BHP Billiton (BHP) has again emphasised the growth options in its petroleum business, continuing its belief that oil and gas (and copper) are the best placed of its areas of interest for expansion in the next few years.
Iron ore coal and other minerals are in the too hard or too depressed basket, but petroleum is at the top, despite weak world prices, a continuing global oversupply and doubts about the latest attempt by OPEC and the Russians to try and freeze production to boost supplies. BHP yesterday outlined plans to gradually expand its petroleum business, indicating it saw new projects as becoming more attractive because of lower costs and a faster than expected recovery in oil and gas prices compared to prices for other commodities it produces.
BHP said that rising oil demand, declining output from existing fields and a lack of major new projects, due to the downturn, is "expected to create a significant opportunity to invest" in the sector.
“While currently well supplied, underlying fundamentals suggest both oil and gas markets are improving more quickly than our minerals commodities,” said BHP petroleum operations president Steve Pastor in a extensive briefing released to the ASX late yesterday.
"Our focus on productivity has significantly reduced both operating and capital costs, supporting a range of shale and conventional investment opportunities that would generate compelling returns at today’s prices."
That includes the Mad Dog II deep-water project in the Gulf of Mexico, on which it forecast an investment decision would be made in the next six months. BHP has a 24% stake in Mad Dog, which is 61% controlled by BP. Chevron owns the rest.
BHP yesterday revealed positive drilling results at the Caicos exploration well in the Gulf of Mexico. Located in Green Canyon 564, this well is approximately 100 miles (160 kilometres) south of the Louisiana coast in the deep water Gulf of Mexico. Caicos was drilled to a total depth of 30,803 feet and encountered oil in multiple horizons.
“We are encouraged by the Caicos results and are moving to further appraise the area. The next step will be drilling the Wildling well in November. With success at Caicos and Shenzi North, we continue to be optimistic around the opportunity for a commercial development in the area,” Mr Pastor said in yesterday’s statement.
“While currently well supplied, underlying fundamentals suggest both oil and gas markets are improving more quickly than our minerals commodities.”
“Over the next decade, demand growth, natural field decline and the effects of industry wide investment deferrals are expected to create a significant opportunity to invest and maximize value in oil.
"By 2025 the world is expected to consume more than 100 million barrels of liquids per day – a third of which would come from new sources.
“We are well placed to capitalise on this opportunity. We have a large, high quality resource base. Our focus on productivity has significantly reduced both operating and capital costs, supporting a range of shale and conventional investment opportunities that would generate compelling returns at today’s prices.
"As a result, Petroleum is well placed to maintain its position as BHP Billiton’s highest margin business and to grow its free cash flow contribution,” he said.
Globally, BHP sees around 30 million barrels of oil a day of new supply being needed by 2025 to fill a growing gap caused by declining output from existing fields, with the new supply equal to around a third of present demand. It sees US shale playing a key role in helping to fill the gap.
Mr Pastor defended BHP’s onshore US assets (mostly shale gas, with some oil where massive write downs of more than $US20 billion have been taken) saying the aim is to maximise value rather than volumes and will continue to adjust its investment plans to reflect market conditions. BHP’s bullish outlook comes just months after it booked a $US7.2 billion charge to write down the value of its US shale assets, pushing the company to a record full year loss.
At the time, it had stripped the shale drilling program to a minimum until oil prices recovered, as part of a review of investment and development plans in the business.
“Our Onshore US business gives us valuable flexibility. Our shale assets generate cash at current prices, with significant upside should oil and gas prices recover as we expect,” Mr Pastor said.
“We operate in the heart of some of the best shale plays and by further reducing costs and improving capital efficiency to levels among the best in the industry, we have increased our investible well inventory.
"As a result, we now have up to 1,200 undrilled net oil wells, contingent upon trials in the Eagle Ford, and 220 undrilled net gas wells that generate a minimum 15 per cent internal rate of return (IRR) at $US50 per barrel of oil and US$3 per MMbtu.
“In the Permian, we have access to over one billion barrels of oil equivalent (boe) meaning this field has the potential to become the largest production and free cash contributor in our Petroleum portfolio within five years.”
In conventional oil, Mr Pastor said the company is expecting unit operating costs to remain at approximately $US10 per boe over the 2017 and 2018 financial years as it pursues a number of options to extend high margin production from its existing facilities.
“We have a rich portfolio of brownfield project options, with total capital expenditure of $US2.5 billion and an average IRR (Internal Rate of Return) of 45 per cent that will help offset field decline. With significant improvements in capital efficiency, major capital projects like Mad Dog 2 are now economically attractive, even below $US50 per barrel of oil,” Mr Pastor said.
BHP said it is looking to rebalance its petroleum portfolio towards oil assets.’"We see more upside potential for oil than gas, given that gas assets are more abundant," Mr Pastor said.
The company’s recent sale of half of its stake in the Scarborough area gas fields, off the coast of Western Australia to Woodside, stemmed from this desire to rebalance its somewhat gas-heavy portfolio.
