Looming revaluations to cast BHP shale investments in better light
Michael Yeager (left) with his global vice-president for drilling, Derek Cardno, at Eagle Ford. Photo: Supplied
BHP Billiton is buying more shale acreage in the US, and believes its recent $US2.84 billion impairment charge will be more than offset by looming valuation boosts on three fronts.
While formal accounting is yet to be finalised, BHP's petroleum chief, Mike Yeager, confirmed that valuation improvements were likely on two of BHP's onshore US shale assets: Eagle Ford and the Permian Basin.
These two escaped the impairment that struck BHP's Fayetteville gas asset in August, because they hold oil liquids as well as gas in their underground shales, meaning they were less affected by a sharp slump in the gas price. It was that slump that prompted BHP to shift its focus from its US gas assets and to producing oil from Eagle Ford and the Permian Basin in Texas.
The Permian Basin in particular is set to bring a lot of upside when BHP's next accounting snapshot is taken, given the company has accelerated work on the asset.
Mr Yeager said the improvement in the accounting value of the Permian Basin was likely to be of similar scale to the $US2.84 billion written off on the value of the Fayetteville shale just months ago.
''The Permian we paid almost nothing for because on paper all it was was acreage, and right now we are not ready to tell you what that will be. But with everything that is going on there we are in a position where that will be worth an enormous amount more,'' he said.
A comparable stake in the Permian sold to Chevron and Shell for $US3.3 billion a month ago.
BHP has nine rigs doing early appraisal work in the Permian and the company is in negotiations to acquire more land there, sometimes in blocks as big as 10,000 hectares.
Mr Yeager has said he expects the field to produce 100,000 barrels of oil a day, but was not able to say when that would be achievable.
He also expects a valuation improvement by ''an order of magnitude'' in the Eagle Ford field, where BHP has more than doubled the number of oil-producing rigs over the past year.
Even the Fayetteville gas shale is looking rosier than it did a few months ago when it was hit with the $US2.84 billion write-down.
The impairment was made after gas prices in the US slumped from above $US4 a unit when BHP bought the asset, to below $US2 a unit. Gas prices have since rebounded to above $US3.30 this week, and Mr Yeager said that price was good enough for BHP to operate some gas wells profitably in Fayetteville.
However, the company was not yet willing to return rigs to the gas assets, preferring to focus on oil at Eagle Ford and the Permian.
''We can drill 20 per cent rate-of-return wells in [Fayetteville] today, but rather than steal from the 60 per cent return of Eagle Ford or slow down this big Permian opportunity, we would have to add rigs, and we can't do that,'' he said.
''The gas price last winter hit us on the nose and you guys [the media] roughed us up a little bit for it.
''It is unfortunate we have to have those accounting snapshots, but it's really about the 30-year outlook … the reserves haven't changed.''
Mr Yeager said BHP was ''pushing hard'' to see if it could develop a similar shale business in Australia, having investigated every basin on the continent.
The Canning Basin in Western Australia and the Cooper Basin in outback South Australia loom as the most prospective, but Mr Yeager said high costs and the need to export the gas overseas to be profitable remained unresolved issues. Santos has already started work on shale prospects in the Cooper Basin.
Mr Yeager declined to comment on speculation on the tenure of BHP chief executive Marius Kloppers, and would not comment on whether he considered himself a candidate to succeed Mr Kloppers.
The reporter visited BHP's Eagle Ford operations as a guest of the company.