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BHP ponders Canning shale gas push

BHP Billiton says it is in talks with land and permit holders in the Canning Basin as it works out whether to extend its $US20 billion Texas shale push into WA.

The mining giant's petroleum boss, Mike Yeager, said Australia's "preferential location" to Asian LNG customers meant BHP had to look at unconventional opportunities here, and he singled out the onshore Canning Basin in the Kimberley as a key target.

But Mr Yeager also warned of the logistical challenges in WA, and costs, and said any gas discovered was likely to have to be exported.

During a wide-ranging discussion with media in his Houston head office late last week, Mr Yeager stressed that key ingredients of his US shale push were a huge domestic gas market and existing pipeline infrastructure - two obvious challenges in WA.

"We have looked at every basin there (in Australia) in great detail," Mr Yeager said. "What we are trying to figure out (is) if we got a bunch more gas there in the Canning Basin, something in the shale there, it looks like we have to get it out of the country in order to make it work, so you have got that kind of economics. In the Canning Basin there are some things there that look pretty good but the transportation . . . is a long, long way away.

"But we are studying this very hard. We owe it to our shareholders to be good (in the shale game) and it is something we should be focused on.

"We are having conversations with the landowners and the people with the different leases and we continue to progress that. (But) it is going to take time."

The comments are Mr Yeager's first about Australia's shale potential and BHP's interest. The Canning Basin and South Australia's Cooper Basin loom as the key shale-prospective regions. The US Energy Information Agency has referred to the Canning as the biggest potential shale region in Australia, containing as much as 229 trillion cubic feet of gas.

In comparison, the Chevron-led Gorgon LNG project is based on about 20tcf of conventional gas.

Already ConocoPhillips and Hess Corp, along with Japanese trading house Mitsubishi, have established big positions in the Canning Basin. Mitsubishi is farming into acreage operated by Buru Energy, which has told investors its landholding south-east of Broome could contain up to 66tcf and four billion barrels of oil.

Buru has excited the industry with significant discoveries - oil at Ungani and gas at Valhalla - although neither are in shales.

BHP's $US20 billion splurge on shale in the US, through the acquisition of permits owned by Chesapeake Energy (February 2011) and the takeover of Petrohawk Energy (July 2011) has repositioned a global petroleum business hitherto dominated by conventional oil and gas production off the Pilbara coast and in the Gulf of Mexico. The transformation has been so substantial that Mr Yeager hinted BHP may offload smaller assets in Pakistan and Trinidad and Tobago.

"We will have some decisions to make around our portfolio," he said. But Mr Yeager denied the US shale push had lessened interest in conventional opportunities in WA, where BHP is finishing off the $US1.5 billion Macedon domestic gas project, seeking a development option for its 10tcf Scarborough gas field joint venture with ExxonMobil, and has 8.3 per cent of the Woodside Petroleum-led Browse LNG project.

"What is on our mind in WA is the cost and the economics," he said. BHP has been an outspoken critic of Woodside's proposal to develop Browse at James Price Point near Broome sparking speculation it may sell out of the consortium. Mr Yeager did not address Browse.

BHP is likely to support a floating solution for Browse, a concept being pedalled by consortium partner Royal Dutch Shell. Such a development could allow BHP to invite Shell into the Scarborough consortium and develop the massive but remote dry gas field through FLNG, using Shell's technology.

But it is shale that occupies most of Mr Yeager's mind as he and his team set about drilling the thousands of horizontal wells required to deliver on his production growth targets. BHP is one of the biggest players in the Eagle Ford, Permian, Hawkesville and Fayetteville shales, mostly in Texas, and has a massive drilling program to raise production from about 270,000 barrels of oil equivalent a day.

The primary focus is the liquids-rich Eagle Ford shale, south-west of Houston, where it is trying to lift production from 60,000bpd to 300,000bpd-plus by 2016. It has 30 drill rigs there.

To put that in perspective, BHP last year produced about 650,000bpd globally, including 215,000bpd in Australia and 90,000bpd in the Gulf of Mexico. The Petroleum Marketers Association of America estimates that by next year the US will be producing 11.4 million bpd of liquids because of the shale phenomenon, just shy of world leader Saudi Arabia's 11.6mbpd. Already industry experts talk about the US becoming self-sufficient in hydrocarbons because of shale - the world's biggest economy produced 81 per cent of its energy needs in the first half of this year - while a low domestic gas price has triggered the reopening and development of steel plants and petrochemical factories. But the collapse in US domestic gas prices to as low as $US1.84 per million British thermal units - the price has since recovered to about $US3.50, compared with about $US7 in WA - has prompted investor angst about BHP's shale strategy and forced a $US2.8 billion write-down of last year's shale deals. Both Mr Yeager and BHP chief executive Marius Kloppers did not receive a short-term bonus last year because of the write-down.

Mr Yeager remains unrepentant about the shale strategy, shifting drilling rig from the dry-gas Hawkesville and exploiting his Eagle Ford position where the liquid content averages 50 per cent.

He hinted that the asset write-downs could be written back.

Despite this, his petroleum division will be forced to borrow money from the parent company because the shale investment is not expected to be self-funding for another two years.

The reporter travelled to Houston as a guest of BHP Billiton