Viewpoint: China beckons again for North Sea exporters

China looks set to be an even more important outlet for North Sea crude next year than it has been in 2020, reflecting both the Asian country's ongoing post-coronavirus economic rebound and the contraction of refining capacity in Europe as the continent continues to battle the Covid-19 pandemic.

China's economy posted growth of 4.9pc in the third quarter, up from 3.2pc in the second, virtually guaranteeing that it will be the only major global economy enjoying growth as 2020 draws to a close. Moreover, while the pandemic has triggered both temporary and permanent refinery closures in Europe, Chinese refining capacity has been expanding, prompting the country's ministry of commerce to increase crude import quotas for 2021 by 20pc to nearly 5mn b/d.

North Sea grades, and two in particular, Norway's Johan Sverdrup and the UK's Forties, are likely to play a material role in meeting that demand in 2021. The Johan Sverdrup field came on stream in October 2019 and has both revived overall North Sea oil production and rapidly established itself as a favourite with China's independent refiners.

Johan Sverdrup output ramped up rapidly in early 2020, hitting 411,000 b/d in April to reach its phase one plateau ahead of schedule. This performance helped lift Norway's overall crude and condensate production to an average 1.7mn b/d for the first nine months of the year, up by 21pc compared with the same period in 2019, according to data from the Norwegian Petroleum Directorate (NPD).

A lot of Johan Sverdrup's volumes have been heading to China. Shipments averaged roughly 170,000 b/d between January and November, according to tracking data from Vortexa, and look set to rise further — according to Argus surveys, around 8.7mn bl of Johan Sverdrup crude traded for January delivery into China's Shandong province, and around 14.4mn bl for delivery in February. Volumes arriving during January and February would typically load over November and December. Trade for March delivery — with most volumes loading in January — is already under way.

Johan Sverdrup volumes into China have swiftly outpaced shipments of Forties, which averaged around 109,000 b/d between January and November this year, down by nearly 48pc from 208,000 b/d during the same period in 2019, according to Vortexa data.

Chinese refiners did most of their North Sea crude buying this year in the spring and summer, when prices in Europe were low. Purchases fell in the third quarter as refiners struggled to digest the massive stocks accumulated earlier in the year, but are picking up again and will likely continue to rise through the first and second quarters of 2021.

The arrival of production from Johan Sverdrup has offset flagging output elsewhere in the North Sea, notably among the grades that feed into the North Sea Dated benchmark. Johan Sverdrup, whose January 2021 programme indicates new record output of 510,000 b/d, will drive total exports of the 12 main North Sea grades to just above 2mn b/d. Exports of the other 11 grades are expected to average 1.56mn b/d in January, a drop of 9pc from 1.7mn b/d a year earlier, loading programmes show.

Dated benchmark crude volumes in the North Sea have been declining for the past five years and will average 878,000 b/d in 2020, down from 909,000 b/d in 2019. That trend looks set to continue into 2021, given how many North Sea producers have cut development, maintenance and exploration spending following the Covid-19-induced slump in oil prices.

The largest Dated benchmark stream, Forties, for example, will be hit when major maintenance work — originally scheduled for summer 2020 — shuts the Forties Pipeline System (FPS) for three weeks in the spring. The start-up of a 37,000 b/d second phase of development of the FPS's largest field, Buzzard, has also been deferred until 2021. Liquidity has been a challenge for the Dated benchmark for many years, prompting the addition of grades such as Forties, Oseberg, Ekofisk and most recently Troll to the benchmark mix.

By Riyan Zerrouki