Photo: Johan Sverdrup field in the North Sea; Source: Equinor

Norway to introduce oil output cuts until end of 2020

The Norwegian Government has decided to make oil production cuts in an attempt to stabilise the oil market faster.

The Government said on Thursday that the coronavirus pandemic and the efforts to contain it in large parts of the world had a substantial impact on economic activity globally and oil demand as well.

The Norwegian authorities believe that oil production cuts will contribute to a faster stabilisation of the oil market compared to letting the rebalancing take place only through the market mechanism.

It is noteworthy that the International Energy Agency’s (IEA) latest estimate from mid-April suggests a fall in demand for oil of around 23 per cent or 23 mbpd in the second quarter.

This large and sudden fall in oil consumption represents an unprecedented event in the oil market. This, together with efforts to contain the pandemic has resulted in a large surplus of oil in the market and large quantities of oil in stock, with prices dropping about 70 per cent since the beginning of 2020.

In turn, many companies took measures to mitigate the effects of the oil price drop by slashing their capital expenditures for the year.

Announced revisions to 2020 capex expenditures; Source: IEA
Announced revisions to 2020 capex expenditures; Source: IEA

Minister of Petroleum and Energy, Tina Bru, said: “Both producers and consumers benefit from a stable market. We have previously stated that we will consider a cut in Norwegian production if several big producing countries implement significant cuts. The decision by the Norwegian Government to reduce Norwegian oil production has been made on an independent basis and with Norwegian interests at heart”.

Quarter-million barrels per day to be cut in June

A group of oil-producing countries within and outside of OPEC has decided to reduce their production significantly from May 2020 to help stabilise the oil market. Norway – which accounts for about 2 per cent of global oil production – is not part of that cooperation.

In an extraordinary energy ministers’ meeting in the G20 in April, the ministers committed to taking necessary measures to ensure energy market stability.

We will cut Norwegian production by 250,000 barrels per day in June and by 134,000 barrels per day in the second half of 2020. In addition, the start-up of production of several fields will be delayed until 2021. Consequently, the total Norwegian production in December 2020 will be 300,000 barrels less per day than originally planned by the companies. The regulation will cease by the end of the year”, Bru added.

The basis for the regulation is a reference production of 1,859,000 barrels of oil per day. Thus, a cut of 250,000 barrels per day in June 2020 gives an upper limit for oil production on the Norwegian Continental Shelf of 1,609,000 barrels per day. A cut of 134,000 barrels per day in the second half of 2020 gives an upper limit for oil production on the Norwegian Continental Shelf in the same period of 1,725,000 barrels per day.

The cut will be distributed between individual fields and implemented by granting revised production permits to the relevant fields.

Companies that hold licenses in fields covered by the regulation will be affected through their ownership shares in the various fields. The effect for individual companies will thus depend on their ownership share in the various fields. The oil companies will be consulted before revised production permits are granted.

There are exemptions

The Government did make adjustments for the cuts in terms of maintenance shut-downs planned for spring 2020 that have been postponed due to infection control measures related to the COVID-19 pandemic.

Also, adjustments have been made following production experience from the start-up phase of the Johan Sverdrup field. These adjustments indicate increased production from the fields in question compared with figures reported in autumn 2019.

The reference production does not include fields where the operating company in the national budget process reported expected production start-up in 2020, but where start-up now is postponed until 2021 as a consequence of infection control measures. This applies to the Yme, Martin Linge, Njord, Hyme, Bauge, and Tor fields.

Furthermore, the regulation will not cover gas and condensate fields, fields bordering on other countries, and some fields where particular problems related to resource management apply in a production regulation including fields in a late tail-end production phase.

Oil demand to grow in 2H 2020

The Government predicts that oil demand is expected to grow throughout the second half of 2020 gradually as economic activity is resumed.

However, a low oil price will also affect oil production globally going forward. A significant reduction is expected in the more costly oil production – like shale oil and oil sands from North America.

Norwegian oil is produced with relatively low production costs. If global oil storage fills up, all producing countries will face a very demanding situation.

Norwegian production in 2020 will also be affected by the pandemic. Several oil fields where operators expected start-up of production in 2020 will be delayed until 2021.

That is the oil that will not enter the market in today’s demanding situation. In total, these volumes amount to 166,000 barrels per day in December 2020.