The lag between oil field development and demand was made stark as the giant Johan Sverdrup field reached 430,000 b/d output, just as demand crashed under the near global Covid-19 lockdown. The crude oil surplus is growing and all available land and sea storage could be full by mid-year
The giant Johan Sverdrup crude oil field in the Norwegian North Sea is a triumph of engineering. The field came on stream on 5 October 2019, more than two months ahead of the original schedule and Nkr40Bn (US$3.8Bn) below the original estimate for development and operation.
According to the operator*, state-owned oil company Equinor, the break-even price for the full-field development is below US$20 per barrel, and expected operating costs are below US$2 per barrel. The field is already producing 430,000 b/d. By May 2020, it will reach 470,000 b/d with the expectation of peak plateau production of 690,000 b/d.
The operator is aware of the timing of bringing such a large volume of crude oil to market during a drop in the oil price and a downturn in demand due to the Covid-19 coronavirus. “Johan Sverdrup is an important project to the companies, the industry and society at large. The project was sanctioned during the oil price fall in 2015 and resulted in important activity to the supplier industry in a demanding period. With low operating costs, Johan Sverdrup provides revenue and cash flow to the companies and Norwegian society at large in a period affected by the coronavirus and a major drop in the oil price. In today’s situation, co-operation between operators, suppliers and authorities is more important than ever to maintain activity and value creation,” said Equinor’s executive vice president for development and production Norway, Arne Sigve Nylund.
Johan Sverdrup’s low opex will help, but for other crude oil production facilities, maintaining “activity and value creation” is going to be a challenge. IHS Markit, which specialises in providing data and information on capital-intensive industries estimates the global oil supply surplus on a monthly basis – the amount of global oil production in excess of demand – could range from 4-10M b/d from February to May 2020. It warns that demand in March and April could be down as much as 10M b/d but oil fields and refineries cannot just shut production overnight. The result will be more crude oil and oil products passing straight through into storage on land and at sea. IHS Markit estimates that global available storage will be overwhelmed by the middle of 2020. From that point onwards, the reduced capacity would reverse back down the supply chain and oil fields will be forced to shut in production.
This is already happening. According to oil analytics company Vortexa, the severe lack of jet fuel storage in South Korea is believed to be behind the newbuilding VLCC Elandra Denali sailing direct from the Ulsan shipyard toward the Seosan KNOC Terminal. Vortexa reports that the Vitol-chartered VLCC may be deployed for jet fuel floating storage and/or for delivery to west of Suez markets. The current steep contango in Singapore jet fuel swaps is driving floating storage interest from traders. Vortexa last observed jet fuel load onto a newbuild VLCC in June 2019. Mirroring the current situation, that cargo was then also loaded from Daesan on the then Vitol-chartered Nissos Despotiko (the subject of an arbitration award), which later discharged via STS onto several tankers offshore west Africa and the UK.
At a macro level, the combination of the sudden fall in oil prices and possibility of a shut in of oil production will have a huge impact on those economies reliant on oil. According to the IEA, Norway is estimated to derive less than 20% of national GDP from oil and gas, which contribute 40% of exports, whereas oil and gas are 100% of Iraq’s exports and over 90% of national revenue (IEA figures). Collectively, revenues for the oil and gas producing nations could fall from US$287Bn in 2019 to US$70Bn in 2020, according to projections from the IEA.
* Johan Sverdrup partners are Equinor: 42.6% (operator), Lundin Norway: 20%, Petoro: 17.36%, Aker BP: 11.5733% and Total: 8.44%.