The corona pandemic and the efforts to contain it in large parts of the world have had substantial impact on economic activity globally and thereby also for oil demand. In the current unprecedented situation cuts in oil production introduced by the government will contribute to a faster stabilisation of the oil market compared to letting the rebalancing take place only though the market mechanism.
“We are currently facing an unprecedented situation in the oil market. 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,” says Norway’s Minister of Petroleum and Energy, Tina Bru.
A faster stabilisation of the oil market is important for good resource management and for the Norwegian economy.
A group of oil producing countries within and outside of OPEC (OPEC+) has decided to reduce their production significantly from May 2020 to help stabilise the oil market. Norway – which accounts for approximately 2% 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 adds.
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 in June. 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.
“The cut will include oil fields on the Norwegian Continental Shelf and be fairly distributed between the fields and thereby between companies. It will imply a limitation of production for those oil companies with ownership shares in the relevant oil fields. Gas fields are exempt. Thus, the cut will not affect Norwegian gas production or Norwegian gas exports,” Bru says.
Throughout the second half of 2020, oil demand is expected to grow 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. This might also affect resource management on the Norwegian continental shelf. 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 oil that will not enter the marked in today’s demanding situation. In total, these volumes amount to 166,000 barrels per day in December 2020
Production regulation will be implemented through a proportionate limitation for those fields covered by the regulation based on production permits granted, the reference production and other relevant information from the companies.