British gas major BG Group was responsible for 55% of the liquefied natural gas deliveries made to the U.S. In the U.S., coal is falling out of favor as a source of electricity, and even in developing nations, natural gas is becoming increasingly popular as a fuel for power generation because it burns much cleaner than oil.
Natural gas isn't easily transported in its gas form; it must be liquefied to be moved long distances. BG Group is investing heavily in LNG infrastructure - liquefaction plants in emerging gas producing nations and regasification plants in growing natural gas markets. In expanding internationally, BG Group faces political threats - both economic and violent. BG Group has assets in Nigeria, Egypt, and Trinidad and Tobago. If the governments of these developing nations realize the full value of their petroleum assets, it's likely BG Group will face issues related to governmental interference.
Still, with oil prices soaring to record levels, BG Group is continuing to expand into new regions and investing in expensive, high-end drilling technology, like deepwater oil exploration, which BG Group is doing in conjunction with Petrobras. Though deepwater exploration can be twice as expensive as traditional offshore rigs, previous discoveries have been enormous; Petrobras and BG Group's discovery of oil and gas in the Tupi deepwater field offshore Brazil has been estimated at 1.7 to 10 billion BOE. With oil prices as high as they are, BG Group can afford to pay more to get more.
BG Group operates four business segments.
BG Group has oil and gas reserves in over 20 countries, containing 2,039 million barrels of oil equivalent. In 2007, it produced 220.3 mmboe in 11 countries, a 1% increase over 2006. About 70% of its production comes from natural gas.
The LNG segment operates infrastructure used in the liquefaction, regasification, and delivery of liquefied natural gas. In 2007, it delivered to 9 of the world's 17 LNG-importing nations. The company has liquefaction facilities in Egypt and Trinidad and Tobago, and regasification facilities in the U.S., the UK, Chile, and Italy. It also has long-term contracts to receive LNG supply from Egypt, Equatorial Guinea, Nigeria, and Trinidad and Tobago. The company sells LNG to natural gas distributors and marketers. In 2007, BG Group managed 13 million tonnes of LNG - 31% more than in 2006.
This segment of BG's business owns interests in natural gas transmission and utilities (distribution) companies in Brazil and India. In Brazil, the company owns a 60.1% stake in Comgas, the country's largest gas utility, with 572,000 customers. In India, the company owns a 65.12% interest in Gujarat Gas Company Limited, India's largest private gas utility, and a 49.75% interest in Mahanagar Gas Limited, India's largest city gas utility. Gujarat increased its delivery volumes by 10%, to 1.202 Bcf, and Mahanagar increased its delivery volumes by 2%, to 506 MMCf.
BG Group has 4.3 GW of power generating capacity. In the UK, it has a 100% interest in one 1.3 GW plant and a 50% interest in a 1.1 GW plant. It has a 40% stake in 1.5 GW worth of power plants in the Phillipines, a 20% interest in a 760 MW plant in Malaysia. BG Group owns Italy's Serene S.p.A, which has 400 MW worth of generating capacity. Finally, in the U.S., it owns over 1.2 GW of generating plants.
Oil prices have been trending upwards in the past decade after averaging around $20 during the 1990s. As oil prices rise, oil and gas exploration companies scramble to increase production; the more that can be produced when margins are high, the more profits are made. As conventional, easy-access wells mature, explorers are moving to develop more difficult reserves in more complex and, thus, more expensive ways. The most promising of the technologies in which BG Group is invested is deepwater oil exploration. BG Group has invested in deepwater drilling in conjunction with Brazilian major, Petrobras. The company has made several deepwater discoveries with Petrobras, including a June 2008 find in the Santos Basin - the fifth since its deepwater program off Brazil's coast began in 2005.
The economic viability of deepwater exploration hinges on high oil prices, since deepwater drilling rigs are scarce. An average 1500 foot semi-submersible costs $293 thousand per day, while an ultra-deepwater semi-submersible can go for over $600 thousand per day. If oil prices drop, BG Group's deepwater drilling programs will become uneconomical, and it will start to lose money on its long-term deepwater drilling rig contracts.
BG Group's financials are reported in British Sterling Pounds (£), but oil is priced in dollars on international markets. This means that when the value of the pound rises, the value of BG Group's oil falls. As a result, large fluctuations in the currency rate between the US Dollar and the Pound can have large impacts on BG Group's earnings.
As a major oil company, BG Group controls oil reserves, pipelines, and LNG plants on five continents, in countries ranging from the developed to the Third World, and is exposed to the politics of every one.
In more stable countries, BG Group potentially faces reserve nationalization or contract renegotiation. The company has had its assets nationalized before, when in 2006 newly elected Bolivian President Evo Morales nationalized the country's gas holdings and forced the company to renegotiate its contracts to give the government a larger share of revenues; during the 180 day period in which Bolivia's forces occupied the gas fields, 82% of the profits went straight to the government, and the renegotiated contracts weren't much better. If the company's operations are severely impacted by political events, it can have dramatic effects on BG Group's earnings.
BG, because of its global reach and large size, competes with the world's largest oil companies - the oil majors. Unlike the majors, however, BG Group does not refine petroleum; it is vertically integrated only on the natural gas side of the business, as it explores for, produces, processes, transports, and sells natural gas; it also uses it to power electric plants. The company explores for and produces oil, but it doesn't refine it, it sells the crude to other refiners.
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