BHP's India loses its spice

BHP Billiton's decision to step back from its costly projects in India reflects the realities of dealing with restrictive investment rules and complex government requirements.

India’s attractiveness as a destination for foreign investment capital has received a fresh blow from the world’s biggest miner. BHP Billiton has decided to walk away from nearly all its oil and gas exploration projects in the country, frustrated by lengthy delays in receiving permits and clearances.

Both Norway’s Statoil and Brazil’s Petrobas made similar decisions in recent years, deciding against pursuing oil and gas exploration blocks because of concerns about getting the necessary approvals. South Korea’s POSCO backed out of a $5 billion steel mill project this year, also citing bureaucratic delays, and rival steelmaker ArcelorMittal dropped plans for a second mill because of problems obtaining mining licences for raw materials.

BHP Billiton pulled out of nine deep-sea projects, relinquishing 100 per cent interests in three exploration blocks and a 26 per cent share of another six blocks in a joint venture, which had all been acquired between 2008 and 2010.

BHP Billiton said the decision was the result of the “inability to carry out exploration operations in these blocks”, according to a company statement emailed to Business Spectator. All that remains of BHP Billiton’s interest in India will be one 50 per cent stake in a deep-water block operated BG Group, where it says it is awaiting results of a seismic survey.

When capital is scarce, companies need to target projects where they can be assured of achieving results. For BHP Billiton, that means focusing on its onshore US petroleum assets, with particular volume growth in the Black Hawk region recorded in the latest quarter.

The timing could not be worse for India, the world’s fourth largest importer of fuel, ahead of the planned auction in January of a fresh round of energy blocks which is being pitched at attracting foreign firms.

The government is trying to reduce reliance on imports, which account for nearly three-quarters of the country’s energy usage, by boosting domestic production. Foreign capital is seen as vital to upgrading the country’s ancient infrastructure, including energy and roads.

For global players, the lure of the markets in India and China is being tempered by the reality of dealing with restrictive investment rules and complex government requirements. Beyond resources, other firms including retailers are having second thoughts.

Both Wal-Mart and Australia’s Woolworths recently pulled out of joint ventures in the country; Woolworths’ decision pre-dated its withdrawal last week from the race of a major Hong Kong supermarket chain (Woolworths’ ill-starred foreign flirtation, October 21).

BHP’s robust quarterly production report pleasantly surprised markets with a 23 per cent surge in iron ore production, pushing the shares up 2 per cent. That beat expectations even after analysts had lifted forecasts based on reduced bottlenecks and increased shipments at Port Hedland. Total petroleum production edged up two per cent to a record 62.7 million barrel of oil equivalent, as oil and gas becomes a growing proportion of the company’s business.

The production report reflects new chief executive Andrew Mackenzie’s shift in focus this year to imposing discipline to extract the best returns from existing assets instead of pursuing costly projects and acquisitions, as did Marius Kloppers.

Kloppers’ splashy bid for shale gas assets in the United States led to $2.8 billion in writedowns and followed unsuccessful tilts for Canada’s Potash Corp, the grab for Rio Tinto and a bid for Rio’s iron ore business. The decision to step back from India marks the latest example of his successor’s tighter focus on costs and results.

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