Norway oil cuts could impact gas, but likely trumped by gas market dynamics

London — Norway's pledge to consider oil production cuts -- if realized -- could impact associated gas output in the country, but gas market dynamics are more likely to dictate Norwegian gas production behavior in the near term.

Oslo has said it would consider a unilateral cut in oil production, provided that the agreement between the OPEC+ countries on output cuts is implemented, as part of a global effort to offset the demand destruction caused by the coronavirus outbreak.

It has said it would return to how a possible production cut would be implemented and the size of it in due course, though S&P Global Platts Analytics estimates a cut could be as big as 300,000 b/d.

Reduced Norwegian oil output could exert some pressure on associated Norwegian gas output, but could also see less emphasis on gas re-injection, making more gas available for exports, Platts Analytics believes.

Less gas re-injection demand combined with maintenance deferrals on gas assets due to coronavirus would more than offset the loss of associated gas output, it said.

But in any case, with state-controlled Equinor already seen to be turning down gas production due to low gas prices, these considerations are likely to play a bigger role than the loss of any associated gas output.

"Gas market dynamics are likely to have a stronger impact on gas output compared to oil production," Platts Analytics said.

A major chunk of Norwegian gas production -- which in February averaged 344 million cu m/d according to official data -- also comes from dry gas fields, such as the major Ormen Lange and Aasta Hansteen fields, making oil output curtailments less meaningful.

Commercial turndown

Equinor has already been seen flexing its two swing fields, Troll and Oseberg, again in recent weeks as European spot gas prices have plunged.

Oseberg in particular has been producing at minimal levels as Equinor opts to defer production until a later date in the hope of higher prices as part of its long-standing "value over volume" strategy.

Flows out of Norway have dropped below 300 million cu m/d over the past two weeks despite planned maintenance work being cancelled or pushed back -- well down on recent highs of 340 million cu m/d from earlier in the winter.

This suggests significant commercial turndown on the NCS despite Equinor saying earlier in the year it could get its gas to European markets for "well below $2/MMBtu" and would not be the first to turn down the taps in 2020.

However, analysts believe Norway was always likely to be one of the first to pull back output in the face of the relentless inflow of LNG from an oversupplied global market.

"The European market has been the central point of the dumping ground of excess gas supply everywhere," Goldman Sachs' global head of commodities, Jeff Currie, told S&P Global Platts last week.

"The biggest candidate [for reducing supply] in Europe would be Norway," Currie said, as competition intensifies among producers to get their gas into Europe.

Oleg Vukmanovic, analyst at Poten & Partners, said on a webinar Wednesday that it was the "worst of all possible worlds for producers" under current market conditions, with European spot prices now close to the short-run marginal cost of both Norwegian and Russian deliveries.

"Norway will be starting to feel the pinch," Vukmanovic said.

US pressure

US gas output is also likely to come under pressure due to the low oil prices and demand destruction, as associated gas production from oil plays is lost as producers shut down wells.

Platts Analytics estimates potential US oil supply shut-ins could take between 3-15 Bcf/d of associated gas off the market in April-June.

If the lost oil production amounts to 1 million b/d, then 3 Bcf/d of gas output would be taken off the market. At the higher end, a 5 million b/d oil output curtailment would see 15 Bcf/d of lost gas production.

Offsetting supply losses, however, Platts Analytics estimates demand destruction from the coronavirus could lower consumption by 6 Bcf/d relative to its base case forecast in Q2.

Goldman Sachs' Currie also sees the US as a driver of gas shut-ins globally.

"We're already beginning to see shut-ins and most of it is going to come from the associated gas in the US," Currie said.

Goldman Sachs sees US gas prices rising as a result, with US LNG also becoming less competitive on international markets.

Analysts at Bank of America Merrill Lynch also expect behavior changes in the US.

"As the global gas markets test physical storage limits, we expect to see reduced US LNG exports," they said in a note.

"The US accounts for 17% of global LNG supply, and we believe their contract structures facilitate more flexibility compared to other LNG supply regions," they said.

But it might take some time for US LNG exports to be affected.

"Due to frictions like the desire to minimize interruptions at liquefaction plants and the long lead time nature inherent in the procurement of logistics, the economics might have to go deep out of the money before LNG export behavior changes."