As policymakers in the United States weigh the merits of a shift in energy export policy, BHP Billiton Ltd. remains bullish on the prospects of exporting crude oil. During today's OnPoint, Dean Dalla Valle, chief commercial officer at BHP Billiton, explains his company's outlook for shale oil, coal and copper investments in the U.S. and around the globe. He also discusses BHP's shale strategy following a 40 percent reduction in the number of operational rigs in the United States.
Monica Trauzzi: Hello. Welcome to OnPoint. I'm Monica Trauzzi. With me today is Dean Dalla Valle -- chief commercial officer at BHP Billiton. Dean, thank you for joining me.
Dean Dalla Valle: Thank you, Monica. It's great to be here in your nation's capital.
Monica Trauzzi: Thank you. A bit of background for viewers who may not be familiar with BHP's operations -- BHP is the world's largest diversified resources company. Your four businesses are iron ore, copper, coal and petroleum. So, Dean, as the United States weighs the merits of a shift in export policy, tell me why BHP is bullish on the prospect of crude oil exports.
Dean Dalla Valle: We're obviously bullish on the long-term use of oil and fossil fuels in general in the world's energy needs. We are one of the largest investors in the shale business here in America, so it's an important part of our business. We see long-term prospects for the gas side of the business, but also, obviously, for the liquids-rich parts of the fields we're in. We think we have some of the best fields in the country. The issue about exports is really more aligned to our global belief that the best way for the world to develop and the most cost-effective way and also to take into account the impacts of climate change is to have open and free trade. We have a policy that is 40 years old, which probably harks from another era. When you're at a country that's likely to still be a net importer of oil for a long time and it's really going to help a country get its supply demand balanced in the most cost-effective way seems to make a lot of sense.
Monica Trauzzi: BHP recently announced earlier this year that it would reduce the number of rigs it operates in the U.S. by about 40 percent. What is the state, then, of your U.S. shale operation?
Dean Dalla Valle: We're under a close period at the moment, and we'll give an update to the market on our production report and our findage report in the coming months. We constantly review our portfolio. We made decisions to where we actually want to continue production and hold back on capital. We've been balancing our shale business out for quite a while, and we continue to do that.
Monica Trauzzi: A 40 percent drop is pretty significant, though.
Dean Dalla Valle: That's what we felt was necessary to ensure that we are getting the right returns for the money deployed there.
Monica Trauzzi: How have your shale assets been impacted by market volatility -- particularly what we saw at the end of last year. What do you ultimately believe is the true growth potential -- especially when you have Saudi Arabia that has such a large seat at the table in dictating where the markets go?
Dean Dalla Valle: Obviously, our pick for the market decision to actually continue to go for market shares had a major impact. We take a very long-term view. When you look at the fundamentals of the market, about 92 million barrels of oil are used today. You look at the decline at most of the fields. You look at the growth that we expect. We really see in the longer term that there will be a need to produce more production, and it will probably come from higher cost areas. So, we see good prospects for the market.
Monica Trauzzi: New York state recently moved to ban fracking. Oklahoma is at the center of increased earthquake activity, and that's thought to be as a result of oil and gas wastewater disposal. How significant are these production challenges to the overall growth potential of the U.S. market?
Dean Dalla Valle: It's something that we monitor very closely. I believe over a million wells now have been drilled and used. It's understood. Protecting aquifers is one of the main features of our program to insure what we do. It's quite deep when we're actually fracking it out in our shale business. It's really below those aquifers. We're obviously convinced that we can do this in an environmentally sustainable way, and we continue to do so. We continue to monitor. It's a very well-regulated industry over here. We think it's sustainable. Obviously, there will be people who have opposition to it. It's important in these arguments that fact always overrides emotion. I think this is one where the facts stand for themselves given the length of time it's been going on and the motors we've drilled. I understand the seismic activity is more due to water disposal than gas and extraction.
Monica Trauzzi: But that's still a critical element of the overall production operation. We are seeing municipalities and local governments looking to ban fracking or to take a second look at it. Is that a concern?
Dean Dalla Valle: It's obviously a concern. I think we have to ensure that we take communities along with us. In the areas that we operate, we have great relationships with the communities. We have great relationships with the landholders. We have very simple principles about being safe and being responsible and being valuable to the community we operate in. I think that if we actually keep practicing those in those areas that we'll continue to be able to grow in this industry.
Monica Trauzzi: Talk about climate change. The Obama administration made climate a focal issue. It's issuing a series of regulations that seek to reduce emissions. The Clean Power Plan is expected to be finalized this summer. It's expected to be a game changer for the electric utilities sector. How are you anticipating this role will impact BHP's coal operations?
Dean Dalla Valle: We built up a ... model of coal demand globally, and we look at bi-regions. We have been watching this very closely for some time. What we do is actually factor in the cost of what carbon could be and the cost of abatement, and we run a range of scenarios. What we see in all of the scenarios we run -- this is in a global sense. This goes beyond America. Fossil fuels -- in particular coal -- will still have a role to play in providing the world's energy source it needs. If you've got good assets in those commodities, then we still see a market. We watch this very carefully, and we do run scenarios. So, we think we actually have this factored in.
Monica Trauzzi: You think that here in the U.S. we'll still continue to see coal playing a dominant role?
Dean Dalla Valle: We think it will still play a dominant role. There's no doubt that we'll be switching costs between coal and gas. That will play out, and there will be some short-term volatility. Obviously, we're in the process of moving out of our coal assets in this country. We'll have significant gas assets.
Monica Trauzzi: How does BHP plan to diversify its resource portfolio as a result of the slowdown? You're moving all to gas, or are there other sectors that you're looking at?
Dean Dalla Valle: We're quite unique. The energy mix we offer is basically coal, gas, oil and uranium. We think we basically have any direction the world ends up taking. Obviously, we'd like to think that the world will -- after Paris -- start to make a map towards a 2-degree world. We think our portfolio is robust and resilient in any of those scenarios.
Monica Trauzzi: So, your portfolio will not include any type of renewables.
Dean Dalla Valle: We are involved in renewables indirectly via copper. If you're going to have copper, you're going to need grids. You're going to need equipment. You're going to need more infrastructure, and along with steel. We really see that we have the commodities to suit each of the developmental phases of any part of the world.
Monica Trauzzi: I want to talk about BHP's China operations. The Chinese market is dynamic, and you recently experienced a slowdown there. Explain the dynamics that led to that slowdown, and how that ultimately dictates what your decisions are about China.
Dean Dalla Valle: China is a very important source for our products. They're our largest customer, so we take great interest in what they do. We pay very close attention, and we study this closely. What we've seen there is a transition. This is something we've seen for a while. They're basically going from an investment-led economy to a consumer-driven economy. This is normal. We've taken a longer-term view. You can look at a quarter. You can look at a year. Over the longer term, we still see that our managers transition successfully. Now, you have a look at the claim this year that says they'll achieve 7 percent GDP growth, which we think is generally directionally right. If you look at the consensus, it would be supported by that. People missed the point when they say 7 percent is small. This is 7 percent of the world's second-largest economy that has doubled in 10 years. So, it's significant. Obviously, the 7 percent will drift something towards 5 in 10 years' time, but it's still off a larger base. When you look at the fundamentals, the actions the government is taking is not just running out and making investments. It's actually changing fiscal policy. They've had interest rate cuts, reservation changes, the way they're managing -- the fact that you look at the economy is more driven by services than industrial output -- it certainly seems to be trending the right way.
Monica Trauzzi: All right. We'll end it right there. Thank you for your time.
Dean Dalla Valle: Thanks, Monica.
Monica Trauzzi: Thanks for watching. We'll see you back here tomorrow.
Dean Dalla Valle: Thank you.