BHP Billiton (NYSE:BHP) is planning a large investment in the company's recently acquired onshore shale assets, and expects to be producing more than one million barrels of oil equivalent (BOE) per day from these areas by the end of the decade.
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New Player
BHP Billiton established a large position in the onshore United States in 2011 through two acquisitions. In February 2011, BHP Billiton announced the purchase of the Fayetteville Shale assets of Chesapeake Energy (NYSE:CHK) for $4.75 billion. These assets included 487,000 acres with current production of 400 million cubic feet of natural gas per day.

Five months later, BHP Billiton announced the acquisition of Petrohawk Energy, a large independent exploration and production company. The deal was valued at $15.1 billion, and gave BHP Billiton a large base of producing and prospective acreage in the Haynesville Shale, Eagle Ford Shale and Permian Basin. (To know more about acquisition, read: Analyzing An Acquisition Announcement.)

Production Growth
BHP Billiton estimates that the company's onshore assets in the U.S. will produce 250,000 BOE per day in fiscal 2012 (ending June 30, 2012). The company expects to increase the productivity of these assets and reach 600,000 BOE per day by fiscal 2015, and 1 million BOE per day by fiscal 2020. There is even considerable upside on these projections as the company has excluded any future production from its Permian Basin properties from these totals.

Capital Investment
The development of these properties will require a staggering capital investment from BHP Billiton, over the next decade. The company estimates that its annual capital budget, for onshore, will increase from approximately $4.5 billion in fiscal 2012 to $6.5 billion by fiscal 2020.

Fayetteville Shale
Although natural gas is not currently in vogue in the industry, BHP Billiton is planning extensive development of the Fayetteville Shale over the next decade. The company is operating six rigs here, and plans to drill more than triple that rig count and reach 20 rigs.

BHP Billiton favors the Fayetteville Shale because the formation is at a shallow depth, relative to other shale plays, is not geologically complex to develop and has been de-risked due to widespread development by the industry. These factors yield lower drilling and completion costs, and acceptable returns even with low natural gas prices.

Haynesville Shale
BHP Billiton has 345,000 net acres in the Haynesville Shale, and is currently producing 780 million cubic feet of natural gas per day from its properties here. The company believes that it is in the best area of the play, and projects a 17% internal rate of return on wells at the higher end of the productivity scale.

One operator, that is reducing development of the Haynesville Shale, is QEP Resources (NYSE:QEP), which recently announced its 2012 capital budget. The company has decided to shift capital away from the Haynesville Shale, and other dry gas areas, and increase development of crude oil and wet gas plays.

Eagle Ford Shale
BHP Billiton's third onshore area is the Eagle Ford Shale, where the company has approximately 332,000 net acres. The company believes that this play offers the best returns of any shale basins in the U.S., and plans to ramp up quickly. BHP Billiton intends to nearly double the number of rigs, and reach 26 rigs by 2013, up from the current level of 14 rigs.

Permian Basin
BHP Billiton is also in the Permian Basin, and has 325,000 net acres under lease. This area provides some upside to the company's production goals, as the current projections have no contribution from any future development here. The Permian properties are exposed to a number of crude oil and wet gas plays, and the company has drilled seven appraisal wells to date.

One company that operates exclusively in the Permian Basin is Concho Resources (NYSE:CXO), which is currently operating 35 rigs here. The company has announced a capital budget of $1.3 billion in 2012 to develop its properties here.

The Bottom Line
BHP Billiton entered the onshore oil and gas market in the United States in a big way in 2011 through two acquisitions. The company must now spend tens of billions in capital through 2020 to make these assets pay off. (To know about oil and gas futures, check out: Uncovering Oil And Gas Futures.)

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