BG streamlines operations as part of growth plan
By 2015, BG hopes to prioritise value over volume by developing upstream assets
BG Group plans to streamline its operations, focusing on a handful of lucrative assets, with production ramp-ups expected from Australia and Brazil, chief executive Chris Finlayson told shareholders at the company's strategy briefing in London on 14 May.
Finlayson told journalists that between now and 2015 BG plans to "prioritise value over volume" by developing 10 to 15 core upstream oil, gas and liquefied natural gas (LNG) assets. "We will focus our business on areas where we have a competitive advantage - early stage origination and development," Finlayson said. "BG Group will be a lean and agile organisation with deep commercial and technical expertise, simple processes and clear accountabilities."
The message that BG is back on track is one Finlayson badly needed to give shareholders. In February, the company admitted that it would miss its production target of 1 billion barrels of oil equivalent per day (boe/d) by 2015 as its profits and output stalled.
The company's earnings for the fourth quarter of 2012 were down by almost 30% year-on-year, to $1.03bn. This was mainly because of lower output from its North Sea and Egyptian operations. In the first quarter of 2013, things were not looking much better. BG reported earnings of $1.18bn for the first quarter of 2013, down 3% year-on-year. This was again due to a fall in overall production to 659,000 boe/d.
BG is now focusing on ramping up its Brazilian output and bringing its Australian LNG projects on stream. In its first quarter results for 2013, BG said it had brought two of its 15 floating storage and production units (FPSOs) on stream in Brazil's Santos basin, bringing its gross production in Brazil to around 140,000 boe/d. A third FPSO is scheduled for start-up on the Lula field in the second quarter of the year.
Production also restarted at the Elgin-Franklin field, in the North Sea, after a well control incident shut in three wells at the field last year.
BG said its 2013 output would be between 630,000 -660,000 boe/d in 2013. This will rise to 775,000-825,000 boe/d in 2015 as projects in Brazil and Australia come online.
The company's output from its core assets, in countries such as Bolivia, Egypt, India, Kazakhstan, Norway, Thailand, Trinidad and Tobago, Tunisia, the UK and the US, would be 530,000-580,000 boe/d between 2013 and 2015. "Our priority is value, not equity production," Finlayson said.
BG said it plans to enter three new basins between now and 2015 and is increasing its exploration spending from $1.6bn a year to $1.8bn per annum over the next three years. It also plans to drill between 50 and 60 new conventional wells, in areas such as Honduras, Uruguay, Kenya, Tanzania and Madagascar, and is planning to spud about 100 unconventional wells, mainly in Australia.
Brazil and Australia are the company's key growth areas for both production and revenue over the next three years. BG plans to invest around $3bn annually in Brazil between 2013 and 2018. The company has interests in four blocks in the offshore Santos basin, which could hold potential reserves of as much as 6bn boe.
The company said the projects it has stakes in are targeted to produce 2.6m boe/d by 2020. Of this, around 500,000 boe/d will be net to BG.
When the BM-S-9 and BM-S-11 wells, in the Sapinhoá and Lula fields respectively, are developed, BG's net production could rise to "well in excess of 600,000 boe/d", it said.
Brazil's low development costs, high margins and break-even costs of less than $40/boe make this country particularly lucrative for the company. "We expect to demonstrate a very significant value increase in Brazil over the next two to three years through our development & appraisal programme," Finlayson said.
The Queensland Curtis LNG (QCLNG) project in Australia is also a key part of BG's recovery strategy. Finlayson said BG's LNG segment is "a growing and highly profitable business in its own right" and the company expects consistent demand growth, especially from Asia, to underpin its growth. "The growing urban middle class in China are increasingly requiring cleaner air which will require a clean, flexible energy source like gas to replace coal," he said. "LNG is filling much of this demand and is likely to continue to do so."
QCLNG is targeting first LNG next year, and could be producing 8m tonnes per year by 2016, BG said. When this happens, it will deliver revenue of between $3.5bn and $4bn per year to BG.
BG expects production of 8bn boe from the the full life of the first two trains of QCLNG, combined with the 15 FPSO programme in Brazil. Future growth projects in Brazil, Tanzania and from QCLNG train three will produce a further 4bn boe. These assets will turn around 90% of BG's existing oil and gas resources into cash, Finlayson said. This would be from either asset sales or production growth. But there are concerns that factors beyond BG's control could affect its output.
"The QCLNG ramp-up rate and Egypt reservoir performance are the main sources of uncertainty in both (exploration and production) and LNG volumes in 2015," Finlayson said. "But volume growth is not the only driver of value growth."
Finlayson said that, over the next five years, BG will triple the proportion of its production with margins of over $50/b, while capital expenditure will fall and earnings will grow faster than production. This earnings growth will be spurred by first production from high-margin assets in Brazil and Australia, due from 2015.
Exploration spending will rise from $1.6bn this year to $1.8bn per year over next three years. But the company's total capital spending will fall to between $8bn and $10bn per year from 2015, down from the $12bn per year planned for this year and next.
Some analysts are not convinced BG's new strategy is foolproof. Neill Morton, an analyst at Investec bank said in a note that relying so heavily on Brazil to boost growth was a risky strategy. "The free cash flow tipping point in 2015 is actually unchanged from previously and so cash returns are probably three years away. Cash flow could fall below expectations. Petrobras could yet veer off its flight path," Morton said. "We are not convinced (capital expenditure) will fall as much as indicated as new projects tend to come onto the radar screen."