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BG eyes production ramp-ups as profits slump

The UK company's operating profit was down 12% year-on-year in the fourth quarter of 2012

BG Group is targeting production increases from its megaprojects in Brazil and Australia to help it boost flagging profits. The UK company’s operating profit for the fourth quarter of 2012 was down 12% year-on-year to $1.8 billion, mainly because of lower output from its North Sea and Egypt operations. The company’s profit for the year came in 4% higher than in 2011, to just over $8bn.

Revenue and other operating income fell by 5% to $4.8bn in the fourth quarter of 2012, due to fewer liquefied natural gas (LNG) cargo deliveries and a 2% decrease in overall production in the period, BG said. The group’s full-year income was just under $19bn, an increase of 7% from 2011. 

Increased LNG output boosted BG’s total full-year production by 3%, to 657,000 barrels of oil equivalent a day (boe/d), as strong Japanese demand drove up margins. Production fell in the fourth quarter, to 640,000 boe/d, as shortfalls from the shutdown of the Elgin-Franklin and Buzzard fields in the North Sea, as well as lower capacity in Egypt, all caused output to slump.

BG’s new chief executive, Chris Finlayson, told journalists in London that the company would almost certainly miss its production target of 1 million boe/d by 2015 and that BG must now focus on ramping up its Brazilian output and bringing its Australian LNG projects on stream. “We expect to see significant volume and cash flow growth from Australia and Brazil in 2014 and 2015,” Finlayson said. “However, right now I understand that we need to rebuild trust in our ability to execute.”

Finlayson added BG was now aiming for production of 630,000-660,000 boe/d this year but uncertainty surrounding when Total will restart production from the Elgin-Franklin field, which has been offline since March 2012, remains a key uncertainty for the group’s production capacity. Reduced output from Egypt has also weighed on BG’s production as reservoir decline problems at the West Delta Deep Marine field, offshore Egypt, have contributed to lower overall revenues, the company said.

BG plans to drill 18 wells at the field this year, targeting 2 trillion cubic feet (cf) of gas. The first wells are expected on stream in 2014.

BG signed an agreement with state-run Egypt General Petroleum Corporation (EGPC) in 2011, which partly links BG’s revenue to its production levels, in particular the volume of gas allocated for export as LNG.

BG’s LNG business, however, was boosted by strong demand from Asia. The LNG business’s full year operating profit, excluding liquefaction costs, was up 13% to $2.6bn. This was mainly due to higher margins from strong Asian demand which offset higher shipping and operating costs. Sustained high LNG demand in Japan, as the country’s nuclear capacity remains offline, increased Asian LNG sales by 13% last year. This is compared to a 45% fall in the company’s LNG sales to Europe and the US last year.

BG expects its LNG business to make $2.5bn- $2.7bn in profit this year, slightly up from 2012. BG’s LNG supply capacity this year will however fall by 300,000 tonnes this year, to around 11.3m tonnes, mainly because of lower supply from Egypt.

The road to recovery

BG’s is pinning its hopes for production growth on its Australian and Brazilian operations and in exploring new frontiers, such as Tanzania. The company will bring seven major projects on stream in 2013, including its Queensland Curtis LNG (QCLNG) project in Australia. First gas from QCLNG is expected  the end of 2013. BG has already signed supply contracts with project partner China National Offshore Oil Corporation (Cnooc) for 8.6m tonnes of LNG a year, starting from 2015. In October last year,  Cnooc increased its stake in the project to 50%. 

Meanwhile, BG said it  expects its total production to decline until the fourth quarter of 2013, when two Brazilian developments are expected to ramp up production. The company drilled 18 wells in the Santos basin, offshore Brazil, last year. First production from the prolific Lula field is expected in the second quarter of this year. The company says its total reserves within the Santos basin could reach 8bn boe. 

BG began commercial production from the Sapinhoá field, also in the Santos basin, in January. Output has reached around 120,000 boe/d. The Cidade de São Paulo floating production and storage and offloading vessel (FPSO), in the Sapinhoá field, is producing about 15,000 boe/d, BG said, which will eventually increase to 25,000 boe/d. The Sapinhoá field development plan includes a second FPSO, the Cidade de Ilhabela, with production capacity of 150,000 barrels of oil a day and 212m cf per day of natural gas. It is expected to start production in the second half of 2014. BG said production from Lula and Sapinhoá will more than triple its Brazilian output to 340 000 boe/d and 528m cf/d.

BG is also looking to Tanzania, where it is sitting on recoverable resources estimated at close to 10 trillion cf of gas across five discoveries. The company said there is “extensive further potential to be explored” within its remaining prospects and acreage in Tanzania.

BG is also reducing output to streamline its business. It will cut its US output this year, mainly because of low Henry Hub prices which fell to below $2 per million British thermal units last year.   Finlayson said the company would keep its portfolio under continual review to increase profitability. “There will be no sacred cow,” Finlayson told reporters in London. “Every asset will have to earn its place in the portfolio.”

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