Recent acquisitions have put Australia's BHP Billiton Ltd. in the "shale of the shales" and positioned it to be a low-cost provider in the development-friendly United States, the company's petroleum unit chief, J. Michael Yeager, told financial analysts, noting that plans to export liquefied U.S. gas to the rest of the world are racing ahead and BHP is ready.
The Fayetteville, Haynesville and Eagle Ford shales, as well as the Permian Basin, are where BHP is making its mark. Last summer BHP bought out Petrohawk Energy Corp. for $12.1 billion, giving it a substantial presence in the Eagle Ford in South Texas, the Haynesville in North Louisiana and East Texas and the Permian in West Texas (see Shale Daily, July 18). This followed its acquisition of Chesapeake Energy Corp.'s Fayetteville portfolio for $4.75 billion (see Shale Daily, Feb. 23).
"...[I]t's irrefutable that the shale business is a game-changer for energy supply across the United States for the next 50 years, and clearly...we think it's irresponsible for this corporation to not be a part of that game-changing aspect that's going to be, not only here in the U.S. but worldwide, as it moves forward," Yeager said.
BHP now claims to be the seventh largest independent oil and gas company in the world. In the Fayetteville it is the second largest producer with 487,000 net acres. In the Haynesville it claims to have "the largest amount of the best acreage in the highest-producing gas field in the U.S." BHP now owns the wisdom garnered by Petrohawk after it drilled its first well in the Eagle Ford in 2008. And in the rejuvenated Permian Basin there is no telling how much more oil is yet to be found, Yeager said.
"...[I]t's not that we are just average in the shale; we are in the shale of the shales as I've described it: Four world class fields, each with very distinct advantages...
"We're the operator of every bit of this. All those JVs [joint ventures] that you guys have read about, we passed on every one of them, and everything I'm going to show you today...is being formed up and we run and drive and control everything I'm going to show you. It allows us to have the scale I've talked about; it allows us to drive the technology and consequently, it allows us to be in a position to repeat this and do it again in what is a game-changing world...That's why we've done it."
During a presentation Monday, Yeager went to great lengths to explain for an international audience of financial analysts the evolution of shale natural gas development, the processes involved and safety measures taken by industry, as well as what he characterized as ever-growing support for shale development in the United States.
Yeager allowed that areas with lower population density, such as South Texas in particular, are more advantageous for development and that familiarity with the energy industry is an advantage for companies like BHP. "There's a very, very direct correlation between the amount of people on the land that you're using and how successful you're going to be at being able to carry out your business, and clearly, being in a low-population area is important.
"We do not expect any material change in our investment plans from any sensible regulatory changes that are coming forward, and everything, I can tell you, ladies and gentlemen, is showing that the number of wells that are drilled and the success of this industry in its documented performance is gaining more and more acceptance across the entire United States, even in places where the industry is new."
Yeager laid out some of the challenges to shale development, big and small, and described how BHP is working to deal with them, noting that the global company is particularly advantaged by its deep pockets.
In Arkansas, for instance, BHP has sidestepped a potential liability by shutting in two drilling waste disposal wells it acquired from Chesapeake that were thought to have contributed to seismic activity in the region (see Shale Daily, July 29). "...[W]e've voluntarily closed those wells in and plugged them and got out of there," he said. "If we have something like this that is thought to be a problem, we're going to take care of it and move on, and that's what we've done."
More difficult than shutting in a couple of disposal wells is dealing with cost creep in the services sector, which has been significant and driven by high demand for equipment, people and services needed to ply the shales.
"The way we manage that is we are now going to be one of the largest operators of shale operations in the U.S.," Yeager said. "We will be the No. 1 or No. 2 customer of most all of the largest vendors" and be able "to extract commercial terms that are as much as 25-40% less than those that don't have our size and scale...We are hoping that the industry itself will have better service support and demand will be ameliorated a little bit, but BHP Billiton's size and scale will allow it to have a commanding position as to whatever is done there."
Still, the company will continue to be a renter and not a buyer of services assets and expertise. "To get in the drilling rig business, to get in the fracking business, to get in those things full-time means training, equipment, maintenance and other things that we would rather leave to people that do that full time," Yeager said.
The former assets of Petrohawk and of Chesapeake are benefiting from BHP's size and know-how, Yeager said.
"Visit with any Petrohawk employee and they would say, 'We do not know how to run these businesses for the long term,'" he said. "We bring the skill to run four major shale businesses -- the Fayetteville, the Permian, the Haynesville and the Eagle Ford -- simultaneously and to run them at a very high level of sophistication.
"As a matter of fact, over the next five years for the Eagle Ford and the Haynesville and the Fayetteville, we're going to be net cash generating by the natural cash flow that we generate from the fields and the net operating losses and the additional depreciation we're going to bring to bear. So we've made transactions that will not draw on the corporation's cash flow at all, and as a matter of fact still return large amounts of cash, even with the ramp up that we're doing that is three and four times what Petrohawk and Chesapeake did.
"Then on top of that, we think we've done good transactions on a per-unit basis. If you look at the top 10 transactions that have been done over the last few years, they've been purchased at an average of 66 cents/Mcf. We average 44 cents, so we've bought all this stuff at 44 cents and we will have it for the next 30 to 50 years, and our competitors are above that [in cost]. So by any measurable way, the fit is good."
Still, even a low-cost provider needs a market for its product. Yeager said utilities in the United States are warming to the natural gas story.
"I have sat with some of the larger utilities in the United States that have been using coal for 40 or 50 years and are now saying that, 'As I gain more and more confidence that the gas supply will be there for the long term, I have less and less problems with making that switch and moving forward [to gas],' so that's an economic proposition as well as a regulatory thing," Yeager said. "But supply dependability is moving forward and becoming much more a stable nature of the way the business is working."
And gas that's not burnt stateside could find a home in markets overseas via exports that would contribute to the leveling of gas prices worldwide, Yeager said.
"There are four permitted [LNG] export terminals right now [in North America], and that's growing rapidly," he said. "And there's one new export contract that has been let for actual purchases of gas [between units of Cheniere Energy Partners LP and BG Group (see Daily GPI, Oct. 27)], 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.
"We have our LNG team looking at all that. We are looking at the economics that it would take to make sure that that's successful. All I can do is point to you how much change has occurred, even in the last six months, of four of these sites being brought to permitting and the first export contract already being framed up where British Gas was willing to pay Henry Hub plus a premium in order to take the gas and go into Europe with it...[A]nd we have the capital and the long-term ability to stay with that."