UPDATE 3-BHP says U.S. shale business to generate cash by 2016

Tue Dec 10, 2013 9:12pm EST

* Says onshore U.S. production to be self-funding in 2016

* Seeks to extend liquids production profile

* To focus spending on Australia, US, Trinidad and Tobago

* Sees good interest in U.S. Permian shale assets up for sale

By Clara Ferreira-Marques

LONDON, Dec 10 (Reuters) - BHP Billiton, the world's largest miner and a top investor in U.S. onshore oil and gas, said on Tuesday its U.S. shale business should generate cash from 2016, contributing almost $3 billion a year to the group by the end of the decade.

BHP, one of the largest producers outside the major integrated oil companies, plans to spend around $4 billion a year to expand its U.S. onshore oil and gas production.

The company is dedicating a growing slice of its spending to petroleum, one of the key pillars of its broader business, along with iron ore in Western Australia, copper and coal.

Some analysts have raised questions over declining returns in a petroleum business, which they say turned cash negative this year for the first time in over a decade, reflecting heavy investments.

They have also queried the length of time before BHP investors will see a payback.

But BHP - whose boss Andrew Mackenzie is a former BP executive - said in presentations in Houston on Tuesday that the U.S. shale business was set to become a major cash-flow generator from 2020.

The company aims to boost productivity there and trim down the remainder of its petroleum unit to focus on core assets in both conventional oil and gas and shale, largely in the United States and Australia.

"We will continue to simplify the portfolio with a firm focus on value," said Tim Cutt, a former Mobil and ExxonMobil executive who took the helm of BHP's petroleum and potash division in July.

BHP is on track to hit its 2014 petroleum production target despite a drop in output in the December quarter. It told investors its spending programme would help it hit a goal of increasing liquids production from its shale business to 200,000 barrels per day in 2017.

RISING PRICE

The company sees total onshore U.S. production of 500,000 barrels of oil equivalent per day by the same date, roughly the total output of a large U.S. independent producer.

Predicated on what BHP forecasts will be a rising U.S. gas price, this would allow the U.S. onshore business to fund itself from the 2016 financial year.

Cutt was confident on gas prices improving based on increasing demand for gas in power stations, trucks and petrochemical plants and, from 2016 onward, in liquefied natural gas (LNG) plants in the United States.

BHP, already a significant oil and gas player, moved heavily into U.S. shale in 2011, acquiring the Fayetteville assets from U.S. energy group Chesapeake and months later Petrohawk Energy.

It spent $20 billion including debt just before a major downturn in U.S. natural gas prices in deals that made it one of the largest foreign investors in U.S. shale since 2008, and has since written down nearly $3 billion on those assets.

But it has also trimmed back in petroleum as it has across all its divisions, to focus on higher-margin assets. It appointed advisers in October to sell roughly half its oil and gas acreage in the Permian basin in Texas to focus on more lucrative assets there.

"We're confident we will move those assets at the right time, but only if we get the right kind of offer," Cutt told reporters on a teleconference from Houston, adding that the company had received good interest from shale players.

BHP flagged on Tuesday it would take a depreciation charge of about $600 million in the Permian this year reflecting the rapid depletion at some of the wells it has drilled.

The group said on Tuesday it would focus on investment on Australia, the United States and, potentially, Trinidad and Tobago, where exploration has focused on promising deepwater acreage following an improvement in Trinidad's fiscal terms on leases.

"We are very excited about Trinidad," Cutt said. "It's a very oily, gassy part of the world. It's a known trend that we're looking at. But we're very early days on this."

BHP also has assets in Pakistan and Algeria, but said those assets had limited room for future growth. Cutt declined to comment on when the company may divest those assets.

It sold its stake in Liverpool Bay, a major integrated development of five producing oil and gas fields off the British coast, in October 2013.

BHP has said it plans to spend the bulk of its U.S. onshore development budget this year on both the Permian basin and Eagle Ford, another major basin, directing its investment to liquids-rich acreage at a time of low natural gas prices.

Petroleum accounts for roughly a fifth of total BHP production, and around a quarter of BHP's operating profit.