BHP pins US shale hopes on oil price recovering

BHP Billiton’s US shale division is unlikely to generate significant free cash flow until next decade.

BHP Billiton’s Fayetteville shale project in Arkansas.

BHP Billiton’s US shale division, which the big miner spent $US20 billion buying in 2011 and nearly that much again developing since, is unlikely to generate significant free cash flow until next decade under average consensus oil and gas pricing scenarios released by BHP last night.

The onshore shale oil and gas ground, the main reason for BHP’s record $US6.4bn full-year loss last month after write-offs, finally started generating cash after big cuts to development drilling, despite slumping global oil and US gas prices.

But the company’s first petroleum update since the February appointment of new oil and gas chief Steve Pastor reveals there is little near-term hope for any material cash contribution from the operations, despite expectations oil and US gas prices would rise.

Under average analyst consensus forecasts that see oil prices rising to $US70 a barrel by 2021, the shale operations remain effectively cash flow neutral until 2021, as capital spending rises to $US2bn from about $US600m this year, BHP said.

After this, the business would generate about $US1bn to $US1.5bn a year in the 2021 and 2022 financial years.

“Our shale assets generate cash at current prices, with significant upside should oil and gas prices recover as we expect,” Houston-based Mr Pastor said.

“Clearly we didn’t get the timing right, but what we did get was some of the best parts of the best shale plays in North America.”

Illustrating the ability of the shale business to react quickly to price rises by stepping up drilling, free cash generation would start in 2018-19 under a scenario where oil prices went to $US80 by 2020.

It would rise to $US3bn by 2022 under this high-price scenario, as capital spending rose close to $US3bn, potentially making the Permian shale ground in Texas the biggest cashflow generator in the petroleum unit.

After BHP bought the US shale assets it spent billions of dollars on development drilling until US gas prices and then global oil prices began to slump.

Their value has been written down by nearly $US20bn.

The big miner is again on the look out for petroleum acquisitions, but this time in the conventional space, where it feels underexposed after the big shale purchase. Mr Pastor said his focus would be on a suite of internal opportunities, such as the $US10bn Mad Dog 2 oil project in the Gulf of Mexico, where BHP has a 24 per cent stake and an investment decision is expected in the next six months.

But, stressing the company would be disciplined, he confirmed BHP was also looking externally for growth options.

“It’s got to be at the right price and it’s got to play to our strengths,” Mr Pastor said.

“Where we see the most potential is deepwater conventional, where we’ve demonstrated many decades of really competitive, effective performance.”

BHP has elevated the remote Scarborough project off Western Australia to an “existing opportunity”, albeit with production expected after 2025, in the wake of an agreement to sell half its 50 per cent stake to Woodside Petroleum.

Mr Pastor said the $US400m sell-down had the effect of reducing exposure to global gas, because the outlook for oil is better, and bringing in Woodside’s know-how alongside operator and 50 per cent owner ExxonMobil.

“We see it (Scarborough) as economically attractive and viable,” he said, adding there were now two potential paths to development.

Exxon is studying developing the field as a floating LNG project, something analysts believe has little chance of happening.

And BHP’s recent exploration push, which Mr Pastor headed under previous petroleum boss Tim Cutt, is another potential area of growth.