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Fuel for Thought: North Sea crude quality shift shakes up customer base

North Sea crude is getting heavier and more sulfurous. Medium sour crude will make up almost a third of the region's volumes by 2040 compared to just over 2% in 2010, according to a data analysis compiled by S&P Global Platts.

Light sweet grades, traditionally the mainstay of crude found in waters straddled mostly by the UK and Norway, may still make up more than half of all output in two decades' time, but overall volumes could be down at not much more than 600,000 b/d by that time from closer to 3 million b/d in recent years and almost double that in 2000, according to Platts Analytics.

Johan Sverdrup, celebrating its two-year anniversary this month, is the medium sour grade responsible for creating metaphorical waves in the North Sea. With gravity of 28.7 API and a sulfur content of 0.8% it has already established itself as a firm favorite among Asian refiners and in China in particular.

Production from the Equinor-operated oil field has ramped up quickly and over half a million barrels a day jostle with key OPEC grades from the likes of Saudi Arabia and Iraq. And the competition is set to grow as the flagship field is expected to achieve capacity of 755,000 b/d around the end of 2022. According to the Platts data analysis, that could mean Sverdrup comprises more than a quarter of all North Sea output by then.

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North Sea oil flows adapt as crude quality evolves

Widening interest

The popularity of Sverdrup is also spreading after finding a natural home in China, with further buying interest in 2021 coming from South Korea and India.

Not only does Sverdrup suit many Asian refiners, but that area of the world is likely to be the hub for demand growth for many years to come. Some seven million b/d of additional Middle East, African and Asian downstream capacity could come in the next five years, while the US and Europe either close or convert refineries amid environmental and economic pressures, according to Platts estimates.

Sverdrup also follows in the vapor trail of fellow North Sea grades such as Ekofisk and Forties, which are similarly well liked by Asian customers — albeit taken in smaller volumes. Forties has a sulfur content higher than many of its peers at 0.54% (and closer to Sverdrup) according to the Platts Periodic Table of Oil, while Ekofisk is an example of the wider interest for classic light sweet North Sea crude.

Lots of Sverdrup has travelled less far in recent months too. Refiners across northwest Europe have added it to their baskets and Greece and Turkey have been snapping up the Norwegian barrels as European refiners dabble a little more with the less familiar as a lower price enables it to compete with Russia's medium sour Urals grade.

Sverdrup is also lauded for its greener credentials.

State-controlled Equinor says emissions from the Sverdrup production process are among the lowest of any oil and gas field in the world at 0.67 kg of CO2/barrel produced, or around 4% of the global average, thanks to the use of hydropower to generate electricity used in operations.

Equinor's minority partner, Lundin Energy, has gone one further, vowing that all its 20% share of crude shipments from the field will be carbon neutral, with residual emissions to be ‘neutralized' using ‘high quality' natural carbon capture projects under the Verified Carbon Standard process.

Sverdrup is arguably the right crude at the right time with right production processes in terms of giving the North Sea oil sector a much-needed boost. But after the surge in medium sour crude, with another boost from the Johan Castberg development in the Barents Sea in late-2022, there is uncertainty on where the next big boost might come from.

The North Sea, as a reflection of the global crude sector, has been facing many shake-ups in recent years: from the rise of US shale on the supply side to changing customer preferences and energy transition pressures on the demand side. But it is clear that demand both at home and abroad, for North Sea crude in all its shapes and forms, will remain robust for many years to come.

Revolving doors

Platts Analytics forecasts the North Sea's light sweet crude production falling below 1 million b/d by 2030. But demand for this premium grade — since sulfur lowers the yield of various refined products such as gasoline, diesel and even plastics — will remain strong in Europe.

This gap is being filled by an ever increasing amount of US crude. Ever since US shale was freed from its shackles in 2015 — when an export ban was lifted — the light sweet crudes have gone global. As many as 24 European countries have taken delivery of US crude and it has become something of a baseload grade in the region.

So while a greater proportion of US crude flows head eastward across the Atlantic satisfying European refiners' appetite for high quality crude, a greater proportion of North Sea crude, largely in the guise of Sverdrup, also heads eastward via the Suez canal.

This complexity — and with it issues around loading programs, delivery mechanisms, quality adjustments and more — has left the market divided over the next evolutionary step in the S&P Global Platts Dated Brent benchmark, used to price about two-thirds of the world's oil.

Platts has been in open consultation with the market over whether to include more crude oil in the benchmark, focusing mainly on Johan Sverdrup and the US' WTI Midland. In recent decades, North Sea grades Forties, Oseberg, Ekofisk and Troll have boosted volume in the Brent benchmark, which started production in the 1970s.

The North Sea, as a reflection of the global crude sector, has been facing many shake-ups in recent years: from the rise of US shale on the supply side to changing customer preferences and energy transition pressures on the demand side. But it is clear that demand both at home and abroad, for North Sea crude in all its shapes and forms, will remain robust for many years to come.