London/Sydney:

BHP Billiton’s decision to pick as it new chief executive a geologist with a history in the oil industry highlights not only the challenges facing the world’s biggest resources group by market value, but also where its future may lie - oil and gas, rather than metals.

Andrew Mackenzie, the 56-year old executive who will replace Marius Kloppers, worked for 22 years at BP before joining miner Rio Tinto in 2004 and BHP in 2008.

“He has a unique combination of in-depth mining and oil experience,” says one person familiar with the deliberation of BHP’s board.

The appointment of Mackenzie - a likeable Scottish executive fluent in five languages and who has lived in six countries on four continents - would also mark a departure from the style of Kloppers. He was viewed - perhaps unfairly - as an abrasive chief executive who is said to have monitored what colour shoes were being worn by staff.

Although BHP is better known for its metals business, including operations in copper in Chile and iron ore in Australia, the company has become over the past five years a significant oil and gas producer.

In the six months to the end of December, the energy business generated $3.1 billion in earnings before interest and taxes, nearly a third of the $9.7 billion total that the company delivered during the same period. Only the iron ore division, with earnings before interest and taxes of $4.8 billion, beat it.

But the energy business has not only become a major profit centre, but also a source of concern. BHP took nearly $3.3 billion of asset writedowns last year, the bulk on the ill-timed purchase of US shale gas assets in 2011, and the rest in nickel.

The miner took an impairment charge of $2.84 billion against the value of its Fayetteville gas assets, which it acquired for $4.75 billion from Chesapeake Energy. Although BHP has not written down any of the $12.1 billion it paid for Petrohawk, an independent US oil and gas company, investors and analysts unanimously believe the company overpaid.

BHP also said it had written down the value of its Australian nickel and aluminium assets by more than US$3 billion because of weaker prices and the strength of the Australian dollar.

While the shale revolution has boosted US gas production through a process known as hydraulic fracturing, or “fracking”, in which thousands of tonnes of water and sand are pumped underground under high pressure, it has also triggered a massive drop in prices, hurting companies such as BHP and ExxonMobil.

Last year, benchmark US natural gas prices dropped to a 10-year low of $2 per million British thermal unit, down more than 85 per cent from a record high of more than $15 per million British thermal units in 2008. US gas prices have recovered to $3.3 per million British thermal units.

The purchase of Petrohawk, the largest ever cash deal completed by BHP, put the company firmly in the path of becoming an integrated natural resources group.

The deal, most likely, opened the door for Mackenzie to become chief executive, beating other internal candidates, which included Alberto Calderon, head of aluminium, nickel and corporate development, and Mick Yeager, head of the oil division.

Calderon suffered because of his role in several failed mergers and acquisitions, including the attempt to combine BHP and Rio Tinto’s iron ore units, and the $40 billion hostile takeover attempt on fertiliser PotashCorp. Yeager’s main handicap was that his career has centred in the oil industry, with 25 years in Mobil and ExxonMobil, but little mining experience.

Another candidate who has been overlooked is Marcus Randolph, the head of BHP’s ferrous and coal businesses. He was seen in some quarters as having the edge on his rivals because of his greater operational experience.

Analysts say the task facing BHP chairman Jac Nasser is to try to keep these executives. However, he may struggle.

More broadly, analysts say the decision to replace Kloppers highlights a cultural shift at BHP. When Kloppers took over as chief executive in 2007, commodity prices were rising and the industry was in a growth phase. That meant BHP needed an aggressive chief executive who was prepared to make bold moves.

But with the outlook for major commodity prices weakening and the industry hit by a series of ill-judged acquisitions, the focus has changed to conserving cash, and delivering existing projects on time and to budget. It was those forces that saw Nasser launch the search for a new chief executive last year.

“We don’t expect major change to strategy,” says UBS mining analyst Glyn Lawcock. “But perhaps a cultural change as BHP adapts to a less growth-intensive environment.”

Analysts at Goldman Sachs said Mackenzie’s promotion was likely to be well received by the market.

“The continuity will reassure investors. Mackenzie has been running copper, diamonds and the development of the Jansen potash opportunity. With iron ore and petroleum in strong hands, there is limited downside risk to this change,” they said.

— Financial Times