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Navigating Norway’s cut

The non-Opec nation’s decision to join in mandated production restrictions is headline grabbing. But the material impact is open to question

Norway’s late April decision that it would be joining the ranks of oil producing countries imposing output cuts is eye-catching due to its novelty. But, while thinking about the Scandinavian nation in an Opec quota style context is new, a key variable—the baseline from which the cuts are calculated—is reassuringly familiar.

The figures put out by the Norwegian ministry of petroleum and energy (MPE) were clear enough—a 250,000bl/d cut in June and a 134,000bl/d cut for the second half of the year. But a cut from what? 

The reference case, says the ministry is 1.859mn bl/d. So, a cut of 250,000bl/d in June means maximum Norwegian continental shelf (NCS) oil production of 1.609mn bl/d, while the 134,000bl/d figure for the second half of the year gives an upper limit of 1.725mn bl/d.

The language used, for example, “upper limit”, is a reminder of the difference between this unusual Norwegian step—in a country with multiple NCS actors, the majority of them fully privately owned—and an Opec country where a state-owned NOC controls all or the vast majority of production.

Should they decide, based on market economics, NCS producers could produce less than the government cap. On the other hand, there is a high degree of state involvement in the Norwegian oil industry, as indeed in most aspects of a nation sometimes gently mocked for being Europe’s last bastion of Soviet-style statism.

The two largest NCS players by field ownership are Equinor, with two-thirds of its shares controlled by the ministry, and Petoro, a fully state-owned entity managing the country’s direct financial ownership of oil and gas fields.

Production permits

And the method of administering the cuts—adjusting the production permits granted to individual fields—also serves as a reminder that the state taking a hand in managing Norwegian production is hardly unprecedented.

The maximum annual limit on the production permit of the giant Troll swing gas field is an established consideration of the European gas market’s supply/demand dynamic. 

The MPE’s statement had several political undertones. It acknowledged both the Opec+ deal and the G20’s energy ministers’ April commitment to market. 

Norway is not in the Opec+ club and, while energy minster Tina Bru participated in the G20 video call, it also has a notoriously spiky relationship with what some Norwegian political figures see as the overly exclusive G20.

Bru’s “the decision by the Norwegian government to reduce Norwegian oil production has been made on an independent basis and with Norwegian interests at heart,” quote in the MPE’s statement felt very much aimed at a domestic political audience.

The cuts will be “fairly distributed” across oilfields, there will be “proportionate limitation” based on a number of criteria, while “oil companies will be consulted before revised production permits are granted”.

But, the ministry stresses, it “has not been in in contact with the licensees on the NCS in the process of establishing the reference production”.

All of this suggests the government is aware of potential disquiet among shareholders in, and even capital flight from, the listed NCS operators who may have to adjust production forecasts for the rest of the year based on regulatory, as well as market conditions, change. It might also be thinking of its commitment to Equinor’s other shareholders to treat all owners of a stake in the company equally.

At first glance, given recent excitement over Norway’s return to output in excess of 2mn bl/d, a cut of 250,000bl/d from a base of 1.859mn bl/d seems significant. But it is worth unpacking.

The 2mn bl/d+ figure is for liquids, rather than crude, i.e. it includes condensate and NGLs. Gas and condensate fields are exempt from Norway’s cuts, the ministry notes, as indeed big Opec+ movers such as Russia like to take condensate out of quota arrangements.

Looking at the latest Norwegian Petroleum Directorate (NPD) production figures, for March, total liquids production was just shy of 2.05mn bl/d for a second successive month of production above 2mn bl/d. But 360,00bl/d of that production was condensate and NGLS, just 1.68mn m³/d was crude.

Indeed, the last time that NCS monthly crude output topped the 1.859mn bl/d reference case? October 2010. Based on March’s number, June at its maximum permitted 1.609mn bl/d would be a cut of 73,000bl/d.

So how has the MPE come up with a reference case that appears to offer very different levels of reduction on paper and in production figures? Producers’ applications for 2020 production permits and reporting to the national budget process in autumn 2019 played a role, says the ministry—as well as the slightly mysterious sounding “new important information received from the companies during the first quarter”—while NPD cooperation has also been sought.

Some of the justification for the high number may cause hard-bitten Opec observers to nod their heads cynically in recognition. “Adjustments have been made for maintenance shutdowns planned for spring 2020 that have been postponed due to infection control measures related to the Covid19 pandemic,” says the ministry. It seems dubious that the cut will have a material impact, particularly given April is hardly a traditionally heavy maintenance month, responds a sceptic.

But one variable does ring much truer. “Adjustments have been made following production experience from the start-up phase of the Johan Sverdrup field,” says the MPE. The new development has seen stellar growth, reaching 378,000bl/d of crude, as well as 13,000bl/d of NGLs, in February.

And Sweden’s Lundin, a minority Johan Sverdrup shareholder, revealed at the end of April that the field had reached a revised phase 1 capacity plateau of 470,000bl/d. Assuming the same crude/NGLS breakdown, that would translate to Johan Sverdrup being able to produce some 76,000bl/d more crude in June than in February. And thus, rather than a 152,000bl/d difference between February’s actual NCS crude production and the June maximum (February’s NCS crude output was materially larger than March’s), the gap in barrels genuinely held off the market would be 228,000bl/d, very much closer to the headline 250,00bl/d figure.

The other question is how much the figures themselves matter. As the MPE acknowledges, Norway produces just 2pc of the world’s crude. But it also points out that “cuts in oil production introduced by government[s] will contribute to a faster stabilisation of the oil market compared to letting the rebalancing take place only though the market mechanism”. That might be the most telling line of all in the MPE’s statement, a clear message to the market that Norway is prepared to do its bit—and not be a freeloading drag—on price recovery. 

 

Source: NPD
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