from todays Australian. worth the subscription imho
the reason i posted it here, is what bet BHP might have a sniff at BPT???
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BHP's US boss sees oil and gas as miner's future
THE brutal scale and breadth of BHP Billiton's capital program in the next half decade means Marius Kloppers' tenure probably rests on more than the immediate future of $20 billion US shale gas and oil play. But the same cannot be said for Kloppers' Houston oil boss, J. Michael Yeager.
The Exxon-trained, former marine has patently staked his reputation on the potential of the rapidly evolving and sometimes controversial unconventional oil and gas sector to sustain a thoroughly new era of growth for a business founded on Bass Strait oil, sustained by the North West Shelf LNG and that more recently has found enriching succor in the deep waters of the Gulf of Mexico.
Yeager introduced BHP to the shale game with the acquisition in February of $US4.75bn ($4.63bn) worth of resource and infrastructure from Chesapeake Energy Corporation, after which BHP better than tripled its bet in July with the $US15.1bn takeover of PetroHawk Energy.
While, in two fell swoops, Yeager had added 300 per cent to BHP's petroleum resource and made real the potential of doubling annual output to one million barrels of oil equivalent within five years, the drive into unconventional territory initially tested the tolerance of the market.
After all, it wasn't long ago that BHP sold its coal-seam options in Australia and, in the interim, Kloppers had consistently eschewed the potential for a move back into unconventional gas on the premise that offshore was where the big boys played.
Overlay that embedded reticence with the fact that shale gas arrives with its very own history of public controversy and environmental uncertainties, and that here in Australia, which remains BHP's core ownership constituency, the broader community was only just being introduced to these complications and you have a mix that might well have been cause for continued pause.
Last night, Yeager provided a whole lot of insight into why the pause button was lifted and that the first half of his briefing focused on the environmental sustainability of shale production shows Houston is well aware of investor concerns over the reputational risk that arrived with the shale investments.
The issue for all shale and most of coal-seam gas drillers is that you have to literally break the coal so that the gas it contains can be released and extracted.
That is done by a process with a very ugly name: hydraulic fracturing. The deal is that about 100,000 barrels of freshwater is driven into the well under pressure and it breaks up the coal seams. The gaps created are then filled with more than 2000 tonnes of sand that are delivered to the cracks, also under pressure, wrapped in a lubricant made up of a mix of chemicals.
Once that sand is in place some of the water pumped down there is brought back up. And there, according to a report delivered recently by New York State's environmental protection agency, is the rub.
The binding issue that connects shale and coal-seam processes is that critics suggest the technology is fragile and that the risk of systemic or accidental pollution of freshwater aquifers is too great to be accepted, no matter how attractive and transformative the economics of gas production might be.
Communities close to where fracturing happens also complain of the seismic activity it generates, just as environmentalists reckon that the massive expansion of shale extraction in the US is going to prove too much of a drain of local water systems.
We have reported here before that the debate over fracturing and unconventional gas is rather more mature in the US than it is here and that is why we need to keep a close watch on the debate over what are quite legitimate concerns across the Pacific ditch.
In this context, the reason why the New York's draft assessment of the risk of shale gas is important is that it is, by some distance, the state most uncertain about the probity of the unconventional industry in general and fracturing technologies in particular.
By my reading, this latest review finds there is little to no prospect that fracturing in itself might allow for the migration of fracturing fluids from the target strata to another.
The report is concerned more that management of the water extracted at the wellhead is more of an issue and needs a whole lot more review before shale gas extraction can again be allowed in that state.
Controversy aside, the numbers say Yeager is looking pretty good given that everything we have seen since the Petrohawk deal closed in August shows BHP has bought pretty keenly.
Over recent weeks, for example, Deutsche Bank's Paul Young has been keeping a close watch on the production and financial performance of BHP's new competitors in its chosen shale territories across the states of Arkansas, Texas and Louisiana.
Those competitors have reported cheaper drilling costs, faster and more efficient well deployment, stronger and longer well recovery profiles and better financial metrics than Young had anticipated in his modelling of BHP's acquisitions.
In other words, there is upside in them thar hills.
Mind you, BHP and the rest of the new giants of the unconventional space must be watching the sinking US gas price with some mild alarm.
The Henry Hub gas price finished last week at about $US3.80 per mmbtu and that is some distance from the $US5.65 per mmbtu that is estimated as the average break-even price for US unconventionals to hit a 10 per cent internal rate of return.
Of course, price is a very now sort of issue and BHP's investment thesis is built on a much longer, more layered view of its world.
BHP receives shale gas as a business matched to its strengths. It has a rapidly evolving technology that will reduce costs as efficiency rises and extraction rates improve. And because it is so capital intensive, despite its relatively short pay-off period, its access to cheap capital gives it a distinct advantage over most of the existing players.
The strategy here, as elsewhere across its portfolio, is to develop an intimate understanding of the quality of the assets it commands, then of the demand-side dynamics for the commodity that those assets produce and then, given the stars align, to invest in progress at a cheaper cost of capital than most of its peers.
The differentiating result here is that BHP says it will secure a 16 per cent rate of return from each new well drilling on the Fayetteville assets it acquired from Chesapeake. Further, Yeager expects a 43 per cent rate of return from any condensate-rich gas it gets from the Eagle Ford prospect that came with Petrohawk while hitting a 15 per cent return from the lean gas produced from the same fields. And it will hit a 17 per cent rate of return from what will be its top producer, the Haynesville acreage.
Needless to say, the cost of making Yeager vision reality is a wee bit mind-boggling.
The thing to appreciate fully here is that this $US20bn investment is but the start of a capital campaign that could bring another $US60bn investment in growth by 2020 under a plan that would send petroleum's contribution to earnings surging from its current 23 per cent to something pretty near 50 per cent.
To digress for one moment here, isn't it interesting to reflect on the simple fact that BHP is on track to pump maybe $US80bn into growing its petroleum business just as Rio Tinto has review its $40bn punt on Alcan with the result that says it is looking for an exit from swathes of the aluminium metal production both acquired in that deal and which pre-dated the acquisition.
The debate over Alcan versus petroleum was one of the central investment themes to Rio's defence against BHP's takeover. The mining house argued, effectively, that petroleum was a wild card in the investment pack and one that introduced uncertainty. But in the end, it looks a whole lot like petroleum has won that argument hands down.
ICN Price at posting:
15.5¢ Sentiment: None Disclosure: Held
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