Is BHP a national champion? That’s the question unasked this morning by the AFR in its coverage of the big Australian’s plan to ship LNG to Asia from the US:
BHP Billiton is considering shipping a portion of its US shale gas reserves to Asia, a strategy that would reshape the global gas industry and compete with exports from Australia’s huge liquefied natural gas projects in Western Australia, the Northern Territory and Queensland.
…A collapse in US gas prices after BHP’s acquisition of 30 trillion-plus cubic feet of gas resources, plus oil resources, for $US20 billion last year led it to reassess its shale gas strategy, which was aimed at US customers.
“It’s not just us that want to do this,” said Mike Yeager, the chief executive of BHP’s petroleum division. “The Asian companies are calling us every day, wanting us to help them do it. Really, the pull is that strong.”
Mr Yeager expressed concern about the cost of developing Australian gas fields. The budgets of new LNG projects in Australia and Papua New Guinea have blown out by $16 billion since May last year.
ExxonMobil, Oil Search and Santos yesterday raised their estimated cost of PNG LNG by $US3.3 billion to $US19 billion and cited the higher than expected Australian dollar, delays in accessing land, bad weather and logistical difficulties.
I’ve been following the operations of BHP for a decade or so. It began when I was the business editor at The Diplomat and was really forced upon me as it became clear in the early years of the mining boom that there was a very large national interest implication to BHP’s business. By 2007, that became obvious to all when BHP’s campaign to break the annual benchmark pricing system for iron ore radically shifted the profile of Australian export revenues. Then it sought to take over Rio Tinto, which radically altered the perception of Australia as a market-friendly regime.
The fallout during after the GFC, which included Australia’s defacto protection of Rio Tinto from the counter-bid made by Chinese interests, contributed to China seeking to create very large alternative sources of iron ore in Africa, in a final irony, with Rio Tinto.
The lesson in all of this was that neither BHP nor Rio Tinto are actually national champions at all. Rather, they are strategic rivals to the nation in the business of extracting value from minerals. A point reinforced again in 2010 when both firms sat in the people’s Cabinet Room writing their own tax regime, following a wildly successful campaign to destabilise the government (for which the government itself was also very much to blame).
So, anyone who is surprised by BHP’s revelation today that it is considering a course that undermines the last remaining pillar of the mining boom needs his head read. If BHP joins its Asian customers in successfully creating an LNG export business in the US, then the likely outcome will be an end to oil price bench-marking system that currently values LNG well north of $10 per gigajoule. The assumed price of many of the $190 billion of local projects will fall well below contract projections. There will be no more development beyond the current suite of projects and many of those will be curtailed.
It’s all good business, of course! Any project that has not factored a falling LNG price over time into its modeling deserves everything it gets. They are the mal-investors of the boom and should be expunged.
But let’s not get this confused with Australia’s national interests. This is not the “big Australian” at work. It’s a globe-trotting multinational miner adjusting its strategy to ensure the fattest margins possible. Don’t ask me, ask BHP:
…“What’s going through our mind in WA is the cost and the economics of what is going on,” Mr Yeager said. “We really just want to make sure the investments in WA are competitive.”
And there you have it, from the horse’s mouth as it were. Squeeze countries so that their cost bases are the lowest possible.
Good, hard-nosed business. National champion, nope.
