

Compare delivered structures fairly

One proposal may state benchmark plus a broad delivered adder; another may list basis, transport, fuel, balancing, and margin separately. Normalize their scope to avoid counting transport twice or omitting it. Request high-demand and constrained-delivery scenarios where they are relevant to the facility. Firmness and physical delivery rights are separate from a quoted financial basis. A low modeled location differential cannot substitute for the operational service required by a process that cannot interrupt gas use.

Hypothetical basis exposure

Assume a simplified monthly benchmark of $3.00/MMBtu and regional basis of $0.50/MMBtu, giving $3.50/MMBtu before unlisted costs. If the benchmark stays at $3.00 while basis rises to $2.00, that subtotal becomes $5.00. A benchmark-only fixed agreement would not automatically protect the $1.50 change. These invented values illustrate the mechanism; actual quotes require the named index, delivery point, transport scope, and terms. Model volume at the same time to translate unit exposure into dollars.

Practical review checklist

• Record benchmark, regional point, publication, period, unit, and the exact basis formula.
• Identify whether commodity, basis, transport, fuel, balancing, and margin are fixed or variable.
• Normalize bundled and unbundled offers without omitting a component or counting it twice.
• Evaluate delivery firmness and constrained-weather obligations separately from the financial price differential.

Questions & answers