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Petroleum Briefing

Sydney 11 November 2019

Geraldine Slattery - President Operations, Petroleum

News release

Presentation

Webcast

Q&A transcript

Good afternoon, and welcome to BHP’s 2019 Petroleum Investor Briefing.

For those I have not met, I am Geraldine Slattery, President Operations Petroleum, and a member of BHP’s Executive Leadership Team.

I have been with BHP for over 25 years, working in our Petroleum assets here in Australia, as well as the US and UK.

Most recently, I was our Asset President Conventional, looking after our global production operations.

Today, we’re here to talk about the Petroleum business, its place in BHP’s portfolio, and to address the questions on your mind.

I recognise that you have interest in understanding our market outlook and our plans to grow value and returns. We will cover all of this.

More than anything else today, there are a few points I would like you to take away.

  • Firstly, we believe oil and advantaged gas are commodities that have the potential to generate strong returns over the long term.
  • Secondly, we have the assets, and the growth projects to replace, and indeed build on the resilient returns we have enjoyed from the Petroleum business, through the next decade.
  • Thirdly, our performance track record in exploration through to production gives confidence in our ability to deliver these plans.
  • And finally, working in both a sustainable and capitally disciplined way underpins everything we do. This is key to the long-term performance of the Petroleum business.

We start with our purpose

So let’s begin with our purpose – ‘to bring people and resources together to build a better world.’

As Andrew Mackenzie and Geoff Healy have shared in recent months, we believe that creating social value is an integral part of creating shareholder value. 

I know that building trust comes from doing the right thing by people and the environment in how we run the business.

It comes from providing access to employment, in providing opportunity to local service providers, and having the highest standards of care for surrounding communities.

Without this trust, we cannot hope to access talent, the most valuable acreage, or the approvals and services needed to competitively deliver on our plans.

Let’s now turn to the specifics of the business.

Petroleum is positioned for long-term value creation

Petroleum has delivered strong returns, and has an attractive outlook.

Our strategy of being in the best commodities, with the best assets, enabled by the best capabilities has delivered strong financial returns over many years.

This strategy is what sets us up to continue such performance.

Our commodity analysis tests against a range of potential scenarios, recognising the inherent uncertainty as we look out several decades.

In any plausible future scenario, we believe oil and advantaged gas will be attractive for decades to come.

We have a pipeline of competitive growth opportunities, with average rates of return of around 25 per cent.

With our existing assets, these position us to deliver an average return on capital employed of greater than 15 per cent through the next decade.

We also have the talent and the track record in safety, in exploration and in deepwater operations that gives confidence in our ability to deliver on our plans.

Of course, we will always put the safety of our people and sustainability of the environment first and be disciplined in our use of BHP’s capital under the Capital Allocation Framework.

Let me turn now to our assets.

Quality assets delivering value and returns

Over the past five years, Petroleum has had the highest margins in the group, at over 65 per cent, and an average ROCE of approximately 15 per cent.

We take great pride in this performance, but also recognise the need to focus on the longer-term outlook as production from our legacy assets declines over the coming decade.

Maintaining our performance relies on us delivering on our current growth projects, and in advancing further growth opportunities from recent exploration success.

The outlook we share today has the potential to:

  • Deliver robust EBITDA margins of more than 60 per cent, inclusive of continued exploration investment;
  • Generate average returns of 12 per cent through the mid-2020s, rising to around 20 per cent in the latter half of the decade;
  • And, increases the base value of the Petroleum business by 80 per cent.

This outlook is based on the following assumptions.

  • It is an unconstrained case, which assumes execution of all our unsanctioned projects… at current equity interests… and earliest schedule.
  • We have used Wood Mackenzie long term price forecasts.
  • We have also indicated the sensitivity of financial metrics to US$60 and US$80 Brent oil and US$6 and US$8 LNG.

As you can see, the returns are resilient across this price range. 

High margin barrels to replace mature asset declines

Many of you may recall that in October 2016, we presented a plan for the Conventional Petroleum business across three core areas:

  • Getting the most from our producing asset base, through high availability and low operating costs;
  • Delivering and generating high-returns from our pipeline of brownfield and greenfield projects;
  • And extending our growth options through exploration and early life-cycle assets.

I am pleased to say we have more than delivered on these commitments. 

To call out a few highlights.

We have completed two major projects, and have more than US$3 billion worth of additional investment in major projects underway. These have average returns in excess of 20 per cent. 

Two of these, Atlantis Phase 3 and Project Ruby were not in the firm plan back in 2016. We had identified them as potential upside cases to be further de-risked through seismic imaging.

In 2016, we successfully acquired the Trion asset in Mexico’s first-ever Deepwater Bid Round. This demonstrates the value of investing counter cyclically.
 
In Trinidad and Tobago, our Exploration program has discovered a material gas resource in the Northern Licenses.

You may remember this was a Frontier basin with the nearest well tests some 200 kilometres away.

And finally, we have expanded our option set, with potential tier one positions in Eastern Canada and Western Gulf of Mexico.

Collectively, our portfolio now has the potential to deliver average annual production growth of 3 per cent over the next decade, whilst maintaining a competitive return on capital employed and EBITDA margins.

This includes the decline in production from our legacy assets in Australia, which we’ll more than replace with high margin barrels from our oil dominated growth projects in the Gulf of Mexico in the near term.

Beyond our current suite of options, we will also continue to increase our pipeline of future growth opportunities through exploration and the acquisition of early stage discovered resource.

This builds on our exploration success over the past three years, in adding new resource and providing low cost options to grow the value of the portfolio.

With that, let’s turn to capex.

Petroleum investments compete for capital

As you will see, we have many attractive and high returning projects and opportunities in various stages of development and maturity within the portfolio.

As the chart on the right shows, the portfolio would require average annual capex from the 2023 financial year to the 2025 financial year, inclusive of exploration expenditure, of under US$4 billion. This reduces as the major projects are past their peak investment period.

As I mentioned at the outset, this is an unconstrained view, and all opportunities will compete for capital under the Capital Allocation Framework.

This prioritises maintenance capital, balance sheet strength and payment of a dividend to shareholders, under the payout ratio policy.

Excess cash is allocated to maximise value and returns, with a rigorous comparison with cash returns to shareholders.

There is always fierce competition across the Group for capital through the annual capital prioritisation processes.

Our growth options give us the flexibility to manage our capital in a value optimised way.

Across the BHP Group, including within Petroleum, this includes:

  • Making further improvements in project economics and capital efficiencies;
  • Potential sell downs in our high-equity positions to reduce capital spend and monetise value improvements;
  • And finally, optimising the phasing of project execution.

So now, let me briefly touch on how Petroleum fits in the broader BHP portfolio.

Petroleum creates a stronger and more resilient BHP

As I mentioned earlier, Petroleum has been a significant contributor to the Group over many years, with strong cash and EBITDA generation.

As you will shortly hear from Michiel, our analysis gives us confidence in the future demand and the ability to generate returns from oil.

However, our contribution goes beyond our commodity attractiveness and returns.

Our group performance demonstrates that a portfolio of diversified commodity exposures reduces the impact of price volatility, as the chart on the slide illustrates.

We also believe that diversified portfolios enable more rigorous capital allocation, with only the most compelling projects being funded.

In addition, having a strong balance sheet allows counter-cyclical investment, and in the right project as our CFO Peter Beaven describes it – “the holy grail of value creation in our industry.”

And finally, Petroleum both enhances and benefits from being part of the broader portfolio.

  • We benefit from BHP’s strong balance sheet – a pre-requisite for deep water operations.
  • We can invest counter-cyclically, which is particularly important in exploration, and has underpinned our success in recent years as we maintained our exploration program in Trinidad and Tobago, and acquired the Trion resource.
  • We can focus on value over reserve replacement, and be patient for the highest returning opportunities.
  • And finally, we benefit from BHP’s integrated geoscience and project expertise.

Our strategy to maximise value and returns

With that introductory summary, and consistent with our strategic framework of being in the best commodities, best assets with the best capabilities, the agenda for today’s briefing will be:

  • Michiel with shortly provide detail on the outlook for our commodities.
  • I will then return to describe our suite of assets and opportunities.
  • We will then take some questions.
  • Following a short break, Sonia will then take you through our exploration strategy.
  • And then I will conclude with a summary of our capabilities and the value and returns that you can expect.
  • There will be another chance for questions after this.

With that, let me hand over to Michiel.

Oil and gas market outlook   

Good afternoon ladies and gentlemen, and thank you Geraldine.

My name is Michiel Hovers and I am the Group Sales and Marketing Officer.

I have been with BHP for 16 years, in various roles throughout our Marketing organisation.

I started off in energy coal, followed by uranium.

Then moved to Singapore to market nickel, followed by looking after the iron ore marketing.

And most recently, before my current role, I was VP of Supply and Marketing for Petroleum based in Houston, where I worked closely with Geraldine and the team.

I am now back in Singapore and responsible for the Marketing organisation for BHP.

It is my great pleasure to share with you today our long-term outlook for the global oil and gas markets.

We are deliberate about the commodities we choose

Before I do that, I would like to touch on BHPs strategy around commodity attractiveness.

As we shared with you in our Strategy Briefing earlier this year, we are very deliberate about the commodities we choose, and assess them against a strict set of criteria.

So what are these criteria:

Firstly, the current and potential size of the market must be large, as we are a large company. This also lessens the potential for single event disruptions that can create significant volatility.

Secondly, we look for favourable demand and supply fundamentals over the long term. We can only grow shareholder value through project options if the market demands these.

Next, We like commodities where the economic rent accrues upstream near the resource - matching our operational capabilities and simultaneously creating a long-term competitive advantage, that cannot be competed away.

Fourth, steep cost curves offer strong margins for low cost assets.

And lastly, we believe that diversified portfolios enable better capital allocation.

So I think that clearly lays out what we are looking for.

Next step then is to use scenario analysis to address future uncertainty.

Using a set of divergent, but plausible scenarios we create bookends to better understand what the future might bring.

We do this for each commodity and also test against a range of strategic themes.

Now, how does Oil and Gas fit into this context?

Fundamentals support our outlook for oil and gas

Our outlook for oil is attractive.

Oil demand will continue to grow, albeit at an increasingly slower pace, until an eventual peak.

Perpetual natural field decline creates a structural supply demand gap – even in our low demand case – which creates the need for inducement economics.

The lower cost supply sources of today, such as core shale, are not large enough to fill this gap.

New, higher cost supply will need to be induced.

This creates a reasonably steep cost curve beyond the mid run. 

The case for natural gas is somewhat nuanced.

The demand profile for natural gas is very healthy: it is diversified and we see consistent growth.

The growth in the LNG segment is even stronger.

Supply of gas, however, is more abundant.

Asset choice is critical.

We like gas assets when they are advantaged on the cost curve, either due to proximity to infrastructure or access to premium markets.

With that intro, let me now move into our outlook for oil and I will start with the demand side.

Oil demand to peak and then decline modestly

For the last four decades, with the exception of the Global Financial Crisis, oil demand has increased every single year.

Population growth, urbanisation and industrialisation are the main drivers for this trend.

Global growth is therefore not equally distributed across the regions.

OECD demand has already peaked and will continue to decline.

We see non-OECD demand rise from over 50 per cent today to nearly 70 per cent of total demand by 2050, driven primarily by China, India and other emerging Asian countries.

As I mentioned, we tend to think through the future in ranges. In our plausible low demand case, we see demand peaking in the mid-2020s and in our central case we peak 10 years later in the mid-2030s.

As the graph on the right illustrates, the sharp decline in light duty vehicle demand is the main catalyst for this peak.

Light duty vehicles currently account for nearly 30 per cent of oil demand, falling to 10 to 20 per cent by 2050.

In contrast, demand growth comes from other sources of transport aviation, rail, shipping, and medium and heavy duty vehicles.

The greatest source of demand growth, however, comes from industry and petrochemicals.

Petrochemical demand is expected to grow at twice the rate of global GDP.

This includes products like plastics, fertilizers, clothing and packaging. Demand for these products is closely linked to the key macro trends of urbanisation and industrialisation.

Our low demand case includes:

  • a much more aggressive rate of EV penetration, well above the vast majority of published mid-cases,
  • significant trend increases in fuel efficiency, and
  • low case macro inputs, constraining non-transport demand.

We also test our entire portfolio against a set of strategic themes.

How the electrification of transport will evolve, is one of them and I would like to dive, a little deeper, into that.

Electrification of transport: a strategic theme

First, let me give you a few round numbers to illustrate why this is a vitally important question.

Global liquids demand stands at approximately 100 million barrels a day,

60 million are used in transport.

Just under 50 million of these are for road transport. 

So we are talking roughly, about half of the global demand here.

We model electric vehicle adoption very aggressively and have been on the green end of the spectrum on this issue for years.

We see electrification of the Light Duty fleet as a certainty; even in our low adoption case, where it just takes longer.

When I spoke to you 3 years ago, at our 2016 Petroleum briefing, I shared our view on the electrification of passenger vehicles in great detail.

Since then, we have expanded our analysis and taken a deeper dive into the medium and heavy duty vehicle sector – trucks and buses.

The short summary is that buses are highly amenable to electrification, however they only make up 3 per cent of oil demand.

The medium and heavy trucking fleet is more relevant, it makes up 14 per cent of demand, and is the last frontier of electrification.

We believe that battery technology and the weight and cost dynamics will impede accelerated adoption.

In addition, the average truck’s useful life, and therefore the cycle time is quite long, around 17-18 years.

Given these adoption hurdles, we do not expect the electrification of the trucking sector to occur until deep into the second half of this century.

On top of this, in our central case, we see the number of trucks increase from around 60 million today to 100 million units by 2050, leading to a potential growth of demand.

A much more detailed look at our latest insights on electrification of transport can be found in our Prospects blog that we posted today on the BHP website.

Let us move on to the oil supply story.

Compelling long run demand-supply fundamentals

We model global natural field decline conservatively at 3 per cent per year.

At that decline rate, half of today’s supply will need to be replaced by 2035, to meet the demand in our central case.

Now, where is all of this supply going to come from?

US shale has been the major source of new supply.

However, like most industry observers, we see US shale evolving into a more mature stage of production.

Shale will continue to be an important source of supply, however issues, such as CHILD - PARENT - well interference, well spacing, water handling, steep decline rates and last but not least capital discipline are headwinds that slow the rate of growth.

As a result, we see slower growth towards a plateau in the mid-2020s, when US oil production peaks at around 16 million barrels a day, before it starts easing off.

On top of this, it is important to note that not all shale is created equal.

The low cost cores, are finite.

We see core shale move off the margin in the mid 2020s.

Conventional oil fields and deep sea developments will be required to meet the demand.

Those barrels will likely come with greater geopolitical complexity and some, from sources still yet to be found.

That brings me to another important point.

On a global basis the most recent oil investment cycle has lacked the required spend to maintain abundant reserves.

The conventional projects that are coming online over the next year or so, are a result of the previous peak in the cycle.

The last three years have seen very low levels of conventional oil resources being sanctioned for development.

According to the IEA, we are tracking 60 per cent lower than the previous five years.

On top of this, the sharp slowdown in exploration spend, has led to record low new discoveries.

We could be at a turning point here, as in 2019, we have started to see a 20 per cent uptick in exploration spend.

For these reasons we see a long-term market that stimulates inducement of new, higher cost supply, which leads to a reasonably steep cost curve beyond the mid run.

That, is why we like oil.

But just to stress the point, I want to highlight again, that we think in ranges and we test all our future plans against this range, including the plausible low.

Now let’s turn to gas.

Gas demand diversified and resilient; LNG gaining share

As the world moves to a lower carbon footprint, natural gas increases its share in the global energy market, in parallel with the rise of renewables.

We forecast an incredible strong growth in renewable power, with wind and solar growing by over 7 per cent per annum over the next three decades, to meet almost 40 per cent of the global power generation by 2050.

This number increases to 55 per cent, if we include hydro.

It is important to note that the global energy consumption continues to rise, and we do not see this peaking, i.e. the global energy pie gets bigger.

Gas will also increase its market share. To the expense of coal.

Gas will see diversified growth in the power and industrial sectors and grow at 1.2 per cent CAGR to 2050.

In the power sector, gas becomes a complement to renewables, providing an important source of baseload flexibility for a market increasingly reliant on intermittent renewables.

We do see a risk of renewables potentially leapfrogging gas as a baseload fuel for power in emerging markets that have a relatively young fleet of coal fired power stations.

This is built into our low case, and only starts to become relevant in the very long run, the 2030s.

Now, Pivoting to LNG, you’ll see on the bottom chart that we are currently experiencing an oversupplied market.

This will continue out to the mid-2020s, after which point we expect the demand to outpace supply.

The LNG market currently stands at a modest 45 BCF/Day, relatively small versus the overall large 370 Bcfd gas market.

We are very positive on the demand outlook for LNG.

It is the fastest growing fossil fuel and grows at a very healthy 4 per cent CAGR to 2040 and is on track to close to doubling its share in the global gas market by 2050.

We see regional demand growth in Asia (primarily China and India) as well as Europe.

The strong demand outlook coupled with the natural field decline will require over 50 new LNG trains to be induced in the next 20 years.

And as the LNG market becomes larger, the impact of new large projects entering the market, will be less likely to create an oversupply, as it does today.

Despite our strong outlook for demand, the overall supply dynamics leave the gas market fundamentally more restrained.

Gas is just more abundant and a more homogenous resource than oil.

As a result we see a flatter cost curve.

Harmonisation develops as the Global LNG market matures

On top of this, the LNG market is transitioning.

The market will continue to harmonise, growing more and more interconnected.

The US export facilities of recent years now connect the US, Europe and Asia into one global LNG market.

The larger spot market, as well as the liberalisation of the power markets in Asia that are driving a need for more contractual flexibility, have diminished the appetite for long term contracts.

Even more, contracting is moving away from oil indexation, which is now estimated to be only 50 per cent of the market.

So what does that mean for our view on Gas?

We like gas, but due to this harmonisation and the flatter cost curve, we need to be selective in the opportunities we pursue.

We like gas assets that are geographically advantaged, vis-a-vis existing infrastructure, customers or both, creating upstream margins.

Fundamentals support our outlook for oil and gas

So let me summarise my key messages in closing.

We like oil because:

  • We see a structural supply and demand gap, even when stress tested against our most aggressive assumptions for EV’s.
  • Even though we call for a peak in demand, natural field decline creates the need for inducement economics.
  • With core shale coming off the margin, this happens at a higher cost than today.

Natural gas, similarly, displays a supply and demand gap.

The demand profile for gas is very healthy.

It is diversified and we see consistent growth,

with the growth in the LNG sector even stronger.

Supply of gas is, however, more abundant and for this reason asset choice is critical.

It is therefore that we favor oil, but still find gas attractive, when advantaged.

Thank you for your time today.

I will now hand back to Geraldine.

High-return assets and opportunities

Thank you Michiel.

We will now turn to our Asset base in more detail, after which we will have an opportunity to take some of your questions.

Quality assets concentrated in key heartlands

Today, we hold nearly 3.2 billion barrels of oil equivalent in resource. 

We continue to add to this resource base through exploration or acquisition.

And we continue to unlock commercialisation through technology and strategic partnerships.

Our asset base is built around a collection of fields and related infrastructure, concentrated in geographical regions, which create what we call a heartland.

Heartlands provide a competitive advantage:

  • Through differentiated access opportunities, to partnerships, to shared infrastructure and to talent;
  • Through deep technical and operating capabilities that allow us to get the most from our assets;
  • And through the ability to impact social value at a larger scale and over an extended period

Replenishing the portfolio with high-value resources

Before we get to the specific Assets, at a portfolio level, we see a strong production outlook through the 2020s.

Our production today stems from three producing heartlands in Bass Strait, Western Australia and the US Gulf of Mexico.

As we progress through the early 2020s, the Gulf of Mexico oil assets grow in contribution, followed by major growth through Scarborough, Trion and potentially a Trinidad and Tobago Northern Gas development.

Turning now to the specifics.

Australia: strong free cash flow generation

Our Australian producing assets are highly cash generative, resilient to price, and will continue to generate strong returns through the mid to late 2020s.

In Bass Strait we are focussed on understanding and commercialising its contingent resource, whilst we also recognise its limited material upside potential beyond the mid 2020s. 

North West Shelf, equally, is a strong cash generator.

Our focus there is on working with our JV partners to enable the Karratha LNG Facility to transition to a third-party tolling facility, given the declining equity gas over the next decade.  
 
Turning now to Scarborough.

Scarborough: working to advance development

Scarborough offers material growth potential to our Australian portfolio.

Development planning is now technically mature and commercial tolling terms are well advanced to the point where we have increasing confidence in sanction decision readiness in 2020.

As you may have seen on Friday, Woodside – the operator – has announced a material increase in the 2C resource estimate, to 11.1 Tcf.

A Scarborough development would also unlock potential future upside, through development of the adjacent Thebe and Jupiter gas resources, which contribute an additional ~2 Tcf.

We are targeting a final investment decision in the 2020 calendar year, with potential first production from 2024.

Turning now to the Gulf of Mexico

US Gulf of Mexico: big fields get bigger

Over the early to mid-2020s, we see the Gulf of Mexico contribution growing – from just over 30 per cent of EBITDA today, to about 50 per cent in the 2025 financial year.

Atlantis is a true tier one asset, and continues to yield further high return growth.

The Phase 3 project offers returns of over 40 per cent, and is expected to deliver first oil in the 2020 calendar year.

Beyond this, development planning is underway on multiple further growth projects, including subsea pumping and further infill wells.

Mad Dog Phase 2 is on track.

As in Atlantis, development planning is underway on further growth, through water injection and field extensions.

Shenzi continues to demonstrate our operating capability in the deepwater Gulf of Mexico, with unit costs and uptime remaining very competitive.

In the early to mid 2020s, we anticipate growth at Shenzi through progressive development of the Wildling discovery to the north.

We anticipate a final investment decision on Wildling Phase 1 in early 2021, with potential first oil in early 2022.

In addition to the named options just mentioned, we have many further unsanctioned projects with IRRs in excess of 20 per cent that have been made possible through advanced technology.

Trion: developing Mexico’s first deepwater development

At Trion, following the success of the 2DEL well, we moved on to 3DEL, which has provided greater confidence around the scale, and quality, of the resource.

With these results, we now have sufficient information to underpin development planning.

Whilst still in the early stages, we are targeting a project breakeven of below US$50 per barrel of oil equivalent, and are confident the Trion development will compete for capital in BHP’s portfolio.

Project sanction is possible from the 2022 financial year, with earliest first oil from 2025.

Trinidad and Tobago: a material, deepwater gas discovery

We have operated in Trinidad and Tobago for nearly 20 years, in the shallow water Angostura field.

Earlier this year, we sanctioned the Ruby brown-field project –  underpinned by continued appraisal and seismic imaging.

In the deep water, in our Northern Licenses, we have declared a 3.5 Tcf (gross) discovery with potential further upside.  

Whilst detailed development studies are just getting started, a hub development appears best suited to this play.

The case we share today assumes access through existing LNG infrastructure in Trinidad and Tobago, which has capacity, whilst recognising there are multiple development concepts to be considered.

As Operator with high equity interest, we also have scope to optimise the development planning schedule and concept.

Subject to being competitive for capital, we see an FID from 2022.

A healthy pipeline of options supports our future

Let me now return to the strength of the portfolio in aggregate.

We start with our suite of producing assets.

From Bass Strait to Mad Dog, this base delivers strong margins and returns through the next decade.

Sanctioned and well advanced projects bring new, high-return oil into production from the 2021 financial year, effectively replacing field decline from our legacy Australian Assets. 

These are highly attractive, with IRRs that range from approximately 20 to 45 per cent.

Beyond this, we have multiple, high-confidence, unsanctioned projects, across green and brownfield – as we have discussed.

And finally, we have a successful exploration and appraisal program that feeds the front end of our pipeline with Trinidad and Tobago North transitioning into Development Planning. 

We also recognise that acquiring early life cycle assets – like Trion – can add value and enhance our portfolio and this remains part of how we seek out future options.

What I’d like to leave with you is that we have a strong base… with near-term high-return new production from already sanctioned projects followed by a healthy pipeline of high-confidence opportunities in various stages of maturity.

With that, we now have time for questions.

Delivering the future through exploration

Welcome back everyone.

I am Sonia Scarselli, the Vice President of Exploration and Appraisal.

Today I will talk about our exploration success and our exciting future opportunities.

I have been at BHP for eight years and worked across Exploration and Production.

I have a PhD in geology… and I started in the industry as a structural geologist… working petroleum systems across multiple basins, such as Atlantic margins, Middle East and South America… just to name a few. 

I sense that the two biggest areas of interest in Exploration are: What are we investing in? And how it creates value?

I will address these questions for you today.

Our exploration strategy is delivering

Our Exploration strategy has been in place for the past five years… and it is delivering.

Since the 2017 financial year, we have added 758 million barrels of oil equivalent of net 2C contingent resources to the portfolio.

Now, when we talk about Exploration, we are referring to accessing opportunities… exploring those opportunities… and then appraising our discoveries.

What does that look like?

Our strategy targets tier one opportunities and is geographically focused.

Based on our commodity outlook, we have a bias for oil.

Where we find gas, if there is a structural advantage, we will look to commercialise it – if not we will monetise.

We target big reservoir systems with world-class source rocks.

And we go after big traps that can deliver multiple 250 million barrels of oil equivalent discoveries.

Why is that? This allows us to explore these basins for multiple decades. Just like in the Gulf of Mexico.

We focus on competitive opportunities with attractive fiscal terms. And we access the plays early… at high equity.

So our exploration strategy in action targets material, high quality opportunities… which are low in the cost curve… offer scope to build scale over time… and are competitive within the BHP portfolio.

This is underpinned by the “BHP way”.

What does this mean?

Investing in the BHP way underpins our success

This means, we apply a rigorous, bottom-up understanding of how the petroleum system works, from the scale of the tectonic plate to the microscopic pore space in the rock.

We understand the critical play elements and the risk of the system.

And we invest in getting the right data to improve our understanding of the volume, risk and value of our opportunities.

For example, to reduce the technical risk in Western Gulf of Mexico, we acquired an Ocean Bottom Node seismic survey.

Having the right data helps drive the right decisions, and reduces the risk profile ahead of drilling.

Our spend is aligned with this approach, with around a third of our budget invested in seismic data, and half going towards exploration drilling.

Both of these help mature our current portfolio.

Of course, we must also work on accessing new opportunities to replenish our growth pipeline.

So why invest in exploration today?

While our current portfolio is well placed to deliver in the 2020s, our exploration program is preparing the opportunities for the future.

Given the maturation cycle of opportunities in Petroleum, to be a sustainable return contributor from the late 2020s into the 2030s, we must bring forward additional portfolio options today.

Early access to capture value and enable optionality

As we mentioned, our strategy is to identify and access the right places early in the lifecycle – where most of the value is captured. 

We capture major positions in frontier basins and new plays so we have the opportunity to create new heartlands.

We are doing this now in the Western Gulf of Mexico and Trinidad and Tobago.

As you see on the right we like to access at a high equity.

This allows us to manage risk through the life cycle, including through partnering at the right time.

Our approach to partnerships centres on the following.

  • Gaining access to resource. For example, partnering with PEMEX allowed entry at Trion, a tier 1 opportunity.  
  • To bring in understanding and knowledge of an area. For example, in Trinidad and Tobago, our partners are both long-term producers in the region.
  • And to manage and share the risk of exploration.

Being an early mover, at high equity, and with large positions allows us to do three critical things.

1) Manage the risk through the lifecycle.

2) Explore using the BHP Way.

3) And increase our likelihood to build a heartland.

I’ll now share with you some examples that reflect these characteristics.

Orphan Basin: major potential tier 1 oil opportunity

Last year, we accessed the Orphan Basin in Eastern Canada. 

It was identified as having tier one potential, as part of our global endowment study.

We recognised that the main part of the play was under-explored, and still had significant remaining potential.

Geologically, the Orphan Basin is analogous to the North Sea, which we know is one of the most prolific regions in the world.

So why now?

The most recent license round drove the acquisition of new seismic data. That allowed us to map large structures.

We could now understand the scale was big enough, and the risk profile was appropriate.

The rest is history.

We captured two major blocks at 100 per cent equity, giving us exposure to a vast portion of the yet to find potential.

These blocks have multiple opportunities and, on success, allow for follow up.

As we mature the portfolio and work towards drilling of the first exploration well in the 2022 financial year, we will consider partnership.

Western GoM: extending prolific Perdido play sub-salt

In the Western Gulf of Mexico, we are looking to extend the prolific Perdido play, where Trion was discovered.

Western Gulf of Mexico is a great example of where we have a large amount of untested potential.

It sits under the salt and the image quality is extremely poor.

We know there is a world-class source rock and a reservoir system. We just can’t see them.

Multiple technologies have been deployed by the industry to improve the image, but without success.

We designed, and worked with suppliers to acquire, the first industry Ocean Bottom Node seismic technology for a large deepwater exploration project.

We are encouraged by the step change in image quality, and we expanded our footprint at the most recent US Gulf of Mexico lease sale.

So, what can you expect from us over the next few years?

Finding new hydrocarbons – executing our program

We will be returning to Trinidad and Tobago North to appraise these discoveries.

In the southern licenses, we are still evaluating oil potential in the area, and how to further commercialise the gas discoveries at LeClerc and Victoria.

In Mexico, we have exploration activity with the Trion license.

In Central Gulf of Mexico, we are maturing drillable options in our existing heartland.

And in the Western Gulf of Mexico, we are awaiting the seismic data. 

In Eastern Canada, we are in the early stage of maturing drillable prospects.

In parallel, we continue to evaluate and bring forward opportunities for further access so that we can replenish our pipeline.

To conclude, the key points I would like to leave you with today are:

  • That our exploration strategy is delivering;
  • We have added 758 million barrels of oil equivalent of 2C contingent resources since the 2017 financial year;
  • We have done this through a focus on understanding the geology and getting the right data;
  • And we are continuing to build the pipeline for the future.

With that, I would like to welcome Geraldine back to the stage.

Thank you.

Capabilities to deliver on our strategy

Thank you, Sonia.

Having heard about the broad suite of opportunities within the portfolio, I wanted to now talk to our capabilities and culture, as it is our people that underpin everything we have talked about.

Social value is an integral part of our business

Let me start with social value.

Our commitment to our people, the communities we operate in and the environment is evident through our performance.

Over the past five years, we have reduced the frequency of high potential injuries – those that have the potential to cause a fatality – by 44 per cent.

This is a key metric we use to understand our safety performance and from which we learn.

Furthermore, over the past five years, we have seen an approximate reduction of 60 per cent in the frequency of total recordable injuries.

Beyond safety, we recognise how a diverse and inclusive organisational culture enables higher performance and allows us to attract and retain the best talent.

We rank as a global leader in this space across industry sectors well beyond the resources sector.

In the environment, we are focused on reducing greenhouse gas emissions at producing assets. And we’ve had good results, through efficiency improvements across our operated assets.

Beyond that, on all new developments, such as Trion, the engineering requirements specifically incorporate a greenhouse gas reduction plan.

This demands inclusion of considerations in power generation efficiency, low fugitive emission equipment, and elimination of routine flaring.

Finally, in our Mexico operation, we have delivered up to double the license requirements for local content.

Exploration strategy rest is delivering success

As you heard from Sonia, we see our capabilities in exploration as a competitive advantage today.

In saying that, I recognise we have had mixed performance in times past.

We have learned from this, and reset our strategy five years ago – as Sonia described – and our recent results show we are on a stronger trajectory.

To put some numbers to that, BHP ranks in the top third of peer companies for average deepwater exploration finding costs at US$2.60 per barrel of oil equivalent.

In addition, we also rank in the top third in terms of average discovery size.

These metrics flow straight through to higher full-cycle returns and faster times to development.

High performance culture delivering results

Staying with returns.

A continued focus on productivity has led to a 25 per cent reduction in unit costs over the past five years despite a 12 per cent reduction in volumes.

To share an example, through a zero-based organisational re-design, we successfully removed all Shale related overhead from the business on its exit earlier this year – with no trailing costs right from the point of exit.

Beyond our producing assets, our deepwater drilling performance benchmarks very well.

This is enabled through application of new technologies in automation and surveillance and in a high performance team culture – from the rig floor to the office.

With drilling accounting for 40 to 50 per cent of typical exploration and development costs, this is an important value driver.

Finally, to Transformation, and how we think about unlocking future value.

Transformation unlocking new opportunities

We look across the lifecycle, and focus on the big value drivers in each area.

In exploration we are adopting technologies that give us better image quality, which in turn increases the likelihood of finding the best prospects.

Sonia shared how we are applying this in practice in Western Gulf of Mexico.

In project development, we are integrating digital and subsea engineering solutions, which increases performance and resource recovery. This has direct relevance to our Shenzi operation, and to our Trion development.

And in production, reservoir and well surveillance again allows us to get the most from our assets. This shows up at Pyrenees, where a further infill project has been enabled through well imaging tools.

In summary, I am confident that we have the capabilities required to execute on our plans and take us through the next phase of development.

Petroleum delivers value and strong returns

So how does all of this translate to value and to returns?

As we have demonstrated, our portfolio has the potential to deliver average production CAGR of 3 per cent over the next decade.

We maintain competitive ROCE and EBITDA margins, which are resilient through the price cycle.

High margin barrels drive production growth and returns

Our average 3 per cent production CAGR over the next decade comprises our base production, sanctioned projects and unsanctioned opportunities.

Our sanctioned oil dominated projects will commence production from next year, replacing barrels lost from field decline.

Our unsanctioned growth opportunities give us the potential to grow our production volumes whilst maintaining our strong returns

This demonstrates the power of our heartlands through the competitive embedded unsanctioned growth options in the Gulf of Mexico and Western Australia.

Additionally, we have competitive discovered resources in Wilding, in Trion, and in Trinidad and Tobago North.

Beyond that, we are testing future tier one oil opportunities in Trinidad and Tobago, Western Gulf of Mexico and Eastern Canada.

Petroleum investments compete for capital

All projects will compete for capital under our Capital Allocation Framework.

This means, that while we have a broad suite of attractive opportunities, only the most competitive on a risk/return basis will progress.

Over 75 per cent of potential capital spend through to the late-2020s is associated with projects yet to be sanctioned. And because of our high equity interest and operatorship, we retain significant flexibility in phasing and scale.

Finally, over 50 per cent of our total potential capital investment is in oil opportunities.

Delivering strong margins, high returns and value

The outlook we have presented today has the potential to deliver strong EBITDA margins and returns.

These margins have exposure to the upside in price, yet are protected in a low price environment.

Our average ROCE is about 12 per cent rising to almost 20 per cent in the latter half of the decade.

Our options have the potential to increase base value by up to 80 per cent.

This starts with our sanctioned projects, which are on track to deliver first production – in the form of high margin Gulf of Mexico barrels – from 2020.

We have high confidence in our unsanctioned projects. While these have embedded flexibility, they have potential to deliver from as early as the mid-2020s – with Scarborough, more Gulf of Mexico, and Trion.

Our discovery in Trinidad and Tobago North is material, with development planning now underway. 

And finally, we have additional value associated with our exploration program.

Importantly, these are distributed along the development lifecycle, which provides value creation opportunities well into the next decade.

Petroleum is positioned for long-term value creation

In summary, Petroleum is a great business enabled by our strategy.

It has an attractive commodity outlook.

Our assets and growth pipeline are resilient across a wide range of prices.

And, we have the capabilities, supported by our commitment to social value and to capital discipline, to maintain and indeed grow superior returns through the next decade

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