Shale termed 'near-term growth engine'

Tim Cutt, president of BHP Billiton Petroleum & Potash.

OIL & GAS FINANCIAL JOURNAL: Congratulations on your new role with BHP Billiton, Tim. Can you tell our readers a little about yourself?

TIM CUTT: I was born in Guildford, England, about 25 miles from London. I moved to New York when I was a young child and later moved to Louisiana. My parents moved to Houston when I finished high school and they have lived here ever since. I have been married to my wife Carolyn for 28 years and we have two sons; Christopher is a chemical engineer for Dow Chemical and Matthew is a senior at the Colorado School of Mines.

OGFJ: After high school, where did you go to college and what career path did you take to end up where you are today?

CUTT: I have a BS degree in petroleum engineering from Louisiana Tech University. I served 24 years with Mobil and then ExxonMobil, the first 18 with Mobil. In that time, I spent about 11 years working in the Gulf of Mexico and six years in California working in heavy oil, so that was a very interesting time in my career. After the merger, I spent a few years in Houston and then transferred up to Newfoundland where I became the president of Hibernia Management & Development Co. From there, we had a quick stop in Calgary prior to being transferred to Caracas, Venezuela. This was during the time of the expropriation of ExxonMobil's assets there. After that, I was approached by Mike Yeager, whom I had known since 1985 during our Mobil days. He asked me to come join BHP Billiton, which was busy building capacity, especially in the offshore, and I agreed and joined as president of the production division at the time. And then about June of 2011 I was asked to move up to Saskatchewan and was appointed president of Diamonds and Specialty Products and was accountable for the Ekati Diamond Mine and the establishment of BHP Billiton's Potash business in Canada.

OGFJ: How did your extensive background in oil and gas help you on the mining side of the business?

CUTT: What I found very quickly in working at Ekati was that there are a lot of commonalities in running a mining group and in running a petroleum business. You put safety first. Then there is cost management, productivity, people management. There is so much that is similar. Since I was working with a good technical and operating team who understood the underground, it wasn't an issue. In Saskatchewan, I have mainly been building the organization and external relationships while progressing construction at the Jansen mine site. My first task was to move the organization from Vancouver to Saskatchewan, and that is where we are building the Potash business.

OGFJ: I haven't been to Saskatchewan. It's one of Canada's prairie provinces. Tell us about it.

CUTT: It's very agricultural and looks a lot like Kansas. It's a beautiful province. There are a number of things going on there – uranium mining to the north, potash in the center, and the Bakken shale play extends up into the southern part of Saskatchewan, so there is growing oil production. All this works in concert with a huge agricultural business. The economy has taken off, and it is one of the fastest-growing provinces in Canada.

OGFJ: BHP Billiton is headquartered in Melbourne, Australia, and has a rich, 150-year history. The company is Australia's largest taxpayer and has emerged as a truly global company with an operating presence in 26 countries from Chile and South Africa to North America and Trinidad & Tobago. It is one of the world's largest publicly-listed companies and the world's largest diversified resources company. What can you tell us about the corporate business strategy and where petroleum fits into the picture? And how did you end up with petroleum and potash?

CUTT: As you know, BHP Billiton has a new CEO this year, Andrew Mackenzie. Andrew is really focused on moving forward with four or potentially five commodities – iron ore, copper, coal, petroleum, and we're positioning potash for longer-term growth. So we're trying to consolidate the focus of the company on those areas. Part of what we're doing is bringing some of our seismic understanding into potash. Exploration for potash is similar to what we do in oil and gas as we define some of the anomalies we find in the potash beds, so there's a connection there. There's also the obvious connection that I sit in North America, and that makes sense geographically. Finally, I have the most recent knowledge on the project and have built relationships in this sector that we need, and I look forward to continuing that going forward. Once potash reaches a certain scale in the future, I think that [combining it with petroleum] will be reconsidered.

OGFJ: How is potash mined? It is surface mining?

CUTT: It's underground. It's about 1100 meters deep. There's a 4.5-meter thick ore body that runs several hundred kilometers across the province. It was once a shallow inland sea. The water evaporated and left a large salt bed made up of potasium, magnesium and chloride. The majority of the magnesium was leached out, leaving the potassium and salt behind. The potash is excavated underground using continuous miners and produced up shafts that are currently being built. Approximately 25% of the ore produced is actually potassium and the rest is salt. So you separate it out, and it's primarily shipped to the US, China, India and Brazil to be used as a crop nutrient.

OGFJ: It sounds rather capital intensive.

CUTT: We've spent some money acquiring land and exploring – about $1.2 billion on the project to date. And we recently announced another $2.6 billion, so we've committed approximately $3.8 billion to the project so far.

OGFJ: Can you elaborate a little about the restructuring and reorganization that BHP Billiton is undergoing? What will be the significance for your group?

CUTT: First, let me say a few things about Andrew (Mackenzie), our new CEO. I worked for him for a few years up in Canada, and he's a brilliant individual with a degree in geology and a PhD in chemistry. He assumed the role of chief executive officer in May and was an excellent choice to replace Marius (Kloppers), who retired from the company. He has a background in both petroleum and mining, so he is an excellent choice to lead the company.

As I mentioned, he has already moved to simplify the corporate structure into five core businesses. We have followed suit by reorganizing Petroleum into two divisions – conventional and shale. Andrew is going to focus less on volume growth and more on value and cash generation. Our shale business holds up well under his productivity agenda that is expected to extract billions in value from the existing portfolio. Our shale business will be a key focus area for this initiative. When we think about developing shale, it's really much more like a manufacturing process than typical oil and gas development. So we're putting a consolidated business around our shale assets. As we restructure the business, we're absolutely confident we will be a top-tier shale development company globally. A final point is that under Andrew's leadership, Petroleum will become more integrated with the minerals business, and you will see more sharing of resources between the businesses.

OGFJ: What plays are you operating in in North America?

CUTT: The play where we are currently spending the most money is the Eagle Ford. That's followed secondly, from an investment standpoint, by the Haynesville. But we also have a large interest in the Fayetteville, although we're not drilling in the Fayetteville right now with natural gas prices being down.

OGFJ: The Haynesville and the Fayetteville are known as gas plays. As you say, gas prices are low right now. Have you shut in production in either of these plays as a result of low prices?

CUTT: I wouldn't say we have shut in gas production. Gas is still profitable to produce. Lifting costs are relatively low, so it's still profitable to produce in all our gas fields. However, I would say our development pace will be much slower in the dry gas fields.

OGFJ: Do you have any assets in Canada?

CUTT: Nothing in Canada at this time. However, as part of our new shale initiative, we have a group of people looking at all the shale bodies around the world, and Canada will be high on the list of places we're considering initially. We're looking at North America first and then elsewhere.

OGFJ: Would you explain your rationale behind creating separate divisions for conventional and shale within Petroleum? What advantages do you gain by doing this?

CUTT: There are different risks and rewards in conventional, which for us is mainly offshore, and shale, so our approach is different. As I alluded to previously, the shale business is similar to optimizing a manufacturing process. However, you need to understand the geology first, the phase of the hydrocarbons, and how the shale will react to hydraulic fracturing. There's a lot of technology that goes into it. It's not just picking up the acreage and beginning extraction. I don't think the exploration/appraisal risk has been eliminated in shale. You clearly need to understand the depositional environment before development commences, and I think the manufacturing approach will boost drilling performance, reduce costs, and accelerate the time from when we spud the wells to the time we sell the products.

In the offshore realm, the upfront costs are much higher, so the initial exposure is greater and the technical challenges can be significant. Having said that, if you discover the right resource in the right part of the world, the returns can be very significant as well, so we're still very interested in offshore. We have tremendous deepwater experience in the organization around the world, a lot of it based here in Houston. And we do plan to leverage that expertise moving forward, so we're not just shifting to shale. We're separating the two businesses, and we're making sure we're focused on both. We'll keep our technical expertise in the deepwater as strong as it has been in the past.

OGFJ: In addition to the Gulf of Mexico, where are some of your other assets, particularly the offshore assets?

CUTT: We are a global company, and we're producing in a number of places. From an operating standpoint, our two big focus areas are the Gulf of Mexico and Western Australia. We operate two FPSOs in Western Australia. We recently started up the Macedon gas project, which has the capability to supply 200 million cubic feet of gas per day into the domestic market in Western Australia. In addition, we have production around the world in Pakistan, Algeria, the UK Irish Sea, and Trinidad and Tobago. We recently secured four highly prospective blocks in two deepwater plays between Trinidad and Tobago and Barbados. One of the most important business components we have is actually our non-operated business with BP in the Gulf of Mexico. We have a large percentage interest in both Atlantis and Mad Dog. We see Mad Dog as one of the largest fields in the GOM with considerable development potential. We also have large operated assets in the GOM, including the Shenzi TLP.

OGFJ: Is BHP Billiton mainly an upstream company, or do you have significant midstream and other assets as well?

CUTT: We're almost exclusively an upstream company. For a long time now, our corporate strategy has been to own and operate large, long-life, low-cost, expandable, upstream assets diversified by commodity, geography, and customer. We do operate midstream assets in our shale business, but the midstream is not a core business for us. We do market extensively, so we have a marketing office in Singapore, and we do market our products. But we don't do any downstream.

OGFJ: How important is shale development to the success of BHP Billiton's petroleum business? Does the company have an acquisition strategy?

CUTT: I think shale will be our growth engine for the foreseeable future as we build upon our experience over the last several years. The overall petroleum business grew about 6% last fiscal year, while our shale business grew approximately 15%, and shale liquids production grew by 76%. We expect very similar growth in the current fiscal year. Shale is critical to Petroleum's success, but is also very important to the entire BHP Billiton Group. A lot of the projects the company invests in are large capital investments upfront and very long life. Shale brings an opportunity for smaller investments and much quicker returns. Overall, the Haynesville acreage is one of the best premier dry gas plays anywhere. We talked about what we are doing in the Eagle Ford. We will seek to grow our position in shale with a primary focus on North America, and we are very interested in learning more about the true potential in additional basins around the world. We recently staffed a shale exploration team that will focus on shales around the globe, not just the US and North America.

OGFJ: Are there any specific countries you are targeting?

CUTT: We're on the front end of the learning curve, and I think it's too early for me to speculate about specific countries. We have some of the best shale plays in the world right here in the US, and we do have a fairly active acreage acquisition process going on. A lot of shale in some of these basins is best done lease by lease. If we see larger opportunities, we'll have the support to do that also. Of course, shale liquids are in the front of our minds right now. By the way, according to the US government, BHP Billiton is the largest foreign investor in US shale since 2008. And our share represents 15% of all shale investments. So we're a very big player here.

OGFJ: Many companies today seem to be almost exclusively focused on liquids-rich portions of shale plays. However, that could change in several years if natural gas prices recover and the US begins to export gas in the form of LNG. So there is the near-term way of looking at gas and the long view. What are your thoughts on this?

CUTT: BHP Billiton supports the development of an LNG export infrastructure in the US. That is consistent with our longstanding belief that free markets should ultimately determine how resources are developed and distributed around the globe. Australia already has a major LNG export industry, and we're part of that. We think the US needs to move quickly to get a competitive edge in what is sure to be a robust LNG industry in the decades to come. We applaud the Administration in Washington for approving three LNG export terminals to date, but we believe it needs to move faster on the remaining 19 project applications.

OGFJ: That's the long-term view. How about short term? Are you focused mainly on liquids?

CUTT: We're really pleased with the portfolio we have that we picked up through the Petrohawk acquisition and also the assets in the Fayetteville. Approximately 75% of our operated drilling activity is focused on our liquids-rich acreage in the Eagle Ford. The remaining activity is going on in the Haynesville and the Permian Basin, where we are continuing to appraise our most prospective acreage. We're encouraged by what we see, and we hope to move more into the development stage in the next couple of years. Our operated drilling program in the Fayetteville, which is dry gas, has been temporarily suspended. However, we will continue to invest in wells operated by third parties, notably Southwestern, where we see value. Wells drilled at the right cost in parts of that play can continue to be economic.

OGFJ: What are some of the major challenges you face and how are you dealing with them?

CUTT: I'm glad you asked that question. With the rapid growth in the shale business, one of the biggest challenges for us is attracting and retaining the very best people in the industry. That's not just true for us, it's true for all companies involved in shale development and in the oil and gas industry in general. I believe the best way to do this is to create a work environment consistent with our charter in which people start the day with a sense of purpose and end each day with a sense of accomplishment. Our employee value proposition must be better than our competition, starting with compensation, having skilled leaders in the organization, providing career development, and having a competitive benefits package. If we don't get all this right, we won't compete in the long term.

OGFJ: As you say, it's a very competitive market for talent. Can you give us some specific figures as to how you're doing?

CUTT: Last year, we added 700 people as we consolidated our shale assets into a single North America Shale Division. This summer, we employed 60 interns, and we now have more than 150 graduate students enjoying the first two years of their career with us. In February, we announced a major new global headquarters building for Petroleum. We break ground this fall across the street from our present location. We think our location in Houston's Galleria area gives us a competitive advantage. The new building will be world class with the best employee amenities available. More importantly, BHP Billiton aspires to be one of the world's great companies, and that will prove to be the best way to attract and retain talent.

OGFJ: Is there anything you would like our readers to know about BHP Billiton that we haven't discussed today?

CUTT: I mentioned that we aspire to be one of the greatest companies in the world. That can't happen in our line of business without being one of the safest. Our commitment to safety – to Zero Harm – is second to none. We are committed to being the best across the spectrum of health, safety, and environmental concerns. We are also committed to being a good neighbor in the communities in which we operate. As a corporation, we are committed to high standards of transparency and business ethics. All of this reflects the cultural environment we operate in today, and will become increasingly indispensable to business success in today's world. All of our stakeholders – including analysts and investors and current and prospective employees – can take great heart in that..

OGFJ: Thank you for your time today, Tim.