Viewpoint: Johan Sverdrup boosts North Sea 2020 supply

Norway's giant Johan Sverdrup field will revitalise North Sea production in 2020, when inflows of US crude should continue to push local output into other markets.

Total North Sea production averaged 2.6mn b/d in 2019, according to Argus calculations, down by 3pc from the previous year. Production in December exceeded 3mn b/d for the first time since February 2012, with similar rates likely in the coming year thanks almost entirely to Johan Sverdrup, where production has ramped up rapidly to 337,000 b/d. Its operator, Norwegian state-controlled Equinor, expects the field to produce 440,000 b/d by next summer.

This will offset continued declines at the North Sea's more mature fields, which are showing signs of age. Shell has started decommissioning the Brent field, and the UK's biggest field Buzzard — the largest contributor to the Forties grade — registered a significant slowdown in 2019. It produced more than 126,000 b/d in January and February, before production declined to average 115,000 b/d in the second quarter and 96,000 b/d in the third quarter. Forties Pipeline System (FPS) operator Ineos forecasts unstabilised Buzzard output to average 119,000 b/d in the first quarter of 2020, some 11pc less than its forecast a year ago for the same period in 2019.

The decline in Buzzard output could lower the availability of Forties, and make the grade lighter and sweeter — potentially affecting whether it trades on an fob or delivered basis.

Johan Sverdrup already appears to have replaced Forties as the North Sea crude of choice for refiners in Asia-Pacific. More than a third of November's seaborne Forties loadings remained in Europe, after Asia-Pacific refiners took 87pc of October's Forties seaborne loadings and all of those in September. Johan Sverdrup came online in early October.

Johan Sverdrup has traded on a delivered China basis more often than on a fob North Sea basis, according to traders. In China, the grade is seen as a direct competitor to Brazilian Lula. But the price of the grade when it loads at Mongstad has been difficult to determine. Traders said Johan Sverdrup was offered at a 50¢/bl discount to North Sea Dated, but trades in Europe have been limited by Equinor's focus on building business in Asia-Pacific. This suggests that eastbound flows of the grade will continue in 2020.

Eastbound shipments were higher for all the North Sea's benchmark grades — Brent, Forties, Oseberg, Ekofisk and Troll — in late 2019, when buyers in many cases turned to smaller tankers rather than the more typical very large crude carriers (VLCCs). This was partly driven by increased demand for light sweet crude to help refiners produce marine fuel compatible with new regulations. New shipping patterns appeared with several North Sea grades being co-loaded, and niche grades that typically go west, such as heavy Kraken, being loaded on the same tankers as cargoes of low sulphur fuel oil for shipment to Asia-Pacific.

European demand for US crude will likely continue in 2020, after shipments nearly doubled in 2019 to an average of roughly 962,000 b/d. WTI typically trades in Europe on a cif Rotterdam basis, most recently at a $2.85/bl premium to Dated.

By Riyan Zerrouki