A year ago, Hyperdynamics was a small company with a huge concession. And it was running out of time.

The company had signed a production-sharing contract (PSC) with the government of Guinea in 2006 for 30,888 sq miles (80,000 sq km) of unexplored offshore acreage. The contract stated that Guinea’s national assembly could request a 64% relinquishment. But the national assembly was abolished soon after the contract was signed.

So Hyperdynamics hung onto the largest concession in Africa, desperately seeking partners to help it develop the acreage. By 2009, the Guinean government was growing impatient, and the company was nearly broke.

That was when Ray Leonard was brought onboard as CEO. He had his work cut out for him from the beginning.

“The company was a mess,” he said. “It was almost bankrupt, and the government was about to take over the asset. There was no good technical story, the stock was in danger of being delisted, and they desperately needed partners but couldn’t attract any.”

Memorandum of Understanding

Leonard (in tie) signs the Memorandum of Understanding with Minister of Mines and Geology Mahmoud Thiam (center) in September 2009. (Images courtesy of Hyperdynamics)

Leonard, a geologist by training, looked at the existing data, which included some vintage 2-D data from the 1970s and ‘80s and more recent 2-D data shot by Hyperdynamics between 2002 and 2008. He liked what he saw.

“The asset is excellent,” he said. “Not only is it large, but there are probably multiple prospects.” He also was interested in the geochemistry, which found numerous oil seeps. “I felt like the company could be fixed,” he said.

Over the past year, Leonard has replaced everyone in a position higher than secretary to bring in a strong management and technical team, most of them former co-workers from Amoco. After reviewing the geology and prospectivity, they enthusiastically agreed to join a high-risk, high-reward venture. A strong board was recruited, including former Texaco E&P president Bob Solberg and former UK Foreign Secretary Lord David Owen. Only one of the original directors remains.

But solving internal problems was only part of the battle. Leonard also had to work with the Guinean government.

‘Renegotiation and relinquishment’
Leonard traveled to Guinea in September 2009 to discuss the PSC with the government. “The first two words out of my mouth were ‘renegotiation’ and ‘relinquishment,’” he said. “I was given to understand from one of the officials that if those hadn’t been the first two words, any other words would have been my last.”

Leonard’s willingness to negotiate; his industry experience; and his partner Hank Cohen, a Hyperdynamics board member and former Assistant Secretary of State for Africa under the Bush administration, were enough to allow talks to continue. Leonard said the government officials were reasonable and agreed to give him until the end of the year to get a better handle on the prospectivity of the acreage so that he could relinquish 70% of it back to the government. They also gave him six months to renegotiate the contract. Leonard, in turn, hired the consulting firm Moyes and Associates to compile a chart showing contractual terms in neighboring countries.

“We said, let’s make sure that your contract is right in the mainstream and consistent with the others,” he said. “If that means changing what we had before, we’ll change it.”

It took the full six months to renegotiate the contract, but, he said, “At the end of the day, we had something that both sides agreed on.”

Taking a chance
With a usable contract in place, the next challenge was finding partners. And finding partners meant shooting new seismic over the remaining acreage. Bergen Oilfield Services, a new Norway-based geophysical contractor, took a chance on Hyperdynamics.

“Here’s a company planning a (US) $10 million program that had less than a million dollars in the bank and was several million dollars in debt,” he said. “We pledged 2.5 million shares so they knew they’d get something, at least their mobilization fee.”

Once the technical story was in place, the company began looking for industry partners. Dana Petroleum and Repsol signed letters of intent (LOIs), which helped to pay for their share of the 2-D survey, and Hyperdynamics went out to the market and raised another $8 million. The two companies took different approaches: Dana was enthusiastic about the project and negotiated all of its contracts quickly, and it worked with Bergen Oilfield Systems in the seismic processing and interpretation.

Repsol was more reluctant and would not sign anything until negotiations with the government were complete. Its guarantee of exclusivity outlined in the LOI expired before the PSC amendment was signed. “At that point, we felt that the value of the project had significantly increased, so we ended up not consummating the deal with Repsol,” Leonard said.

Once the 2-D survey was shot, senior geophysicists set about planning a 3-D survey. By this time, Hyperdynamics had money in the bank, and all of the major geophysical contractors bid on the job, which eventually was awarded to PGS.

The survey, covering 1,420 sq miles (3,675 sq km), will be complete in October 2010, with time-migrated processing complete by the end of the year and depth-migrated processing available in March 2011. Leonard said there are two prospects that half of the survey will cover; the other half will cover a prospective area on the southern edge of the concession that is cut by very deep channels at the seafloor. “Without poststack 3-D depth migration, we’re not going to see anything,” he said. “The 3-D is going to image that subsurface for the first time.”

To get an independent view on the prospectivity, he hired Nederland Sewell and Associates (NSAI) to compile a Competent Persons Report. NSAI conducted a three-month assessment of the prospective oil resources in selected prospects that resulted in “best estimates” of 2.3 Bbbl of recoverable unrisked prospective oil resources.

Then what?
While Hyperdynamics is seeking additional partners, it is not in a rush. The first well needs to be spudded, but not completed, in 2011, so it is scheduled to spud in 4Q 2010. And until the seismic processing is complete, the total value of the project is hard to determine.

“We firmly believe the value of the prospect will increase as that data comes in,” Leonard said.

Meanwhile, things in Guinea are improving as well. After 50 years of turmoil, the government now is being run by a combination of military and civilian personnel, and Guinea had its first democratic election in the country’s history in June. A run-off election is scheduled soon.

“The transition government is made up of a general and a civilian who pledged that they would not be running in the new elections so that they can run things without having a political bias,” he said. “This renegotiation was done with the new regime. They’re excited about the new contract and the fact we’re moving forward.”

Overall, despite a rough beginning, the Hyperdynamics story seems destined for a happy ending. “The company is on a solid financial footing, we’ve got a good technical staff, we’ve got an excellent partner in Dana, and the concession is solid,” Leonard said. “That’s what we did in one year.”