BHP Billiton Executive Gives Candid Assessment of Fayetteville Shale

Earlier this year, Talk Business reported on Australia-based BHP Billiton’s acquisitions of Chesapeake Energy’s and Petrohawk’s Arkansas Fayetteville Shale assets. The move made BHP the second largest leaseholder in the unconventional natural gas play behind No. 1 Southwestern Energy but ahead of No. 3 XTO, which is owned by ExxonMobil Corp.

In a lengthy presentation to investors, BHP’s Houston-based petroleum division chief executive, Mike Yeager, provided detailed insight on the company’s strategy with these new assets.

LOW COST EXPLORATION
“This field is unique. By shale standards, it’s shallow. From 2,000 to 8,500 feet with low average drilling cost,” Yeager said. “The geology here is excellent. The field is very – the shale is very brittle. It cracks easily, it breaks up and it gives you largely de-risk amounts of gas that we can count on and are dependable but at low cost.”

That “low cost” Yeager noted is one of the primary reasons for investing in the Fayetteville Shale play. He says the potential profitability in Arkansas is significant based on its low costs of drilling compared to other shale regions in the U.S.

“These are some of the cheapest wells in the United States at only three and a half million to drill and frac. And right now, at today’s forward strip at the prices that were out there, we make a 16 per cent rate of return on the investments on these wells at today’s very, very depressed circumstances. Why? Shallow brittle and lower cost are clearly an advantage situation. So if you are going to be in the gas business in the U.S., even during these times, being in the good part of the Fayetteville is a really, really good place to be and I hope you can see that,” Yeager said.

The industry as a whole has been struggling in recent years with depressed natural gas prices, which Yeager referenced. According to the closely watched Henry Hub — which largely sets natural gas prices in the North American market — the price of natural gas ranged from around $9 per million BTU in early 2006 to just over $13 in mid-2008. This year, the price pushed towards $5 this summer, but has tumbled to about $3.50 on average in recent weeks.

In its most recent earnings call, Southwestern Energy CEO Steve Mueller said the company has adjusted its economics to cope with the low U.S. gas prices.

“I think internally, $4.50 is the new $7 is the way we think about it,” Mueller said. “… we’re just assuming for the next few years at least that we’re range bound in that $4 to $5 range and I think that’s reflected in our hedges.”

But there are other markets where natural gas can also be traded, including liquified natural gas (LNG) markets in Europe and Asia, where prices have in recent months reached highs of $15 per million BTU. Some market analysts are saying the winter prices could push past $20 per million BTU, with demand from Japanese utilities moving away from nuclear fuel bumping up against rising demand from China and India.

“Last but not least, LNG export potential has been announced,” Yeager told investors. “There are four permitted export terminals [in the U.S.] right now and that’s growing rapidly, and there’s one new export contract that has been let for actual purchases of gas, should it be developed, and liquefied and sent into Europe, and all that’s happening at light speed. So as you can see, clearly, shale gas is changing the landscape and becoming a major source of hydrocarbons around the world for the future.”

AN UPTICK IN ACTIVITY EQUALS JOBS
One can expect an uptick in drilling activity from BHP in Arkansas in 2012 and 2013. Yeager said he plans to ramp up drilling in the Fayetteville Shale to 20 rigs starting in January. Currently, BHP is only operating 9 rigs. The new rigs are part of $1 billion in investment that BHP is planning for next year.

Southwestern Energy and XTO (ExxonMobil) have not disclosed plans for 2012 yet; however, Southwestern is currently operating 19 drilling rigs in the play. For the first 9 months of 2011, Southwestern invested $1 billion in its exploration and production business in Arkansas.

For every rig brought online, it translates into jobs.

According to a recent study in Pennsylvania’s Marcellus Shale, hundreds of part-time and mobile jobs are created by drilling rigs when one calculates from pre-production to breakdown.

Adding up all hours, researchers with Pennsylvania’s Cooperative Extension Service and the Pennsylvania College of Technology found that just one drilling rig’s operation can create 240 to 450 jobs for 37 to 59 contractors.

Take the low range and do the math on the additional 11 rigs that BHP is discussing and you’re looking at 2,640 new jobs for scores of contractors from BHP’s planned efforts. If other drillers increase their 2012 projections, that number could grow.