Johan Sverdrup, the largest North Sea oil field to begin production in decades, could end up as the biggest wrinkle to hit the global Dated Brent benchmark since Buzzard was added to Forties years ago but for now it is a welcome addition to the Asian refining menu.
This new medium sulfur and density crude is comparable to many West African grades as well as a few blends from the Americas and just like Forties could find its way to Asia, offering Chinese refiners another much-needed alternative as the region grapples with the fallout from the U.S.-Sino trade war, industry sources said.
“The vacuum cut is too high for European refineries to make very low sulfur fuel oil (VLSFO),” said one source, suggesting that the blend with probably end up in Asia or the U.S. east coast.
West African grades such as Mostarda and Saturno from Angola are the closest match to Johan Sverdrup’s API of 28 and sulfur of 0.8%. They have a high vacuum gas oil yield and as such are currently in demand because of the IMO 2020 mandate to use low sulfur marine fuels.
Although the sulfur is above the 0.5% limit set by the IMO, Asian refiners are well equipped to handle sour grades as most have very large atmospheric residue desulfurizers (ARDS).
Chinese refiners could also use Johan Sverdrup as a substitute to the heavier grades that they purchase from the U.S. including Alaskan North Slope (ANS), Thunder Horse and Mars. Since China imposed a 5% tax on U.S. crude imports from Sept. 1, traders have had to divert vessels that are already on the waters to other destination.
Market sources said 3-4 cargoes have so far already been successfully diverted to India, Singapore and South Korea.
Norway Crude Exports to Far East, Southeast Asia and India
Norway Crude Exports to Europe, U.S.
Data from IHS Markit’s Commodities At Sea show that Norway has never been a prolific crude exporter to Asia as its light-sweet grades are mostly consumed within the region or shipped to the U.S.
China has in recent months replaced South Korea as the biggest importer of North Sea Forties crude and may also be an equally large buyer of Johan Sverdrup. Forties, which is the sourest among the crudes used to price Dated Brent, is exported from the UK via the Hound Point terminal.
The imminent surge in Johan Sverdrup supplies, which will plateau at 400,000 barrels a day (b/d) next summer and hit a peak of 660,000 b/d in 2022, making it the largest single blend from the North Sea, is reverberating across the Atlantic slate of sour crudes including the mammoth Russian Urals.
“This crude came out very suddenly, it took the market by surprise,” said one trader. “There’s some fear in the market that it will be added to the basket of crudes used to price Dated Brent.”
The fear, the source said, goes some way towards explaining a quirk in the Dated Front Line (DFL) curve, which essentially is the spread between Dated Brent and ICE Brent swaps.
The prompt Sept. spread is plus 59 cts/bbl and drops to 17 cts/bbl in Nov. before flipping to the negative at minus 19 cts/bbl for Dec. and settling at minus 50-60 cts/bbl for the rest of the first half of 2020., data from brokers show
“This is like adding Basrah to the Dubai benchmark,” the trader said.
Dated Brent generally reflects light-sweet grades but a big component of it is Forties, which is typically also the cheapest blend due to its higher sulfur content and ends up being the price used to set the benchmark.
The surge of Johan Sverdrup barrels will put additional pressure on the North Sea sour market and in turn Forties and Dated Brent even if the new blend is not added to the basket of crudes making up the marker, the sources said.
“Forties will get pressured too because its residue cut has high sulfur,” an analyst said.
Traders said there is a rethink within some quarters in the industry on the methodology used to price Dated Brent and questions are being raised on the wisdom of creating a CFR price to boost liquidity, which is then tweaked with a freight adjustment to come up with a comparable FOB number.
Liquidity, they said, will no longer be an issue if Johan Sverdrup is added to the basket as its first-phase output is already more than Forties but unlike Forties, which has a higher 38.7 API that is comparable to the other light grades used in Dated Brent, the newcomer is much heavier.
This would make pricing Dated a lot more difficult that simply to build a sulfur de-escalator.
In the run-up to the IMO 2020 mandate, placing a value on hydrocarbons using traditional methods are no longer accurate. For example, the market is currently driven by the need to produce as much low sulfur fuel oil as possible by whatever means.
This has raised the value of what were once very cheap crudes such as Dar Blend, Doba, Vincent and Van Gogh.
But down the road needs may change, and viscosity might be the driver or even flash point as oil companies try get the best economics from their blending activities to meet the IMO requirement.
For now, eyes are on what will happen when the first cargoes are shipped out next month.
Angola Crude Exports to Far East, Southeast Asia and India
U.S. Crude Exports to Far East, Southeast Asia and India
China with their sophisticated refining system as well as all the other more complex facilities being built across Asia make the region a natural outlet for such grades.
Market sources said West African producers are likely to bear the brunt of the introduction of Johan Sverdrup with the October loading program already released. The program showed 12 cargoes, including one cross-month parcel, totaling 7.6 million will be shipped next month.
Equinor is the operator of the field and its partners in the project are Lundin Norway, Petoro, Aker BP and Total.
“After reaching plateau for the first phase of the Johan Sverdrup development, expected during the summer of 2020, Equinor expects operating costs below $2/bbl,” the company said in a statement, which would place production costs among the cheapest in the world.
Raj Rajendran, (Rajendran.Ramasamy@ihsmarkit.com)
Copyright, Oil Price Information Service
