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Yesterday BHP Billiton came out with a report labelled the BHP Billiton petroleum Investor Briefing which is very significant to Billiton investors. This is because BHP have focused much of its expansion in this area after investing up to $20bn in gas assets over the last 6 months. In the last fiscal year they made up to 23% of their profits from its energy division. Recently the BlackRock (who are one of BHP's biggest investors) MD Evy Hambro came out with a swipe at the company for not providing adequate reasoning for the big expansion. Well here is their answer.
Another reason this is important especially to us as South Africans is because this report is very much focused on fracking, a very contentious issue at the moment locally. In fact, Trevor Manuel stated in his 20 year plan that fracking should be further explored and has the potential of being a low carbon solution to our energy needs. I've written about this topic extensively and I am not going to get into it again but if you are interested in the debate. I suggest you read -> the BHP report.
So let's look at the important points mentioned in the report. Firstly, Billiton alone are the 7th largest oil and gas company in the world by total resources. Production in the Gulf of Mexico, one of their strongest areas, is back on track following the BP incident and is now producing record volumes again. That is their oil drilling business. These acquisitions however involve gas and more specifically shale gas.
The report shows that the process of fracking has become way more efficient as technology gets better. In fact production has increased 25% in 4 years just from technological improvements. They also emphasise how quick it is to set up a site and start producing. Up to 3 months to set up can result in decades of production. This explains why up to 35000 wells are fracked per year, incredible. The biggest issue with regards to the Karoo (where BHP are not involved ) is the use of fresh water. Up to 100 000 barrels of fresh water can be used per well. A lot of this is recycled and the land is reusable after the drilling is done. In fact on a per energy basis, shale gas uses significantly less water than is used in extracting coal or producing corn ethanol. The feasibility of using salt water is also being explored.
In terms of long term sustainability BHP feel they are sitting on a game changing asset which will create massive energy security for the US (shale gas could be 50% of natural gas supply in the US by 2020). I've read articles that go as far as saying that gas could be the saviour of the US economy. It will create jobs, is low on carbon emissions and allows for attractive landowner mineral rights. There are concerns of course which involve water shortages, environmental concerns and seismic activity. These issues come part of the parcel with mining and are being dealt with by BHP.
The technology is only getting better.
As investors in the company we are very excited in these new prospects. This shift from gas to coal looks to be ahead of the curve which may become mandatory for companies in the future as they try and reduce greenhouse gases. We see it happening at Sasol too. BHP have bought good, established assets with the right geology, in a country that has embraced fracking as a potential energy source, has the right technologies available and already has a huge gas market. The demand is on their doorstep and the potential for high returns in a short period of time looks very compelling. To end it off I hacked a little comparison between shale gas and conventional oil and gas production. It paints a good picture as to why $20bn is justified.
