Norway's Johan Sverdrup crude, the rising star of the European market in recent months, may be losing some of its status as the go-to replacement for Russia's Urals, as markets adjust and Equinor considers the field's possible decline.
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The rise of Johan Sverdrup crude production proved a life-saver for European refiners following the shutdown of Russian Urals crude supplies to Europe after the 2022 invasion of Ukraine.
Sverdrup, which first came on stream in 2019, is the third-largest Norwegian oil field ever developed. The crude is more sour and heavier than the light sweet grades such as Forties traditionally associated with the North Sea, and its sour quality -- similar to Urals -- makes it sought-after for diesel production, particularly as sanctions also bar Russian diesel from Europe.
However, Sverdrup pricing, having moved well above the Platts North Sea benchmark Dated Brent, has recently shown signs of weakening, leading to discussion over whether the crude is losing its edge among refiners and traders.
On Nov. 6 Platts assessed Sverdrup at a discount to Dated Brent for the first time since April, just weeks after it had reached a premium of almost $5/b. The grade was assessed at a $2.11/b discount to Dated Brent on Nov. 10, on a FOB (Free on Board) basis.
Platts is part of S&P Global Commodity Insights.
These weaker prices may be partly down to temporary factors such as freight costs, but the sheer abundance of Sverdrup is also a factor.
Sverdrup production neared a planned capacity level of 755,000 b/d during the course of this year after the startup of a second development phase in December 2022. That production level is higher than the peaks achieved at Ekofisk and Statfjord, Norwegian fields that had larger reserves.
However, weaker Sverdrup prices but may also reflect refiners adjusting to what could be a prolonged lack of sour crude, not only because of sanctions on Russia, but also scant supply from the Middle East, where Iran is also under sanctions and OPEC cuts are persisting.
Market participants expect Europe to get more of its diesel from outside the region -- India, Saudi Arabia and the US have become top suppliers -- while Europe's production of high-sulfur fuel oil, largely a bi-product of other refinery processes and used as a bunker fuel, is also likely to decline.
Arne Lohmann Rasmussen, chief analyst and head of research at hedge fund Global Risk Management, said he expected "structurally, a move towards light [crude] slates in Europe."
"I would assume they would be adapting to that over the coming years," he added.
"In Europe at least it's harder to optimize than before because there's no Urals and you're competing for a smaller pool of sour crude," one trader told S&P Global Commodity Insights. "It's tricky because middle distillates are what really makes money, at least in the recent past."
However, other participants say buyers should be able to get hold of sour crude through careful planning, arguing the period of sky-high premiums for Sverdrup reflected a surge in spot deals as traders struggled to cope with the timing of Middle East price announcements.
"In the long run you can substitute from other regions without having to pay excessive premia," one crude trader said.
Along with the questions over demand, there are also uncertainties about the long-term supply of Sverdrup crude.
By size of reserves the Sverdrup field, at 2.7 billion barrels, doesn't match up to the world's biggest fields, but it does account for a quarter of the oil produced in an otherwise declining North Sea basin.
Equinor has said Sverdrup production could start to decline as soon as 2024 or 2025, although it will do its best to maintain high rates, with plans on the table to install a new Phase 3 production facility comprising two seabed templates and eight wells.
"We will continue to produce at high levels, but of course ...we will also come off plateau at some point in time," Equinor CFO Torgrim Reitan said Oct. 27. "It is expected to be coming off plateau in 2024 and 2025, but as you know we are actively working with the reservoir and getting to understand it better and optimizing it on a daily basis." The purpose of the Phase 3 project "is to maintain a high level of production on Johan Sverdrup continuously," he added.
For the time being, there are reasons to think the crude will remain a major force in Europe -- supplemented by other Norwegian medium sour grades such as Grane, or the upcoming Johan Castberg crude grade, due on stream in the Barents Sea in the fourth quarter of 2024.
Equinor anticipates five decades of commercial production from Sverdrup. Ian Conway, upstream researcher at S&P Global Commodity Insights, pointed to the exceptional quality of the reservoir as reason to believe "plateau" output will continue beyond 2025, assuming timely implementation of the Phase 3 project.
"The high offtake rates for Johan Sverdrup are supported by secondary recovery schemes -- water and gas injection," Conway said. While a final investment decision on Phase 3 is still pending, "we assess this phase of development as low-risk and highly revenue generative at current commodity prices," he added. "Equinor will be keen to bring Phase 3 onstream in the near term."