As head for the last nine months of BHP Billiton (NYSE:BHP) , the world's largest mining company, Marius Kloppers has spent much of his tenure defending his group's presence in the oil and gas industry.
BHP is embroiled in a lengthy and hostile $167bn takeover bid for rival Rio Tinto, and there have been suggestions that the group should sell its petroleum division to help fund the proposed acquisition. Some analysts feel that an oil and gas business has no place inside a diversified mining group, while other commentators - including Tom Albanese, Rio Tinto's chief executive - have said BHP's petroleum division is too small to have critical mass.
But as the oil price has continued to climb this year the petroleum division has become BHP's highest-margin business, and Mr Kloppers feels he can justify his heavy investment in oil and gas projects. "Historically, oil prices and metals prices are inversely correlated. That portfolio diversification is one thing that we believe really makes sense for us." In the past five years, however, oil and metals prices have risen together, which has also worked in BHP's favour. "We are a large consumer of energy, so our petroleum division is an internal hedge."
BHP has been involved in the Australian oil and gas business since the 1960s, when it played a part in developing the Kingfish and Halibut gas fields in the Gippsland Basin off the coast of Victoria. In the 1980s it expanded into the North Sea with the acquisition of Hamilton Oil of the US, but Mr Kloppers says the big break for the business came when BHP moved into the deep waters of the Gulf of Mexico, 10 years ago.
The Gulf of Mexico is where most of BHP's extra oil is due to come from in the next two years, with several new fields coming into production, including Neptune and Shenzi.
Mr Kloppers says the Gulf of Mexico is typical of the high-tech, high-margin environment in which BHP's petroleum division likes to operate. "We are in the business of oil and gas discovery and hard-to-get barrels. We specialise in real geoscience, such as oil under salt. It's in these areas we would like to build."
Mr Kloppers worked for Billiton of South Africa before it merged with Australia's BHP in 2001 and has spent more of his career in metals than in energy. "The first time I had to look at energy in depth was when we were buying WMC Resources three years ago. I had to look at the world's energy mix and energy consumption as part of the acquisition hinged on the outlook for uranium, the future of nuclear energy and of carbon emissions. So by the time I became chief executive, I was reasonably au fait with petroleum."
The diversified nature of BHP's businesses allows Mr Kloppers to take a broad view of the world's energy needs, and he sees different prices becoming increasingly correlated. "The whole energy complex is increasingly linked; gas, oil, power-generating capacity and carbon permits," he says. "Power companies make choices whether to run more gas or coal, depending on commodity price movements. That means it is very difficult to see a situation of high oil prices and low coal prices, it is all arbitraged out.
"People do not reflect enough on the interconnectivity of the whole energy complex," he says.
Mr Kloppers believes that nuclear power is on the rise, and that BHP can supply the new generation of reactors with fuel from its huge Olympic Dam mine in southern Australia. "The world has forgotten how to build nuclear reactors as it hasn't built any in the last 20 years."
Mr Kloppers says that China will be at the forefront of the nuclear revival, bringing down the cost of reactor construction in the same way it did with the cost of building steel mills.
"China, in all of its businesses, uses its massive domestic scale to move up the learning curve. I believe the same thing will happen with nuclear. China will licence a standard reactor and deal with CO2 emissions by building many, many copies. Eventually, they will be able to do it 40 per cent cheaper than anyone else."
Uranium prices peaked at more than $130 a pound last year and have fallen to about $57 a pound after reactor shutdowns in Japan, Germany and the UK led to a drop in demand for nuclear fuel. But uranium prices remain well above the level seen for most of the past three decades, buoyed by an expectation of growth in nuclear power.
"Bill Gates said about the internet that in the short term, everyone overestimates change and in the long run people underestimate change. The same holds for uranium," says Mr Kloppers, noting that the uranium price ran ahead of itself last year.
"But the nuclear new-build project hasn't started. The world doesn't even know how to cost nuclear at the moment. In the long run, nuclear will be a big part of the greenhouse solution, but it will take time."
