BHP Billiton Loves The Fayetteville Shale

By Eric Fox | November 18, 2011 AAA

BHP Billiton (NYSE:BHP) is not shifting capital away from natural gas, like many of its peers, and plans to increase development of the Fayetteville Shale over the balance of the decade. This program is part of the company's plan to quadruple production from the onshore United States by 2020. (To know about oil and gas future, read: Uncovering Oil And Gas Futures.)
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Development Program
BHP Billiton plans to increase the company's operated rig count in the Fayetteville Shale to 20 rigs, and has a number of new land rigs under order. The company expects to start receiving these new builds in early 2012.

This program is one component of the company's plan to increase production from onshore shale assets to 1 million barrels of oil equivalent (BOE) per day in 2020, up from the expected production of 250,000 BOE per day in the fiscal year ending June 30, 2012.

Operational Data
BHP Billiton has 487,000 net acres under lease that is prospective for the Fayetteville Shale, and has an average working interest of 58% in these properties. The company is currently producing 435 million cubic feet (Mcf) of natural gas per day from the Fayetteville Shale.

BHP Billiton estimates that the company's Fayetteville Shale properties have 10 trillion cubic feet (Tcf) of potential risked resources assuming 70 acre spacing across the play.

Geology
According to the company, the Fayetteville Shale has a number of advantages that make the play economical, even in the current environment of low natural gas prices company. The shale is present across its acreage at depths ranging from 2,000 to 8,000 feet, much shallower than other unconventional resource plays in the U.S.

The geological characteristics of the shale also make it easier to develop, relative to other plays, as the Fayetteville Shale is more brittle and fractures easier during completion operations. The play has also been de risked by other operators that have been operating here for years.

BHP Billiton believes that these factors will lead to lower development costs for the company, in the Fayetteville Shale and keep returns at acceptable levels.

Service Costs
BHP Billiton is also anticipating a 20 to 40% reduction in oil service costs in the Fayetteville Shale when current contracts rollover. These assets were originally purchased from Chesapeake Energy (NYSE:CHK) in early 2011, and that company agreed to keep managing the properties for a fee until BHP Billiton was able to take over the operations itself.

Returns
BHP Billiton estimates that wells drilled, here, will have a 16% internal rate of return using current strip prices for natural gas. This return assumes drilling and completion costs of $3.5 million per well, and an estimated ultimate recovery of 3.2 Bcf. (For additional reading, check out: Accounting For Differences In Oil And Gas Accounting.)

Other Operators
Southwestern Energy (NYSE:SWN) is the leader in the Fayetteville Shale, and was the first exploration and production company to develop this play on a large scale. The company reported gross production of 1.9 Bcf of natural gas per day, from here, as of October 2011.

Exxon Mobil (NYSE:XOM) is also active in the Fayetteville Shale, and got involved here through its purchase of XTO Energy in 2010. The company has picked up additional acreage, here, since that time, and has approximately 560,000 net acres under lease.

The Bottom Line
BHP Billiton's plan to increase development of low cost shale assets in the Fayetteville Shale, appears to be a sound strategy, and indicates that not all natural gas assets are to be shunned.

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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