Chief Executive’s statement
I am pleased to report that in 2007 BG Group delivered another year of good operating performance, together with very positive progress in the development of the Group’s long–term growth opportunities. Our distinctive strategy has enabled us to capture increased value from our existing assets whilst strengthening further the foundations for our next decade of delivery.
Operating performance*
As the Chairman notes in his statement, BG Group has continued to meet its commitment to deliver value to our shareholders, with earnings of £1 783 million (2006 £1 640 million).
In Exploration and Production (E&P), volumes were 220.3 mmboe (2006 219.2 mmboe). Overall production levels were maintained, despite the impact of disposals in Canada and Mauritania and the shutdown of the UK North Sea Central Area Transmission System (CATS) pipeline as a result of third-party anchor damage. Operating profit was £2 387 million (2006 £2 457 million).
Liquefied Natural Gas (LNG) performance was particularly strong in 2007. Global LNG markets continue to be supply-constrained amid accelerating demand from consumer nations. The Group’s focus on the development of a flexible, global LNG portfolio means we are well-placed to supply markets across the world, and this was reflected in 2007 in a 48% increase in total operating profit in our LNG business.
Our Transmission and Distribution (T&D) businesses in India and Brazil continued to grow throughout 2007 in line with the Group’s integrated approach to capturing value along the gas value chain. Total operating profit increased by 7% to £247 million. In Power Generation, total operating profit increased by 23% to £130 million, principally due to the consolidation of new subsidiaries.
Strategy for success
I am sure that shareholders will by now be familiar with our core strategy – a focus on specific, high value markets and on securing competitively priced gas to connect to those markets.
It is a strategy that BG Group, as an integrated global gas company, is particularly well-placed to deliver; we combine a deep understanding of global gas markets with an excellent track record in finding, developing and marketing reserves. More importantly, as these results show, it is a strategy designed to deliver value to our shareholders over the long term.
The need for secure supply to meet the growing energy needs of both emerging and established economies, together with growing public debate about climate change and development priorities, presents a complex business context. The associated challenges yield opportunities for companies able to move swiftly and which are sufficiently flexible and willing to align their objectives with those of governments, businesses and communities. BG Group’s successful global portfolio has been founded on this approach.
The Group now has business interests in a total of 27 countries across five continents. We have an established presence in a range of core territories – Brazil, Egypt, India, Kazakhstan, Trinidad and Tobago, Tunisia, the UK and the USA – and in 2007 made good headway in developing new sources of value from within our existing portfolio. There was also positive progress through the year in the development of more recent additions to our portfolio, such as Nigeria, Norway and Oman. Additionally, shortly after the period under review, the Group announced an alliance with Queensland Gas Company Limited in Australia. The two companies will co-operate in the exploration and development of coal seam gas from the Surat Basin, Australia, and will also jointly pursue domestic market opportunities and the construction of a new LNG export facility.
Taken together, we believe that BG Group’s robust current production base, combined with our strong total reserves and resources position and positive exploration prospects, gives us the inherent potential to support a compound annual growth rate in production volumes of between 6% and 8%, right out to 2020.
Energy prices have risen in response to increasing global demand. This, in turn, has stimulated cost inflation as operators seek to acquire the raw commodities and plant required to capture market opportunities. The Group is well-positioned to face these challenges; we have a long-life portfolio of base assets, where incremental development is at a lower cost, and we maintain a rigorous capital discipline in our broad portfolio of opportunities. We screen all projects against a wide range of price, cost and production scenarios to ensure that our investments generate shareholder value. We will continue to seek innovative ways to manage procurement, construction and operating costs in the current inflationary environment. Our aim throughout is to maintain today’s position as a high value, low cost operator.
Portfolio developments
2007 was an important year in the development of our exploration portfolio, with notable drilling successes and the acquisition of new acreage. During the year, appraisal drilling in the Tupi discovery in the Santos Basin, offshore Brazil, found indications of significant volumes of hydrocarbons in place – potentially the largest new source of oil and gas that the world has seen for some years. The Tupi structure is at an early stage of appraisal but is now estimated to contain hydrocarbons in place of between 12 and 30 or more billion barrels of oil equivalent. BG Group has good exposure to this evolving frontier play, with all four wells in the Santos Basin so far proving successful, and further exploration drilling still to come.
We drilled 20 wells in 2007, with 12 successes, including wells in Bolivia, Brazil, Norway, Thailand and the UK. The year saw extensive seismic acquisition activity, with surveys in Algeria, Brazil, Canada, China, Libya, Nigeria, Norway, Oman, Trinidad and Tobago and the UK. We also acquired more than 4 600 square kilometres of new exploration acreage, with additional licences in Canada, India, Norway, Trinidad and Tobago and the UK.
In 2007, BG Group made important advances in a number of key producing assets. UK Continental Shelf (UKCS) contribution to Group production volumes was enhanced during the year with the start-up of the Buzzard and West Franklin fields. We made further good progress in our Karachaganak operations in Kazakhstan, working closely with partners and stakeholders to agree a new Gas Sales Agreement that will facilitate the sanction of the proposed Phase III expansion project. Investment by BG Group and partners in the development of the mid-Tapti field, offshore India, was another notable highlight; gas production from the Panna/Mukta and Tapti fields has almost doubled over the last five years.
In Trinidad and Tobago, the Group secured agreement for a further 15 years of domestic gas sales, beginning 2009, from the East Coast Marine Area (ECMA).
Our LNG business performed very strongly through the year, with managed volumes up 31%. The Group has been the Atlantic Basin leader for some time; we are now also the main supplier of Atlantic Basin LNG into Pacific Basin markets, deploying our flexible global portfolio to good effect to meet strong demand in the Asia Pacific region. We continue to expand our global fleet, taking delivery of four new LNG ships during the year. We also began to deliver the first cargoes under a new long–term supply contract with Equatorial Guinea LNG.
The Group sanctioned the Quintero regasification terminal in Chile, with the initial start-up phase planned for 2009, and the Dragon LNG import terminal in south Wales advanced towards completion. In the USA – where the Group imported 55% of all LNG supplied in 2007 – our gas marketing activity was boosted further by the addition of new capacity rights in the Cypress pipeline, connecting the Elba Island import facility to downstream markets in south Georgia and Florida. In 2007, the US regulatory authorities also approved terminal expansion and new pipeline proposals for Elba Island, which are intended to extend the Group’s capacity for downstream marketing in the USA in future years.
BG Group continues to derive value from downstream gas demand driven by rapid economic growth in leading non-OECD nations. Our Transmission and Distribution (T&D) subsidiaries showed a strong performance through the year. In Brazil, Comgas sales volumes increased by 5%; the business now serves more than 500 000 customers. India’s largest private gas company, Gujarat Gas, demonstrated solid growth, and growth continued at Mahanagar Gas, which serves India’s economic hub, Mumbai. In our Power Generation segment, we acquired an additional gas-fuelled power plant in north-eastern USA – a region with a flexible and accessible power generation market – in a further expansion of the Group’s integrated US gas marketing strategy.
BG Group’s role as a leading gas company is dependent on the safe, swift and cost-effective application of innovative responses to the many operating challenges inherent in our industry.
That spirit of innovation is acknowledged in the Chief Executive’s Awards, our annual ceremony highlighting the best of the technological achievements sustaining BG Group’s ongoing success, which in 2007 saw some of the strongest entries in recent years.
Corporate Responsibility
As the Chairman explains in his statement, we believe that Corporate Responsibility (CR) is the bedrock of sustainable value creation. Our activities are guided by our Business Principles, which define our commitment to responsible conduct and which set out our responsibilities to our people, to the societies within which we work and to the environment. Our inclusion in the FTSE4Good index and Dow Jones Sustainability Indexes and our “Sustainable Investing Leader” rating in the Goldman Sachs GS Sustain focus list are testament to that commitment. There is more detail on our CR performance in Corporate Responsibility.
Safe and responsible working practices are integral to all we do at BG Group. We expect all of our people, myself included, to take personal accountability for ensuring not only their own safety but also the safety of others. We all have a continuous obligation to intervene to identify unsafe practices and promote safe behaviour. This obligation is communicated clearly and regularly through employee engagement and training across the global business.
The Group completed its detailed examination of the findings of the Baker Panel established in the aftermath of BP’s 2005 Texas City refinery accident, and has tested the key conclusions against our own asset integrity systems. Those systems, already well-developed over a number of years, were refined further in 2007.
The Group’s Lost Time Injury Frequency (LTIF) of 0.26 per million hours worked in 2007 was our lowest-ever figure, reflecting the continuous focus on safety across the Group. For comparison, in 1998 – the point when BG Group first embarked upon a refreshed approach to safety management – the LTIF was 6.7. None of us at BG Group forgets that behind the statistics lies the reality of injured colleagues and bereaved families. It is therefore with great regret that I report the deaths of two contractors during 2007: one in a road accident in Kazakhstan and the second working on the construction of one of the Group’s new LNG ships in South Korea. In early 2008, shortly after the end of the reporting period, a contractor working on behalf of our Gujarat Gas subsidiary in India died following an incident during street works. All incidents have been examined in detail to assess lessons to be learned.
Group Executive Committee
In 2007, we announced changes to the management structure of the global business to expand our capacity for long–term strategic activity at the most senior levels of the organisation. This included the introduction of new Senior Vice President roles reporting into the Group Executive Committee (GEC) and plans to increase the number of senior positions both in the professional functions at Group level and in our country businesses. In parallel with these developments, we also reorganised the Group’s activities within three geographic regions in place of five. Taken together, we believe these changes will enhance further the Group’s ability to deliver on our growth ambitions. The Directors’ Report sets out further details of the new regional Executive responsibilities.
We also welcomed Graham Vinter to the GEC as our new General Counsel, and Keith Hubber as our new Company Secretary. As the Chairman notes, our Deputy Chief Executive William Friedrich announced his retirement. I would like to express my personal thanks to Bill for his tremendous contribution to the Group over the years. I would also like to thank Rick Waddell, Executive Vice President and Managing Director for South America, who stood down from the GEC shortly after the period under review.
Looking forward
In my view, 2007 demonstrated once again that our strategy and approach are robust and can be expected to provide the Group with a source of competitive advantage in the future business environment. We benefit from an established and diversified long-life asset base, combined with a broad spread of future opportunities, offering the prospect of value creation through the next decade. This is underpinned by the skills, experience and focus on delivery of all of my colleagues at BG Group. I thank them for their passion, energy and commitment to value creation; they are central to the Group’s success.
Frank Chapman
Chief Executive
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- For a reconciliation between Business Performance and Total Results, see note 2