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BHP presses ahead with US shale gas

BHP Billiton plans to press ahead with an ambitious US shale-gas agenda despite low natural gas prices and crippling write downs on the carrying value of its onshore assets

Speaking in Houston, chief executive Michael Yeager said the company would spend about $12 billion over the next two years, with more than half allocated to four US shale-gas plays: the Eagle Ford, Permian Basin, Fayetteville and Haynesville.

The company is targeting 10% annual production growth to 2020, which would put it over 1 million barrels of oil equivalent per day (boe/d) by the end of the decade.

From virtually nothing two years ago, BHP has grown into a top-10 US onshore producer, with a resource base of about 8 billion boe of reserves spread across 1.6 million acres in Texas, Louisiana and Arkansas.

But building a dominant position in the onshore unconventional shales has come at a $20 billion cost. In 2011 BHP spent $4.75 billion to buy Chesapeake Energy’s Fayetteville acreage. In July of that year it tripled down with a $15 billion bid for Petrohawk Energy, to gain dominant positions in the Eagle Ford and Permian.

Analysts questioned the wisdom of paying a 65% premium for Petrohawk, as natural gas prices fell to decade lows.

According to data from the Energy Information Administration (EIA), US wellhead prices have averaged about $2.37 per million British thermal units (Btu) in the first seven months of the year compared with $3.95/million Btu in 2011. If trends continue, 2012 will post the lowest averages since 1998.

Those kinds of numbers have resulted in hardship across the entire E&P sector. “We’re no different than any other company,” Yeager says.

In August, BHP was forced to take a $2.8 billion write down on the carrying value of its acquired assets, mostly properties in Arkansas it purchased from Chesapeake. The Petrohawk assets remain profitable, owing to the high liquids content of the gas produced.

Nonetheless, impairment charges on the US assets prompted Yeager and BHP chairman Marius Kloppers to forego their annual bonuses.

Undeterred, Yeager insists BHP is a long-term player in the unconventional sector and plans to maintain and increase productivity at its US operations.

The company will build and field 45 new purpose-built rigs to drill horizontal wells and deploy the latest technology. Even in the money-losing Fayetteville, rig-release times have fallen from an average of 40 days in August of 2011 to around 12 days in June 2012. Though the cost savings are not enough to overcome the low gas price, BHP is in good position to take advantage of a recovery when the market turns.

With its deep pockets, BHP is a  “differentiator” in the US unconventional sector, Yeager said. The company isn’t looking to the next several quarters, but the next several decades — fields like the Eagle Ford are estimated to have a 50-year reserve and production life.

“We can weather the downturn and set our eyes on the long-term prize”, he said. “We’re in it for the long haul.”

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