BHP and Woodside Petroleum have announced a $20 billion oil and gas merger that will create one of the world's biggest energy companies.

Woodside will issue new shares to BHP shareholders in a deal that gives Woodside investors a majority stake in the expanded company. Woodside would be 52 per cent owned by its shareholders and 48 per cent by BHP investors.

BHP runs oil and gas fields in Australia, the Gulf of Mexico, Trinidad and Tobago and Algeria, as well as a stake in the Bass Strait oil and gas fields off the coast of Tasmania.

Woodside's new chief executive Meg O'Neill says the merger will open up funding for new projects, including the Scarborough gas field off the coast of Western Australia.

“The proposed transaction de-risks and supports Scarborough FID [final investment decision] later this year and enables more flexible capital allocation,” she said.

“We will continue reducing carbon emissions from the combined portfolio towards Woodside's ambition to be net zero by 2050.”

BHP chief executive Mike Henry said the deal gives BHP investors some new choices. 

“The merger of our petroleum assets with Woodside will create an organisation with the scale, capability and expertise to meet global demand for key oil and gas resources the world will need over the energy transition,” he said.

“The merger will also enable the skills, talent and technology of both organisations to build a resilient future as the world's needs evolve.”

The merger also marks BHP's exit from petroleum, at a time of increasing importance of environmental considerations for companies. 

BHP has already announced it will invest $US5.7 billion ($7.8 billion) in the Jansen potash project in Canada - part of its move to diversify its portfolio away from fossil fuels.

Woodside has been criticised for “doubling its exposure to oil and gas, while at the same time claiming the merger reduces risk” by Dan Gocher from investor lobby group the Australasian Centre for Corporate Responsibility.

“As expected, this merger is a disastrous outcome for Woodside shareholders and climate,” he said.

“The Woodside board is dominated by former oil and gas executives, so this deal is hardly a surprise. Shareholders must now be considering board renewal.

“BHP and Woodside have been at the heart of Australia's inability to tackle climate change for the best part of 30 years. For Woodside, that will likely continue, and while BHP may one day claim to be 'fossil fuel free', it cannot erase its past,” Mr Gocher said.

The merger deal still needs to be approved by investors and regulators.