Booming oil prices pose an ESG dilemma as BHP goes green
BHP’s involvement in the petroleum business has long been controversial, both for investors and its board and management.
BHP’s involvement in the petroleum business has long been controversial, both for investors and its board and management.
But oil and gas has been a key part of its business for more than 50 years, and the company remains the only mining giant to have successfully straddled the minerals and petroleum divide.
Despite talk about stranded petroleum assets as climate concerns ratchet up, the market is now expecting several years of strong growth – or even the best part of this decade – with global oil demand roaring back to life above pre-Covid levels.
BHP boss Mike Henry is now weighing the tensions between an investor push for resources companies to decarbonise their portfolios and his own belief that incrementally rising demand will hold up the oil price and deliver strong returns for low-cost producers.
The traditional arguments for retaining its petroleum division – that it was a useful counterweight to the cyclical nature of earnings in the rest of its business – is no longer as strong as it once was, however.
For decades that argument held weight as a rising oil price acted as a restraint on growth in industrialised economies, and the economic costs of high oil prices reduced demand for minerals and commodity prices.
But the rise of China as the world’s biggest buyer of raw materials in the 2000s has disrupted that equation. While high fuel costs might hurt China’s manufacturers, they no longer seem to restrain growth.
Now, more than 60 years after BHP first decided to explore for gas in the Bass Strait, its petroleum division sits at the crossroads.
Its involvement in the oil and gas industry is now overshadowed by the spectacular failure of its $US20bn ($27bn) excursion into the US shale industry during the boom years, which brought chief executive Marius Kloppers undone and led to a shift in strategy under Andrew Mackenzie.
But over decades it has delivered striking successes. Its decision to peg oil and gas acreage in the 1960s raised eyebrows, but its joint venture with Standard Oil’s Australian subsidiary, Esso Standard, hit the jackpot in the Bass Strait and yielded a massively profitable operation that is only now nearing the end of its life.
Bass Strait, in turn, lent BHP the confidence and expertise to muscle in on the emerging gas fields off the North West Shelf in the late 1970s, giving it a key role in a second nation-building resources project.
That presence led to its first tilt at Woodside in 1985, when BHP and Shell tried their luck in a joint bid but failed to seal the deal despite emerging with a collective 80 per cent stake.
But BHP’s acquisition of Energy Reserves Group and Monsanto the same year created a company with oil interests in the US and Australia.
And in 1987, as stockmarkets crashed around the globe, BHP launched a raid on deep sea operator Hamilton Oil which arguably laid the foundations for its current petroleum arm.
Hamilton’s interest in Europe’s North Sea delivered deep sea experience and boosted BHP’s reputation as a low-cost, fast-track offshore developer.
Those assets have now been sold, but they helped deliver the expertise that allowed BHP to develop its Gulf of Mexico assets, now the centrepiece of its petroleum division.
That expertise, and the hi- tech nature of the petroleum industry, has also been a strong argument in favour of BHP retaining its interest in the sector.
Only a few months ago chief technology officer Laura Tyler was talking up the benefits from combining BHP’s oil and minerals exploration expertise, translating its expertise in petroleum basin analysis to hard rock discovery.
Now, speculation is again rife that BHP is considering a spin-out of its petroleum division, or a trade sale of the assets, or even another tilt at buying Woodside Petroleum.
But the argument for sale is not compelling either.
Bernstein analyst Bob Brackett summed up the dilemma, pointing out the benefits of a sale to BHP were minimal, and noting that an exit could deprive BHP of the benefits of a promised petroleum cycle upswing, and cost the company growth options – which are in short supply elsewhere.
“The benefits of exiting could combine cash (which they don’t currently need), strategic focus (which hasn’t formerly been an issue), improved ESG (but not fully decarbonised), avoiding project risk (Scarborough and Trion) and reduction of stranded asset risk around GHG emissions (but of course the remaining portfolio is still exposed via iron ore and met coal for example),” Brackett said.
BHP’s petroleum unit should deliver earnings of $US2.9bn in 2022, Bernstein estimates, about 7 per cent of total earnings.
Mining veteran Hugh Morgan – the former WMC boss before it was taken over by BHP in 2005 – said a big issue for the resources giant was how it would use any cash if it sold its petroleum arm.
Some of a potential $US10bn-$US15bn petroleum windfall could be returned to shareholders but that’s a difficult decision.
“If the price is right you’d have to say you’d sell it but big companies like BHP have always got a problem – what’s going to move the dial?” Morgan said.
“You sit yourself down and ask yourself as a board member what would you do with, say, $US15bn. Shareholders might say we’d like it back, but it’s easy selling things. I could sell everything. You need to ask: have I got something better to do with the money?”
BHP is getting near a decision on its $US5.7bn Jansen potash project in Canada but has no need for funds for its huge iron ore operations, and has shown limited appetite for big ticket M&A in the last few years.
It has been growing its portfolio in the Gulf of Mexico where it enjoys much higher returns than several of its Australian gas plays, which face more challenging conditions, lower payback and potentially massive decommissioning costs.
Keeping the petroleum arm for a few more years yet may pay a healthy dividend, Morgan says.
