Poten & Partners analysed the situation in the North Sea, a mature oil producing region that is neither showing explosive growth nor experiencing geopolitical instability - ignoring Brexit.
Although North Sea oil production is less than half of that of 20 years ago, UK and Norwegian sector producers have been able to gradually increase output since 2013. More significant export growth is expected when the giant Johan Sverdrup oil field starts up later this year.
Over the years, the vast majority of North Sea oil production stayed in the region. With growing production and a changing oil market, including competition from other sources, how will trade patterns for North Sea exports change and which tanker segments will likely benefit?
Johan Sverdrup operator, Norwegian state oil company Equinor, described it as one of the five largest oil fields on the Norwegian continental shelf. It has expected resources of 2.7 bill barrels. Construction started in 2015 and is forecast to last until 2025.
Recently, the last pieces of the four platforms that make up phase one of the giant development were lifted into place in preparation for production start-up expected in November, 2019.
Johan Sverdrup is expected to produce up to 380,000 barrels per day during phase one and it will produce up to 650,000 barrels when fully commissioned in 2022. The field is expected to produce for 50 years and by 2040 it will account for more than half of Norway’s oil production.
As is the case with all of Norway’s oil and gas production, most of Sverdrup’s output, which is medium heavy crude (API of 28), is targeted for export. The oil will be transported by pipeline from the field to the Mongstad terminal and then exported.
Aframaxes have traditionally dominated North Sea exports, due to the short-haul nature of most export trades. About 80% of North Sea crude stays in the UK-Cont/Baltic area with the Netherlands and the UK the top two recipients.
Other destinations in the Atlantic, such as the Mediterranean, receive relatively small volumes of North Sea crude. Italy is the most significant Mediterranean customer taking about 100,000 barrels per day.
The US used to be a major importer of North Sea crude, routinely taking 300-500,000 barrels per day each from both Norway and the UK in the early 2000s. However, the rapid decline in North Sea production from 2000-2011, combined with the US shale revolution from 2012 onwards reduced US imports of North Sea crude to a relative trickle.
While Aframaxes and, to a lesser extent, Suezmaxes, dominate North Sea shipments to destinations in the Atlantic Basin, the volumes shipped to Asia are predominantly moved on VLCCs.
China and South Korea are the main customers. Chinese charterers take an average of three VLCCs per month from the North Sea. South Korea is the second largest Asian importer of North Sea crude, which is partially due to a favourable system of freight rebates that the South Korean government put in place to reduce the dependence of the country on Middle Eastern imports.
Future increases in crude oil production and exports from the North Sea, especially as a result of the startup of Johan Sverdrup, will likely also find their way mostly to Asia.
Europe has limited appetite for additional crude oil imports. North America, which is already long on crude oil, will have even less need for North Sea crude after the closure of the PES refinery in Philadelphia.
On the other hand, Chinese charterers, who are facing supply uncertainty in the Middle East, as a result of the stand-off between the US/UK and Iran and who do not have access to US crude because of the trade war, will happily take more crude from a reliable and stable source like Norway.
This will provide a welcome boost to VLCC tonne/mile demand, Poten concluded.