Deliberations on which benchmark presents the best opportunities to trade just never seem to stop. The gradual decline of all erstwhile champions of North Sea output champions has compelled pricing agencies to include newer and newer grades into the Brent basket to ensure the traded benchmark’s liquidity.
The recent maintenance of the Forties pipeline system, with the UK grade being the largest stream within the Brent price-setting barrel pool, has rekindled speculation that pricing transparency requires substantial volumes, which can only come about by physically extending the basket. Despite being Europe’s largest producing oilfield now, at some point assumed to amount to more than third of Norway’s total output, Johan Sverdrup has been an unlikely candidate to join the ranks of BFOET grades, yet it is indeed the Norwegian grade that is believed to be the prime candidate. The issue of Brent liquidity has haunted reporting agencies for quite some time already. All of the grades making up Dated Brent are either in terminal decline or currently plateauing, meaning that the immediate future of BFOET – Brent, Forties, Oseberg, Ekofisk, and Troll – would be hover around 600kbpd before even dropping lower. Platts, the main source of market information for Dated Brent, has tried to add a delivered WTI quote to its Brent assessments, to little avail. This in and of itself is a deviation from the current Brent logic as all involved quotes are FOB bases, not delivered ones. Moreover, WTI is doubly problematic as it lacks the foreseeable character of North Sea grades whose loading programs are acted upon even before a cargo’s loading takes place.
Thus, Johan Sverdrup emerged as Europe’s response to the concept of expanding the Brent basket. Its loadings are as trackable as those of Forties and it also loads on a North Sea FOB basis. What is more, its hedging variants are much reconcilable with the current set of Brent futures and CFDs. Simultaneously, it needs to be said that the new Norwegian flagship-grade for heavy sour barrels is nowhere near Brent in terms of its quality.
Johan Sverdrup is heavy sour crude, having 28°API and 0.7-0.8% Sulphur, whilst the average Brent quality would be within the 37-39° API density interval with some 0.3-0.5% sulphur. One might argue that the previous inclusion of grades like Forties has also changed the way the Brent basket is gauged, e.g.: the addition of Forties has paved the way for a sulphur de-escalator, a phenomenon previously unknown to the UK Continental Shelf.
With this being said, what exactly would Sverdrup improve in terms of the Brent basket? Liquidity has been the Achilles’ heel of Brent. In order to have enough liquidity, price-reporting needs scope and visibility (i.e. regular transactions done on a transparent basis) – some 5 years ago, even before the inclusion of Troll, BFOE exports were well above 1 mbpd.
Today, having included Troll into the basket, the physical availability underpinning the global benchmark is as thin as 550-600kbpd, decreasing across all fields. Leading global pricing agencies have tried to include delivered grades, amongst others WTI barrels coming into Northwest Europe, however, the perturbations of 2020-2021 have uncovered the weakness in such endeavors. Today, when WTI has crept up really close to Brent, US exports into Europe are structurally weak – not only does backwardation kill the structure, the differing regional fundamentals are further the incentive to export.
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Were Sverdrup to be added into the Brent basket, it would immediately send the overall tally of physical flows above the 1mbpd mark. On the upside, Phase Two of the Norwegian field is still some way to materialize, meaning that hypothetically BFOETS flows could move into a 1.3-1.4 mbpd by mid-2020s yet the Sverdrup dependence would only increase over time. Oseberg is now producing less than 100kbpd, a fraction of its peak output of 700kbpd in 1994-1997; the other Norwegian giant Ekofisk is now putting out less than a third of its 400kbpd peak. The gradual increase in Sverdrup dependence would weaken the light premium of Brent as Sverdrup has been trading some 1.5-2 USD per barrel lower than Brent since the new grade started producing in October 2019.
Johan Sverdrup did exceed expectations in almost every aspect. Its peak production capacity turned out to be even higher than initially anticipated and following recent assessments was increased to 755kbpd by 2024-2025, i.e. a couple of years after Phase II of the offshore project starts in late 2022.
The first-phase peak plateau surpassed estimates, too, reaching some 530kbpd this year. The recoverable reserves saw an upwards revision, raised by some 200MMbbls to a total of 2.5 Bbbls. All this has led to the project stakeholder dropping the field’s breakeven level to some 15 USD per barrel for the full-field development of Sverdrup (some 10 USD per barrel lower the initial assessment). Simultaneously, Sverdrup barrels have joined the scarce ranks of other carbon-neutral grades, as marketed by project partner Lundin Energy, largely thanks to the field being connected to Norway’s continental grid and thus running on hydropower.
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By Gerald Jansen for Oilprice.com
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