Mining giant stakes claim on flexibility of US shale

HOUSTON — Australian mining behemoth BHP Billiton is now one of the biggest foreign investors in U.S. shale, but it wants to cultivate a nimble approach to American source rock that could beat out even the smallest, scrappiest oil and gas companies.

The company first dipped into the shale business in 2011 and accelerated its investment that year when it bought Petrohawk Energy Corp., a Houston company stocked with liquids-rich Eagle Ford assets. Now it aims to spend about two-thirds of its $6 billion petroleum budget on shale over the next few years.

The company is vying to use new drilling and production technologies to shave as much cost as it can from its shale business. In July, the company’s cost-cutting new CEO, Andrew Mackenzie, split BHP Billiton’s petroleum business in two, creating divisions for its conventional and shale businesses as a way to have more executive oversight.

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Part of the appeal of U.S. shale to BHP Billiton, one of the world’s largest excavators of resources like iron ore and copper, is its flexibility. It’s easier to move in and out of the shale business compared with the company’s multidecade mining projects, says Tim Cutt, BHP Billiton’s Houston-based president for petroleum and potash.

Cutt spoke with FuelFix about his company’s movements in U.S. shale and his other ward, potash, a nutrient mined and used to improve crop yields.

Here are edited excerpts from the interview:

FuelFix: The company has been in the U.S. shale since 2011 and has amassed a position in the Eagle Ford. Where are you looking to expand?

Cutt: We’ve been appraising the Permian Basin for the last two years. It’s fair to say some of the best shales are in North America: They’re larger, they don’t decline as steeply as other shales, and the hydrocarbon content is good. So we have a lot of running room right here in our backyard before we have to consider big moves to other places in the world.

FuelFix: Why split the petroleum into two divisions, shale and conventional?

Cutt: The shale business really was the driver for separating those two. In the conventional business, you usually build big projects and you put all the capital in up front. In the shale, it’s a continual investment, and those who win have the best manufacturing process and they have the best recovery per well.

FuelFix: What do you mean by “manufacturing process?”

Cutt: Once you determine the parts of the field you want to be in, the design of the wells is fairly consistent, the technology is fairly consistent. Those who win get that to where, within the bounds of keeping it extraordinarily safe, you get the lowest cost you can get to, and then repeat it.

FuelFix: The Energy Information Administration’s new report on drilling productivity highlights rapid decline rates in several U.S. shale plays. Is that a concern at this point?

Cutt: When we appraise different parts of the field, we find the ones with the lowest decline rates and develop there first. Those wells decline fairly significantly at first, but they sit there as a long-tail base for decades. The good news is technology continues to advance, for every well we drill and complete and fracture we get more and more oil each time, so that’s a real positive.

FuelFix: BHP Billiton’s new CEO, Andrew Mackenzie, has been saying the company will focus less on production growth and more on increasing value. What’s the implication for the asset-acquisition part of the shale business?

Cutt: On the question of volume and value: If we continue to invest heavily in onshore dry gas, we could run our volume up, but it won’t be as valuable as shifting and consolidating that focus on liquids. We’d be producing more barrels of oil equivalent, but we’d be making less money. I’d say our focus over the next few years will be less about acquisitions and a whole lot more about productivity and improving the margin on every single well we’re drilling.

FuelFix: Tell me about the potash business and why the company is moving into it.

Cutt: In very simple terms, it’s potassium. Potassium is a basic crop nutrient that helps with fending off disease and improving yields. As the population continues to grow, peoples’ diets improve with time, and the combination of those things means we’re going to need to produce more out of every acre of land that’s farmed. We have a land position in Canada where we’re working to start developing our first mine. We’re positioning ourselves well for when market conditions warrant moving into the commodity in a broader way.


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