Equinor's surging Sverdrup output, cost cuts cushion $3-bil impairment

London — Norway's Johan Sverdrup field, responsible for a quarter of the country's oil output, helped buoy state-controlled Equinor in the third quarter as it reported $2.9 billion in financial impairments relating to lower prices and its US shale investments.

The company's overall oil and gas output was up 7% from a year earlier at 1.87 million b/d of oil equivalent, which included a 25% jump in its Norwegian oil production to 619,000 b/d, offset by a 17% drop in its overseas oil production, to 371,000 b/d, a results statement showed.

CFO Lars Christian Bacher forecast a full-year increase in the company's oil and gas production of 1.5%-2%, depending on European gas prices, adding the impact of a 10-day strike by offshore managers at the start of October had been "marginal." He also said oil price perceptions were overly "skewed" by weak demand.

Production from Johan Sverdrup has steadily increased since it came on stream in October 2019, with liquids output exceeding the official capacity of the first development phase to reach nearly 490,000 b/d in August, the latest month for which figures are publicly available. Equinor holds a 42.6% stake in the field. Digital innovations had helped enable per-barrel production costs at the field of less than $1 during the quarter, Bacher said in an investor call.

Equinor's overseas oil production has, however, been hit by a problem with risers at its Peregrino heavy oil field offshore Brazil, which Bacher said was taking "way longer" to resolve due to coronavirus restrictions, with the field now expected back on stream in the first quarter 2021.

However, the company also benefited from improved gas prices in Q3, which spurred it to increase gas production by 9% year-on-year to 874,000 boe/d, including a 15% jump in its Norwegian gas production to 654,000 boe/d.

Bacher noted that one major upset for the company, a fire that badly damaged the Hammerfest LNG complex in northern Norway in September, was taking time to respond to partly because salt water from the production stream had been used to extinguish the blaze. The company has said it could take up to a year for the 4.3 million mt/year plant to come back on line.

Equinor reported an adjusted profit of $780 million profit, down 70% from a year earlier, but an outright loss of $2.1 billion, reflecting financial impairments, "mainly due to reduced future price assumptions as well as some reductions in reserves estimates," it said. The impairments included $1.2 billion relating to US shale and $1.2 billion relating to overseas activities outside the US, principally the UK's Mariner heavy oil field, the company said.

In early October Equinor published the results of an independent review of its loss-making US shale purchases, dating from 2008-11, which found the purchases were based on overly optimistic price assumptions and a lack of control.

Oil fundamentals

However, Bacher, while defending Equinor's recent moves into renewables, took a relatively bullish stance on the outlook for oil, as the company produced a new projection for prices, putting the assumed Brent price in 2025 at $65/b, rising further to 2030. Its previous 2025 assumption for Brent was $78/b.

Bacher said current perceptions in the market were overly influenced by weak demand rather than the reduction in future supply being brought about by falls in investment, and said there had not been any "fundamentals" behind this spring's commodity price crash.

Equinor's projections, he said, took into account trends such as population and GDP change around the world, and underlying changes in energy supply and demand patterns. What could alter price assumptions more fundamentally would be "game-changing" technology breakthroughs relating, for example, to hydrogen, he said. "For us this is a huge and very thorough analysis," Bacher said.

"Discussion is somewhat skewed towards a huge focus on the demand side and the weak demand which we see now in the market, but that's for the short term. But really we focus on the supply side and what has been taken out of new capacity over the last year by projects being not sanctioned, or postponed or stopped even, half way into the development in a few cases."

"Whatever we saw in March-April in the drop in commodity prices... there were not any fundamentals behind it. It was just sort of the market reaction there and then, and the assessment around that."

The company's debt gearing increased to 31.6% at the end of the quarter because of the impairments, and it reiterated its plans for $8.5 billion in capital spending this year following a downward revision in response to lower prices.

"Significant uncertainty remains around the future commodity price development, underlining the importance of increased competitiveness and financial resilience," CEO Eldar Saetre said.

Separately, Equinor said it had made two oil discoveries offshore Newfoundland, Canada, alongside BP, in the Cappahayden and Cambriol prospects in the Flemish Pass basin, but said it was too early to assess the extent of the finds.