BHP's True Believer

INTERVIEW TRANSCRIPT: Paul Anderson by Michael Pascoe

Paul Anderson (PA): The main reason I feel that we need a carbon tax is that we need to put some economic incentives in to start us on a glide path to go to a less carbon intensive world and I think a carbon tax is a sort of a “no regrets” way of approaching it. It allows companies and individuals to adjust to the economic signals that it sends. It’s not prescriptive. It’s not telling people you can’t do this, or you have to do that. It’s simply saying if you emit carbon you’re going to pay a higher tax than somebody who doesn’t emit carbon so it allows industry to adjust to a lower carbon intensity in a manner that makes economic sense to them. And at the end of the day, if indeed there’s not a problem with global warming which some of the experts out there seem to feel, the worst thing that’s happened is you’ve changed the basis for your tax and you’ve actually seen conservation.

Michael Pascoe (MP): Politically how does that idea get out in the States?

PA: Oh to date it hasn’t gone down very well because I believe there’s a natural cynicism that says if you put a carbon tax in place you’re not going to reduce tax in other places. Obviously if you have a consumption tax like a carbon tax you need to back off of income taxes or some other taxes that you have.

MP: That’s just the politics of taxation. What about global warming more generally. How does that go down in the US given that United States is one of the few hold outs against Kyoto.

PA: Well there’s a groundswell of concern about global warming almost every place except at the Federal level at this point in time and I think what’s happening is that the Federal Government has had other priorities with the war in Iraq and things like that so they’ve sort of, they just haven’t focussed on the issue. In the meantime you’ve got the rest of the world very intensely focussing on the issue and it’s starting to swell up within the American population and so you’re seeing just at the local level and the State level a growing concern about global warming. We have six states in the United States now that have passed their own laws regarding carbon emissions and so what we’re seeing is a patchwork approach to the problem as opposed to a Federal approach and that’s probably the biggest issue we have as the worst thing would be to have each State come up with their own approach as to how do you handle global warming and not have a Federal policy.

MP: That’s not a very good outcome but is it the likely outcome?

PA: I don’t think so. I think ultimately that at some point the Federal Government will really focus on this fact. The debate is starting to start up at the Federal level and I think what we’re going to see is eventually that the Federal Government is going to realise that we don’t want each State to come up with an individual policy. We do need a Federal policy and sometime within the next 3 or 4 years I would expect that we will see some sort of Federal umbrella over this.

MP: So it’s probably an issue for the next Presidential election, the next Administration?

PA: I would imagine it will be a central part of the debate in the next presidential election. I think it will be one of those pivotal issues that people debate.

MP: What are the implications of that for financial markets, commodity markets, power companies?

PA: Well of course part of it is how does it play out. And the way it plays out will be absolutely critical. I mean for instance the worst thing that can happen from our standpoint is that a policy be formulated that focuses on station sources, power companies in particular, and ignores the rests of the economy, that’s why I’ve been very vocal about a carbon tax because it’s an economy wide approach as opposed to focussing on individual industries, so the worst thing that could happen to the power industry would be to say each power company has to reduce carbon emissions by 20% or some prescriptive approach like that. That would probably be viewed very negatively by the financial markets. On the other hand if you come up with something that’s economy wide that addresses transportation fuels, fuel economy is a very important component of this, a carbon tax will address that, that addresses things like heating efficiency in homes even and again a carbon tax will address that. A widespread approach would be viewed very positively I believe.

MP: Just on the mechanics of it, a carbon tax will be collected at the fuel source, at the production of the fuel source?

PA: Yes. On the mechanics it would be at the fuel source so that you don’t really worry about where it goes and that’s one of the nice things about it. You don’t get into the political trap of hospitals don’t have to pay a carbon tax but bars do and grocery stores don’t and all that sort of thing. So you simply collect it at the source of production and then there’s not a political debate as to who’s actually paying for it.

MP: Back to the impact on financial markets, do alternative sources of energy suddenly become economical under that sort of scenario.

PA: Sort of in the pecking order, the highest carbon tax would be coal. Then you’d have oil then you’d have natural gas and then you go to things like hydro power and nuclear power, wind, solar, things like that and it’s really a matter of the relative economics of those as to where you’re going to put your investment dollars.

MP: Well running Duke Energy, what does it mean for you?

PA: Well for us we’d probably have a much stronger emphasis on nuclear now than we would have had say 5 years ago. We’re actively looking at new sites right now for nuclear plants. We’re actively developing technology and putting together a licence application. So you know I think that from Duke’s standpoint we will be very biased towards a nuclear plant.

MP: The other alternatives, they’re too hard? They’re not economic?

PA: The other alternatives, first all they’re not developed fully. Wind is sort of on the cusp right now. Solar is certainly much more expensive but most of the other alternatives aren’t large enough. You put a nuclear plant in place you can put 1000 megawats in place in one fell swoop. It takes an awful lot of windmills to come up with 1000 megawats of power. You have to cover half the state of Texas with windmills to make up for one nuclear plant.

MP: The nuclear investment then how does that pan out economically compared with a coal fired plant?

PA: Well of course the relative economics of nuclear versus other fuels have to do with whether you look at all-in cost or the incremental cost. The incremental cost of nuclear running the plant is almost nil because you use so little fuel the fuel cost is almost incidental to the whole thing. It’s the capital cost up front. So once you’re put a nuclear plant in place it’s certainly much more economic than anything else to run that plant. If you look at the all-in cost, right now it’s just about a break even with a new technology coal fired plant and by that I mean one that has the scrubbers and everything on it to have pretty clean coal technology.

MP: Does having a discussion in the West about global warning make any sense while China’s still out there building the equivalent of the Australian power system every year?

PA: Well I think it absolutely does. You have to take into account the fact that in the Western world our per capita use of fuels is so much higher than China or India and it’s not reasonable to say that we’re going to cap the economies of places like China and India at a power usage or fuel usage that’s one fifth of what it is in the United States or one fifth of what it is in Australia. I don’t think that we’re going to really get away that kind of thinking and so you really have to allow some growth in those countries at the same time that we’re trying to constrain growth of carbon in our countries.

MP: Getting back to nuclear, you say you don’t need much fuel once you’ve got the plan up and going, uranium supplies though, is that something you look at strategically? How much is there, how much has to be found, how expensive is it?

PA: We look at that and our assessment is that there’s plenty of uranium in the world. Of course Australia’s a great source of uranium. Canada’s another great source of uranium. The constraint is more likely to be the processing facilities to manufacture nuclear fuel. You have to go a long ways from uranium to actually pellets that go into the reactors.

MP: We’re looking at the sort of problem you’ve got with ordinary fuel in the Gulf states. A shortage of refineries?

PA: Well though we have time. I mean it’s not a resource constraint. I mean given time, you can build more processing facilities so that isn’t the same sort of constraint you have as say oil and gas reserves where all the time in the world isn’t going to help, if you can’t find the reserves, you can’t find the reserves. I think we have adequate reserves of uranium. It’s just a matter of we’ve got to get the facilities in to develop those reserve and to process them into fuel.

MP: Duke is planning to build more nuclear plants?

PA: I would say that it’s highly likely that we’ll have another nuclear plant within the next 10 years. It takes a long time to actually develop the design and site the plant and go through the permitting and everything in the construction process. It will be 10 years before we have one on line.

MP: Still in the States, the impact of Katrina, we’ve read a lot about the possible economic impact, what’s the total impact?

PA: Well I believe Katrina was a real wake up call from half a dozen standpoints. I mean just on a political basis there was a wake up call to the fact that the Federal Government and State Governments weren’t coordinated and weren’t prepared for something like this. It was certainly a wake up call on the local level that nobody had ever really worked through an evacuation plan of how do you get a million people out of an area. It was a wake up call certainly to the inter-connectivity of the chemical and the energy industry in the Gulf coast. The fact that the Gulf coast first of all supplies quite a bit of energy into the United States. Natural gas and its oil comes from offshore and it has a lot of the refineries there, a lot of petrochemical industry, but the fact that they’re all inter-connected really surprised people. For instance you might have a refinery that in order to process sour crude uses hydrogen from another plant to run its hydro cracker. Well if that plant’s shut down then this refinery can’t run. Or it needs a blend stock that was coming from another plant some place else in the area, so suddenly you found that everyone realised how inter-connected they were and until you get this plant up over here, this refinery can’t start until this refinery starts you can’t start taking off take from this platform in the Gulf and until that one starts producing this processing plant can’t start. And it really drove home the fact that this has all been built up over decades and is very inter-connected and very vulnerable.

MP: And what lesson comes out of that?

PA: Well I believe there’s going to be a lot of impetus to come up with new sources of supply to diversify refining locations, in fact there’s a push right now to have President Bush designate some of the old shut down military installations as sites for refineries saying well look the Federal Government already owns these. There’s some pretty good sites here, we don’t have to go through all the permitting and what have you. We could just set these up for new refinery locations. There’s going to be a push for bringing LNG in, other than in the Gulf coast, probably off the east coast. Maybe up in Canada around Sable Island and then pipe the gas south down into the north east. There’ll probably be impetus to site a plant say in Baja California and then have the LNG go north up into the State of California. There’ll be more impetus to open up the Alaskan reserves. The Alaskan pipeline will probably get a shot in the arm here because people say hang on here, it doesn’t matter what the supplier is, you’ve got to think of where the supply is as well because having adequate supplies concentrated in an area that can be shut down is just as bad as not having the supplies.

MP: You say Baja California is a likely site for LNG, Mexico rather than California, why?

PA: Well California is very politically difficult to get an LNG terminal sited there. The other thing is if you look at California, California doesn’t really need natural gas. What California needs is they need electricity - they use the natural gas to generate electricity. They don’t use it so much as a feed stock or as a heating source, they do use it for that but the real growth in natural gas in California is to generate electricity because they have an air quality issue there that they’re dealing with. As long as they can get electricity into the state they don’t really need the gas necessarily. So what you might find is that you’ll find on the periphery of California, natural gas coming in and firing gas fired plants and then the electricity going into the state and that sort of solves the problem of politically are you going to put a terminal off of Santa Monica.

MP: Duke had installations in the Gulf, is it still affected by Katrina?

PA: Some of them are still affected. I think we’ve got installations that were under water are no longer under water but in many cases, we receive an awful lot of natural gas particularly from the Gulf and we process the natural gas, we clean it up and we then transport it to New York or Boston and all of the United States. We’re one of the big transporters of natural gas and the problem we have is that a lot of the gas that feeds our system is shut in. The platforms have been either cut back or shut off and they aren’t producing yet.

MP: How long before you’ll be back in full production?

PA: Well it will be months before we’re back to full production. I think we’ll go through this winter with some curtailment of production into our system. I believe we’ll be able to satisfy our customers. We’ve filled storage in the market area and it will be tight but I think that there will be adequate certainly adequate supplies for residential customers. There might be some shut down of industrial use just because of price. I mean price might be high enough that you’ll see a shut down there. But it will be a tight winter and I would say it’s going to be the first of next year before things are really back on. And they won’t come back on totally like they were because a lot of facilities or producers right now are saying we need to kind of re-evaluate our facility, is it set up to take another storm like this? Do we need to step back and really rethink a design of a platform that might be coming on in the next year.

MP: Is Duke in the market for setting up an LNG platform off Baja California and buying some good Australian natural gas?

PA: We’re not in the platform business for the LNG re-gasification but we’re certainly in the business of taking it from LNG facility. We are big into logistics of natural gas and the thing that we do is we can take large quantities of gas, move it to where it needs to be in store until it’s ready to be used and so we’re a natural for coupling up with somebody who’s bringing in LNG because LNG tends to be a big slug of delivery into one point in the country and it’s got to be distributed all over the place and so we will be very active. In fact that’s a lot of our growth in the gas business will come from the change in the logistics requirements. We’re building storage facilities, we’re expanding existing storage facilities, we’re expanding parts of the pipeline system where there are bottlenecks because gas is moving from point A to point C now instead of point A to point B.

MP: So you’re an optimist about the market potential for Australian LNG?

PA: Oh I think there’s a great market potential for Australian LNG. There’s no question about it. The real key is siting that terminal.

MP: You say it’s going to be a tight winter, does that mean more spikes across the whole energy portfolio, energy markets?

PA: Well certainly in the US the spikes in the US will come primarily in natural gas and in the price of power because a lot, on the margin, natural gas that’s the price of power in the US. I think that the rest of the world will be a lot less influenced by that. I don’t think that the issues that the US is going to face will really feed into the rest of the world.

MP: So petrol prices won’t be as affected as they have been by Katrina.

PA: No I think that really if anything my personal view is that petrol prices will probably go down a bit because they’re such a restriction on demand, a dampening of demand as people are realising just how much it does cost to fill their tank now.

MP: It’s the impossible question: oil prices.

PA: Well everybody has a guess on that. My personal feel is that we will have higher oil prices but not at the same level that we’re at for the next five years. And by that, I’ll just tell you how I’m running Duke Energy and the assumptions that we make in taking on projects. Our assumption is that the price of oil will ultimately revert down to about the $40 US level or $40 to $45. Something in that range. That it will settle down in that range but it will stay in that range for at least the next 5 years. We’re just kind of running our business on that basis.

MP: Just question that assumption to begin with. How do you make that assumption given the growth in demand for China or India?

PA: Well China and India is the wildcard as to how much they will use and I would say that we are running two scenarios. We’re saying well what if it stays at about $65? I don’t think it’s going to get higher than $65. I think that we’ve had an abnormal period here in the hurricanes have certainly influenced that but there’s not just conservation that can kick in here. There are alternative sources that are going to kick in here. You’re going to see tar sands in Canada and marginal fields will be started up. It’s amazing how much marginal production comes on stream when you get prices at this level and I don’t think that we have all that much of a shortage in the longer run. I think that we have a very short-term shortage here.

MP: Oil staying at $40/$45 a barrel for the next 5 years is probably one of the most optimistic views I’ve heard.

PA: Well a year ago people would have said that’s very pessimistic so I guess I’ve been in this business a long time and I remember some of the first oil shocks back even in the 70s and then I remember $45 a barrel oil back in the early 80s which is still higher than where we are today if you adjust for inflation and everybody decided that oil was going to be high forever and then it crashed and everybody thought it would be low forever. When I first came to BHP we had quite a debate as to what the oil price was going to be. That was 1998 and I remember my first board meeting and someone had just come back from Davos and I remember that the debate was around the fact that I guess it was the oil minister of Saudi Arabia or somebody had given a speech at Davos saying that oil would remain $10 a barrel or below. And the question was, would it really remain below $10 a barrel and that was 1998. Now here we are in 2005 and suddenly $45 a barrel oil is the most optimistic thing you’re hearing so I just, I think things are never quite as good as you think they are or quite as bad as you think they are.

MP: Well you mentioned BHP. You’ve still got your BHP shares in your portfolio?

PA: I have a considerable amount of them. I have diversified a little bit but I certainly have enough to keep my interest up.

MP: And your outlook for that stock, just as an investor?

PA: Just as an investor I think that stock is an outstanding stock and I intend to keep those shares. There’s a couple of things going on. I don’t believe that the market fully appreciated the difference between being the 3rd or 4th largest miner and being number 1. And what that means in terms of opportunities that it opens up but I see it from the States, very clearly. When I came over to BHP people would say BHP let’s see, that’s an Australian company. What do they do? And it was sort of, there wasn’t a great deal of familiarity with the company. Today BHP Billiton, you turn on Bloomberg and they talk about BHP Billiton, the world’s largest miner has just done this or just done that and you know, it has a real place at the table on the global scene. And that position, being number 1 in an industry, opens up a lot of opportunities for you. So just the fact that it is now the number one mining house in the world makes me very optimistic about it. I think that there’s also been sort of a super cycle that we’ve gone through where nobody invested in capacity for a long time and so the world kind of, at the same time China and India were taking off, production was declining and these two things have collided here and I think we’re going to see several years of good commodity prices here.

MP: So BHP’s still a buy at these levels?

PA: I think it’s a bargain.

MP: Mentioning BHP and coming here, was there a degree of culture shock to be dropped in Australia as CEO of a major company? Having been used to the American corporate scene?

PA: Oh yeah, there were all kinds of little shocks. Some big, some little but yes it was a culture shock. You can start with the, you can make a whole laundry list, the first culture shock I had is that it takes twice as long to have dinner in Australia as it does in the US. In the US everybody’s rushing and you sit down to dinner and pretty soon they come over, slap your dessert down and say here’s the check, I’ll take it as soon as you’re ready and out the door with you. And you know, in Australia they say you’re here to have a good experience, take your time. Take 2, 3 hours, that’s fine.

MP: Well it’s civilized, that’s why.

PA: Well I’m sure that’s it, but there are all kinds of little cultural differences like that but on the business scene the interesting thing was that, of course BHP was very large relative to the economy in Australia, but that the public takes a great deal of interest in the large iconic companies. Much more so than in the US. You have some large companies in the US like Microsoft. If Bill Gates said I’m going to reincorporate Microsoft in France because I think that there’s a good reason to do it, whatever the reason, people would say, that’s interesting and you know, there might be somebody who would complain about taxes going to France or somebody would complain about are we going to have a jobs issue or something like that, but it wouldn’t be a big deal. Here that sort of thing, it becomes a national issue. It becomes something that everyone focuses on and many of the issues that got focused on at BHP were not really economic issues or shareholder issues. I mean, I felt that many times the shareholders were looking for something other than shareholder value. That they were looking for, what’s this mean to just the national interest in terms of how we view this company? The combination of BHP with Billiton really brought that out where there was a tremendous angst about well you know, half the company is going to be owned by people offshore and what does that mean and where am I sleeping every night. There was a great deal of interest in are you sleeping in Australia or are you sleeping in the UK. Where are you traveling, where do you eat your meals. It was the sorts of things that I don’t think anybody ever asked Bill Gates, you know, how many nights do you spend in Seattle. That doesn’t even cross their mind. In fact they’d probably be very disappointed if they found out he was spending most of his time at Microsoft headquarters instead of being out some place in the world.

MP: What about corporate management culture internally. Is there an Australian corporate way, an American corporate way or varieties of both?

PA: Well I’m sure that there is a variety and I’ve only seen a limited sample both in Australia and in the US but I would say that in general there’s more consensus building in Australia than there is in the United States. In the United States there is a search for input from members of management but the person at the top pretty well calls the shots and doesn’t feel that they really need to explain why they call the shots the way they do. They say thank you for your input, here’s where we’re going and get on with it. I found that in Australia it was very important that everybody on the team understood why you made the decision you did so I spent a lot more time talking through the rationale of a decision as opposed to just saying here’s the decision, let’s go.

MP: Is one system better than the other or do they all end up the same, as long as the right decision’s made in the first place?

PA: Well I think the American system works faster but the long term result, if you can get the consensus, I think the Australian system is more enduring in that you make a decision and there’s buy-in and everybody’s behind it and implements the decision. Unfortunately if you can’t get the buy-in, if you can’t get the consensus you can get gridlock and nothing happens and that’s the worst of all worlds is that you don’t go anyplace because you can’t agree on the direction you’re going. So I guess if it’s working, the Australian system would be my preference. If it’s not working at the end of the day somebody’s got to say we’re going.

MP: Which system have you got working at Duke?

PA: I actually, it’s funny because my management style evolved quite a bit when I was over here in Australia and I really have taken the Australian system back to Duke. I would say that I’m much more into consensus building now than I was when I was CEO of Pan Energy, it was much more of a command control, the leader takes over and leads the way and now I’m much more into let’s gather information, let’s make sure that everybody’s on board here.

MP: What stage is Duke at? You’ve done another turnaround. What part of the journey are you at there?

PA: I think we’re ready to go to the next level. We have announced that we’re merging with a company called Cinergy. It’s in the Midwest and Cinergy is considerably smaller than Duke but what it will do, it will give the power business the flexibility to grow. It’ll create the platform for the power business to go beyond the geographic constraints it’s had because to date our power business has been limited to the Carolinas, at least the regulated part of it. This will give us a platform that we can actually participate in the consolidation of the power business in the United States and I think there’s going to be a whole trend towards rolling up power companies and creating some mega power companies in the United States. This will give us the platform to become a leader in that roll up. At the same time it will give us the degree of freedom to, if we choose, separate the gas business out and let the gas business be a stand alone business. Very much like if you recall we spin off the steel company at BHP and Bluescope has performed very well as an independent company and I think that we have a little bit of that situation at Duke right now in that having the gas business together with the power business neither one of them are as vibrant as they might be if they were separate entities. So we’re looking at that, what the implications are of separating those two halves of the business and then of course the growth of the power business will be enhanced considerably by basically breaking through the geographic constraints that we have right now.

MP: Paul Anderson, thanks for talking to us.

PA: Well thanks for having me.

ENDS