Annual Report and Accounts 2007

Financial review

The operations of BG Group comprise Exploration and Production (E&P), Liquefied Natural Gas (LNG), Transmission and Distribution (T&D), Power Generation (Power) and Other activities.

SUMMARY

For the year ended 31 December 2007, total operating profit and cash flow from operations rose by 5% and 10% respectively. These results reflect a good operating performance across the Group. The underlying performance was particularly pleasing as total operating profit increased despite the one-off impact of the CATS pipeline outage (details below) and the adverse impact of the change in the US$/UK£ exchange rate.

The Group continued to invest in a successful exploration and appraisal programme and the related expense rose by £64 million to £336 million.

The Group’s effective tax rate was 2% lower at 43% and the share repurchase programme was earnings per share accretive. Earnings per share rose by 11% to 52.7 pence.

During 2007, the Group invested £2.5 billion on capital projects, acquisitions and its exploration programme, and realised proceeds of £0.5 billion from targeted disposals. The Group has been successful at growing its portfolio of investment opportunities and plans to invest a further £6.3 billion during 2008 and 2009.

During February 2008, the Group completed the £750 million share repurchase programme announced in early 2007.

The Group’s cash flows and financial position remain strong, enabling the Group to finance its growth plans and continued growth in the dividend.

EARNINGS AND EARNINGS PER SHARE

Excluding disposals, re-measurements and impairments, earnings (and earnings per share) were £1 783 million (52.7 pence) in 2007 compared to £1 640 million (47.4 pence) in 2006. The five year growth in earnings per share is shown below.

Including disposals, re-measurements and impairments, earnings (and earnings per share) were £1 746 million (51.6 pence) in 2007 compared to £1 779 million (51.4 pence) in 2006.

A five year summary from 2003 to 2007 of the financial results of BG Group’s operations is set out in Five year financial summary.

DIVIDEND

In considering the dividend level, the Board takes account of the outlook for earnings growth, cash flow generation and financial gearing. The Group’s strong financial performance and prospects has allowed the Board to recommend a full year dividend of 9.36 pence per share, an increase of 30%.

It is the intention of the Board to continue to increase the dividend in line with the underlying growth in earnings.

The final dividend will be paid on 23 May 2008 (2 June 2008 in respect of American Depositary Shares (ADSs)).

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E&P

E&P production increased by 1% in 2007 compared with 2006 following disposals in Canada and Mauritania, and the loss of the CATS UK gas export route following third-party damage to the pipeline. Excluding these events, production would have grown by around 5%.

During 2007, volumes benefited from the start-up of the Buzzard and West Franklin fields in the UK, while in Trinidad and Tobago lower demand and capacity constraints restricted production.

Revenue and other operating income rose by 3%. The Group’s average gas price fell by 6%, principally reflecting the impact of weaker US$/UK£ exchange rates on average international gas prices. The weaker exchange rate was the principal driver behind a 1.7 pence fall in the average international gas price to 15.5 pence per therm.

In the UK, approximately two-thirds of BG Group’s gas production was sold under various contract prices. The remaining UK gas volumes were sold on an uncontracted basis. BG Group’s realised average UK gas price per produced therm was 33.3 pence in 2007 compared to 31.9 pence in 2006.

Unit lifting costs^(d) were £1.64 per boe in 2007 compared with £1.34 per boe in 2006. Unit operating expenditure^(d) was £2.61 per boe in 2007 against £2.29 per boe in 2006. The increases in unit lifting costs and unit operating costs in 2007 reflect increased maintenance expense and the impact of higher hydrocarbon prices, as these feed through into higher input costs.

E&P operating profit was 3% lower in 2007 as firmer prices were more than offset by weaker US$/UK£ exchange rates, the impact of the CATS shutdown and the increased expense associated with the Group’s larger exploration programme. At constant US$/UK£ exchange rates and upstream prices, operating profit increased by 2%.

During 2007, gross exploration expenditure was £536 million (2006 £555 million), including £304 million (2006 £396 million) of expenditure that was capitalised.

(d)

See Glossary of Terms.

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LNG

The Group’s LNG business has two separate but related business lines: shipping and marketing and LNG production (liquefaction).

Revenue and other operating income increased to £3 099 million in 2007 (2006 £2 442 million), reflecting the growth in LNG volumes and higher realisations achieved through the redirection of the Group’s flexible supply portfolio to the markets with the strongest demand.

The volume growth and improved realisations flowed through to total operating profit, which rose by 48% to £521 million. The volume of LNG marketed rose by 31% to 13 million tonnes due to an increase in the long–term, contracted supply, from Nigeria and Equatorial Guinea, and an increase in the amount of short-term supply BG Group was able to attract.

BG Group’s share of operating profits from its interests in liquefaction businesses increased 22% to £127 million (2006 £104 million). The increase in 2007 was principally due to an increase in tariffs at Atlantic LNG Train 4 as it entered its commercial phase during the year.

Business development and other costs of £69 million (2006 £84 million) were incurred on new projects, including the development of Quintero LNG (Chile), which achieved firm project approval in the first half of 2007.

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T&D

T&D revenue in 2007 was £978 million (2006 £877 million). The increase in revenue in 2007 was primarily due to volume growth at Comgas and Gujarat Gas, together with favourable exchange rate movements.

Total operating profit in 2007, including the Group’s share of operating profit in joint ventures and associates, was £247 million (2006 £231 million), reflecting growth at Comgas and Gujarat Gas.

Comgas’ operating profit in 2007 rose 13% to £211 million (2006 £186 million), reflecting volume growth of 5% and favourable Brazilian Real exchange rates.

The Group’s T&D businesses in India (Gujarat Gas and Mahanagar Gas) contributed £38  million to operating profit, an increase of £12 million compared with 2006.

POWER

In 2007, BG Group completed the acquisitions of the Lake Road and Masspower power plants (USA) and the remaining 66.32% of Serene S.p.A. (Italy).

Power revenue increased by £275 million to £523 million in 2007 (2006 £248  million). The increase in revenue is principally due to the contribution from power generation assets in the USA and Italy acquired in late 2006 and 2007.

Total operating profit of £130 million (2006 £106 million) included the Group’s share of operating profits in joint ventures and associates of £86 million (2006 £88  million) attributable to the power plants at Seabank (UK), Santa Rita and San Lorenzo (the Philippines), and Genting Sanyen Power (Malaysia). In 2006, the Group’s share of operating profits in joint ventures and associates included profits attributable to Serene S.p.A., which became a wholly-owned subsidiary in early 2007.

OTHER ACTIVITIES

Revenue for Other activities in 2007 was £7 million (2006 £8 million).

The total operating loss in 2007 was £37 million compared with £43 million in 2006. The loss in both years related mainly to corporate costs and business development expense.

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DISPOSALS, RE-MEASUREMENTS AND IMPAIRMENTS

The following items, described as ‘disposals, re-measurements and impairments’ are excluded from Business Performance as exclusion of these items provides a clearer presentation of the underlying performance of the Group. Disposals, re-measurements and impairments amounted, in aggregate, to a charge of £153 million before tax and interest (2006 £251  million gain). In 2007, this represented a non-cash re-measurement charge of £172 million (see details below), partly offset by disposal gains of £19 million. For a full reconciliation between BG Group’s Total Results and Business Performance, see note 2. For further details of amounts comprising disposals, re-measurements and impairments, see note 6.

In 2007, the profit on disposal of non-current assets was £19 million (2006 £49  million loss). This included a pre-tax profit of £18 million on disposal of certain Canadian assets, a pre-tax gain of £1 million relating to the disposal of certain E&P licences and a pre-tax loss of £1 million relating to the completion of BG Group’s disposal of its Mauritanian interests, all of which were recognised in the E&P segment.

In 2007, BG Group sold its 25% equity interest in Interconnector (UK) Limited, resulting in a pre-tax gain of £157 million. BG Group retained throughput capacity contracts in the Interconnector pipeline and concluded that the obligations associated with these contracts exceed the benefit expected to be realised from the Interconnector interest. Accordingly, a pre-tax provision of £156 million was established to reflect the present obligation under these contracts. The overall transaction generated a pre-tax gain on disposal of £1  million, which was recognised in the T&D segment.

In 2006, the loss on disposal of non-current assets included a pre-tax profit of £35  million on the disposal of two LNG vessels (recognised in the LNG segment) and net pre-tax losses of £7 million attributable to other disposals recognised in the T&D segment (£1 million profit) and Other activities segment (£8 million loss). During 2006, management committed to a plan to dispose of BG Group’s interests in Mauritania and the Microgen business in the UK. These programmes resulted in pre-tax charges of £67  million in the E&P segment and £10 million in the Other activities segment. The Microgen business was closed in 2007.

Given the current uncertainties surrounding the Brindisi LNG project, in 2006, an impairment provision of £104 million, recognised within operating costs in the LNG segment, was established against the cumulative capitalised construction costs of the Brindisi project.

Re-measurements included within other operating income in 2007 amounted to a non-cash charge of £172 million (2006 £404 million credit) attributable to the E&P segment. The re-measurements in both years primarily consisted of mark-to-market movements on certain long–term UK gas contracts that fall within the scope of IAS 39, ‘Financial Instruments: Recognition and Measurement’ and arise as a result of movements in UK gas prices and other commodity indices. The re-measurements reflect the differences between current market gas prices and actual prices to be realised under the gas sales contracts. This non-cash re-measurement unwinds as gas is delivered under the relevant contract.

Re-measurements presented within net finance costs include a re-measurement charge of £4 million (2006 £23 million credit) in respect of certain financial derivatives and adjustments made to borrowings in respect of effective fair value hedges and net foreign exchange gains of £6 million (2006 £22 million losses) on certain other borrowings in subsidiaries.

FINANCE COSTS

In 2007, BG Group’s net finance costs before re-measurements and including BG Group’s share of finance costs for joint ventures and associates, was £27 million (2006 £43  million).

The lower finance costs in 2007 reflect the reduction in average net borrowings and a decrease in BG Group’s share of finance costs for joint ventures and associates, partially offset by the effect of £28 million interest received in 2006 in relation to tax settlements. Total net finance costs, including re-measurements and BG Group’s share of finance costs for joint ventures and associates amounted to £25 million (2006 £42 million).

TAXATION

BG Group’s tax charge in 2007 before disposals, re-measurements and impairments and including BG Group’s share of taxation from joint ventures and associates was £1 385 million (2006 £1 375 million).

The Group’s tax charge in 2006 included a one-off adjustment associated with the increase in the North Sea tax rate from 40% to 50%. The one-off adjustment comprised a credit of £61 million to restate the deferred tax asset associated with certain fair value re-measurement balances and a charge of £38 million for other deferred tax balances.

The Group’s tax charge for 2007, including disposals, re-measurements and impairments and BG Group’s share of taxation from joint ventures and associates was £1 270  million (2006 £1 488 million).

In 2007, the tax charge on disposals, re-measurements and impairments included a £84  million credit (2006 £201 million charge) that arose on fair value re-measurement of certain commodity contracts and a tax credit of £32 million arising on the provision made in respect of retained capacity contracts in the Interconnector pipeline. In 2006, a deferred tax credit of £25 million arose on the impairment of BG Group’s interests in Mauritania and the Brindisi project.

CAPITAL INVESTMENT

Capital investment in 2007 was £2 497 million (2006 £1 847 million) and included £507  million (2006 £47 million) on acquisitions.

Capital investment in E&P (including capitalised exploration expenditure) was £1 652 million (2006 £1 165 million). E&P investment in 2007 and 2006 included projects in the UK, Egypt, Kazakhstan, Trinidad and Tobago, India and Tunisia.

Development investment (on proved properties) totalled £1 242 million compared with £721 million in 2006. Development expenditure in 2007 was primarily in respect of the Buzzard and Maria fields in the UK, West Delta Deep Marine fields in Egypt, Panna/Mukta fields in India, Karachaganak field in Kazakhstan and the Miskar and Hasdrubal fields in Tunisia.

Capital investment in LNG in 2007 was £194 million compared with £496 million in 2006. Investment in 2007 included the construction of LNG ships and the regasification terminal projects in Quintero Bay (Chile) and Milford Haven (UK). Investment in 2006 included the construction of LNG ships, and investment on the development of LNG regasification terminals at Milford Haven and Brindisi (Italy).

Capital investment in T&D in 2007 amounted to £117 million (2006 £123 million). Investment in 2007 and 2006 was incurred mainly on the expansion of the Comgas network.

Capital investment in Power during 2007 was £520 million (2006 £55 million), including £507 million for the acquisition of the Lake Road and Masspower generation assets in the USA and the remaining equity of Serene S.p.A. in Italy. Capital investment in 2006 included £47 million for the acquisition of the Dighton plant in the USA.

CASH FLOW

Cash generated by operations in 2007 was £3 691 million, an increase of £331 million (2006 £3 360 million), principally reflecting increased operating profit, excluding non-cash re-measurements and working capital movements (see note 30).

Cash flow from operating activities included tax paid of £950 million in 2007 compared with £979 million in 2006.

Dividends from joint ventures and associates amounted to £148 million in 2007 (2006 £193 million). Dividends received in 2006 benefited from the completion of a re-financing programme at Atlantic LNG.

Pre-tax proceeds from the disposal of subsidiary undertakings and non-current assets amounted to £464 million in 2007 (2006 £58 million) and principally represented the proceeds from the disposal of certain Canadian E&P assets, BG Group’s Mauritanian interests and an equity interest in Interconnector (UK) Limited. Receipts in 2006 primarily represented the disposal of two LNG vessels.

Payments to acquire property, plant and equipment and intangible assets amounted to £1 718 million in 2007 (2006 £1 313 million). Capital expenditure on business combinations and other investments amounted to £497 million in 2007 (2006 £67 million) and included £480 million, net of cash acquired, on the acquisition of power businesses in the USA and Italy.

Cash flows from financing activities accounted for a net cash outflow of £648 million in 2007 (2006 £1 192 million). This included £555 million (2006 £972 million) associated with the share repurchase programmes. Cash flows from financing activities also included a £37 million outflow (2006 £36 million) in respect of dividends paid to minority shareholders. Net interest received amounted to £3 million in 2007 (2006 £14  million).

FINANCING AND CAPITAL

Net funds (comprising cash and cash equivalent investments, finance leases, currency and interest rate derivative financial instruments and short- and long–term borrowings) were £25 million compared to £103 million of net borrowings as at 31 December 2006.

As at 31 December 2007, the Group’s share of third-party net borrowings in joint ventures and associates amounted to approximately £350 million (2006 approximately £400  million) and included gross borrowings of £312 million, which were guaranteed by the Group (2006  £410 million). Including BG Group shareholder loans of £658 million (2006 £591  million), the total Group share of these net borrowings was approximately £1 billion (2006 £1 billion). These net borrowings are taken into account in the Group’s share of the net assets in joint ventures and associates, which are accounted for using the equity method.

Total equity as at 31 December 2007 was £7 357 million compared with £6 465 million at the beginning of the year. For information on the Group dividend see Dividend section.

Details of the maturity, currency and interest rate profile of the Group’s borrowings as at 31 December 2007 are shown in note 20, and details of the Group’s cash and cash equivalents as at 31 December 2007 are shown in note 18.

BG Group’s principal borrowing entities are: BG Energy Holdings Limited (BGEH), including wholly owned subsidiary undertakings, the majority of whose borrowings are guaranteed by BGEH (collectively BGEH Borrowers); and Comgas and Gujarat Gas, who conduct their borrowing activities on a stand-alone basis and whose borrowings are made without recourse to other members of the Group.

BGEH is the Group’s principal credit rated entity, with long–term credit ratings of A+ from Fitch Ratings Limited, A2 from Moody’s Investors Service Ltd and A- from Standard & Poor’s. BGEH has short-term credit ratings of F1 from Fitch Ratings Limited, P-1 from Moody’s Investors Service Ltd and A-2 from Standard & Poor’s as at 12 March 2008.

As at 31 December 2007, BGEH had aggregate committed multicurrency revolving borrowing facilities of US$1 040 million, which mature in 2012. There are no restrictions on the application of funds under these facilities, all of which were undrawn as at 31 December 2007.

BGEH Borrowers had a US$1 billion US Commercial Paper Programme, which was unutilised, a US$1 billion Eurocommercial Paper Programme, of which US$969 million was unutilised, and a US$2 billion Euro Medium Term Note Programme, of which US$1 550 million was unutilised. In addition, at 31 December 2007, BGEH had uncommitted borrowing facilities including multicurrency lines, overdraft facilities of £60 million and credit facilities of US$40 million, all of which were unutilised.

BGEH Borrowers are also lessees under a number of LNG ship charters that constitute finance leases.

As at 31 December 2007, Comgas had committed borrowing facilities of Brazilian Reals (BRL) 1 795 million (£504 million), of which BRL 395 million (£111 million) was unutilised, and uncommitted borrowing facilities of BRL 578 million (£162 million), all of which were unutilised. Some of the borrowings of Comgas have restrictions on their use, being linked to capital projects.

The distribution of the profits of Comgas is restricted under local legislation. Details of these restrictions are shown in note 31. Distribution of the profits of BG Group’s other subsidiary undertakings is not materially restricted.

The Group proposes to meet its commitments from the operating cash flows of the business, existing cash and cash equivalent investments, from the money and capital markets and existing committed lines of credit.

SIGNIFICANT ACCOUNTING POLICIES

BG Group’s Principal Accounting Policies are set out here. To apply certain of these policies, management is required to make estimates and assumptions that affect reported profit, assets and liabilities. Actual outcomes could differ from those calculated based on estimates or assumptions.

BG Group believes that the accounting policies associated with exploration expenditure, depreciation, decommissioning, impairments, financial instruments, including commodity contracts, and revenue recognition are the significant policies where changes in the estimates and assumptions made could have a material impact on the consolidated Financial Statements.

One particular estimate that affects most of the policies discussed in this section is the estimation of hydrocarbon reserves. The Group’s estimates of reserves of gas and oil are reviewed and, where appropriate, updated quarterly. They are also subject to periodic review by external petroleum engineers. A number of factors impact on the amount of gas and oil reserves, including the available reservoir data, commodity prices and future costs, and the amount is subject to periodic revision as these factors change.

Exploration expenditure

BG Group accounts for exploration expenditure under the successful efforts method. The success or failure of each exploration effort is judged on a well-by-well basis as each potential hydrocarbon structure is identified and tested. Certain expenditure, such as licence acquisition and drilling costs, is capitalised within intangible assets pending determination of whether or not proved reserves have been discovered. A review is carried out at least annually and any unsuccessful expenditure is written off to the income statement. Costs that relate directly to the discovery and development of specific gas and oil reserves are capitalised and depreciated over the useful economic lives of those reserves. Certain expenditure that is general in nature, such as geological and geophysical exploration costs, is written off directly to the income statement.

An alternative policy would be the ‘full cost’ method under which all costs associated with exploring for and developing gas and oil reserves within a cost pool are capitalised and written off against income from subsequent production. While the reported profit under each method will be the same over the total life of the entity, profit is generally recognised earlier under the full cost method.

As at 31 December 2007, BG Group held a balance of £769 million relating to expenditure on unproved gas and oil reserves within intangible assets. Capitalised exploratory well costs included within this total amounted to £397 million. Exploration expenditure written off to the income statement in 2007 was £104 million (2006 £113 million).

Capitalised exploratory well costs relate to offshore and frontier areas where further work is being undertaken on geological and geophysical assessment, development design and commercial arrangements.

Depreciation

Exploration and production assets are depreciated using the unit of production method, based on estimates of proved developed reserves of those fields, except that a basis of total proved reserves is used for acquired interests and for facilities.

The Group estimates that a 1% change throughout 2007 in the estimation of proved and proved developed reserves associated with producing fields would have changed the 2007 depreciation charge by £5 million.

Decommissioning

Where a legal or constructive obligation has been incurred, decommissioning provisions are recognised in the Financial Statements at the net present value of the future expenditure estimated to be required to settle the Group’s decommissioning obligations. The discount implicit in recognising the decommissioning liability is unwound over the life of the provision and is included in the income statement as a financial item within finance costs. Where a provision gives access to future economic benefits, an asset is recognised and depreciated in accordance with the Group’s depreciation policy. Any changes to estimated costs are dealt with prospectively.

The measurement of decommissioning provisions involves the use of estimates and assumptions such as the discount rate used to determine the net present value of the liability. The estimated cost of decommissioning is based on engineering estimates and reports. In addition, the payment dates of expected decommissioning costs are uncertain and are based on economic assumptions surrounding the useful economic lives of the fields concerned.

On the basis that all other assumptions in the calculation remain the same, a 10% change in the cost estimates used to assess the final decommissioning obligations would result in a change to the decommissioning provision of £43 million as at 31 December 2007. This change would be principally offset by a change in the value of the associated asset, resulting in no material change to the consolidated net assets. The impact on 2008 profit of such a change is estimated to be £11 million (pre-tax), comprising a £9 million change in the depreciation charge and a £2  million change in the unwinding of the provision charge.

Impairments

The Group reviews its assets for impairment if there is an indication that the carrying amount may not be recoverable. Goodwill is subject to an impairment review at least annually, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Impairment reviews compare the carrying value of a cash generating unit (including associated goodwill) with its recoverable amount. The recoverable amount is the higher of the estimated value in use and fair value less costs to sell. Value in use is based on the net present value of estimated future pre-tax cash flows. Impairment reviews may cover all operating segments.

For the purposes of impairment testing, assets may be aggregated into appropriate cash generating units based on considerations including geographical location, the use of common facilities and marketing arrangements.

BG Group uses a range of long–term assumptions to determine the net present value of future cash flows for use in impairment reviews unless, by exception, short-term market assumptions are more appropriate to the asset under review. Particular assumptions that impact the calculations are commodity prices, exchange rates and discount rates. Risk Factors includes further detail in relation to commodity prices and exchange rates.

E&P activities form BG Group’s largest business segment, the results of which are sensitive to a number of factors, but particularly to commodity prices.

BG Group performs impairment testing for gas and oil reserves using its proved plus probable reserves estimates, which are based on the Society of Petroleum Engineers’ definition.

Financial instruments

The Group is exposed to credit risk, interest rate risk, exchange rate risk and liquidity risk. As part of its business operations, the Group uses derivative financial instruments (derivatives) in order to manage exposure to fluctuations in interest rates and exchange rates. The Group enters into interest rate swaps or forward rate agreements to manage the composition of floating and fixed rate debt. The Group enters into forward currency contracts and currency swaps to hedge certain foreign currency cash flows and to adjust the currency composition of its assets and liabilities. Certain agreements are combined foreign currency and interest swap transactions, described as cross currency interest rate swaps. The Group’s policy is not to use interest rate and exchange rate derivatives for speculative purposes.

Derivatives are recognised at fair value on the balance sheet. Certain derivatives are designated as hedges under IAS 39, in line with the Group’s risk management policies. Derivatives used for hedging are measured at fair value, and gains and losses arising from the re-measurement of these derivatives are either recognised in the income statement or deferred in equity, depending on the type of hedge. Movements in fair value of derivatives not formally included in hedging relationships are recognised in the income statement.

The Group calculates the fair value of medium- and long–term debt and derivatives by using market valuations where available or, where not available, by discounting all future cash flows using the market yield curve at the balance sheet date.

Loans held by the Group are measured at amortised cost except where they form the underlying transaction in an effective fair value hedge relationship, when the carrying amount is adjusted to reflect the fair value movements associated with the hedged risks. Other financial instruments, such as receivables balances, are measured at amortised cost less any provisions for impairment. Liabilities associated with financial guarantee contracts are initially measured at fair value and re-measured at each balance sheet date.

Commodity instruments

On adoption of IAS 39, BG Group assessed all commodity contracts to determine whether they fell within the scope of the standard at the inception of each contract. Within the ordinary course of business, the Group routinely enters into sale and purchase transactions for commodities. The majority of these transactions take the form of contracts that were entered into, and continue to be held for the purpose of receipt or delivery of the commodity, in accordance with the Group’s expected sale, purchase or usage requirements. Such contracts are not within the scope of IAS 39 and, accordingly, are not recognised in the Financial Statements.

Certain short-term contracts for the purchase and subsequent resale of third-party commodities are within the scope of IAS 39 and are recognised on the balance sheet at fair value, with movements in fair value recognised in the income statement.

Certain long–term gas contracts operating in the UK gas market have terms within the contract that constitute written options and, accordingly, they fall within the scope of IAS 39. They are recognised on the balance sheet at fair value, with movements in fair value recognised in the income statement.

The Group uses various commodity based derivative instruments to manage some of the risks arising from fluctuations in commodity prices. Such contracts include physical and net-settled forwards, futures, swaps and options. Where these derivatives have been designated under IAS 39 as cash flow hedges of underlying commodity price exposures, certain gains and losses attributable to these instruments are deferred in equity and recognised in the income statement when the underlying hedged transaction occurs.

All other net-settled commodity contracts are measured at fair value with gains and losses taken to the income statement.

Gas contracts and related derivatives associated with the physical purchase, storage and resale of third-party gas are presented on a net basis within other operating income.

Revenue recognition

BG Group recognises revenue when the significant risks and rewards of ownership of any goods and services have been transferred.

Revenue associated with exploration and production sales (of crude oil and petroleum products, including natural gas) is recorded when title passes to the customer. Revenue from the production of natural gas and oil in which the Group has an interest with other producers is recognised on the basis of the Group’s working interest and the terms of the relevant production sharing contracts (entitlement method). Differences between production sold and the Group’s share of production are not significant.

Sales of LNG and associated products are recognised when title passes to the customer. LNG shipping revenue is recognised over the period of the relevant contract.

Revenue from gas transmission and distribution activities is recognised in the same period in which the related volumes are delivered to the customer.

For power stations which are contracted based on availability, revenue is recognised based on the availability status of the power station to produce at a given point in time. Where power output is sold under pool or other contractual arrangements and where revenue is linked to the costs of actual production, revenue is recognised when the output is delivered.

All other revenue is recognised when title passes to the customer.

RELATED PARTY TRANSACTIONS

BG Group provides goods and services to, and receives goods and services from, its joint ventures and associates.

In the year ended 31 December 2007, the Group incurred charges of £455 million (2006  £448 million) and, in turn, received income of £128 million (2006 £120 million) under these arrangements. In addition, the Group provides financing to some of these parties by way of loans. As at 31 December 2007, loans of £658 million (2006 £591 million) were due from joint ventures and associates. These loans are accounted for as part of the Group’s investment in joint ventures and associates and are disclosed in note 14. Interest of £29 million (2006  £34 million) was charged on these loans during the year at interest rates of between 0% and 9.95% (2006 0% and 9.95%). The maximum debt outstanding during the year was £658  million (2006 £601 million).

During 2007, Comgas received charges relating to trading transactions of £1 million (2006 £1 million) from another shareholder. As at 31 December 2007, £nil was outstanding with this party (2006 £nil).

During the year, there were also a number of transactions between the Company and its subsidiary undertakings that are eliminated on consolidation and therefore not disclosed.

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