With prompt prices continuing their descent and the TTF’s contango deepening, there is little question that Q3 19 Norwegian production will remain muted, with producers having little incentive to use flexible field supply to offset summer maintenance constraints. But it remains unclear exactly how far prices would need to drop for Norway to be incentivised to defer production into future years, as it has done in previous summers. For now, we maintain our forecast that Q3 19 output will slump by 3.8 bcm y/y to 25.8 bcm, a reduction consistent with the y/y increase in seasonal maintenance cuts.
We expect Q2 19 Norwegian output to be 0.4 bcm higher y/y, nearly in line with the summer maintenance schedule, which was 0.6 bcm lighter y/y in terms of production constraints. All of that strength should come from output in May, which was 0.4 bcm higher y/y at 9.9 bcm.
With Q3 19 just weeks away, a y/y downturn in supply consistent with the maintenance schedule is imminent, but there is still some uncertainty regarding how much of a loss to expect. By 19 June, the TFF Q3 19 contract fell to a 5.80 €/MWh discount to the Summer 2020 strip, the deepest contango for a Q3–front summer spread in at least six years. And with LNG supply into Europe still posting y/y gains, and the region having yet to make significant progress on closing the massive 24.5 bcm y/y storage gap, there is no incentive to replace volumes lost to annual maintenance with output from flexible fields like Troll or Oseberg. Given the weakness in the current market, we expect that Q3 19 output will total 25.8 bcm, down by 3.8 bcm y/y due to that heavier maintenance period.
It is possible that there could be some further downside risk to Q3 19 production. In summer 2016, Norwegian production was 1.8 bcm lower y/y, despite much lighter y/y scheduled maintenance constraints. At the time, the market was in a contango less severe than at present, and Equinor (then known as Statoil) said it was seeking a “value-over-volume” approach. Given that experience, another 1–2 bcm y/y reduction on top of that 3.8 bcm reduction would not be surprising. Still, earlier this year Equinor signalled that it would not defer production, saying in late February that “if anyone turns off the taps, it should not be us”. However, with prices low and contango high, the incentives not to turn up seem likely to outweigh volume concerns.
|Fig 1: Y/y production, bcm||Fig 2: Summer maintenance, mcm|
|Source: NPD, Energy Aspects||Source: Gassco, Energy Aspects|