Kloppers' caution on BHP balance

Marius Kloppers' most turbulent day, Wednesday February 20, was almost over. The BHP Billiton chief's retirement and lower profit announcements were behind him. It was a time to join his successor Andrew Mackenzie to ‘relax' and yarn with your correspondent about the past and the future, albeit briefly. And as we yarned I became aware of a surprising challenge Kloppers was handing to Mackenzie.

I asked Marius to recall what were the best and worst decision-making moments during his reign at BHP. He had no hesitation in saying that the best and worst moment was the same – the decision to withdraw the BHP Billiton bid for Rio Tinto. It was bad because so much effort had been put into the bid but it was the right decision for shareholders, given the new economic circumstances at the time.

In terms of his other best decisions Kloppers isolates the changes in the iron ore pricing. Historically iron ore pricing had been a difficult area where both the miners and the customers were almost constantly at war because prices were fixed in contracts which expired at different times. Now, thanks to Kloppers, iron ore is priced to market and relations are much better. (On the way up iron ore price rises also boosted BHP's profit, but they were also a contributor to the latest fall.)

In terms of the worst decisions, Kloppers is regretful he did not spot the alumina deterioration earlier than he did. Perhaps, had he had more foresight, the board could have taken action six months to a year earlier.

Then I asked Marius to look forward five to ten years and predict what might happen to what I believe is his biggest achievement – the acquisition of US shale, gas and oil (Can Mackenzie lift Kloppers to glory? February 20 and Kloppers' accidental recipe for riches, January 10).

Kloppers' response surprised me. There was no hesitation – the BHP ‘mission' was to establish a diversified company. Naturally, the development of BHP shale oil and gas would be a decision for Mackenzie, but Kloppers was in effect underlining that conceivably the US shale opportunity could be so large that it threatened the balance of BHP's diversification. I drew the conclusion that as things currently stand there is some natural upper limit to the size of any particular piece of the business.

Kloppers said: "I would have little doubt that US shale, gas and oil assets will be the largest and most profitable of the petroleum assets in the future… but it was part of a balanced portfolio”.

Kloppers believes that the US shale gas and oil industry will be a significant contributor to the world energy supply in the next five or ten years. How profitable it becomes will govern the investment options BHP will have.

However, Kloppers believes there was no doubt that shale gas is going to be a disruptive influence on the fossil fuels market, particularly the power and energy coal markets. Kloppers says what is not known is how many other countries will follow the US and develop their shale.

It is likely that because the United States industry will have an energy cost advantage over its rivals, the US will expand rapidly, particularly in fertiliser and chemicals. That expansion will also extend to many other industries.

But the five- to ten-year overall global energy source trends could take many different directions and the most attractive part of BHP was that it has substantial stakes in all major energy sources except renewables. And of course that includes uranium via Olympic Dam.

Marius Kloppers said that much of his work was developing and maximising the returns from assets that previous CEOs had already put there. And I guess that will be the same for his successor Andrew Mackenzie.

I put it to Mackenzie that rather than constrain the growth of US shale by the need for a balanced BHP portfolio, why not float it off and allow BHP shale to be a major player in this enormous growth sector? Understandingly, that's an impossible question for an incoming chief executive on his first day but it's not on his agenda.