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Johan Sverdrup partners to test production upside as heavy crudes rebound: Lundin Energy

Highlights

Sverdrup well capacity exceeds capacity of facilities

Lundin's heavy crudes enjoy price boost

Higher expectations for Edvard Grieg heavy crude

London — The partners in Norway's giant Johan Sverdrup field will test the facilities for further "upside" beyond the current 470,000 b/d "plateau" in the second half of this year, Lundin Energy said July 29, noting also a recovery in prices for its mainly heavy oil production.

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In a second-quarter results statement, the Norway-focused company, previously called Lundin Petroleum, reported a $132 million loss and lower revenue than a year earlier, despite more than doubling its oil and gas production to 163,000 b/d of oil equivalent, as oil prices took a pummeling from the coronavirus and tensions among OPEC+ producer nations.

It estimated its operating costs for this year at $2.8/barrel of oil equivalent, reflecting the size and low cost of operations for the Johan Sverdrup field.

The 2.7 billion barrel field came on stream last October and in April reached a plateau production level of 470,000 b/d, higher than originally planned for the first phase of the project. A second phase due on stream in 2022 is expected to lift output to 690,000 b/d.

Lundin discovered Johan Sverdrup in 2010 and retains a 20% stake in the field, which is operated by Norway's state-controlled Equinor.

In its statement, Lundin noted the 11 wells currently in production are capable of producing at beyond the capacity of the platform facilities, and another four development wells are due to be drilled this year.

"Now that there is sufficient well capacity a plan is in place to test the limits of the facility above the current established capacity of 470,000 b/d," Lundin said.

CEO Alex Schneiter highlighted not only the recovery in oil prices from record lows, but said the company was achieving premiums for its crude. S&P Global Platts has reported an uptick in demand for heavy North Sea crudes in recent weeks, reflecting lower availability of Russia's Urals crude as well as production cuts by the OPEC+ nations.

Lundin derived more than 90% of its Q2 production from two fields that produce heavy crude: Johan Sverdrup and Edvard Grieg, which feeds the Grane crude stream.

In the second quarter, "we encountered some of the lowest realized pricing we have witnessed, both when taking into account the historic negative Dated Brent differential and physical discount; a situation which has now normalized and in fact we are witnessing premiums for our barrels in the market again," Schneiter said.

Looking ahead, Lundin is re-examining the potential of Edvard Grieg for possible upside.

Edvard Grieg produced 98,000 b/d last year, or almost half of the Grane heavy crude stream, and Lundin has said it expects to maintain plateau production until at least the end of 2022.

A tie-back project, Solveig, is due on stream in the third quarter next year, with expected peak production of 30,000 b/d, and another potential tie-back, Rolvsnes, is being examined.

"At Edvard Grieg, reservoir performance continues to exceed expectations," Schneiter said. "The reservoir model is currently being updated along with the recently completed 4D seismic survey and we already see clear potential for a further increase in reserves and an extension of the plateau production."

The company also aims to expedite a number of potential new developments to take advantage of Norwegian tax breaks introduced in response to the crisis in oil markets that speed up reimbursement of capital spending. They expire in 2022.

Financial 'resilience'

Lundin said it was not booking any financial impairments as a result of the recent price crash, but has lowered its long-term assumptions and consequently the "headroom" for avoiding impairments.

At the end of the period Lundin had $3.8 billion of net debt, up from $3.4 billion a year earlier, and shareholders' equity was minus $2.3 billion, reflecting borrowing entailed by the Johan Sverdrup development. During the quarter the company received an inaugural credit rating from S&P Global Ratings of BBB- with a stable outlook.

The company, which is one third owned by Sweden's Lundin family, reduced its dividend and announced a 12% spending cut for the year in March.

Schneiter highlighted the $382 million of free cash flow generated by the company's operations in the period, which excludes items such as payments to creditors, and said: "The resilience Lundin Energy has shown in the face of the sharpest downturn in the history of the oil industry is a testament to the quality of the asset base, flexibility of our financial resources and operational excellence of the business and our people."