09 September 2015
Tim Cutt, President Petroleum, BHP Billiton
2015 Barclays CEO Energy-Power Conference
New York, 9 September 2015
I am very pleased to be here with you in New York City and I look forward to discussing our high-quality portfolio. Before we get started, I must point you to our disclaimer and remind you of its importance to today’s presentation.
At a very high level, I hope you leave today’s discussion with an understanding that:
- As part of a larger resource company with a strong balance sheet, we can be very flexible in our development programs. We will always choose value over volume and have responded decisively in the low price environment.
- We are well positioned on the cost curve and continue to drive costs out through our productivity agenda.
- We are confident that margins will improve in the future and we will continue to hold and pursue opportunities that will add significant value for our shareholders over the long-term.
We are proud of our long standing safety record. In both the Conventional and Shale businesses, we are in the top quartile of industry safety performance with regards to the Lost-Time Injury Frequency rate.
We strive to eliminate occupational hazards associated with our operations. We have worked closely with our suppliers in our fracking operations and have made a significant reduction in silica exposure by use of dust extraction equipment.
We also assess our performance based on the impact we have on the environment. Reducing greenhouse gas emissions is a priority for us and I am pleased to report that we have achieved a 12 per cent reduction compared to the previous fiscal year while our production increased four per cent to a record 256 million barrels of oil equivalent (MMboe).
Higher cost oil and gas supply will be required
Given supply and demand fundamentals, we are confident in a medium term recovery of both oil and U.S. gas prices and agree that the near term will be volatile until the imbalance of approximately two million barrels per day works through.
A recovery in prices, along with a reduction in development costs, will be necessary to induce the investments required to deliver new supply to meet growing demand.
The fundamentals support our drive to increase exposure to oil in both the U.S. onshore and select deepwater plays to grow our development options in the medium to long term.
Given the steep decline curves associated with U.S. shale gas production, high rate wells from the Haynesville and other dry gas areas – including the Fayetteville – will be called upon to help balance the market as liquefied natural gas (LNG) starts to be exported and additional gas flows to Mexico. We continue to drive down development and operating costs to bring forward our significant dry gas development options.
A high-quality, focused portfolio
The Petroleum portfolio is focused in areas where we are familiar with the geology, have excellent operational capabilities, and understand the political environment. It is dominated by the U.S. and Australia, with their stable fiscal regimes and where we have a long history of production. Approximately 94 per cent of our 700 kboe/d comes from these two regions.
We are a top ten producer in our core regions for both the Conventional and Shale businesses. Our total resource position – in excess of 10 billion barrels of oil equivalent – remains relatively unchanged and we remain committed to increasing our exposure to oil.
Given our focus on value over volume, along with the flexibility of our portfolio, our response to market conditions has been swift.
With the active competition for capital we see across our broader minerals and petroleum portfolio, we are prepared to leave hydrocarbons in the ground today if we see better returns available in the future.
Our initial guidance for the 2016 financial year represents a reduction in capital spend of 34 per cent from the previous year. Depending on oil prices in the near-term, the capital reduction this year could be even more pronounced.
Our primary development focus in shale has been in the liquids-rich acreage in Black Hawk and Permian, where we continue to optimize our development techniques and establish new internal benchmarks for drilling and completion efficiency. Our shale gas business remains an attractive component of our long-term portfolio as a flexible option with a low cost of carry.
We are pleased with the significant strides we have made in our productivity program and will take our enhanced development practices to our dry-gas assets in order to make them more resilient in a low price environment.
We plan to invest approximately US$1.6 billion in our Conventional business to maintain steady production and approximately US$600 million per year in exploration to test three Tier 1 plays over the next three years.
Leading operational capability in Conventional
In the 2015 financial year, our Conventional business delivered EBIT of over US$4 billion and free cash flow in excess of US$4.2 billion with an EBITDA margin of 70 per cent, despite facing weaker prices during the second half of the year.
We have best-in-class unit costs below $11 per barrel, down almost 10 per cent from the 2014 financial year, and we achieve some of the highest uptime in the industry across our operated assets.
Our operational performance translates into very healthy financial returns. We continue to be a leader in offshore drilling efficiency which will be a differentiator as we compete in a lower price environment. And finally, our Conventional assets are expected to produce 125 MMboe in the 2016 financial year and remain relatively flat for the next three years.
Given our existing infrastructure and high-margin production, we continue to invest in programs to help offset natural decline. Investments include field extension projects at Bass Strait and North West Shelf along with continued infill drilling at Shenzi, Pyrenees, Atlantis and Mad Dog.
Within this portfolio, we are fairly balanced on product composition as we produce approximately 50 per cent liquids and 50 per cent natural gas.
On the Mad Dog II project, we continue to work with the operator to progress the technical work. The facility engineering studies are progressing, costs are coming down and the major execution contract tenders are in the final stages of completion.
Our current list of development projects is robust and competitive within the broader
BHP Billiton portfolio of opportunities. And the focus of our exploration is to replenish the conventional portfolio and address the existing resource imbalance towards gas.
Driving continuous improvement in Onshore US
Our Shale development continues to be focused on liquids-rich areas, and liquids production increased 67 per cent in the 2015 financial year. Given the current price environment, we have elected to preserve value and drop activity, which is reflected in the production estimate for the 2016 financial year.
The capital guidance provided for this financial year is US$1.5 billion, down almost 60 per cent from last year. We will continue to monitor the market and adjust activities to maximise value.
Earlier, I mentioned the significant gains in drilling efficiency. Since the first quarter of fiscal year 2013, approximately US$1.2 billion of efficiencies has been achieved. During FY15, we delivered our budgeted number of wells for US$700 million less capital than planned. Since the first quarter of FY13, our drilling costs have come down substantially in our focus areas of Black Hawk and Permian and are expected to fall further this year.
Our Shale assets are expected to produce 112 MMboe in the 2016 financial year. While we are holding relatively flat on production from Black Hawk and Permian, the overall decline of 11 per cent is driven by the deferral of our dry gas developments.
Black Hawk continues to be the flagship asset of our Shale business. We are the top producer in the area where we are developing, with gross production recently exceeding 325 kboe/d. This asset is now the single largest producer in the entire Petroleum portfolio.
Given we have in excess of 500 remaining well locations in the primary horizon, plenty of opportunity remains. Further, as our understanding of the play has improved, we see additional opportunities in different horizons and upside through re-fracking activity.
In drilling operations, safely drilling with the lowest possible cost is critical and we are now very competitive with our peers. However, with completions, it is less about the cost and more about the recovery of resource. Our objective has always been to have the highest ultimate recovery per well.
If you look at cumulative production since the start-up of the well against the cost of the completion, our completion costs are competitive with most of our peers. But it is the six, 12 and 36 month cumulative volumes that set us apart. Our superior performance is attributable to optimal stage spacing and efficient placement of the right-sized proppant.
We are applying these learnings in our Permian development program to enhance recoveries and improve financial returns.
The Permian is an emerging play in our shale portfolio. We have a strong acreage position in the heart of the play with almost 80,000 net acres in the core area.
This has been one of the fastest growing parts of our business. We are currently producing approximately 30 kboe/d and expect this number to peak at well over 150,000 kboe/d once the field is fully developed. At this time, we are restricting our pace of development to only two rigs in the field. This allows us to hold acreage and fine-tune our development plan until economic conditions improve.
Currently, our development plan has approximately 850 gross wells but this will likely grow over time. This region is believed to have multiple economic horizons which add to the anticipated well program and provide considerable upside moving forward.
The Permian offers complex geology and we have been at the forefront in evaluating the Wolfcamp since the early days of the shale movement in west Texas. Our well performance has improved over time and given us more consistent and predictable results.
Preserving the value of our dry-gas fields
I mentioned that due to economic conditions, we are deferring the development of our dry gas acreage but this remains a very important part of our business.
The Haynesville is among the best unconventional gas plays in the world and our acreage is in the heart of the field. Because the majority of the acreage is held by production, we control the pace of development which allows us to preserve value for the future.
The resources of the Haynesville and Fayetteville fields are vast. Our Onshore US dry-gas resource of 25 trillion cubic feet could support half a century of production at twice our current production rate.
But we know that we must get better in order to make the economic returns more viable in today’s price environment. That is precisely why I have challenged our team to become more efficient, reduce costs and safely achieve at least a 20 per cent rate of return at a flat $3 Henry Hub gas price. Based on the significant strides we have made in our focus areas, I am confident we will get there in the near future.
We continue to be encouraged by the development potential in the core of the Hawkville field. The geology in the Hawkville is more complex than the Blackhawk, but it will deliver healthy returns in the heart of the play with high-value liquids in the product mix.
The initial wells in the field outperformed our expectations as a result of intersecting natural fracture systems in the formation. Subsequent development wells delivered disappointing results which caused us to quickly slow down the development pace and test our well placement and fracture length assumptions. Fortunately, recent completion trials have shown encouraging results.
We remain poised to develop the sweet spot of the field as our technical understanding improves and margins recover. We continue to view this asset as a key part of our portfolio.
Focused exploration program
Our exploration strategy focuses on early access to Tier 1 liquids opportunities with a high working interest.
Based on our global endowment work, we have positioned ourselves in key focus areas or basins around the globe.
- In the Gulf of Mexico we are targeting the relatively immature Paleogene and Cretaceous plays with a focus on the western Gulf of Mexico. Over the past 12 months, we have acquired 50 blocks including the recent sale which is subject to customary approval.
- In the Caribbean, we have built a leading ‘first mover’ acreage position totalling approximately 17,000 km2 across two plays (the Oligocene and Miocene) in Trinidad and Tobago and Barbados. This is four times the size of our entire Gulf of Mexico portfolio.
- In Western Australia, we have similarly accessed a leading position (totalling approximately 25,000 km2) over the largely untested Beagle sub-basin.
Over the next three years our program aims to test these plays with the drill bit. Our integrated basin analysis of the entire Gulf of Mexico, including the U.S. and Mexico, indicates Tier 1 oil potential in the Paleogene and Cretaceous plays with the potential to access more than 40 untested, greater than 300 MMbbl, opportunities.
Born out of approximately 20 years of exploration experience in the region, we have accessed a leading 'first mover' deep water acreage position in Trinidad and Tobago across two plays.
We have completed the largest proprietary 3D seismic survey acquired by a non-national oil company at 21,000 km2. Our work continues to provide positive evidence of prospectivity in this area.
The Pegleg prospect is one of the structures that meets our exploration criteria in the Miocene play. The footprint of this lead is around two-three times the size of our major Gulf of Mexico fields. The first well of an eight well program is planned for the 2016 calendar year; representing an industry-leading three-year timeframe from access to drilling the first well.
Our mega-regional evaluation of Western Australia highlighted the potential for a largely untested Tier 1 liquids play in the Beagle sub-basin. The play is on trend with the Barrow sub-basin and we have identified four leads that each have the potential of over 400 Mmbbl recoverable.
In closing, I hope you have an enhanced appreciation of the quality of BHP Billiton’s portfolio:
- High-quality conventional assets and infill drilling opportunities
- Vast shale position with a near-term focus on liquids
- Our Exploration program will test large structures within three basins over the next three years
I also hope that you can see by slowing down activity in the Onshore U.S., shifting towards liquids and applying our productivity agenda to drilling cost and optimal recoveries that we are truly operating with a strategic approach of “value over volume”.
Lastly BHP Billiton, as one of the leading natural resources companies in the world, is also one of the leaders in technology application in the exploration and production space and it is this very core competency that will ensure maximum value creation for our shareholders.
Check against delivery.