Johan Sverdrup emerges as potential benchmark saviour

Norway's Johan Sverdrup is being touted as an unlikely saviour for Europe's light sweet marker, following the recent abortive attempt to add WTI to Dated Brent.

Price reporting agency Platts earlier this year retreated from its attempt to convert its Dated Brent benchmark into a delivered price featuring WTI, following a fierce backlash from the industry. But including US crude in the basket of crudes underpinning the benchmark appears to remain the favoured option of Platts and a significant part of the North Sea trading community.

But for others, WTI makes little sense. It trades on a delivered rather than a fob basis, on cargoes 100,000 bl larger than the North Sea grades it competes with. And with no loading programme, its inclusion as a deliverable grade in the North Sea forward contract looks problematic at best. Opponents have instead suggested Norway's Johan Sverdrup. The grade, which started up in 2019, has a loading programme, loads in the North Sea on mostly Aframax tankers and already trades on a fob basis. So it ticks a lot of boxes. And there is plenty of it.

Benchmark grades Brent, Forties, Oseberg, Ekofisk and Troll are declining, with loadings last month slumping to 600,000 b/d — the lowest in decades. Johan Sverdrup flows, by contrast, will rise as more wells come on stream. Using them to underpin the marker would perhaps be the simplest solution to its sliding volumes.

The key benefit of Johan Sverdrup is its loading programme, which is released at the same time each month as the existing benchmark schedules. WTI, of course, does not have a loading programme. As a result, there will always be an uncertain number of cargoes available for European buyers — WTI could travel somewhere else or it could not travel at all if the economics do not work. Establishing a price when the amount of supply is certain is a far easier task.

The main objection to Johan Sverdrup is its quality, with WTI a far closer match to "Brent". Johan Sverdrup is heavier at 28°API, and sourer with a sulphur content of 0.8pc. But Johan Sverdrup is sour only by North Sea standards. Its sulphur content is actually not dissimilar to Forties' 0.62pc. And Forties used to regularly be around 0.8pc when the giant Buzzard field was producing more.

Five degrees of separation

While Johan Sverdup is heavier than the marker grades, the five crudes differ from each other quite markedly, with five degrees of gravity between Forties and Troll, for example. The average difference between their highest and lowest price has been 66¢/bl in the past three months. Nonetheless, Johan Sverdrup does trade at a sharp discount to them, averaging over $2/bl below Brent and Forties since Argus launched a fob Mongstad price for the grade in February.

Argus and Platts already use a system of quality premiums to adjust for price differences between the five grades. A similar mechanism could be used to adjust the price of Johan Sverdrup for benchmarking purposes.

The perception that Johan Sverdrup is unrepresentative of the region's output is perhaps changing. It already accounts for a fifth of North Sea production, and this will rise. North Sea output in the first half of this year has been relatively stable with recent years at 2.7mn b/d. But this is entirely down to Johan Sverdrup. Without it, January-June flows would have been the lowest since 1979.

The fact remains that as a heavier sourer crude, its price reflects different market dynamics to a light sweet crude. There are good reasons not to include Johan Sverdrup in Dated Brent, as there are for WTI. But the perfect solution does not exist. It may be that it is less disruptive to include a quality-adjusted grade from the North Sea than a light sweet grade from elsewhere. Given the declining volumes in the existing basket, a choice needs to be made soon.

By Michael Carolan

Johan Sverdrup discount to Forties

North Sea benchmark stream output