INTERVIEW: Norway's Aker BP eyes Sverdrup oil field upside in 'intensely strong' market

Norway's second-biggest oil and gas producer, Aker BP, is benefiting from an extremely tight North Sea market as it anticipates a further boost from Phase 2 of the Johan Sverdrup crude project and does its best to help ease Europe's energy crisis, CEO Karl Johnny Hersvik said in an interview.

Hersvik was speaking Aug. 29 after Aker BP completed its purchase of Swedish-owned Lundin Energy's oil and gas assets on June 30, more than doubling its output to at least 400,000 b/d of oil equivalent.

The company, with BP and engineering group Aker as its biggest shareholders, has an oil-weighted portfolio -- the Lundin assets potentially push up the share of oil further -- and thus less exposure than some rivals to Europe's high gas prices.

However, Hersvik noted fields producing heavier oil, which traditionally traded at a discount, are fetching strong prices in the wake of sanctions and efforts to isolate Russia following the Ukraine invasion, as Moscow diverts medium sour Urals crude elsewhere.

Aker BP is the second-largest stakeholder in Norway's flagship Johan Sverdrup field, a producer of medium-sour crude, with a 31.6% stake. It also operates Edvard Grieg, a contributor to the Grane heavy blend.

Sverdrup has traded at a premium to benchmark Dated Brent for much of the last six months, according to Platts, part of S&P Global Commodity Insights.

"I've never experienced a stronger physical market in my entire career," Hersvik said, noting the high-quality Alvheim grade had fetched premiums in the region of $4.50-9.50/b.

"The discount we used to see on the heavier [grades], the Grane blend and also other North Sea qualities, has almost disappeared, which means there is a physical under-supply" in Europe, he said, adding that Russian use of Aframax tankers to send oil to Asia was also a likely factor.

High prices are a stimulus to quickly launch production from Phase 2 of the Johan Sverdrup development, Hersvik said. The 2.7 billion barrel field, discovered by Lundin, came on stream in 2019 and is Norway's highest producer, with Phase 2 set to raise capacity from 535,000 b/d to 755,000 b/d.

State-controlled Equinor is targeting Q4 2022 to bring Phase 2 on stream, although it managed the 2019 startup slightly earlier than planned.

The partners are also looking at a possible Phase 3, aimed at boosting recovery rates, Equinor says. Hersvik said an exploration campaign would take place in "the next couple of years" to check for overlooked resources.

"Our focus at the moment is in parallel with the operator to get Phase 2 into production as soon as we can for obvious reasons given today's oil and gas market run," he said.

"The No. 2 priority is to get line of sight on -- let's call it -- an infill drilling program, to make sure there's sufficient well capacity. Then the Number 3 priority is to look at further infrastructure investment opportunities or tie-back opportunities."

On Europe's energy crisis, Hersvik said Aker BP was maximizing gas output from its Skarv field, which was formerly an oil producer, but has been switched to gas production, with remaining oil reserves now under 10 million barrels.

He predicted Europe's efforts to reduce reliance on Russia while reducing emissions could boost the role of gas as a "transition" fuel en route to net-zero, and said he didn't expect an impact on Aker BP's strategy, which targets hydrocarbons rather than oil specifically. The company aims to submit 15 development plans in 2022, taking advantage of pandemic tax breaks.

"In the oil and gas business after we take a decision it's three-five years until we see cashflow so we need to think about this on a long time horizon and I think our view on the energy market is that gas as a transition fuel -- that position is secured, it's probably more secure," he said.

"We don't really see an alternative, but we in parallel see stronger investment in renewables, which might ultimately take over quicker in Europe if you look at it from a 5-10 year perspective than without the current energy crisis."

Electrification challenge

The company is, however, facing higher costs due to the energy crisis and Norway's switch to powering oil and gas facilities from its hydropower-based grid, an issue also raised by rival operator Wintershall Dea.

Whereas operators traditionally used their own gas, or imported diesel, to run turbines and compressors, Norway aims to curb emissions by installing subsea cables from shore, with Sverdrup a conduit for supplying power to other fields.

Following a dry summer that helped push up prices, Aker BP's power purchases have raised its operating costs by $1/b, Hersvik said, predicting, however, Norway would not reverse the strategy.

New field developments are "totally dependent on power from shore to be developed at all," he said, adding any hypothetical reversal in policy would reduce gas supply to Europe, and a more likely solution would be upgrades to the power supply system.

Barents Sea

On the long-term outlook, Hersvik reiterated his reservations over the cost of the 500 million barrel Wisting project in the Barents Sea, in which Aker BP is a partner with Equinor, its stake derived from the Lundin purchase. A development plan is due to be submitted for approval by year-end.

While Equinor already has the Johan Castberg oil project underway in the Barents Sea, Hersvik said Wisting would be a marker for the viability of further far northern projects.

"I still have doubts about the Barents Sea because the Aker BP exploration results have not been what we expected. To me you always have to investigate your results and you have to be quite cynical about what kind of results you have delivered," he said.

"The Lundin exploration team had a different view, so the debate is back up in the air, which is also good and sometimes your prejudices need to be examined again."