LITTLE ROCK — In a reversal of what it said it would do when it bought Chesapeake Energy Corp.’s Fayetteville Shale assets, BHP Billiton of Australia will decrease the number of rigs operating in the Fayetteville Shale in response to near-historic low natural-gas prices.
When BHP, the largest mining company in the world, bought Oklahoma City-based Chesapeake’s assets in the state for $4.75 billion last year it said it would be increasing the number of rigs to about 20 from eight. But on Wednesday, Danny Games, externalaffairs manager for BHP’s Fayetteville Shale operation, said the company would be reducing the number of rigs from eight to five or six.
Instead the company will be raising production and exploration of oil-rich shale formations in south and west Texas, according to BHP’s biennial earnings report.
“We’re still committed to the Fayetteville Shale and our development here,” Games said. “We are at eight rigs today and over the course of the year we will probably go to five or six rigs in light of market conditions.”
In November, BHP said it planned to spend a little more than $1 billion developing the Fayetteville Shale this year. On Wednesday, Games said he didn’t know how much BHP would now be spending.
In addition to disclosing that it will curtail production in natural-gas formations it invested in last year, Marius Kloppers, BHP chief executive officer, acknowledged that it may have been wiser in terms of capital expenditure projections for 20 rigs to wait and see how low gas prices would fall.
“Did we know the gas price would be where it is today when we made the acquisition? We probably would have taken the easier course and gone and sat in front of a screen if we could have predicted that,” Kloppers said from Melbourne, Australia, in a conference call with analysts late Tuesday night. “Management will act. If the facts change it’ll change its plans.”
But he called shale gas “revolutionary,” saying, “It’s going to change things in energy around the world, not only in the U.S.”
Bloomberg News reported that BHP Billiton posted a 5.5 percent drop in first-half profit, the first decline since 2009, as rising costs and lower output and prices cut basemetals earnings by half.
Net income fell to $9.9 billion in the six months that ended in December from $10.5 billion a year earlier, the company said in its earnings report. That compares with the $10 billion average estimate of seven analysts surveyed by Bloomberg.
Prices started falling as development of shale formations across the country caused an oversupply. New techniques that allow horizontal drilling, combined with hydraulic fracturing, or fracking, has made drilling for oil and natural gas feasible in places where it wasn’t before — as long as prices are right.
Fracking is the process of injecting millions of gallons of water, sand and chemicals into a well to break up the rock and allow natural gas or oil to flow.
A milder winter further drove down prices to where it is today, BHP said in its earnings report.
On Wednesday, naturalgas futures fell 2 cents to end at $2.45 per 1,000 cubic feet on the New York Mercantile Exchange. In January, natural gas hit a 10-year low at $2.32 per 1,000 cubic feet, and the price is still less than half of what it was in 2010, The Associated Press reported.
In July 2008, natural-gas prices in New York were near $13 per 1,000 cubic feet, and in December 2005 prices were more than $14 per 1,000 cubic feet. For most of 2011, prices stayed between $3 and $5.
James Williams, an energy economist and owner of Russellville-based WTRG Economics, said he expects that as companies cut back on natural-gas drilling, the price will go up.
The slowdown “might only last a year,” he said Wednesday. “If enough companies cut back on drilling we could see prices come up above $3 or $4 by next year, and if we see that we’re going to see more drilling in Arkansas.”
Williams added that BHP “is in the commodities” business and has to be flexible to respond to price swings. The company makes long-term investments and has to strike while a particular market has high prices.
BHP plans to increase oil output by 20 percent in the Eagle Ford Shale in south Texas as well as a shale formation in west Texas. Last year, BHP bought Houston-based Petrohawk Energy Corp. for $12.1 billion, giving it acreage in the two oil-rich formations.
Though natural-gas prices are low, the other two major operators in the Fayetteville Shale have said they don’t have plans to curb production.
Southwestern Energy, the largest operator in the Fayetteville Shale, with 11 rigs, said last week that it is watching the price of natural gas but the company is still profitable at current prices.
Exxon Mobil subsidiary XTO Energy, the third-largest driller in the Fayetteville Shale, and the largest naturalgas producer in the U.S., said this week that it has no intentions of curbing production.
Business, Pages 23 on 02/09/2012