Drilling advances

The typical operating procedure in a shale play is to go full speed ahead, drill a bevy of wells, and deliver production to pipelines and rail cars, as quickly as possible. However, prominent shale player BHP Billiton, for one, believes that the long-term vitality of an asset may best be served by decelerating a bit and taking a more studied approach to development. 

One of the BHP-operated H&P Flex rigs at work in the Haynesville (photo courtesy of BHP Billiton).

“What you don’t want to do is go so fast, that you drill it all up and complete it before you know the optimum spacing or fluid characteristics,” said Tim Cutt, who in July was named president of BHP Billiton’s newly formed Petroleum and Potash business group. Speaking to a Houston media gathering in December, Cutt added, “We’re doing a great deal of experimentation with completions, for instance, so that’s why we went from 45 rigs a year ago to 26 today. That’s a big part of our value proposition.”

The media presentation followed the company’s annual analyst briefing that included a tour of some Eagle Ford locations. The shale strategy is all part of BHP Billiton’s focus on accentuating value over volume, according to Cutt, who after a 25-year stint with Exxon Mobil, joined the Australian mining and petroleum giant  in 2007 as president of the production division. Stressing value, he said, is precisely the strategy that BHP Billiton follows in the 1.5 million net acres that it holds in the Fayetteville, Haynesville, Eagle Ford and Permian basin shale plays, he said.

“We concentrate on value over volume, and we see real opportunity in the shales, which have a great deal of economic flexibility,” Cutt said. “The shift to liquids reflects our focus on value, though we do produce a huge amount of gas. We make prioritized investment decisions, based on maximizing shareholder value, while conserving the value of other opportunities for the future. That is where the flexibility of the shale plays gives us real advantages.”

A case-in-point is the operator’s acreage position in the Haynesville, which Cutt described as “in the very core of one of the most productive gas plays in North America.”  In what the firm describes as a swing play, it presently runs five rigs, mainly to enhance the learning curve, including optimizing frac designs and fluids, determining well spacing and lateral lengths, and assessing the Bossier potential above the Haynesville shale. Consequently, when gas prices recover, the operator will be in a prime position to capitalize quickly.

Elsewhere, Cutt said that in October, BHP completed and is testing its first well drilled in the Pearsall formation underlying the Eagle Ford. “In the last few months, we successfully accessed options for 70,000 net acres (prospective for the Pearsall). We believe the Pearsall holds potential for additional liquids production,” Cutt said.

Efficiencies cut costs. Cutt echoed universal sentiment that improved efficiencies are playing a significant role in the attractive rates of return for U.S. shale plays. BHP Billiton’s drilling costs in the Eagle Ford, he said, have dropped year-on-year from about $5 million/well to roughly $4 million today. Cutt said that perhaps the biggest efficiency-driver has been the wholesale switch to new-generation H&P Flex rigs, which are replacing older rigs being retired from the BHP-contracted fleet. “The reduced drilling time between wells with these new rigs, and the overall efficiency, is really paying out,” he said. 

On the other hand, Cutt said experimentation with new completion techniques and technologies has increased up-front costs, but also ultimate reservoir drainage. “In the Eagle Ford, for example, our completions are probably $1 million to $1.5 million more expensive than some of our competitors, but we also are seeing 50% higher EUR (estimated ultimate recovery).”

“This is a business that looks a lot like a manufacturing operation—driven by efficiency, repetition and advancements in technology,” he said. “We believe there’s a significant productivity opportunity in the shales, and we have plans in place to capture it.

“It’s quite possible that across our entire group, the largest productivity increases are right here in the shale business, and a lot of that comes from drilling cost reductions, technology improvements and EUR improvements. We expect the shales to be a major cash generator for us. In fact, we expect pre-cash flow differentials between FY13 and FY20 to approximate $6 billion.” 

Offshore component. While Cutt focused extensively on the operator’s U.S. shale acreage, he cited advancements in its Australian and Gulf of Mexico offshore holdings as contributing heavily to a global resource base that, as of June 30, 2013, stood at 10 Bboe. He pointed specifically to ongoing development drilling at Pyrenees oil field off Australia’s North West Shelf and upcoming exploratory drilling at Scarborough field off the western coast. Additional drilling, likewise, is underway at its operated Shenzi field, which Cutt described as “one of the most successful developments in the deepwater Gulf of Mexico.”

In 2016, the firm will initiate exploratory deepwater drilling off Trinidad and Tobago. The operator is shooting seismic across its holdings, which Cutt says extend to Barbados, and are a continuation of the Miocene and Pliocene plays offshore Venezuela.  “We are extremely excited about this, as it is a known petroleum system.”