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SYDNEY—BHP Billiton Ltd. outlined a plan to expand its valuable oil-and-natural-gas business, advancing new projects it says it can develop at a fraction of the cost than previously expected to take advantage of a projected recovery in global energy prices.

Petroleum operations President Steve Pastor on Wednesday said BHP plans to be "patient and prudent" in growing the business, but forecast oil investments to account for a greater share of its cash flow. He added that the unit, weighed down in recent times by struggling U.S. shale fields, is likely to be the mining company's highest-margin division for years to come, outpacing commodities such as iron ore.

For the world's No. 1 mining company, it is a sign of its commitment to the oil-and-gas business that has set it apart from most of its peers but failed to cushion BHP from a now-multiyear downturn in metals markets. In August, BHP recorded its worst annual loss to date, with weak oil and natural-gas markets one of the biggest weights on its bottom line. BHP's petroleum business incurred a loss of US$7.72 billion after write-downs linked to U.S. shale assets BHP acquired in 2011.

U.S. mining company Freeport-McMoRan Inc. also branched out into oil in recent years, but is now working to unload its energy business to reduce its debt and refocus on producing copper.

BHP, which has run petroleum assets since the 1960s, has "sharpened and strengthened" its oil-and-gas strategy over the past two years, switching focus to "value over volume," Mr. Pastor told reporters on Wednesday before an investor briefing.

That was "out of necessity, to be quite honest," said Mr. Pastor, adding: "With oversupply, it has really compelled us to work much more diligently."

A huge drop in drilling costs that has accompanied the oil-price slump, coupled with internal measures to improve productivity generally, are making major initiatives such as the roughly US$10 billion Mad Dog 2 deep-water project in the Gulf of Mexico more appealing. "With significant improvements in capital efficiency, major capital projects like Mad Dog 2 are now economically attractive, even below US$50 per barrel of oil," Mr. Pastor said.Mr. Pastor said an investment decision on Mad Dog 2 is expected within the next six months. BHP has a 24% stake in the site, which is 61% controlled by BP PLC. Chevron Corp. owns the rest.

In the Eagle Ford Shale in south Texas, where BHP says it now has a backlog of undrilled wells to tap, drilling costs have been cut to less than US$1.5 million per well from about US$5.5 million three years ago. Also in Texas, in the Permian Basin, BHP said it now has access to more than one billion barrels of oil equivalent, that could turn the field into the largest producer of barrels and cash in the petroleum unit within five years.

Additionally, BHP isn't ruling out acquisitions, Mr. Pastor said, adding: "It has to be at the right price and it has to play to our strengths."

When Andrew Mackenzie became chief executive of BHP in 2013, he designated oil and gas as one of four "pillars" of its business, alongside iron ore, copper and coal.

Last year, the mining company carved out a suite of other commodity businesses it no longer wanted, including manganese mines and aluminum smelters.

The company previously said it planned to gear future investments toward petroleum and copper instead of iron ore and coal, where it spent heavily expanding its operations in recent years.

For BHP, it is effectively a bet on rising demand for products as diverse as refrigerators and cars in China and India.

On Wednesday, the company forecast oil demand will rise about 1% a year over the next couple of decades.

Vast new supplies—equal to about one-third of current demand—will be needed to fill the gap, as some existing fields dry up, it said.

Earlier this year, oil prices slipped below US$30 a barrel for the first time in more than a decade because of a global glut.Prices, down from more than US$100 as recently as 2014, have since sprung back to about US$50 a barrel and supply-and-demand dynamics seem to suggest oil and gas markets will improve more quickly than the other commodities BHP produces, Mr. Pastor said.

BHP isn't alone in looking at growth.

Over the summer, Chevron Corp., Exxon Mobil Corp. and several partners committed US$37 billion to expand an oil project in Kazakhstan known as Tengiz. BP PLC is fast-tracking a major offshore gas discovery in Egypt.

Historically, petroleum has been BHP's highest-margin business, with an earnings margin of 64% over the past 15 years versus 42% for the group, according to Macquarie Group. However, over the past five years, since BHP acquired its shale assets, that margin has been in steady decline and in the year through June, iron ore overtook petroleum as the unit with the best margins, it said.

Mr. Pastor said petroleum would likely "maintain its position as BHP Billiton's highest-margin business" over the longer run, though, as it expands its most profitable assets.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

(END) Dow Jones Newswires

October 05, 2016 13:05 ET (17:05 GMT)

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