The New Era of Shale. BHP Billiton Petroleum

Transcription

1 The New Era of Shale BHP Billiton Petroleum Supplement to

2 Contents 2 The Company 4 Operating Principles 6 The Growth of U.S. Onshore Oil and Gas 10 Building the Wells 12 The Move into Shale 14 The Eagle Ford Shale 22 The Permian Basin 26 The Haynesville Shale 30 The Fayetteville Shale 34 Zero Harm 36 Good Neighbors 38 Avoiding Potential Roadblocks 40 Company Profiles

3 Every time we look at the opportunities in our shale oil and gas plays, they get larger. Mike Yeager Chief Executive BHP Billiton Petroleum We know the resources are there. Our job is to deliver them safely and in an environmentally responsible way. We are in this business for the long haul, and we are going to do it right.

4 2 BHP Billiton The Company Houston-based BHP Billiton Petroleum delivers nearly one fourth of the annual earnings of the BHP Billiton Group. BHP Billion Petroleum s exploration, development, production, and marketing activities span more than a dozen countries. The company holds significant positions in the deepwater Gulf of Mexico and onshore United States as well as in Australia, the United Kingdom, Algeria, Trinidad and Tobago, and Pakistan. It also has promising prospects in the Philippines, India, and Malaysia. Between 2007 and 2011, BHP Billiton Petroleum brought five world-class developments on stream. The company entered the onshore shale business with the $4.75 billion Fayetteville Shale acquisition in April, 2011, but that was just the first step. It strengthened its U.S. onshore position later in the year through the $15 billion acquisition of Petrohawk Energy BHP Billiton Petroleum s Seismic Processing and Imaging Team has numerous technology projects with research institutions around the world.

5 BHP Billiton 3 BHP Billiton Petroleum s Shenzi deepwater platform in the Gulf of Mexico began production in Corporation, which gave it major stakes in the Haynesville, Eagle Ford, and Permian basins to complement its Fayetteville position. Since then, the U.S. onshore workforce has doubled. BHP Billiton Petroleum operates some 45 land drilling rigs in the United States in addition to its deepwater drilling around the world. BHP Billiton Petroleum is now among the largest independent oil and gas companies in terms of both its total production and resource base. Its shale assets in North America are some of the most valuable, high-quality resources in the world. The company s business is built on a powerful platform of rigorous safety standards, high quality oil and gas resources, functional excellence, operating discipline, and financial strength. It has the people and skills to take on complicated and diverse opportunities, and the flexibility to move quickly to deliver value in any environment. BHP Billiton Petroleum has close to 4,000 employees globally, and is deeply committed to their safety. The company has the systems in place to ensure its employees return home unharmed at the end of the day, and it continually strives to improve its sterling safety performance. As a global producer, exporter, and consumer of energy, BHP Billiton understands the need to conserve energy and the risks of climate change. Since 2006, it has achieved an 16 percent reduction in greenhouse gas emissions per volume of production, exceeding its public target of a six percent reduction by 2012.

6 4 BHP Billiton Operating Principles These five basic operating principles shape everything BHP Billiton Petroleum does as a company and serve as its pledge to local communities. 1. To be the safest company in the industry We carefully develop and rigorously implement safety and operating systems, properly train our people, and will not compromise our behavioral standards. We only work with contractors who share our commitment to safety. We partner with local communities to prepare them to respond to unplanned events. 2. We will protect the land where we operate We install and operate our wells and facilities in the most environmentally sensitive manner. We look for opportunities to drill multiple wells from a single pad to reduce the size of our surface footprint. We conduct environmental assessments prior to the execution of work to properly plan for and minimize the impacts of our operations. We are committed to restoring the environment when we complete our operations to ensure it is as healthy and robust as before we arrived. 3. We will safeguard and manage water resources We minimize our impact on fresh water by utilizing alternate sources wherever possible. We do not dispose wastewater into any surface source (streams, lakes, rivers). We do not drill or conduct hydraulic fracturing operations unless we are confident that groundwater will be protected. 4. We will minimize air emissions from our operations We conduct our operations in a manner that minimizes flaring and venting. We use alternative or cleaner-fuel source technologies. We have one of the most modern and operationally efficient drilling fleets in the onshore industry. 5. We will be a good neighbor to our communities We look for ways to make our operations less intrusive to the community. We publicly disclose the chemicals that are used in our hydraulic fracturing operations. We work with state and local officials to find workable solutions to common industry problems. We give back to the community in a meaningful way through social investment and partnerships.

7 BHP Billiton 5 Safety is BHP Billiton Petroleum s primary concern. The company recognizes that the business of finding, extracting, and delivering hydrocarbons is full of potential hazards, and its commitment to the safety of its employees and contractors is one reason that, statistically, they are less likely to be injured at work than they are in their own homes. Every employee and contractor, no matter what their position, has the right and obligation to speak up if they have doubts about any activity. If they can t be certain of the task at hand, they are required to either stop the job or do whatever it takes to ensure their own safety and that of those around them. Is the approach working? Yes. In its U.S. onshore operations, many of the safety standards established by BHP Billiton Petroleum have improved not only its own safety performance, but that of its contractors and other operators as well. Eagle Ford Drilling and Completions Manager Michael Bloom prepares a group of journalists for a drillling rig site visit.

8 6 BHP Billiton The Growth of U.S. Onshore Oil and Gas It s no secret that recent advances in hydraulic fracturing and well completion are opening vast new oil and gas resources. The biggest fields by far are in North America. An increasing portion of BHP Billion Petroleum s North American portfolio consists of what are known as unconventional oil and gas plays. While shale oil and shale gas are considered unconventional resources, the term refers only to the source rock, not the high-value liquids and natural gas that come from it. Two basins in particular, the Eagle Ford and the Permian, account for about 40 percent of all the unconventional oil and gas activity in the United States. What are shale and tight gas reservoirs? In conventional reservoirs, hydrocarbon molecules are able to squeeze between the grains of relatively porous rock. Above that porous zone, however, there must be what geologists call a trap or seal to keep the oil and natural gas from migrating all the way to the surface. Shale reservoirs are different. Shale and other tight reservoirs don t need traps and seals, because the source rock itself is the trap. Hydrocarbons are caught within pore spaces that are significantly smaller and more restrictive, and are also absorbed onto the clay mineral particles that make up the shale. The only way hydrocarbon molecules can move around is through natural and artificial cracks.

9 BHP Billiton 7 A matter of scale One of the biggest differences in shale oil and gas fields is the large number of wells needed to extract the resource.

10 8 BHP Billiton An abundance of opportunity exists in shale in the lower 48 states. Source: Energy Information Administration based on data from various published studies. Updated: May 9, Geologists have long been aware of the oil and gas contained in shale, but didn t have a way to recover it economically. That changed on a significat scale in the mid-2000s, thanks to improvements in a 50-year-old technology known as hydraulic fracturing, or fracing for short. Fracing uses water pressure to create networks of tiny cracks in the rock. To hold them open, sand and minute amounts of a gel-like thickener are added to the water. But what about market changes? After BHP Billiton Petroleum acquired a stake in the U.S. shale oil and gas industry, the price of natural gas in the United States dropped to the lowest level in years. Such low prices are squeezing out the small operators and forcing changes within the industry. That s nothing new in the oil and gas business. What s important to remember is that discovering, producing, and delivering hydrocarbons is a long-term venture. Fields take years, even decades, to develop. The wells being drilled now will be productive for at least the next 30 years. At the end of 2012, the company s onshore holdings stood at 1.6 million acres. Since it will take 20 years just to develop the shale resources it knows are in the ground, the fields themselves will be active for at least the next 50 years. Few industries have lead times as long as this, or capital expenditures as large.

11 BHP Billiton 9 The drillers control room, known in the industry as the dog house, on one of BPH Billiton Petroleum s brand new Eagle Ford rigs built to company specifications. Supply and demand drives the market. While the United States now has an oversupply of natural gas, Europe and Asia do not. That will likely change in the next few years as more liquefied natural gas (LNG) receiving terminals in the United States are converted to export terminals. When it becomes relatively easy to export natural gas, world prices should be more uniform. Other factors are changing the market as well. Low prices are encouraging some electric power producers to shift from coal to gas, and chemical plants are increasing capacity to take advantage of the relatively low cost of natural gas liquids. The demand for natural gas and natural gas liquids is certain to grow in the United States, the largest and most mature market in the world. What about liquids production? By the end of 2012, BHP Billiton Petroleum s onshore fields were delivering 270,000 barrels of oil equivalent per day to U.S. customers. The hydrocarbons are a mix of oil, natural gas, and natural gas liquids in the current market, the liquids sell for more than dry gas. Since many of the company s onshore fields have the capacity to produce more than 50 percent liquids, it has the flexibility to leave the dry gas in the ground for now and keep its crews and equipment busy producing more liquids, including crude oil, which continues to sell at strong prices.

12 10 BHP Billiton Building the Wells At the surface After geologists and reservoir engineers determine where the wells should be, crews level the site, construct a lease road, erect the drilling rig, and place support facilities on the pad. For efficiency, and to minimize disturbance at the surface, BHP Billiton Petroleum typically drills and completes several wells from a single pad, directing each wellbore to a different part of the target zone. When the wells are to be hydraulically fractured, an array of large trucks, pumps, storage units, and control systems will be brought in for several days. Once all the wells are completed, the perimeter of the site is restored as close as possible to its original condition, leaving only a minimal surface footprint. Surface drilling and casing Drillers start a new well by drilling a hole to a depth of approximately feet, and installing a large-diameter pipe called a conductor casing, which is then cemented in place. Protecting the water table Once the conductor casing is set, drilling continues to a depth that state regulatory agencies determine is well below the level of any fresh ground water. The heavy pipe called surface casing is then installed and cemented in place by pumping cement down the pipe. The cement circulates to the bottom of the surface casing and rises back to the surface on the outside of the casing, forming another layer of protection and strength. Horizontal drilling Shale wells are usually completed with a horizontal section. As the wellbore continues downward and it approaches the target shale, drilling engineers guide the drill bit, curving the borehole until its path is horizontal or nearly so. The finished hole may run horizontally for a mile or more through the hydrocarbon-rich layers of rock. Production Casing The drilling phase is finished after drillers install and cement an additional set of piping from the bottom of the well all the way back to the surface, forming yet another barrier between the rock and the inside of the well.

13 BHP Billiton 11 Manufacturing wells In most shale fields, operations continue around the clock. Depending on the reservoir, wells typically take days to drill. BHP Billiton Petroleum drills several wells from each pad in a manufacturing-like process. Perforating In a critical part of the completion phase, portions of the production casing are perforated by a series of small explosive charges, creating holes that are about an inch in diameter and extend as far as 18 inches into the surrounding rock. These perforations provide a conduit for fluid and sand to be pumped into the reservoir during the fracing stage, and afterward allow hydrocarbons into the wellbore so they can flow or be pumped to the surface. Hydraulic Fracturing Because shale is too dense for hydrocarbons to flow through it on their own, the wells are stimulated by pumping in fluid usually water and thickeners and sand under very high pressure. Downhole, the fluids push out through the perforations into the rock formation. The pressure is great enough to break the rock and release hydrocarbon molecules from microscopic voids in the shale. The sand, called proppant, holds the fractures open so the fluids can flow into the wellbore and to the surface.

14 12 BHP Billiton The Move into Shale Through purchases in 2011, BHP Billiton Petroleum acquired major positions in four of the largest onshore oil and gas fields in the United States. Two of the assets are what the industry calls liquidrich, which means the hydrocarbons they produce are largely oil and natural gas liquids, as opposed to dry gas. In some areas, the proportion of total liquids production is as high as 80 percent. The company s holdings in shale basins across Texas, Louisiana, and Arkansas contain some 8.0 billion barrels of oil equivalent, a U.S. domestic resource that we will be producing over the next 50 years. People know us BHP Billiton Petroleum s onshore acreage in the United States lies in regions where people have a long history in the oil and gas business and the industry is an important part of the economy. At the end of 2012, the company was producing 270,000 barrels of oil equivalent per day from these onshore fields. That number will grow throughout 2013, driven by more than $4 billion in drilling and completion and facility development. Using local contractors, BHP Billiton Petroleum is building the infrastructure to bring valuable gas and liquids to market. In 2012, it installed some 140 miles of new pipeline in the Eagle Ford and Permian shales, and is building another 200 miles of pipeline in Over the next few years, the company will add six new processing plants and lay about 800 miles of pipeline in the Eagle Ford alone. Development in the Permian includes some 600 miles of pipeline, as well as gas dehydration, compression, and cryogenic facilities. These large, long-life, and low-cost assets hold tremendous volumes, with potential for significant future development. Together, they make BHP Billiton Petroleum one of the industry leaders in some of the most productive shale basins in the United States. BHP Billiton Petroleum s size and scale give it the flexibility to respond to market conditions. In financial year 2012, the company adjusted its shale development plans to focus on oil rather than gas, while maintaining its capability to ramp up in the future when natural gas prices rebound. A diversified portfolio of onshore oil and gas opportunities provides extraordinary flexibility to respond to changes in the market.

15 BHP Billiton 13 Home-grown energy BHP Billiton Petroleum works closely with landowners to minimize its footprint. Shale proving to be an economic boon to the U.S million jobs created in past few years. New jobs expected to grow to 3 million in $2.5 trillion in government revenue by Nearly 2% of U.S. GDP over next three years. Source: U.S. Chamber of Commerce

16 14 BHP Billiton The Eagle Ford Shale Hydrocarbons in economic quantities were discovered in the Eagle Ford shale in Since then, the region has become the epicenter of shale operations in Texas, and one of the premiere plays in North America. The Eagle Ford spans more than 400 miles of south-central Texas. The heart of the play is about 50 miles wide and has an average thickness of 250 feet. It is a giant resource that will be productive for many years to come.

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18 16 BHP Billiton BHP Billiton Petroleum s average hydrocarbon production from the Eagle Ford, which includes the Black Hawk and Hawkville fields, is over 50 percent liquid hydrocarbons. With an attractive product mix of condensate and natural gas liquids, the Eagle Ford Shale is rated among the lowest cost plays in North America. As a result, the economics of dry gas have much less effect on company activities. The rigs are working flat-out, says Eagle Ford Production Unit Manager Steve Pastor. Our success is due in part to the fact that we re in the sweet spot of the basin. Geologically, it is among the best of the best. According to a study by the independent research and consulting group, Wood Mackenzie, BHP Billiton Petroleum has the second most valuable position in the Eagle Ford. The Eagle Ford includes a vast rural area of south-central Texas. Hydraulic fracturing at night in the Eagle Ford Shale. Drilling and completions operations run non-stop, lessening America s dependence on foreign oil and gas.

19 BHP Billiton 17 The field produces three products. First is the crude oil and condensate, which is a high-value lighter form of crude oil. Next is dry gas, which can often go straight into interstate pipelines and be sold directly into the market. Between the two are natural gas liquids ethane, propane, butane, and pentane which are typically separated out in gas processing plants. In 2012, BHP Billiton Petroleum produced nearly 100,000 barrels of oil equivalent per day from the Eagle Ford Shale, with half of that being hydrocarbon liquids and the rest, dry gas. In the next few years, the company aims to produce 300,000 barrels equivalent per day from the Eagle Ford. Six new processing plants will be needed to handle the volumes. BHP Billiton Petroleum will be adding 800 miles of pipeline, and has already spent more than a billion dollars on the infrastructure. Reservoir modeling Commercial amounts of hydrocarbons were discovered in the Eagle Ford Shale in The region has since seen an extraordinary amount of development as one of the premiere shale plays in North America. What BHP Billiton Petroleum brings to the table is financial strength and technical depth to make the most of this outstanding resource. BHP Billiton Petroleum s Technology Goals Model and understand production complexities associated with nano-permeability reservoirs Lead the industry in the development of static and dynamic shale reservoir models Improve hydraulic fracturing efficiency, development planning, and ultimate energy recovery Identify, assess, and implement breakthrough technology If we can unlock the secrets of the Eagle Ford, we can apply that technology elsewhere around the world. Vice President of Development Planning Rob Kase.

20 18 BHP Billiton We are now working on dynamic reservoir models of the field, says Rob Kase, Vice President of Development Planning. That s what we do for conventional reservoirs, but it has never been done in a shale like the Eagle Ford. Reservoir models are computer-based simulations of a field s geology. Specialists construct them using seismic data and information from wells. Dynamic 3D models help engineers and geoscientists predict how fluids will move through a reservoir. Accurate models help them plan the location of new wells and develop strategies for enhancing recovery. The reason no one has created a dynamic model for a shale reservoir is that the permeability of the rock is so much less than it is in a conventional oil and gas reservoir. The rock is so tight that some of the parameters geoscientists would use to model a conventional reservoir just don t apply. The conventional approach is difficult to use in the Eagle Ford, Kase says. In a well-connected reservoir with higher permeability, you can calculate the flow or drainage rate based on the reservoir parameters. Here, because the rock is so dense and varied, it creates a significant challenge. The flow rate from a single well, for example, can be deceiving. The fluids might be entering the well at a uniform rate throughout the length of the completion zone, or the majority of the fluids might be coming from a narrow zone that just happens to have more natural fractures in the rock. Without a good model of the reservoir, there is Eagle Ford Production Unit Manager Steve Pastor (left) with Eagle Ford HSEC Supervisor Harry Barnes. not a strong correlation between the characteristics of the reservoir and how much production you can expect from the wells. Shale gas recovery factors generally run in the mid to high teens, and oil recovery factors between five and seven percent, Kase says. If we can build a dynamic reservoir model for the Eagle Ford, I believe we can improve recoveries significantly. This will have a significant impact on not only production rates, but the value of the asset. The really big prize, however if we can unlock the secrets

21 BHP Billiton 19 in revenue, created 38,000 full-time jobs, and added $211 million to local government revenues in south-central Texas. Today, communities in the 14 counties that make up the Eagle Ford are building new schools and hospitals and launching training programs to help people realize the benefits of shale oil and gas development in the regions surrounding their communities. The study projects that up to 116,000 full-time jobs will be created by Water in an arid land The Eagle Ford has no surface water to speak of. Much of the area is quite arid, but there is a world-class aquifer that has an immense volume of fresh water in a porous sandstone that is 400 to 500 feet thick. The problem is, the water is extraordinarily deep. While most freshwater aquifers are no more than 400 feet below the surface, one has to drill much deeper down to reach this one. Cities can afford to get their water from this source, but many ranchers and farmers can t. BHP Billiton Petroleum Chief Executive J. Michael Yeager (left) on a visit to the Eagle Ford. of the Eagle Ford will be the ability to apply that technology elsewhere around the world. Adjusting to the market Low natural gas prices in the United States have caused dramatic shifts in the way producing companies manage their fields. Such cycles, driven by supply and demand, have been the nature of the petroleum industry since In BHP Billiton Petroleum s case, it has shifted assets to produce more hydrocarbon liquids and less dry gas. Since the Eagle Ford and Permian are its most liquids-rich fields, they are getting the most attention. Near the end of 2012, the company was running 8 rigs in the Permian Basin and 30 in the Eagle Ford. A new fleet of drilling rigs, most of them purpose-built for working in shale, are now being delivered from fabrication yards on the Texas Gulf Coast. Several units are already in service and the rest will be in the field by mid By then, all 45 BHP Billiton Petroleum drilling rigs will be the safest, cleanest, and most energy-efficient in the field. A boost for local communities Exploration, development, and production in the Eagle Ford Shale has contributed to the economic revitalization of the region. According to a 2012 study by the University of Texas at San Antonio, the shale gas projects in 2011 alone generated just under $20 billion To get enough water for drilling and hydraulic fracturing, we have drilled a number of fresh water wells and turned them over to private landowners.

22 20 BHP Billiton To get the water needed for drilling and fracing wells in the Hawkville area of the Eagle Ford, BHP Billiton Petroleum is drilling these extra-deep water wells and turning them over to private landowners in exchange for a share of the water. That gives it the water it needs, and the property owners are happy to have a reliable source of fresh water. How much is needed? The amount of water needed per well for hydraulic fracturing varies from one field to the next, but three to five million gallons is a ballpark figure. While that sounds like a lot, it is small compared to the daily water consumption of a power plant or the irrigation needs of a large farm. To ensure that it is not taking too much water or harming the aquifer in any way, the company has retained the services of a Ph.D. geologist who lives in the area. As a landowner himself, he represents the community and advises local water boards. The drilling program When BHP Billiton Petroleum took over drilling in the Eagle Ford, it put a lot more hardware in the field, including 30 new rigs built to its specifications. Our rig fleet is entirely composed of modern AC rigs split between fast movers and skidders, says Derek Cardno, the company s vice president for global drilling and completions. The fast movers are typically used for drilling only one or two wells on a pad. That equipment is easier to move from one site to another. The skidder rigs are designed to drill multiple wells on a pad. They are more complex because they include a skidding system that allows the derrick to move quickly from one well to the next. If the idea is to drill appraisal wells, as is done in the Permian, then the rigs need to be easy to move. If the rigs will be drilling large numbers of development wells, as they are in the Eagle Ford, then rigs on skids are the answer. All 45 of our new rigs have much better control systems than the units they are replacing, Cardno adds. That makes them more suited to drilling the type of short-radius horizontal wells we want. These rigs can drill the curve and lateral sections of the wellbore much more efficiently and with a high degree of precision. The new equipment is also more automated than ever before. Drillers, for example, can enter set points, then take their hands off the controls and let the rig s computers guide the drill string. These advanced rigs are inherently safer than the older ones, Cardno says. A lot of the hazards have been designed out. A finished well site in the Eagle Ford field.

23 BHP Billiton 21 We re trying to change the way folks think about safety in their day-to-day business. That s going to take constant vigilance. Vice President of Drilling Derek Cardno. Safely managing change With 45 drilling rigs in BHP Billiton Petroleum s U.S. onshore fleet, part of the challenge is managing them consistently. We are a bigger organization now, Cardno explains. Smaller companies are used to working with fewer rigs. We work that way ourselves in the conventional business, where we had only eight or ten work fronts at any one time around the world. They were run by a small team. Everyone knew how each other worked. Now, in the unconventional plays, we are geared up to run 45 rigs and nine frac spreads, so we have work fronts. That is a lot to get your arms around. Consistency is one of the most difficult things to achieve in daily operations. When you consider that the drilling program spans not only the Eagle Ford, but three other large fields as well, the challenge is huge. What Cardno and his team did is divide the drilling organization into smaller, more manageable chunks: Drilling managers look over a certain number of rigs. Drilling superintendents oversee smaller numbers of rigs. An engineer and superintendent work together, and each has a certain number of rigs supported by a small team. The hard part is getting a consistent message across all work fronts, Cardno says. We re managing that through a lot of interaction. I receive direct reports daily. We have a morning meeting every day to go through the operations and discuss issues. Managers do the same down the line. The drilling organization also brings all of the field personnel together every three to six months. The goal is to get the same message out to everyone about the company s expectations and its requirements for safety, performance, and quality. It is also an opportunity to gain valuable feedback from the field. We are doing it with our service providers as well, Cardno says. We ve met with vice presidents and CEOs of all our service companies. We brought them all together to make sure everyone understands what we expect in terms of safety, quality, and performance. We re making great strides, but we cannot get complacent. We re trying to change the way folks think about safety in their day-to-day business. That s not going to happen overnight.

24 22 BHP Billiton The Permian Basin The Eagle Ford is liquids-rich, but the Permian Basin, which covers some 75,000 square miles of west Texas and southeastern New Mexico, has a very high percentage of crude oil. Although BHP Billiton Petroleum is still drilling appraisal wells, it is seeing liquid hydrocarbon production from shale in the range of 75 percent. The best wells are in the 30,000 square-mile Midland Basin and in the smaller Delaware Basin, which lies to the west. Many operators are working in various parts of the Permian, which accounts for about 20 percent of all the drilling in the United States today. sine waves slowly through the earth, pushing up mountains in some places and leaving basins in between. The Permian is huge, and anything but consistent. There are multiple layers of hydrocarbon-bearing rock with names like Wolfcamp, Sprayberry, and a blend of the two known as the Wolfberry. The Permian includes the north and south Midland basins, a Central Basin Platform and the Delaware Basin. BHP Billiton Petroleum s BHP Billiton Petroleum has more than 440,000 acres of undeveloped land under lease. What is it finding? One of its appraisal wells peaked out at 500 barrels of oil and six million cubic feet of gas per day. It s too early to tell how many such wells it will have, but its Permian drilling program calls for 60 new wells in 2013, and the company is just getting started. An area known as the South Midland is largely unexplored, but many companies are starting to drill there now. It is a very new play for the industry in general, and there is a lot of optimism because liquids production in some areas could be as high as 90 percent. Portions of the Permian Basin have been producing conventional oil and gas since the 1920s. In 2012, the conventional part of the Permian produced the energy equivalent of a million barrels of oil per day. Now, with the ability to recover hydrocarbons from unconventional plays, production from the Permian could reach two million barrels per day by Challenging geology of the Permian The basin itself was formed as part of the Ouachita orogeny, a 50-million-year era of mountain building caused when the continents we now call North and South America bumped together some 300 million years ago. The continental collision sent huge Lee Higgins is BHP Billiton Petroleum s top geoscientist evaluating the Permian Basin.

25 Safer and more efficient rigs Forty-one of the rigs in BHP Billiton Petroleum s 45-rig fleet are new and purpose-built for drilling in shale. The remaining four rigs are only three years old, which means that the company operates the most energy efficient, technicallyadvanced, and safest rigs in the field.

26 24 BHP Billiton largest holdings are in the Midland, where the producing zone averages around 700 feet thick, and the Delaware, where the Wolfcamp interval is nearly 1,000 feet thick. By comparison, that is three to ten times thicker than most shale plays. I ve been working and studying this area since 1988, says Lee Higgins, the company s top geoscientist working on the Permian. When I saw how much acreage the company had, I was eager to work on the project. The Permian is a huge challenge, both from an operations standpoint and from a technical, scientific standpoint. For one thing, the shale is not really shale. What we have in the Wolfcamp is really a different type of rock, Higgins says. You won t find this in the Haynesville, Fayetteville, or Eagle Ford. It is different from the Bakken, the Marcellus, and the Utica. Those are all more classic shale plays. What we have in the Wolfcamp is actually mud rock, which implies that it was deposited differently than shale. Despite the region s long history of conventional production, there was little data on the layers known as the Lower Permian. The Permian is an old basin, Higgins explains. The rock changes vertically and laterally. It is not the same here as it is over there, so even nearby wells could have different characteristics. Every time we get new data, we go back and rethink what we thought before. One question is whether it is better to drill vertical wells through the 1,000-foot thick producing zone, or to drill them with long Operations Engineer Phillip Schneider. horizontal sections. Operators are trying both, and there are good arguments for each approach. Vertical wells are cheaper to drill, but horizontals reach more of the reservoir. We re exploring the concept of drilling stacked laterals, Higgins adds. That means a series of two or more horizontal wellbores, one above the other. The trick is where to put those laterals. It s important to remember that we have only drilled a handful of wells and we are still studying the results. We are just in the early stages here. Striking a balance The abundance of high-value liquids, particularly in the South Midland and Delaware basins, gives operators more flexibility in developing the field. Even so, it is important to control costs. We re drilling fairly long laterals, says Permian Production Unit Manager Doug Handyside. The idea is to touch as much rock as possible. Horizontal wells in the Delaware are 4,000 to 5,000 feet long. In the South Midland, we re drilling 7,500-foot laterals, and some in the industry have drilled laterals up to 10,000 feet. Permian Drilling and Completions Manager Paul Kelly (left) with Drilling Supervisor Daren Mahoney. It s likely that fields in the Permian will be developed using a mix of horizontal and vertical wells as companies decide which are the most economical for their portions of the play.

27 BHP Billiton 25 Our initial assessment of development potential here suggests that we will recover only about five percent of potential hydrocarbon in place. The upside is enormous if we can double that to only 10 percent. I believe that in five to ten years, we ll be there. Growing pains There is limited infrastructure capacity in the Delaware and South Midland fields to accommodate the rapid pace of drilling, but operators are catching up. Typically, collections of nearby wells will flow to pads or tank batteries to begin separating the oil from the natural gas liquids and dry gas. The oil and condensate is typically stored at the lease site and trucked out. For the gas, we propose to build infield gathering systems and route it to a central distribution point, Handyside says. There, the gas would be dehydrated and compressed and either processed or simply sold into a third-party line. We are also building a small cryogenic plant to process our own gas in the Delaware Basin. Another challenge, besides separating the production into marketable products, is how to get them out of the field. The pipelines coming out of west Texas are full of oil, Handyside explains. The pipelines that handle the NGL mix are almost full. There is enough pipeline capacity to handle the dry gas, but getting liquids out has been an issue. Pipeline companies are beginning to move in, expanding their capacity and building new lines. The lag in infrastructure is mainly due to the rapid increase in liquids production as the unconventional reservoirs in the Permian are developed. Operations Supervisor Brian Downing (left) and Production Supervisor Dennis Winowiecki at the site of a new gas plant under construction.

28 26 BHP Billiton The Haynesville Shale In 2007, the Haynesville Field in northwestern Louisiana did not exist. Today it is among the largest gas fields in the United States. Technically known as the Haynesville/Bossier Shale, this play is remarkable for several reasons. Like other shale developments in the BHP Billiton Petroleum portfolio, this one is big. The entire play straddles east Texas and western Louisiana. Most of the company s portion of the field is in Louisiana, where the producing zone is up to 300 feet thick and the reservoir pressure is relatively high. The rock is also hydrocarbon-rich, and the water saturation is low. The Haynesville shale currently produces enough natural gas to satisfy 10 percent of U.S. demand. BHP Billiton Petroleum is one of the largest leaseholders in this field, as it is in the Fayetteville play to the north in Arkansas. Even if U.S. gas prices trend low through 2013, the Haynesville shale still contains enough easy-to-recover hydrocarbons to make it profitable. The wells are fairly deep, but the shale is easy to frac. The company s strategy for the Haynesville given the prolific Permian Basin and Eagle Ford plays in its portfolio is to continue drilling at a moderate pace. It has enough rigs to keep its drilling teams busy and support its contractors. When dry gas prices in the United States firm up, the company can pick up the pace. There are places in the Haynesville where neighbors can see our operations from their back porch. BHP Billiton Petroleum s new office building in Shreveport, Louisiana, will double as a training center for new employees.

29 BHP Billiton 27 Here to stay Drilling continues in the Haynesville even in the face of lower natural gas prices. Part of the company s strategy is to maintain a solid base of contractors and experienced crews so they will be available when the market rebounds.

30 28 BHP Billiton The neighbors Unlike the Permian and Eagle Ford fields, there are places in the Haynesville where neighbors can see BHP Billiton Petroleum operations from their back porch. A two-well site near Shreveport is about 1,000 feet from the home of a retired federal judge and a church, and the Red River is just across the highway, says Haynesville Production Unit Manager Greg McCain. Another site is about the same distance from a school. Even though BHP Billiton Petroleum is new in town, its employees are not. External Affairs Manager Tommy Clark has lived in Shreveport more than 25 years. He has a business background and has worked extensively with local and state governmental agencies. External Affairs Manager Tommy Clark (left) and Haynesville Production Unit Manager Greg McCain. When working so close to the community, Clark says, we go out of our way not to be a nuisance. We are sensitive about noise, for example, so fracing operations are typically restricted to daylight hours. In the case of the nearby school, we waited until Christmas break to complete the well. In the Haynesville area there is plenty of surface water available. Much of it comes from the Red River.

31 BHP Billiton 29 To conserve water and avoid the high cost of disposal, much of the produced water from BHP Billiton Petroleum wells is stored on site in tanks and reused for hydraulic fracturing. Responsible water use In most areas where operators use hydraulic fracturing, finding enough water is a problem. Not so in the Haynesville, where there s plenty of surface water available. Much of it comes directly from the Red River or ponds that have been built to hold frac water. The bigger challenge is what to do with water that comes back to the surface after a frac job, and what comes up from the producing wells. We recycle and reuse as much water as we possibly can, McCain says. We don t pull water from freshwater aquifers that supply rural communities. Where we are close to the river, we pull water from there. We also drill water wells into the Red River alluvial, which is where the State of Louisiana wants us to drill. What about the water that is not recycled? In the Haynesville, there aren t many disposal wells, so that also drives the effort to recycle. Although we ve been in the Haynesville a relatively short time, the equipment and practices we have in place so far allow us to reuse more than 40 percent of all the water from hydraulic fracturing, and the company is constantly improving on that.

32 30 BHP Billiton The Fayetteville Shale The Fayetteville is a giant field that covers a large amount of central Arkansas. Its wells are shallow, predictable, and remarkably productive. BHP Billiton Petroleum purchased the asset in April, Since then, the company has hired more than 250 workers. While the level of activity has been scaled back due to lower than expected natural gas prices, Fayetteville continues to be a major part of its onshore oil and gas portfolio. The previous operator was very good at identifying the plays, getting the land, and appraising it, says former Fayetteville Production Unit Manager Rob Skaufel, and now BHP Billiton Petroleum s President of global Conventional Production. Now we are at the point of developing the acreage. It was exactly the time to step in. As a large international oil company, BHP Billiton Petroleum brings resources, financial strength, and a depth of experience that smaller companies seldom have. Take safety, for example. Our way of doing things is based on our experience offshore, Skaufel says. Safety is the highest priority in the company. We bring established systems and processes developed offshore and adapt them for onshore operations. The same culture of safety and operational integrity shows in the way the fields are being developed, Skaufel notes. We do assessments and baseline studies that cover a 1,500- foot radius around each well. If there are existing water wells or sources of surface water, we sample them to be sure we know what condition they are in before we drill, then we sample them again later to see if there is any change. Responsible water use There are more than 3,000 wells in the Fayetteville area. BHP Billiton Petroleum operates about 800 of them. Together, those 800 wells produce around 10,000 barrels of water per day, and something has to be done with it. The previous company primarily trucked the produced water to disposal wells, Skaufel says. All of the injection wells were in the heart of the field. Right about the time we took ownership, however, a series of small earthquakes swept this part of Arkansas. A similar thing happened 50 years ago. We thought the recent quakes were a repeat of the older ones, but we wanted to make sure they were not related to our water injection wells. We did a study, and even though we did not find evidence that our wells caused the problem, we could not prove they didn t, so we voluntarily shut them down. The water disposal costs shot up, from $2 a barrel to as much as $15. Waste water had to be trucked to disposal wells as far away as eastern Oklahoma. Our way of doing things is based on our experience offshore. Safety is everything.

33 BHP Billiton 31 Efficient design Skid-mounted drilling rigs such as this one are much more efficient for drilling multiple wells on a single pad.

34 32 BHP Billiton The final stage of building a well is to run all of the fluids through a test separator like this one to determine the exact amount of water, oil, and natural gas the well is producing. (Photo courtesy Cameron) We were still doing that when I joined the company in August, 2011, says Operations Specialist Corey Riddle. Disposal is still the most direct way to handle produced water, but we think it s better to recycle as much of it as we can. That s easier said than done in a field where the wells are widely spaced and set among rolling hills. Riddle s answer was to group wells to one of four water-collection hubs. That did two things: It made the collection system more efficient, and it took a lot of big trucks off the road. If one truck holds 100 barrels (4,200 gallons) of water, and we needed to dispose of 10,000 barrels of produced water a day, that means 100 trucks were picking up the water and driving four to eight hours to the disposal site, Riddle says. That was not only wasteful, it was a safety risk. Now the system is more localized, and much of our produced water is being treated and recycled for fracing nearby wells. Our highway truck traffic is down substantially. While truck traffic is down, the amount of water being recycled is way up. When we first started to focus on water use, we were recycling about 10 percent, Skaufel says. By April, 2012, it climbed as high as 85 percent, and there have been weeks since then that we were recycling 95 percent of our water. Drilling efficiency In 2011, it was taking a month to drill the average Fayetteville well. Through a process of continuous improvement, crews are now doing the same in less than half the time. On the south end of the field, it is not unusual to take 20 days to drill a well, but in other places we have come down to 10 days, says Fayetteville Drilling Superintendent Bill Robinson. There are many things we have been doing to improve the efficiency and safety of our rigs. Most of the drilling has shifted to the liquids-rich Eagle Ford area, and an increasing number of rigs will go to the Permian. Even so, Fayetteville has the potential to be a major producer of natural gas for the next 50 years. The current development plan is to continue drilling through the middle of Even with low gas prices, we are still drilling economic wells, Robinson says, but for now, we have dropped our rig count in Fayetteville from a high of 13 down to two. We don t want to lose the momentum and capability we have gained over the last year, both internally and with our contractor base. If the U.S. demand for natural gas comes back as quickly as it fell, we want to be able to meet the need.

35 BHP Billiton 33 Much of our produced water is being treated and recycled for fracing nearby wells. Operations Specialist Corey Riddle. BHP Billiton Petroleum s newest wells in the Fayetteville use composite trees that are more compact than conventional frac trees. They are also safer, since operators can reach all of the controls from a comfortable height, rather than having to use a lift. (Photo courtesy Cameron)

36 34 BHP Billiton Zero Harm BHP Billiton Petroleum operates under the principle of Zero Harm to people and the environment. In many locations, the company s policies set the standard for smaller operators. As a globally significant producer, exporter, and consumer of energy, BHP Billiton Petroleum is committed to managing its greenhouse-gas emissions. The company actively seeks to reduce water usage and carbon emissions across its business, and publishes the results in its annual Sustainability Report. its history, and it places BHP Billiton Petroleum firmly in the top 10 percent of the industry. My group supports them, says HSEC Vice President Kristen Ray. In our North American Shale operations, our first remit is getting the basics right. Much of our work involves regulatory compliance BHP Billiton Petroleum is one of the safest oil and gas companies in the industry. It works at it. Its programs aim to identify all risks so they can be understood and controlled. That means the company investigates every incident to determine the root cause and prevent it from happening again. Since 2006, BHP Billiton Petroleum has experienced continuous improvement in its Health, Safety, Environmental and Community (HSEC) programs. In fiscal 2012, the total recordable injury rate within its conventional business was 1.34, which is the best-ever in We look at risks and what we can do to prevent injuries. That always comes first. HSEC Vice President Kristen Ray.

37 BHP Billiton 35 Operations Engineer Tommy Roberts (left) and Drilling Superintendent Orville Crandall. and our license to operate. We look at risks and what we can do to prevent injuries. That always comes first. The company s rapid growth in 2011 and 2012 meant hiring a lot of people, not only on the drilling and operations side, but also the HSEC professionals needed to support them. Up and down the line, all of those new employees needed to learn how BHP Billiton Petroleum works. We have to communicate and train and make people aware of what the company expects, especially in terms of safety, Ray says. We are still in the early stages of that journey. We are establishing baselines for compliance and learning where our opportunities for improvement are. From there, we can build on improvement and driving cultural change. But it is a journey that will take several years. The lessons the company has learned in the conventional oil and gas business are now being applied to each of its four giant fields in the Onshore United States. The company s goal is to become the safest company in the industry. It is proud of its achievements so far, and is confident that it will continue to make progress towards its goal of Zero Harm.