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BHP Sees U.S. Onshore Liquids Growth Peaking Within Decade

The United States may have become the world's swing oil producer but it won't be for too long, according to BHP Billiton plc.

The Australian mining conglomerate, one of the biggest international investors in the United States, both onshore and in the Gulf of Mexico, expects domestic shale oil growth to peak within the decade, CEO Andrew Mackenzie said Tuesday in London during a conference call.

Mackenzie, like his peers, spent some time during the one-hour call on second-half 2014 performance to comment about the future of oil and natural gas prices.

BHP, which first was slammed by falling U.S. natural gas prices in 2009 -- forcing asset sales and a pullback in strategy -- plans to reduce the U.S. onshore rig count to 16 from 26 by the end of June (see Shale DailyJan. 21).

About 15% less is to be spent in the U.S. onshore this year, with most of the budget earmarked for the Eagle Ford Shale. Only one natural gas rig is planned in the Haynesville Shale.

Asked his thoughts about the trend for natural gas and oil prices, Mackenzie said management expects U.S. onshore liquids production to "peak within the next decade," and there's no demand to match gas supply growth. Those trends eventually should impact pricing -- but it’s not going to happen anytime soon.

"Clearly there is a sense of almost a global glut of gas," so "I would be fairly modest about my long-term views on gas," he said. "Oil is the most difficult...I mean obviously, what we've seen is that OPEC has successfully transferred the role of swing producer to the higher-cost U.S. shale oil, but of course, we have lower cost U.S. shale."

The United States as the global swing producer for oil prices "will be quite short-lived because we don't think U.S. shale oil is going to last for a very long time," said the CEO. "Obviously as that comes out, then there will be further choices to be made."

BHP management's views that U.S. shale oil production will diminish mirrors the latest annual outlook by BP plc, which expects OPEC to overtake the United States as the leading oil producer (see Shale DailyFeb. 18).

The low-cost producer generally is "never" the swing producer, whether it be for iron ore or petroleum, Mackenzie noted.

"OPEC has figured that out," said Mackenzie. "Once the impact of shale oil is less strongly felt, I think that will cause...oil prices to how much will really depend on the momentum of demand attrition that you have for energy, driven by the desire to take out carbon and so on and so forth..."

The current down cycle in prices "will remain an enduring feature of our industry, so our strategy, the quality of our portfolio and the strength of our balance sheet will make sure that we're also perfectly positioned to capitalize on the expected price recovery for some of our key commodities."

An oversupply of crude oil "is likely to persist throughout the 2015 calendar year, but with capital expenditure reduced, particularly in the U.S. shale sector, we are now seeing a slowdown in the rate of supply growth. Longer term, with new supply required to offset natural fuel decline, the outlook for a cyclical recovery in liquids prices is positive. And so this supports our recent decision to preserve the value of our onshore U.S. acreage...

"The world in commodity prices has become, and will remain, more volatile. And our strategy, plans and actions all embrace this new paradigm and provide us with unrivaled flexibility to adapt. So we have reacted quickly to market volatility and strategically flexed various levers to maximize free cash flow...We have exercised supply discipline, where appropriate, by shutting in operations that were not cash positive."

CFO Peter Beaven, who also participated in the conference call, said operating productivity continues to improve in the petroleum business, with unit cash costs at onshore U.S. sites declining by 8% sequentially.

"Capital productivity is a key driver of value for our shale business," Beaven said. "We invested $1.9 billion at onshore U.S. and expect this to reduce to $1.5 billion in the second half of the financial year, as a result of a reduction in drilling activity."

Although the rig count is falling, "we're not reducing overall activity," said Beaven. "We're drilling and producing at lower costs."

The operator, the world's largest miner by market value, reported a 47% decline in first-half profit to $4.27 billion net from $8.11 billion in the final six months of 2014. The most important commodities, iron ore and oil, both were halved in value over the period; iron accounted for almost half of the group's entire earnings.

Cost reductions are taking place across the board, not only in North America, Mackenzie noted. "We continue to surprise ourselves," he told analysts about the ability to squeeze costs while maintaining productivity gains.

BHP now expects to spend $12.6 billion through June, 15% below initial estimates. For the first half of 2016, it expects to spend around $10.8 billion. By midyear, assets including nickel pits and aluminum smelters are to be spun off into a separately listed company, South32.

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