European gas traders grow pessimistic amid Norway’s overproduction

By ISIS ALMEIDA and MIKAEL HOLTER
Bloomberg

European natural gas traders have one more reason to be bearish: Norway is overproducing and output at the nation’s biggest field is poised to reach an eight-year high.

Europe’s second-largest supplier pumped more gas than forecast in five of the first six months this year, Norwegian Petroleum Directorate data show. Output from the Troll field is set to climb 23% to 33.5 billion cubic meters (1.2 trillion cubic feet) in the year through September, according to an estimate by Eclipse Energy Group, a London-based consultant.

Norwegian output is rising amid a global oil and gas glut that’s pressuring prices and cutting profit for companies including Troll’s operator Statoil. Brent crude is trading close to the six-year low it reached in January, and gas prices in the UK, a European benchmark, are at the weakest for this time of year since 2009.

“You can draw a straight line between Norwegian production coming in above forecast and revenue issues tied to lower oil and gas prices,” said Ira Joseph, executive director of international gas at Pira Energy Group, which correctly forecast last year’s slump in crude. “The more oil prices weaken, the more important revenues from gas exports become.”

Norway produced 56 billion cubic meters of gas in the first half of 2015, 8.3% more than NPD forecast in January. Output at Troll will rise from 27.2 billion cubic meters/year earlier to the highest since 2006-07, according to Jessica Gervais, a Norwegian gas analyst at Eclipse, a unit of McGraw Hill’s Platts.

Gas Bank

UK gas for next month-delivery climbed 1% to 41 pence/therm ($6.39/MMBtu) on the ICE Futures Europe exchange by 12:20 p.m. in London. The price is down 3.2% this month.

While companies extracting gas in Norway need to obtain permits, they usually have the flexibility to ramp-up output to compensate for periods of lower production, said Jan Bygdevoll, a senior reservoir engineer at NPD. Output is increasing to take advantage of near-dated delivery prices that have been higher than those for next summer, Eclipse’s Gervais said.

“Troll typically has an annual production permit of 30 billion cubic meters a year, but it also has a ‘bank’ of unused gas from previous years,” she said. “This year, there is no price incentive to defer production until summer 2016, so Troll is producing at a higher rate and is on course to use up all of its ‘banked’ production from previous years.”

Output Increase

Statoil increases deliveries to take advantage of market developments, said Sverre Olden Mala, a spokesman for the company. This can be done by increasing production or buying gas from third parties, he said, declining to comment on specific production forecasts for the Troll field.

Statoil’s average daily gas and liquids production in Norway increased 7% in the second quarter, after it deferred output in the same period a year earlier to “enhance value,” the company said July 28. Second-quarter profit fell 27% at the Stavanger, Norway-based company.

Norway’s output will rise 1.8% to 113 billion cubic meters in 2015, the most since a record 114.7 billion in 2012, according to Societe Generale and NPD data.

“We’re wondering whether we’ll be able to top the highest deliveries that we’ve had,” said Kjell Larsen, a spokesman for gas pipeline operator Gassco. “There have been few shutdowns, both in terms of production and transportation.”

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