DOMINOES BEGIN TO FALL: BHP Chairman Says $20 Billion Shale Investment “MISTAKE”

As the U.S. and Global Oil and Gas Industry continues to cannibalize itself to stay alive, the Shale Dominoes begin to fall as BHP Chairman announced its shale investment was a MISTAKE.  Yes, it’s true, BHP Chairman Jacques Nassar said his company’s $20 billion shale investment six years ago, in hindsight, was a mistake.

According to the article, A $20 billion mistake: BHP Billiton chairman laments huge deal in US shale:

BHP entered the shale business at the height of the fracking boom in 2011 and invested billions more developing the operations. The fall in oil prices since then has led to pre-tax writedowns of about $13 billion on the business. Activist shareholder and hedge fund Elliott Management, holding 4.1 percent of BHP’s London-listed shares, has been trying to gain support from other shareholders to persuade BHP to sell the shale oil and gas business.

“If you had to turn the clock back, and if we knew what we knew today, we wouldn’t do it, of course we wouldn’t do it, but go back and put yourself in our position at that time,” Nasser told a business seminar, referring to the shale purchase.

“We bought exactly what we thought we were buying, but the timing was way off.”

While BHP Chairman Nassar stated that “the timing was way off” in its shale investment purchases, I really don’t think it was prudent “AT ANY TIME” to invest in shale oil and gas.  BHP Billiton is making the case that they knew exactly what they were getting into, but they paid too much for their shale investments.

As the article states, BHP Billiton has written off $13 billion of their shale oil and gas investments.  Assuming they purchased $20 billion in shale energy assets, they have written off 65% of their investment.  This is a big deal because BHP Billiton is the second largest mining company in the world.

I was writing back at the time of BHP Billiton’s shale purchases that the company was making a BIG ERROR in judgement.  However, with the oil price above $100 a barrel from 2011 to 2014, the market believed that shale was going to be the next best thing since sliced bread.  Unfortunately, the U.S. shale oil and gas industry has been a dismal failure…. that is, if we consider it as a financial venture.

As I have posted in several articles, here is a table of the top U.S. shale oil and gas producers operating cash flow surplus-deficits since 2005:

Again, you will notice that up until 2008, the industry enjoyed an operating cash SURPLUS.  However, since 2009, the top U.S. shale oil and gas producers have suffered an operating cash DEFICIT… and it even was worse from 2011-2014, when the oil price was over $100.  So, it really didn’t matter WHEN BHP Billiton purchased its shale energy assets…. they were going to be LOSERS, regardless.

Now, if we go back to 2011, when BHP Billiton started purchasing its shale energy assets, we can clearly see how overly optimistic and wrong they were about the industry.  In the Financial Times article, BHP in $4.7bn US shale gas assets deal:

BHP Billiton has moved to bulk up its energy holdings, entering the US shale market with a deal to buy Chesapeake Energy’s Arkansas-based gas business for $4.75bn.

The Anglo-Australian miner said on Monday that it would buy 487,000 acres of leasehold gas properties in the Fayetteville shale, funding the deal from its existing cash balances.

The assets, which currently produce about 400m cubic feet of gas per day, will increase BHP’s oil and gas reserves from current levels by about 45 per cent. The company sees potential to triple the production from the Fayetteville acreage during its 40-year operating lifetime.

BHP Billiton purchased Cheasapeake Energy’s Fayetteville Shale Gas assets in Arkansas for nearly $5 billion with the hopes of tripling its production over the 40-year operating lifetime.  I find this quite amusing because most shale gas fields will peak within 5-8 years:

The Barnett Shale in Texas was the first large shale gas field exploited in the United States.  While initial production began in the early 2000’s, it really didn’t start to take off until 2005.  However,  production peaked in the Barnett at 5.2 billion cubic feet per day (Bcf/day) in November 2011.  This chart is a bit dated, but according to the most recent figures, production at the Barnett is down to only 2.8 Bcf/day…. a 46% decline from peak.

So, what does this tell us??  It shows us that U.S. shale oil and gas fields do not have a long lifespan.  Which means, BHP’s statement that they planned on tripling shale gas production in the Fayetteville, was simply a delusion.

In looking at BHP Billiton’s actual petroleum production figures, we can plainly see that they totally overestimated their forecast for shale gas production in the Fayetteville:

BHP’s Shale gas production in the Fayetteville declined from 153 Bcf (per year) in 2014, to an estimated 96 Bcf in June 2017.  That’s a 37% decline in three years... no where close to their forecast of a tripling of production.  And it wasn’t just BHP Billiton that suffered declining shale gas production in the Fayetteville…. it was also the entire industry.

NOTE:  BHP Billiton did not break down its individual U.S. gas production until 2014.  So, the data for the Fayetteville only was available from 2014 onwards.  Also, the figures for BHP’s Fayetteville shale gas production are for the entire year.  Thus, it produced a total of 153 billion cubic feet of shale gas in the Fayetteville in 2014.  This turns out to be about 0.41 Bcf per day.

Total shale gas production in the Fayetteville peaked at 2.9 Bcf/day in November 2012 and is currently producing 1.7 Bcf/day:

As we can see, shale gas production started to take off in 2006, but peaked just five years later in 2011.  Thus, Fayetteville Shale gas production is already down 41% from its peak six years ago.

Now, this is only one example of the several shale energy assets that BHP Billiton has on its balance sheet.  It also has U.S. shale assets in the Haynesville, Eagle Ford and Permian.  For example, BHP’s Eagle Ford oil production is estimated to be down 50% from its peak in 2015:

BHP’s Eagle Ford Crude Oil & Condensate Production (in thousand barrels oil equivalent – Mboe)

2014 = 20,462 Mboe

2015 = 35,823 Mboe

2016 = 26,823 Mboe

2017 = 17,800 Mboe (Est.)

BHP’s Eagle Ford crude and condensate production peaked in 2015 at 35,823 Mboe, or 35.8 million barrels of oil equivalent and is estimated to be down to 17.8 million barrels in 2017.   BHP’s financial year for 2017 ends on June 30th.

Lastly, here are the figures for BHP’s Haynesville shale gas production:

2014 = 183.5 Bcf

2015 = 162.5 Bcf

2016 = 136.6 Bcf

2017 = 99.0 Bcf (Est.)

As we can see, BHP’s Haynesville shale gas production is down even more than its Fayetteville production.  According to my estimate of BHP’s Haynesville shale gas production of 99 Bcf (billion cubic feet) in 2017, it is down 46% from the 183 Bcf produced in 2014.

The evidence is quite clear.  BHP Billiton thought they were going to strike it rich producing shale oil and gas in the United States.  Unfortunately, the shale oil and gas industry has been a dismal failure as no one really made any money producing it.  Sure, a few companies may have made some profits, but the energy industry as a whole spent more money drilling and producing shale oil and gas than they made from operating cash.  Thus, they have added a great deal of debt to their balance sheets.

So, no…. we can’t blame BHP Billiton for not being able to make money producing shale oil and gas just because their expertise is more focused on mining.  Again, NO ONE really made any money producing shale oil and gas in the United States.  This is why the U.S. oil and gas industry is now staring at a HUGE DEBT WALL to become due over the next several years:

BHP Billiton is now trying to offload its increasingly worthless shale oil and gas assets to anyone that would buy them.  According to the Financial Times article, BHP says it is willing to sell US shale business:

Andrew Mackenzie, BHP chief executive, said on Tuesday he was willing to sell its US shale business, as he prepared to meet Elliott Advisors for the first time since the activist investor called for a major restructuring of the world’s largest mining company by market capitalisation.

Elliott said last month that BHP should spin off its US petroleum business, which includes onshore shale assets as well as fields in the Gulf of Mexico, and the hedge fund also called on the Anglo-Australian company to simplify its corporate structure.

“If there is a natural owner out there who believes in more upside that can be achieved within this shale business than we do, we will be more than happy to talk turkey with them,” he added.

The important sentence in the article above is where BHP CEO, Mackenzie states, “If there is a natural owner out there who believes in more upside that can be achieved within this shale business than we do, we will be more than happy to talk turkey with them.”  That is quite an amusing thing for the BHP CEO to say.

Why?  Because there really isn’t much upside for U.S. shale oil and gas going forward.  Also, it was quite interesting that Elliot Management, activist investor with 4.1% stake in BHP Billiton, wants the company to TOTALLY DIVEST itself from all Petroleum assets in the United States, not just the shale energy assets.  This includes their Gulf of Mexico oil and gas assets as well.

I believe any company that purchases BHP’s shale energy assets is in for serious trouble.  Unless they are able to acquire BHP’s shale energy assets for a large discount and then sell them for a profit to some other poor slob, it would be a big mistake to try and make money producing shale oil and gas from these assets.

While some companies are claiming that they can produce oil in the Permian for $30 a barrel, they seem to forget the massive amount of debt they have acquired on their balance sheets in producing shale for the past several years.  Also, breaking even at $30 or $40 a barrel is not a good investment, especially when the industry is saddled with debt and paying upwards of 75% of its operating income to service it:

Please stay tuned as I will be posting my interview with Chris Martenson at PeakProsperity.com when they release it this week.

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41 Comments on "DOMINOES BEGIN TO FALL: BHP Chairman Says $20 Billion Shale Investment “MISTAKE”"

  1. Great article Steve,

    I would also like to note that the Houston Chronicle ran a story last week stating that investments cash into the shale industry dropped by 97% in the month of June. That is almost hand to mouth. So I feel your title of “domino’s falling’ is dead on!

    http://www.chron.com/business/energy/article/The-party-is-over-for-investors-in-U-S-shale-11242266.php

    • MASTERMIND,

      Thanks for linking that article. Yes, it looks like MONEY HAS TOTALLY DRIED UP for the marginal shale operators. While the BIG CAPS like ExxonMobil will continue to drill in the Permian, it looks like BIG TROUBLE ahead for the Small-Mid-Cap Shale producers.

      steve

  2. Diogenes Shrugged | July 2, 2017 at 1:16 pm | Reply

    In the final graph, extending the trend by a year (to today) shows 100% of cash flow. Anybody know if that reflects reality? Looks like an epic buyer’s market is coming to American gas lands.

    • Diogenes Shrugged,

      When you say, “Looks like an epic buyer’s market is coming to American gas lands”, If you mean that many of the shale companies are going to have to unload their shale assets just like BHP Billiton, I wonder who in the LIVING HADES is stupid enough to buy them?

      They way I see it…. if no one really made any money producing shale when oil was over $100… I wonder who in their RIGHT MIND would buy Shale assets, even at pennies on the Dollar? The real costs are in the DRILLING & PRODUCING the Shale oil & gas.

      steve

      • Who is stupid enough to buy them? Probably Australian Super Funds!!!!!

      • Diogenes Shrugged | July 2, 2017 at 8:48 pm | Reply

        Steve,

        “I wonder who in the LIVING HADES is stupid enough to buy them?”

        Possibly somebody rich enough to drill and produce without resorting to financing?

        If silver appreciates the way some folks predict, then maybe Bix Weir will buy up all those fields after the current players default. Maybe that’s Bix’s end-game, to eventually become an oil tycoon.

        In the mean time, before the defaults get underway, I’m wondering if the greatest fools won’t turn out to be Jeff Bezos or Elon Musk. Government subsidies, rigged markets and robots to replace petroleum engineers, geologists and roughnecks. Maybe they can dream up a way to drill through sixteen thousand feet of solid rock with solar or wind power, fracture stimulate the formation, and deliver their bountiful hydrocarbons with drones. Or at least dream up a way convince a gullible public that they have our energy future under control. Elite control, that is.

  3. So..what are the possible ramifications of uneconomical shale gas going offline?

  4. Jacques Nasser. Wasn’t he the CEO of Ford and nearly ran that company into the ground twenty years ago? We keep paying these CEOs to screw up.

  5. These people; BHP executives are supposed to be at the top of their game! Can’t they read their own numbers (or competition) until it is too late? And they are always referred to in opinion pieces as intelligent people!!!! Give me a break!!!

  6. ‘So..what are the possible ramifications of uneconomical shale gas going offline?’

    Collapse of the global economy — the end of civilization — starvation — violence — disease — massive release of radiation from unmanaged spent fuel ponds — extinction

  7. Thanks Steve, regards

  8. Hiring Nasser was a big mistake. We had enough of him at Ford motor. I’m not surprised he made another blunder. Loser!,,

  9. Paul Revere2020 | July 2, 2017 at 9:25 pm | Reply

    the US tried already to produce shale oil back in the 1980″s. And in 1991 the company producing it went bankrupt and out of business.

    Unocal to Close the Nation’s Last Shale Oil Project
    http://articles.latimes.com/1991-03-27/business/fi-898_1_shale-oil

    • There is a difference between oil shale and shale oil. The link you refer to is about oil shale, which is a kerogen rich rock that has to be mined and processed as an ore (crushing and heating) to extract the hydrocarbons. Shale oil is produced as a liquid that can be pumped in the normal manner. Oil shale is not a viable resource at all due to mechanical problems in the separation process, not to mention the environmental disaster that would accompany it if it was ever undertaken in a large scale.
      https://geology.utah.gov/map-pub/survey-notes/oil-shale-vs-shale-oil-whats-the-difference/

  10. ConocoPhillips is getting ready to lay off a whole bunch more people.

  11. Alfred (Melbourne) | July 3, 2017 at 3:26 am | Reply

    BHP Chairman Jacques Nassar was an excellent car man – but he know nothing about the mining and the gas businesses. He should simply admit that he had no idea what he was buying. Those who sold those fracking businesses certainly did. 🙂

  12. BHP took a 20 billion dollar hit! So what? you’ve been at this almost ten years now. It was peak oil, then the economy stinks, stocks are a bubble, EROI sucks, wars in our midst i.e. Korea, Russia, Iran, Iraq etc. Dollar is FIAT crap and on and on. But, have you noticed one
    curiosity in all of this? The facts are that during your tenure as a silver expert, silver keeps dropping in price. It dropped 3% today. Why doesn’t anything you write about affect silver?Shall we keep buying? Maybe in 50 years or so silver will rise in price? Most likely the cause will be simple inflation. Why is it that all you write doesn’t ever affect the price of precious metals like silver?

    • Joe, please, explain what is it that you are saying? That there is no peak oil, the economy is awesome, stocks are undervalued, EROI is a BS concept, there is world peace, and the dollar is king forever? Or are you saying that had Steve never written any blog posts all of the above would be true now? I.e. that Steve is causing peak oil, wars, and stock bubbles? Or are you saying that you bought an asset near the top and now you are blaming someone else for not doing your homework? Or you actually don’t own any silver and you are worked up that you can buy it so cheap now? In that case I will gladly sell you as much silver as you need for $50 an ounce, if that damned low market price is all that keeps you up at night.

    • DisappearingCulture | July 3, 2017 at 3:52 pm | Reply

      “Why is it that all you write doesn’t ever affect the price of precious metals like silver?

      Becasue what is written by Steve, you, anyone, doesn’t matter to the forces [people & organizations] that control the silver price.

    • You should read the following article Joe Lindell 🙂

      The Crash Of 1929: “Somewhere, Deep Down, They Knew The Party Was Over”

      http://www.zerohedge.com/news/2017-07-02/crash-1929-somewhere-deep-down-they-knew-party-was-over

      • GrahamB,

        While I appreciate you trying to ENLIGHTEN Joe, it seems as if he has made his mind up that Central & Commercial Bankers are the Good Guys, and the Precious metals dealers are the real pieces of GARBAGE. Also, Joe believes its going to be 25-50 years before anything bad happens.

        So… I no longer waste me time responding.

        steve

  13. Here’s How NASA Thinks Society Will Collapse
    Too much inequality and too few natural resources could leave the West vulnerable to a Roman Empire-style fall.

    https://www.theatlantic.com/politics/archive/2014/03/heres-how-nasa-thinks-society-will-collapse/441375/

  14. Thanks for the response Steve. All I’m saying about you and all silver gurus is that you
    hype silver year in and year out with charts, data and what else you can uncover but the
    fact is it doesn’t affect the price of silver. You seem to be one guy that never cares about the price of silver. Investors care that buying silver these past 7 to 10 years are all losing money. Why doesn’t anything you write affect silver? You write articles on silver, like Tom Cloud and then peddle silver on their websites. If what you write affects us in 2025 or 2050, then you too have duped your readers.

    • DisappearingCulture | July 3, 2017 at 4:05 pm | Reply

      “Why doesn’t anything you write affect silver? You write articles on silver, like Tom Cloud and then peddle silver on their websites.”

      Again nothing written will EVER, EVER affect the price of silver. Sure if a Fed chairman or the Treasury Secretary wrote about silver like Steve does…but they never will.

      “If what you write affects us in 2025 or 2050, then you too have duped your readers.”

      That doesn’t really make any sense.

    • joe lindell,

      I have to applaud your original and insightful comment. I am constantly surprised by your ability to continually write original thought provoking comments.

      Keep up the excellent work.

      steve

    • Robert Forshee | July 5, 2017 at 9:36 pm | Reply

      Joe,
      My plan for many years has been the preservation of my labor. Some for my retirement and hopefully to pass on the largest part to my children.

      When I was a boy, my Grandmother would give all the grandchildren one Morgan Silver Dollar for their birthday. She bought them from a bank for one paper dollar each. So, I just looked up the current price for Morgans and it is about $25 for VG-VF each. I still have them.

      Bob F.

  15. Simple really….when the world economy collapses everything shuts down…the end….were talking about grids down all over the world and 7.5B people dropping like f*** flies in short order…the collapse will be absolutely horrible..There is no collapse or horror movie ever produced that has even come close to imagining what the collapse of BAU might look like… I’m talking about every corporation and every social program going bankrupt at once. I’m talking about people eating people. I’m talking about the worst catastrophe to ever happen in the history of mankind, and WILL ever happen. Nothing has ever, or will ever come close.

    (Meadows 1972) (Ehrlich 2013) (Motesharrei 2012) (Jefferson 2015) (Ebrahimi 2015)
    (Chapman,I 2013)

    • MASTERMIND,

      While what you have outlined in your comment is indeed one of many possible outcomes, I wonder… are you the LIFE OF THE PARTY at family get-togethers or social gatherings?? LOL.

      steve

      • All I know is when the energy shortages hit Gas stations only have around three days worth of supplies. And that will be gone in a few hours with Preppers gassing up their Bug Out Trucks. And Bankers fueling up their private jets…

  16. This deal was ALWAYS going to be a disaster… Not that Barclays or Kloppers suffered.
    Petrohawk and Chesapeake had a brief wait for useful idiot Kloppers and his Barclays gurus to arrive. “Let’s pay moar, Let’s pay Moar” they pleaded, the sellers obliged.

    Some quotes from the time of acquisition :
    1)Petrohawk directors have been net sellers of shares over last 6 months: DITTO institutional investors : No wonder “Petrohawk Directors Unanimously Recommend Offer”
    2)”Revisions to SEC rules have allowed producers to book undeveloped reserves that questionably justify development costs based on their own projections in public filings.”
    3) Dan McSpirit, analyst at BMO Capital Markets, described the deal as involving a willing seller more than anything else. …. “For Sale” sign that’s been on the company’s front lawn for years”
    4) “Speculators cease to worry about how much they pay for an asset, since they think someone else will always pay more later. Unfortunately for those caught up in powerful swings of herding behaviour, it’s never different this time. Boom inevitably turns into bust, because the supply of Greater Fools is not infinite after all.”
    5) “BHP is being advised by Barclays Capital and Scotia Waterous. Barclays will act as dealer manager for the offer, the statement said. Goldman Sachs Group Inc. (GS) is advising Petrohawk.”
    6) “BHP is paying 18.4 times earnings before interest, tax, depreciation and amortization, versus a median of 13.5 times for seven purchases by producers over the past five years, the data show. It’s paying $2.54 a barrel of oil equivalent for Petrohawk, compared with $2.79 a barrel for the Chesapeake assets, Morgan Stanley Melbourne-based analyst Cameron Judd said today in a note to clients. “
    7) “Barclays Capital benefited this year from its relationship with BHP, which announced the two biggest acquisitions by Australian companies in 2011. The investment bank also worked for BHP, the world’s largest mining company, on its $4.75 billion takeover of Chesapeake Energy Corp. assets in March.”

    AND THE WINNER IS : BARCLAYS!!!
    REUTERS May 23, 2017 : “BHP hires Barclays to divest U.S. shale gas assets”. Nice Work : Advise them to overpay for useless assets, Finance the canard, and FINALLY slurp up fabulous divestment fees. Probably have another little scheme for fleecing the company for early exit from the borrowing scheme.

  17. Good interview with Chris Martenson at Peak Prosperity YT channel, Steve.

    I was anxiously hoping to see if you would elaborate more on the Hills Group Hypothesis. Two different routes as I see it: 1.) oil becomes too expensive to explore, drill, transport, and refine and therefore price goes up in an overleveraged economy that can’t afford it and the economy declines, or 2.) the EROEI is such a crappy deal that the econom , the drillers, and the banks loaning to them etc go belly up, the economy grinds to a halt from this financial backlash, even with an ample supply of oil stores for the moment, and the price of oil drops because the economy is slowing down faster than the declining supply of oil, despite oil producers need to keep pumping for oil to pay their debts, or in the Saudi’s case, maintain their lifestyle, thus aggravating the shale and Saudi situation even more.

  18. They need some massive distraction soon or they will be losing their heads literally. They know that. That is why the war insanity is coming to the surface and is so blatant. Desperation.I don’t see the world surviving the coming war. The insane U$ Jew powers that be are trying so hard (Russia, China, Iran, North Korea), I think they will get desperate and push the button, if they don’t cause Russia to push it firs, which I expect. This is one time I hope I am wrong but all signs point to it happening in the near future. And note the time difference Russia’s day is our night. Sleep well in your beds tonight America, the MIC has your back. LMAO

  19. Steve,
    Meanwhile up in the Marcellus PA holler as the locals say, its all bright and hopeful eyes once again as this local newspaper article describes how the shale gas industry is coming back due to the recent, albeit relatively small uptick in natural gas prices:

    http://www.foxbusiness.com/markets/2017/07/04/after-dismal-2016-shale-gas-drillers-begin-to-turn-corner.html

    I say small uptick in shale gas pricing given the billions upon billions of O&G drillers short and long term debt you have focused on compared to what is actually in the ground.

    New drilling begins again due to a better price, long awaited NG pipelines becoming reality and with it, the sacred and coveted holy grail of being able to pipe fracked gas to liquefied NG shipping terminals to blessed higher priced overseas markets.

    While you focus on the realities of the math of the situation, in fool’s land the song goes on forever and the party never ends.

    Best regards,
    Bob

  20. https://www.ft.com/content/569df5e9-104f-3dc6-b1f1-0e7a855f8cad?mhq5j=e2

    I got an email today from an employee of an offshore drilling platform builder in Singapore. He was looking for a job. His company recently completed a North Sea drilling rig. Does he see the writing on the wall?

    • Eric P,

      Yes… the North Sea Drilling and production operations are coming to a close. It was nice while it lasted. The British enjoyed a nice bit of oil revenue when the North Sea really came online in the 1980’s. It peaked about 2000, when the U.K was producing about 2.5 million barrels per day. Last year it fell below 500,000 bd.

      So, it looks like they will have to spend a lot of money to cap these wells.

      steve

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