Ray Leonard was appointed CEO of independent and Houston-based oil company Hyperdynamics last summer. For the two previous decades, his background in the oil industry included high-level roles with the former Yukos Oil in Russia and more recently Kuwait Energy in the Middle East. One of his early talks on the topic of peak oil was delivered at ASPO-1 in Upsalla, Sweden (2002). Last October he delivered remarks at ASPO-8 (Denver). Ray was on record in 2001 as forecasting a peaking of world oil production in the 2010 to 2020 time frame, at around 90 million barrels a day (mbd). Steve Andrews caught up with him in early April and posed a few questions.
Q: What are your thoughts about the recent report on peak oil written by Kuwait University and the Kuwait Oil Company?
Leonard: I don’t know the details of that report. Before I left Kuwait last June, I gave a presentation on peak oil at a convention. One of the Kuwaitis, the assistant to the petroleum minister, came up after my speech and said it was very interesting. She wanted to arrange a presentation for the petroleum minister. Because I ended up leaving a little sooner than anticipated, I ended up meeting with her. I laid out my background information and gave her a copy of my presentation and she said I’m going to make sure the minister knows about it as well as all the key people in our planning and decision-making group. Clearly she did that. The Kuwaitis are very careful about their planning. I’ve been in Guinea the last few weeks, focusing on Northwest Africa and closing our contract there, so I haven’t had a chance to read the Kuwaiti report but I suspect the talk had some sort of impact.
Q: Russia recently hit a post-Soviet oil production peak. Do you think they can continue increasing much longer or is this about their limit?
Leonard: As I’ve said previously, I think Russia will produce around 10 million barrels a day for a while. They’ve got the reserves whereby they could have gone to 13 or 14 mbd. But because of what’s going on in the industry, partially by choice, they’re going to stick around 10 mbd. They’ve got some upside now from the new pipeline in the east and from Sakahlin that can at least make up for the declines elsewhere. The Pacific pipeline does open up East Siberia; that region has gone a lot more slowly than it would have if Yukos had forged forward, but you do have several giant oil fields there and they’ll add several hundred thousand barrels a day that wouldn’t be produced without that pipeline. But overall I don’t see their ability to raise significantly above 10 million. I remember a few years ago, CERA [Cambridge Energy Research Associates] was talking about 12 to 13 mbd, and that’s just not going to happen.
Q: Was the recent announcement, about opening up portions of the Outer Continental Shelf previously under moratoria, the right thing to do? And when and how much might they contribute to US production?
Leonard: Absolutely, for a few reasons. If the US is going to adopt a more sensible energy policy, they need to encompass three key groups and aspects. First is greenhouse gases and the environmental groups, then the national security group and the economic group. The US is currently importing close to 70 percent of the petroleum it consumes. That’s close to a billion dollars a day, and they have to do something about that. The only new domestic area where there is a hope for increased production is the Shelf. From an economic and national security standpoint, it’s obvious that the imported oil puts the US at risk. From the environmental standpoint, the huge advances in drilling safety from 30 to 40 years ago…I don’t think that’s a worry.
On the prospectivity side, the ultra-deepwater off the east coast has something of a connection to Northwest Africa. Northwest Africa was an exploration graveyard during the 1980s with consistent dry holes. The east coast will really only come alive when you can start drill the ultra-deepwater where you have the thicker sediment packages and the development of the source rocks. It’s the other half of the piece of the puzzle with NW Africa, so it makes a lot of sense from a geologic standpoint. The prospectivity off the coast of California is such that it’s a little disappointing that they didn’t open up portions there; they could desperately use the income.
So I think the opening of more of the OCS is a step in the right direction. It’s a tentative step, which is a shame, because if you’re going to take a step that is going to get one of the key energy policy groups-the environmentalists-screaming and yelling at you, you might as well take the bolder step that would give you the best chance to accomplish something. I think President Obama wants a carbon-emissions policy, and he’s trying to throw lines out to all sides. It’s a step in the right direction, but it would have been more effective as a bolder step.
Q: How is Hyperdynamics doing with its offshore Northwest Africa properties?
Leonard: We completed a 2-D seismic survey and we’re about to initiate a 3-D seismic survey. We’ve completed an agreement with the government of Guinea. There are two themes that are interesting here. First, there was real competition from the Chinese. They are working hard to obtain resources off Northwest Africa; it’s a major battleground. It’s clear that their demand, after maybe a slight pause, has taken off again, so they’re hunting for resources and Northwest Africa is considered prime ground right now. Second, there have been some nice delineation wells in the billion barrel plus Jubillee field offshore Ghana, which is shaping up to be a significant petroleum province, with an extension of the trend with the Venus discovery in Sierra Leone. I see Northwest Africa as a significant petroleum province that can add several billion barrels of oil. I don’t see it as a North-Sea-sized province.
So often people lose perspective. You find a 400- to 500 million barrel field in the deepwater Gulf of Mexico and some talk about weaning the US off imported oil. The US is importing about 13 million barrels of oil a day, so it replaces only one month import supply! Northwest Africa’s oil is not something that is going to turn around peak oil or solve the world’s problems, but it is significant. It is part of the bridge to what comes next. Also, those discoveries in Northwest Africa provide support for the potential for oil in the area that’s starting to open now in the deepwater shelf off the US Atlantic coast.
Q: Will you be drilling wells soon?
Leonard: We are committed to start drilling in 2011. The 3-D seismic will help us with the final well location. Then we’ll get a rig and start drilling next year. Our prospects vary from being in 100 meters of water to 1500 meters of water; we’ll pick the location that has the best chance of finding oil.
Q: You said “a bridge to what comes next.” Care to comment on what you think should come next?
Leonard: One of the cards that the US has been dealt in the last three or four years that we are really struggling to take advantage of is the shale gas as another big part of the bridge. It is a tremendous generator of jobs and income in the US. But price is a big problem. Last week oil was comfortably above $80 a barrel while the gas price drifted below $4 per million cubic feet. I don’t ever remember as big a gap in the value between oil and gas. And at the same time, gas is the cleanest burning fossil fuel. So from a greenhouse standpoint, we need to do something to support gas production. My son is a driller with Chevron and he mentions that somewhere around $6 is the price they need to keep the shale gas really moving. $6 gas is like $36 oil, but oil is $80. So I think the US is missing a bet; supporting natural gas would cut down imported oil, help the US economy, and be a greenhouse-gas bridge.
Admittedly, questions have been raised about the amount of water used during production, plus possible groundwater contamination. Another point is that the coal lobby is very strong. It was coal-state democrats who really gutted the greenhouse gas bill. The political reality is that not much can be done without those coal-state democrats.
Q: A recent draft paper from a Cornell University professor indicated that shale gas was not as effective a greenhouse gas tool abate strategy as had been thought, apparently due to the much-larger energy inputs to produce the shale gas. Did you see that notice?
Leonard: No. I’ll be interested to see the calculations. On working with certain assumptions, and if someone shows me [something] that I didn’t think of, I’m certain willing to rethink.
Q: Are there recent events influencing world production levels that you would like to mention?
Leonard: Two things are happening in the background with respect to eventual peak oil production. First, look at the policies of Brazil; they are moving towards being very careful about how and at what rate they develop their resources. They saw the UK’s production going up and down relatively quickly. They’re setting rules to become more and more exclusionary, with more focus on Petrobras being the main player. One of the reason’s BP paid such an enormous price for Devon’s assets in Brazil’s Campos Basin is that BP sees that if you want a position you have to buy out a current owner. So Brazil is going to carefully manage their production, like Norway. Second, while Iraq talks about large future production, I still see all sorts of chaos there. I do think they can go up to 4 mb/d from today’s 2 mb/d, but going to 8 or 10 or 12 is just not real.
Q: Do you get comments about your article on peak oil from 10 years ago?
Leonard: Yes. I get periodic requests for the paper. I’m glad I went on record that long ago that the peak was going to be around 90 million because it establishes some credibility. There are pieces of the paper that seemed reasonable at the time that aren’t accurate now. I was probably wrong about the reserves claims during quota wars of the late mid-to-late 1980s; I think the big change in claimed reserves then is mostly about the switch from the SEC to the SPE reserve categorization. The timing was a little bit political but that’s what happened rather than OPEC’s new numbers being fake numbers. They’re real numbers but they are different categories. Also, I underestimated Russian reserves because that paper was written just about the time I arrived at Yukos. While I was a Yukos VP my staff did a year-long comprehensive study of Russian reserves. That’s what gave me my current understanding of their reserves.
Q: Any interesting peak oil talks of late?
Leonard: I gave a presentation on the issue at the Lyndon Baines Johnson School of Public Affairs in Austin [TX]. And I spoke last November in Washington to the Energy Forum. It included a number of energy staffers from Capitol Hill, though the groups that seemed to take it most seriously, based on follow-up contacts, are representatives from the Defense Department.
(Note: Commentaries and interview remarks do not necessarily represent the Peak Oil Review’s position; they are personal statements and observations by informed commentators.)