The outlook for Norwegian gas production for the rest of this summer is particularly bearish with TTF gas prompt prices already below the 5% fuel switch trigger and still sinking. TTF Q3 19 prices are now sporting a wide discount to forward contracts, providing no incentive to offset any production lost to maintenance works by ramping up flexible fields. While Troll output is certain to be lower y/y, we also expect Oseberg production to be lower y/y or flat at best. Additionally, while we have finally seen production from the new Aasta Hansteen field hit the peak 23 mcm/d that Equinor had promised in winter 2018, we do not expect the new field to offer any y/y boost to Norwegian output in summer 2019. We have reduced by 1.2 bcm our forecast for summer 2019 Norwegian production to 54.1 bcm, (4.1 bcm lower y/y), but there is still some downside risk to our Q3 19 forecast of 25.6 bcm.
Norwegian production was initially expected to be higher y/y in Q2 19 owing to fewer scheduled maintenance constraints, but pipeline receipts have so far underperformed relative to the summer maintenance schedule and we expect that trend to continue the rest of the quarter. Aggregate Norwegian production and processing capacity cuts were scheduled to average 4 mcm/d lower y/y over 1-21 May, but pipeline deliveries into Europe were 14 mcm/d lower y/y. Part of the tepid pace of production could be because of upstream constraints affecting the Troll and Oseberg fields, the main source of Norwegian production flexibility. Output at the 21 mcm/d Oseberg field was cut by about 10 mcm/d on 8-18 May because of unplanned maintenance, while a 40 mcm/d constraint at the Kollsnes processing plant early in the month will have prevented Troll from exceeding the 0.1 bcm/d of production it averaged in May 2018. But at a minimum, there should have been enough available production capacity at both fields for aggregate deliveries to have been flat y/y or even a touch higher.
However, with gas prompt prices sinking and the TTF Jun-19 trading at a 50 cent/MWh discount to the Q3 19 contract, there is little incentive for Equinor to raise output from flexible fields to offset maintenance cuts. April 2019 maintenance constraints were scheduled to average 6 mcm/d lower y/y yet production that month was just 2 mcm/d higher y/y despite cold weather boosting demand. With that in mind, we have revised down our forecast for Q2 19 production, to around 28.5 bcm, 0.2 bcm lower y/y, vs the 0.2 bcm y/y rise we had previously forecast.
|Fig 1: Y/y production, bcm||Fig 2: Summer maintenance, mcm|
|Source: NPD, Energy Aspects||Source: Gassco, Energy Aspects|
A Q3 19 conundrum: how low can it go?
The rest of the summer is looking very bearish. Ample incremental LNG supply, a stubborn 23 bcm y/y storage overhang and brisk renewable generation are all weighing on prompt contracts extending through September. But there is less certainty regarding how Norwegian pipeline flows will perform in Q3 19. The Gassco schedule shows maintenance constraints are heavily weighted to Q3 19 this year, with cuts scheduled to be 4 bcm higher y/y in that quarter. Historical flow data from previous summers demonstrate that scheduled maintenance only provides a rough indication of ultimate production. For example, maintenance constraints in summer 2018 were scheduled to be almost 1 bcm heavier y/y but a tight supply-demand balance and high prompt prices encouraged producers to boost Troll output, leaving production just 0.5 bcm lower y/y.
A more salient example is output in summer 2016. Maintenance constraints were scheduled to be 3.2 bcm lower y/y—leaving plenty of room for a y/y rise—yet April-September 2016 production was 1.8 bcm lower y/y. At the time, a loose supply-demand balance and sinking prompt prices led Equinor to embrace a ‘value over volume’ strategy and turn down flexible supply.
It is unclear at exactly which price point Equinor opts to turn down supply, but the TTF Q3 19 contract has already sunk to a 4.7 €/MWh discount to the Summer 2020 price, from a 2.8 €/MWh discount at end-March, much wider than the 2.40 €/WMh the TTF D+1-Summer 2017 spread averaged in summer 2016. We are almost assured of seeing lower y/y Troll output in Q3 19, given that the field’s output was exceptionally high last summer. While there is ample scope to raise Q3 19 Oseberg output from the sluggish 3 mcm/d it averaged in Q3 18, we now expect such output to be flat. Likewise, we no longer expect that strong flows from the new Aasta Hansteen field—which in March finally ramped up to its peak production of 23 mcm/d—will help offset any planned production cuts. We now expect a base case of Q3 19 production of 25.6 bcm, 3.9 bcm lower y/y, a downward revision from the 26.5 bcm we had previously forecast. We note that there is ample scope for Equinor to further reduce Troll flows this summer, so there is even some downside risk to that weak Q3 19 forecast.