The Norwegian Government has decided to make oil production cuts in an attempt to stabilise the oil market faster.
The Government said on Thursday that the coronavirus pandemic and the efforts to contain it in large parts of the world had a substantial impact on economic activity globally and oil demand as well.
The Norwegian authorities believe that oil production cuts will contribute to a faster stabilisation of the oil market compared to letting the rebalancing take place only through the market mechanism.
It is noteworthy that the International Energy Agency’s (IEA) latest estimate from mid-April suggests a fall in demand for oil of around 23 per cent or 23 mbpd in the second quarter.
This large and sudden fall in oil consumption represents an unprecedented event in the oil market. This, together with efforts to contain the pandemic has resulted in a large surplus of oil in the market and large quantities of oil in stock, with prices dropping about 70 per cent since the beginning of 2020.
In turn, many companies took measures to mitigate the effects of the oil price drop by slashing their capital expenditures for the year.
Norwegian Minister of Petroleum and Energy, Tina Bru, said: “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”.
“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 added.
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. 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.