Norway's Sverdrup expansion finds demand sweet spot in sanctions-roiled market

Norway's ramp-up of production from the flagship Johan Sverdrup oil development is finding a demand sweet spot thanks to improving global sentiment, North Sea production issues, and sanctions against Russia's Urals crude oil.

First brought on stream in October 2019, the 2.7-billion-barrel Sverdrup field was considered an outlier, the crude being a heavier, more sour grade than the sought-after light sweet crudes normally associated with the North Sea.

But Sverdrup has filled a hole as UK output plunged in the wake of the pandemic -- loadings of both the Brent and Forties crude blends fell in 2022, with Brent loadings dropping below 50,000 b/d in some months. UK oil output hit eight-year lows over the summer, while loadings of Norway's Oseberg blend have also declined.

Reflecting these pressures, 96% of Norwegian oil produced by state controlled Equinor went to European destinations in the third quarter, the company said.

In addition, an EU ban on seaborne imports of Russian crude that came into force Dec. 5 has made Sverdrup, with its similar quality, a substitute for Russia's Urals.

Europe's supply pressures come as Equinor ramps up production from Phase 2 of the Sverdrup development.

Sverdrup already accounted for over a quarter of Norway's oil output before Phase 2 started up in December 2022, and with the new phase, capacity is set to rise to 720,000 b/d, potentially accounting for over a quarter of all North Sea production.

The ramp-up is "good news" for European refiners, the International Energy Agency said in December, describing Sverdrup as the "most suitable" European replacement for Urals.

It remains early days as the Sverdrup Phase 2 development has suffered a shutdown since a Jan. 11 power outage.

Prices for the grade briefly dipped in November, possibly amid a glut of Russian crude ahead of the ban coming into force.

But analysts at S&P Global Commodity Insights expect prices for the grade to remain well supported.

With global economic sentiment improving, Sverdrup crude was assessed at a $1/b discount to the Dated Brent benchmark through much of January 2022, narrowing to a discount of 86.5 cents/b Jan. 25. That compares with a discount of $1.16/b on an average in January-February 2022, prior to the Russia-Ukraine war, according to S&P Global data.

Equinor says it is working to resolve the Sverdrup Phase 2 power issues, which are not the first of their kind at the Sverdrup project and are linked to its reliance on renewable power provided by subsea cable from the onshore electricity grid.

Exports diversifying

Sverdrup crude "has seen a few new buyers for sure in the new year," a North Sea trader said in recent days, adding that buyers had come from inside and outside Northwest Europe.

The latter is evident in renewed arbitrage shipments to Asia of both Sverdrup and the other main North Sea export grade, the UK's Forties, in recent months.

Chinese refiners appear keen to maintain a varied diet despite the price advantage of Russia's Urals.

Closer to home, the grade is making its way to southern Europe and the Mediterranean, including Spain, Greece, and even Turkey, the latter traditionally a big Urals buyer, ship-tracking data shows.

Cracking netbacks for Sverdrup crude in the Mediterranean -- an indication of realizations from refining the crude -- have also firmed since refiners shunned Urals crude in the wake of the invasion of Ukraine, with the netback assessed at $12.90/b Jan. 25.

Meanwhile, Finland's Neste, traditionally another big buyer of Urals, has also turned to Johan Sverdrup. Sverdrup imports to Finland have surged to over 100,000 b/d in most months since the invasion of Ukraine.