BHP Exec: Fayetteville Shale Production Could Last Another ‘Half A Century’

In a presentation to Wall Street investors last month, the head of BHP Billiton’s global petroleum operations said the Australian mining giant’s dry gas assets in the Fayetteville and adjacent Haynesville shale plays could support production for another 50 years.

“The resources of the Haynesville and Fayetteville fields are vast,” Tim Cutt, president of BHP Billiton’s petroleum operations, told investors and Wall Street analysts at the 2015 Barclays CEO Energy Power conference in New York City. “Our U.S. dry-gas resource of 25 trillion cubic feet could support half a century of production at twice our current production rate.”

Cutt made his eye-opening observation amid BHP’s cost-cutting campaign in the Arkansas shale play, which has seen the Australian mining giant essentially mothball its drilling operations in the unconventional dry-gas shale basin that has brought billions of dollars in capital investment to the Natural State in the past decade.

And although BHP’s U.S. oil and gas operations are a small part of the Australian conglomerate’s expansive global mining reach, the company has made substantial investments in U.S. shale plays in Arkansas, Louisiana and Texas over the past five years that it hopes to pay off at some point in the future.

“Given the steep decline curves associated with U.S. shale gas production, high rate wells from the Haynesville and other dry gas areas – including the Fayetteville – will be called upon to help balance the market as liquefied natural gas (LNG) starts to be exported and additional gas flows to Mexico,” Cutt forecasted in a webcast of the Barclays meeting. “We continue to drive down development and operating costs to bring forward our significant dry gas development options.”

Once the flagship of the Australian miner’s U.S. shale investments when it was purchased for $4.75 billion from Chesapeake Energy Corp. in 2011, BHP’s 2015 capital budget for Arkansas dry gas play is now only about $200 million.

SIMPLER PORTFOLIO, REDUCED COSTS, BETTER RESULTS
That capital spending, however, still allows BHP to keep a watch over its 487,000 net acres of leasehold position in the shale basin, while also continuing to cash in on production from wells already drilled when the company had nearly 30 rigs and working crews located across north central Arkansas. For fiscal year 2015, BHP drilled and completed only 45 of its 1,070 productive wells, compared to 71 well completions a year ago.

Reiterating goals first expressed by BHP Billiton CEO Andrew Mackenzie in July during the company’s operational review, Cutt’s Wall Street presentation stated that the company’s simpler portfolio is fixated on performance, reduced costs and increased production with a significant reduction in capital spending.

To that end, BHP has shifted most of its capital investments to liquids-rich Eagle Ford and Permian shale plays in West Texas, hoping to increase its production of wet natural gas and crude oil to 67% by the end of year. Cutt also reaffirmed BHP’s earlier forecast to cut the company’s U.S. onshore capital budget by 15% from $4 billion to $3.4 billion in 2015.

Going forward, Cutt said BHP plans to invest only $1.6 billion in the company’s conventional dry shale plays to maintain steady production over the next three years, allotting about $600 million per year for exploration projects at that time. “And the focus of our exploration is to replenish the conventional portfolio and address the existing resource imbalance towards gas,” he said.

$3 HENRY HUB PRICE NEEDED FOR BETTER FAYETTEVILLE SHALE VALUE
Because of current economic conditions, Cutt said the company’s key focus for the Fayetteville and Haynesville shale plays is preserving their value for future production when prices rise above $3 per million British thermal units on the international futures market.

“But we know that we must get better in order to make the economic returns more viable in today’s price environment. That is precisely why I have challenged our team to become more efficient, reduce costs and safely achieve at least a 20% rate of return at a flat $3 Henry Hub gas price,” said the BHP executive. “Based on the significant strides we have made in our focus areas, I am confident we will get there in the near future.”

The BHP executive also offered strong support for the fast-growing Haynesville shale play, which stretches across northern Louisiana into several South Arkansas counties.

“The Haynesville is among the best unconventional gas plays in the world and our acreage is in the heart of the field,” Cutt said. “Because the majority of the acreage is held by production, we control the pace of development which allows us to preserve value for the future.”

Separately, the Sydney Morning Herald (Australia) reported today that BHP is looking more closely at global “merger and acquisition opportunities” in the copper and conventional oil sectors. In trading Tuesday on the New York Stock Exchange, BHP’s American Depositary shares were down 49 cents at $36.57.

One of the world’s largest mining companies, BHP reported revenues of $44.6 billion, down 21.4% from $56.8 billion in the year-ago period.