BHP Billiton believes oil and gas can make a quicker come back than the minerals sector and is backing its judgement by focusing on what it describes as a “broad range of opportunities within its Petroleum business to grow value, returns and cash flow as markets improve.”
BHP Billiton’s president Operations Petroleum, Steve Pastor, recently told an investor briefing in London that having both minerals and petroleum in the company’s portfolio “allows us to maximise the value of our petroleum assets at the right point in the cycle.”
“While currently well supplied, underlying fundamentals suggest both oil and gas markets are improving more quickly than our minerals commodities,” Mr Pastor said.
He told the gathering that it is expected that 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 maximise 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,” Mr Pastor said.
“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.”
Mr Pastor told the briefing that the company will continue to have a major focus on its US onshore assets.
“BHP Billiton runs its onshore US assets to maximise value rather than volumes and will continue to adjust its investment plans to reflect market conditions.
“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 US$50 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.”
BHP Billiton estimates its conventional oil and gas unit operating costs to remain at approximately US$10 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 US$2.5 billion and an average IRR 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 US$50 per barrel of oil,” Mr Pastor said.