News that BHP was exiting carbon, becoming ‘greener’, and taking a $US1.3 billion hit on the value of its work so far on its next big thing – the Jansen potash project in Canada – was overshadowed by the 2020-21 result, huge dividends and the Woodside Petroleum deal.
That deal is company-changing for Woodside, which will become a top-10 oil and gas company globally after the $US17 billion purchase of BHP’s oil and gas business.
The deal will allow Woodside to regain boasting rights as the biggest oil and gas company in Australia after Santos and Oil Search topped it with their $21 billion merger proposal.
The deal will see BHP’s shareholders and not the company holding a stake in the expanded group, which will have responsibility for fighting against the growing push on climate change and cutting carbon emissions as quickly as possible.
At the same time, as part of BHP’s push to move deeper into renewables (on top of its expanding nickel and copper operations), the miner will start the huge Jansen potash project in Canada at an initial cost of $A7.5 billion ($US5.7 billion).
Following months of speculation, the companies announced an all-share merger of BHP’s entire petroleum division (with assets in Australia, the Americas and North Africa to Woodside.
The combined Woodside-BHP Petroleum entity would be owned 52% by Woodside shareholders and 48% by BHP shareholders and would have annual production close to 200 million barrels of oil, gas and liquids a year.
The companies expect annual savings more than $US400 million a year once Woodside takes control.
Petroleum has been a major part of BHP since 1966, when the company found Australia’s first major offshore oil and gas field in the Bass Strait, between Victoria and Tasmania.
That was in partnership with Esso (now Exxon Mobil) which tried last year to sell its 50% stake in the areas to no avail.
BHP’s decision this month to approve $1 billion in development spending on two oil projects in the US Gulf of Mexico – just days before a new report that issued dire warnings about human contribution to climate change – has only ratcheted up pressure from some investors to sell.
But it did end the company’s development project list in the division, leaving the responsibility for them with Woodside.
Woodside also announced on Tuesday (among the many statements on the BHP deal), that it had confirmed acting CEO, Meg O’Neil as the company’s 6th CEO.
That’s a reward for leading the company into the reshaping of its future via the BHP deal.
Ms O’Neill succeeds Peter Coleman who retired from Woodside in June 2021. The appointment is effective immediately.
Woodside Chairman Richard Goyder said that Ms O’Neill’s appointment was the outcome of an extensive international recruitment process that included an exceptional field of internal and external candidates.
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In approving the Jansen project, BHP CEO, Mike Henry made it clear the company was looking to be involved in this industry for decades to come, despite taking an early loss in an asset write down.
First production is a long way off: 2027, according to yesterday’s announcement.
He said in the statement announcing the go-ahead that Jansen is aligned with BHP’s strategy of growing our exposure to future facing commodities in world class assets, which are large, low cost and expandable.
“This is an important milestone for BHP and an investment in a new commodity that we believe will create value for shareholders for generations,” Mr Henry said. Jansen is located in the world’s best potash basin and is expected to operate up to 100 years.
“Potash provides BHP with increased leverage to key global mega-trends, including rising population, changing diets, decarbonisation and improving environmental stewardship.
“In addition to its merits as a stand-alone project, Jansen also brings with it a series of high returning growth options in an attractive investment jurisdiction.
“In developing the Jansen project, BHP has had ongoing positive engagement and collaboration with First Nations and local communities, and with the provincial and federal governments. Jansen is designed with a focus on sustainability, including being designed for low GHG emissions and low water consumption.” Mr Henry added.
Jansen is expected to produce approximately 4.35 million tonnes of potash a year and has the potential for further expansions (subject to studies and approvals). At current spot prices around $US202 a tonne, that’s a possible annual revenue of $US1 billion. the market is currently oversupplied but BHP expects that disappear over the next five years or so.
Construction expected to take approximately six years, followed by a ramp up period of two years.
Jansen’s first stage includes the design, engineering and construction of an underground potash mine and surface infrastructure including a processing facility, a product storage building, and a continuous automated rail loading system.
This will be BHP’s biggest investment outside hard rock minerals and oil and gas.
The first stage of Jansen had something of a rocky start yesterday. Buried deep in the announcement was the revelation that BHP had spent $US4.7 billion on early feasibility and other work on Jansen, but had written down that value by $US1.3 billion after an impairment test.
“As part of our 2021 financial results, we have assessed the carrying value of the existing Potash asset base as at 30 June 2021 and have recognised a pre-tax impairment charge of US$1.3 billion (US$2.1 billion after tax).
“The impairment charge against our Potash assets reflects an analysis of recent market perspectives and the value that we would now expect a market participant to attribute to our investments to date.”
That’s called “right-sizing” the cost base, and it was a bit cute of BHP to bury the write down on a day when the Woodside deal grabbed headlines as well as the huge profit and dividend.
