The Peak of Light Sweet Crude?
Posted by Stuart Staniford on August 24, 2005 - 12:00am
Vital Trivia recently made a fascinating claim that light sweet crude has passed its peak production. If true, this is a very significant milestone in the peak oil story, and strong evidence for the idea that there is a near-term peak in total liquids production. But is it true? Let's take a closer look.
Unfortunately, public data for the history of light sweet crude production seems to be almost non-existent. The case at the moment is based on some data on page three of the August Opec Monthly Oil Market Report.
A careful analysis of the numbers reveals some serious problems, however. Here's basically what it gives for global production:
The first thing that will hit you is that, indeed, the light production has dropped. OPEC's figures says the global production of light sweet dropped by 2.6 mbpd from 2000 to 2004. But there's a problem. Notice the total production here: 93.8 mbpd in 2000, and 99 mbpd in 2004. That's not an error on my part: the OPEC report says 2000 non-OPEC production was 66 mbpd, and 2000 OPEC production was 27.8 mbpd. 2004 numbers were 70 mbpd and 29 mbpd respectively. This can't possibly be right (all other authorities state that total production last year was in the low 80s). So there's something wrong with OPEC's numbers.
Even if that problem turns out not to be material, there's some danger in assuming from two data points that we know the shape of the curve. Maybe one or other data point was an anomaly. Declaring peak on light sweet crude would be a lot more comfortable with the whole curve before us. Still, there are other interesting indications. The Saudi's have been saying for some time that the world's current problem is lack of refining capacity for heavy oil, not lack of oil per se. And, as Econbrowser noted recently, the price spread between light sweet crude and heavier grades has grown unprecedentedly: consistent with the idea that the good stuff is in decline, while there's still increasing amounts of the not-so-great oil.
If we are some time past the peak of light sweet production, that is profoundly important. Firstly: nobody noticed till now! Truly a tribute to the lousy data in the oil market.
But, more importantly, it suggests that light sweet might be a canary in the coal mine: a predictor for what depletion of the whole liquid fuel sector might have in store for us. If the light sweet depletion stays at moderate annual percentages, that suggests there'll be time for gradual adaptation as we all start driving hybrids, building windmills and nuclear power plants, and digging up more coal. But suppose light sweet falls off a North-sea style cliff (10% plus per year); if Matt Simmons is right about Ghawar then it surely must. Then we shall know that we are in for a very nasty experience, but with a little warning before the medium and heavy oil follow the light trend.
Now all we need are some decent data...
Also significant is this data compared to comments still made by Saudis officials and Aramco officials. Telling the world trust me - we can deliver what you want - trust us. But how can anyone trust them if their statements actually are incorrect momentarily. The customers do not want heavy sour they want light sweet which OPEC CAN NOT produce sufficiently.
Hopefully statistics will improve and we all have the responsibilety to support anyone presenting statistics with constructive feedback.
You always expect a company/country to drill out its cheapest and its most easily producible reserves first. The fact that the Saudis have seen fit to take 5 jackup rigs, at higher than the going rate in the GOM, with an indication of interest for another 6-8 rigs, suggests that they have run out of cheap sources of oil to drill out, and are now moving down the ladder to the more expensive sources.
You're right, light sweet crude should be the canary in the mine. The theory holds that companies pump the easy and profitable crude first, and leave the heavy stuff until later. Better grades would peak earlier.
If light sweet is a leading indicator, then the possibility that we've quietly passed that peak is also consistent with theory: we won't know we've peaked until well after it's happened.
It's as if when you asked what a car costs, they gave you the price of a 2005 Rolls Royce. When you asked how many cars are in inventory, they counted rusted out 1960 Plymouths the same as a 2005 Rolls Royce. In other words, the commonly tracked crude oil inventory numbers are virtually useless. As you noted, the developing light, sweet crude oil shortage is showing up in the spread between light, sweet and heavy, sour.
Jeffrey Brown
Petroleum Geologist
This is a very important result but as you point out I tend to think of the peak in terms of the daily production number. CERA based it's report on a 2004 baseline = 84 mbd. These OPEC numbers are outrageously high.
But let's continue. The more I think about it, the more important decline rates in existing fields are. Look at this analysis from Charles Maxwell in the UK of the CERA numbers. If this is to be believed, we will have 9.8 new supply by 2010 in CERA's best case scenario, which is a Pollyanna view in my opinion. And as Maxwell points out, this represents a shortfall with respect to demand based on 1.5 to 3 mbd/year.
Now, what are the numbers? If depeletion really is even 4%/year in existing fields, then you've got to come up with a whole lotta oil to see positive gains by 2010 above the projected production this year, which is in the 84 to 85 mbd range. I see this kind of stuff all the time.
kurt wulff, whose reports to clients are made freely available (after a delay) on sunday evenings at www.mcdep.com, said at the end of 2004 in a barron's interview that light sweet crude had evidently peaked worldwide.
wulff is not a peak oil activist, he's a wall-streeter. very bullish on energy these days. he expresses his more general views in his weekly "meter reader" and "u.s. natural gas royalty trusts" reports.
he seems to understand at least part of the peak oil idea, but he doesn't let on to being overly concerned about it.
here is the key excerpt from the barron's interview, dated december 27, 2004:
"The big event of 2004 is that the oil market called Saudi Arabia's bluff. They couldn't deliver the spare capacity they said they had. It turns out they have spare capacity, but it is in heavy oil, not light oil, which is easy to refine and doesn't have much sulphur in it. It's also known as "light sweet" crude, and it produces more gasoline and more heating oil. So 2004 was the year in which the world production of light oil peaked. There are no big fields of light oil producing now that can produce more. Saudi Arabia has heavy oil to sell, but they have to discount it much more. If Saudi Arabia could have produced more light oil, they would have."
http://www.opec.org/opecna/Press%20Releases/2005/pr082005.htm
The new ORB is made up of the following: Saharan Blend (Algeria), Minas (Indonesia), Iran Heavy (Islamic Republic of Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and BCF 17 (Venezuela).
At present the API gravity for the new Basket is heavier, at 32.7º compared to 34.6 º for the previous basket of seven crudes. In addition, the sulphur content of the new Reference Basket is more sour at 1.77%, compared to the previous basket of 1.44%.
Some "speculation" is as a result of hedging - oil BUYERS are buying because they believe prices will go higher; oil SELLERS (including oil producers), so far, have been unwilling to unload their wares at lower prices.
Of course, some of this movement is caused by emotion and herd mentality too.
Markets are a supply and demand thing. Demand has outstripped supply and thus the futures contracts head higher. Someone believes in scarcity it seems.
Speaking of demand, US total product demand hit a new 1 year high in today's EIA report, perhaps a new record high, still checking that one.
this is seriously getting scarier by the day. Every once in a while i just wish i could go back to the halcyon days before matt savinar infected me with this curse.
Very interesting post. Lots of this stuff stares you in the face until somebody just gets up and points out the obvious.