[On June 27th, Ray Leonard showed 18 slides and delivered 20 minutes of remarks to a private invited group of roughly 50 different players—from industry, government, academia, think tanks, etc.—who were all focused on key energy issues during a three-day seminar. Leonard gave permission for his remarks and the contents of his slides to be summarized and posted here.

Ray Leonard is Vice-President-Eurasia with Kuwait Energy Company, the first non-national oil company based in the Middle East. During a 19-year career with Amoco he served in Trinidad, Norway and West Africa. In 1989 he was appointed Director of New Ventures for the Soviet Union, Eastern Europe and China. In 1998, he became Exploration VP for a newly formed company in Kazakstan. He became VP-Exploration and New Ventures for Yukos in 2001, with responsibility for diversifying the upstream portfolio into East Siberia, the Russian Shelf and Central Asia. He holds a B.S. in Geology from the U. of Arizona and an M.A. in Geology from the U. of Texas-Austin.]

Mr. Leonard started by saying he has “always been interested in the oil reserves question.” In 2001, he wrote a paper on peak oil that two U.S.-based publications turned down but which Yukos then published in Russian. At a recent energy seminar, Leonard handed out copies of his 2001 paper to the 50 attendees. The key quote up front is this:

“By 2010, the production of the fuel that has driven the world’s economy will start to rapidly decline. This will conflict with the steadily increasing demand for oil. The collision of these two trends will lead to shortages and increased prices, providing a strong incentive to shift to alternative fuel resources…Due to unequal distribution through the world of oil and gas supply and consumption, [the upcoming] transition will result in significant shifts in global power and wealth.”

Leonard’s updated conclusion fits relatively closely with that laid out in his paper seven years ago: the world will “hit an oil production wall at 90 million barrels per day by the end of the decade.” Some key points from most (but not all) of his slides:

  • “It’s not the size of the tank but the size of the tap.” World peak oil describes the level of world oil production. The level of production is not dependent on the level of reserves in much of the world, only on the portion which operates under free market conditions, which is becoming a smaller and smaller portion of the world market.
  • Based on the November 2006 Hedberg conference, the industry estimate for to-be-discovered oil is roughly 60 percent lower than the USGS’s estimate (for the Niger Delta, West Siberia, SW Africa, North Caspian, Gulf of Mexico, offshore Brazil, and Saudi Arabia).
  • The world is divided into three oil supply segments:

    Supply Segment Controlled Reserves Production
    OPEC 73.2% 43%
    Former Soviet Union (FSU) 13.1% 16%
    Rest of World 13.7% 41%
  • OPEC: The limitation on production from the Arabian Gulf is mostly due to politics, lack of motivation, investment level, and type of crude, not shortages of reserves. A rapid increase in production is not physically possible at this time. However, an additional five million barrels/day of production is possible within a decade. (In his further responses, Leonard seemed to indicate that 5 million additional barrels was more “technically possible” than likely.)
  • Saudi Arabia’s stated 260 billion barrels of reserves is based on a 65% recovery factor. This recovery factor would involve unreasonably high levels of water cut.
  • FSU production increased from 7.5 million b/day in 1999 to 13 million b/day last year, providing 60% of world oil production growth during that period. Russian reserves were sufficient to continue growing Russian production (alone) to 14 million b/day by 2010 (117 billion barrels from the author’s study vs. 79.8 billion from BP); however, politics and tax regimes initiated during 2003 have halted growth. Russia has simply decided that they will control production growth at 10 million b/day; they may well both be able to and decide to produce close to that level for a decade.
  • Kazakhstan reserves are sufficient to double production, but increases have been slowed by pipeline constraints and mismanagement of development of the Kashagan field. Azerbaijan has had no recent exploration success, and its reserves are insufficient to increase beyond a 1.2 million b/day plateau.
  • In Rest of World (excluding tar sands), the decline rate in existing fields is estimated at 7%/year. With the exception of Brazil (ultradeep water), major producing countries are at or past peak. Rapid declines in recent years from the North Sea, Mexico and USA have been temporarily halted by additions from the deepwater Gulf of Mexico. Overall ROW production peaked in 2003; an intensive effort is needed to minimize decline rates. New production from ultradeep development has masked decline of ROW, but within the next decade, this welcome new addition will pass and the subsequent decline will accelerate.
  • The offshore US shelf should be opened for drilling, in part because it is hypocritical to ask others to drill on our behalf without doing more drilling on our own shores. However, the new offshore would probably be limited to between 1 and 2 million additional barrels/day within a couple of decades. [These points by Leonard were made during Q&A and offline conversation.]
  • Unconventional oil production: in-place resources of bitumen, tar sands and oil shale are roughly 10 trillion barrels or equivalent. However, having the oil in place is very different from getting the oil out in the near term. Compared to an average recovery factor of 35% for conventional, the recovery of the unconventional resources averages 10% or less. The costs—monetary, manpower and environmental—to develop these resources are considerably higher. The three largest resources are at least in the western hemisphere: USA, Canada and USA.
  • The Alberta tar sands require large water and natural gas inputs, emit large amounts of CO2 and are short of trained personnel. From today’s 1.5 million b/day, they are likely to hit the lower target of 2.5 million b/day than the higher target of 5.0 million b/day.
  • In Venezuela, growth of production to 800,000 b/day in the past decade is likely to stop or dramatically slow due to government reinvestment policies.
  • In the USA, the intensive drilling needed is unlikely to receive environmental permits on the scale needed to have significant impact on domestic production. Probably maximum US production from unconventional oil would be less than 1 million b/day.
  • Likely results during the next decade from unconventional sources: combined production is only likely to grow from today’s 2.3 million b/day to 4 or 4.5 million b/day; 6 million b/day is the most optimistic. Oil prices will need to consistently stay above $80/barrel for the investment needed. The environmental impact will be negative; the consequences need to be assessed.
  • Conclusions: a moderate rise in OPEC production will be partially offset by decreasing production in the Rest of World, with FSU production steady. A production peak of ultradeep water fields will allow the “peak” to be a “plateau during the coming decade, followed by a sharp fall. An increase in production of unconventional oil and natural gas liquids can add 5 million b/day during the coming decade. The current supply-side crisis is due to peak oil reached in the Rest of World in 2003, combined with a cessation of significant production growth in Russia after 2004.
  • “We are nearing World Peak Oil, with resulting high prices and associated political and economic disruptions….What I have presented is a ‘most-likely scenario,’ from my somewhat different perspective of having worked extensively in the FSU and now living in the Middle East.”

[Final note: the person assigned to deliver summary remarks during the final morning of the conference stated that, in a quick written poll of attendees, the most important point made at the conference was “oil supply limitations.” It appears that Ray Leonard’s remarks were heeded by attendees.]

Steve Andrews is a co-founder of ASPO-USA. He attended the conference where Ray Leonard delivered his remarks