Kloppers' accidental recipe for riches

As luck would have it, failure of some plum opportunities for BHP Billiton paved the way to Marius Kloppers' shale coup. Now the miner has the chance for an even bigger slice of the action.

In many ways BHP Billiton chief executive Marius Kloppers is blessed with good fortune. The Marius Kloppers story could so easily have been different. BHP now has a substantial stake in what is the most exciting global mineral development of the next decade or two – the US oil and gas shale reserves. 

These resources should to be extremely profitable for BHP Billiton and will drive the company’s value well into the future. As I have said previously, the acquisition has the potential to equate with the Mount Newman iron ore acquisition by Ian McLennan in the 1960s and James McNeill’s acquisition of Utah Coal and Escondida Copper in the 1980s. (Kloppers' slippery BHP gold mine, December 4).

Yet it could easily have been different. Marius Kloppers got the job as BHP chief executive over then BHP finance director Chris Lynch because the board believed he was the best person to drive a merger with Rio Tinto. 

Had BHP acquired the Rio Tinto iron ore business most of its efforts in the coming years would have been concentrated on integrating that operation. It’s highly unlikely that it would have made a $20 billion US shale acquisition. BHP could easily have ended up with Rio Tinto’s aluminium assets which, although they are first-class properties, are suffering because of the glut of aluminium created by China. Again that acquisition would have kept BHP away from shale.

Then Kloppers went for Potash Corp in an attempt to acquire a major global player in potash rather than start up a greenfields operation. That move was blocked by the Canadians so BHP is now embarking on its own greenfields potash operation – but it is a much more limited exercise and the group might well bring in a partner. 

Back in Australia two vast projects could have been accelerated, which might have prevented the US plunge. First was the outer harbour at Port Hedland and second was Olympic Dam. So although BHP has had a very active capital expenditure operation it had room for one major project and that turned out to be the shale acquisition.

Kloppers was also lucky because when he bid for the two shale properties the price of gas was falling and it was possible to get them at a reasonable price. Indeed the gas price fell very sharply and forced a small writedown, but the only way you can obtain really prized assets is when the market is falling and people are prepared to sell. 

That’s how McLennan got Mt Newman and McNeill got Utah. Of course Australia’s short-term institutions saw the acquisition as a horrible failure for Kloppers and demanded his head. But Australian institutions have no knowledge of history – or of anything that might happen in 12 months. Already, BHP could sell its acquisition for a 50 per cent profit, but it will do much better down the track.

The low cost US gas will be used for US domestic purposes and creating vast new American enterprises. Some will be exported as LNG so gradually the export price and the US domestic price will come together, increasing the value of shale gas deposits. Most commentators correctly point out that the amount of US gas that will be converted to LNG to compete with Australian LNG exports is relatively small. But the US is going to replace vast amounts of energy from the Middle East and create energy surpluses. 

BHP understands the implications of the US gas/oil discovery on future Australian LNG projects, given our high costs. That’s one reason why it sold out of the Browse project. BHP is currently using a lot of its cash to lower its gearing and is clearly thinking about a major acquisition in 2013 or 2014. 

If an opportunity arises it would make a lot of sense to use the advantages of the first low-priced acquisition to get an even bigger stake in where the action is going to be in the next decade or so – US shale.