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Avinash Gandhi

BRGYY AT A GLANCE

 

 

 

 

 

 

In 2007, British gas major BG Group was responsible for 55% of the liquefied natural gas deliveries made to the U.S.^[1] 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 is 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. In 2006, the company's Bolivian holdings were nationalized by Evo Morales, forcing it to renegotiate its contracts.^[2] 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 have a repeat of its Bolivia experience. For example, in June 2008, Nigerian rebels bombed an offshore oil rig^[3]; if BG Group's pipeline in Nigeria is bombed, the company's lucrative supply deal with Nigeria LNG will be worthless.

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^[4], 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.^[5] With oil prices as high as they are, BG Group can afford to pay more to get more.

Company Overview

BG Group's revenue has increased, but its operating income fell because of the adverse affect of the rising value of the British pound against the American dollar, in which oil is priced.^[6]

Business and Financial Metrics

In 2007, BG Group made £8,158 million, up from £7,647 million in 2006. Its operating income, however, fell from £3,121 to £2,848, primarily because of the appreciation of the pound.^[8]

Business Segments

BG Group operates four business segments. Note: revenue/income breakdown does not add up to 100% because of other revenue/expenses from investments, currency fluctuations, etc.

The majority of BG Group's operating profit comes from Europe and Central Asia.^[9]

Exploration and Production (48.5% of total revenue, 73.5% of operating profits^[10])'

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.^[11]

Liquefied Natural Gas (37.2%, 16%^[12])

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.^[13]

Transmission and Distribution (11.7%, 7.6%^[14])

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 and a 5% sales increase in 2007. 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. In 2007, Gujarat increased its delivery volumes by 10%, to 1.202 Bcf, and Mahanagar increased its delivery volumes by 2%, to 506 MMCf.^[15]

Power Generation (6.3%, 4%^[16])

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. In 2007, operating profit for the segment grew 23%.^[17]

Trends and Forces

BG Group is Taking Advantage of High Oil Prices by Developing Expensive, Unconventional Production Technologies

Since the middle of 2007, oil prices have been trending upwards, to record highs; on the 21st of May, 2008, for example, oil traded at $134.10 per barrel^[18], after averaging around $20 during the 1990s.^[19] 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; in late 2007, the companies seemed to have struck gold when Petrobras announced that it had discovered a deepwater gas reserve in the Tupi field off the coast of Brazil. BG Group estimated the size of the field to be anywhere from 1.7 billion to 10 billion barrels of oil equivalent - and BG Group has a 25% stake in developing the region.^[20] The company has made several other 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.^[21]

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^[22], while an ultra-deepwater semi-submersible can go for over $600 thousand per day.^[23] 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 is Hurt by the Appreciation of the Pound

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. In 2007, the British pound hit an all time high against the dollar - 1£ per 2.067$.^[24] Correspondingly, BG Group reported that its average price per barrel rose between 2006 and 2007 by $7.9 but it rose by just £0.7.^[25] Despite the fact that BG Group's revenues rose in 2007, its operating income fell because of the pound's appreciation.^[26]

Investing in Natural Gas Infrastructure Increases the Company's Exposure to a Potentially High-Growth Market

BG Group in investing heavily in Liquefied Natural Gas sending, receiving, and transporting infrastructure; its LNG segment saw a 31% increase in the amount of LNG it handled in 2007^[27], and the company ships to nine of the world's 17 LNG-importing countries.

In the face of environmental criticism of coal as a form of energy, many electric utilities in the U.S. are adopting natural gas as the fuel for their large-scale generators^[28] The supply to match this growing demand cannot be met solely through natural gas production in the U.S.; but importing natural gas requires the use of new technologies that convert the fuel from its gas form to a more-easily-transportable liquid form - liquefied natural gas (LNG). In 2007, BG Group was responsible for 55% of the LNG imported into the United States; its deliveries met 1% of the country's overall gas use.^[29] The company's strong track record in the States will let it grow with U.S. gas demand, and with regasification terminals being built in Europe, Italy, and Chile, it is expanding into Europe and South America where future demand also has the potential to grow.

With International Expansion Comes Political Risk

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.^[30]

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.^[31]

Other oil companies have faced even harsher treatment. In 2007, oil major ConocoPhillips lost $3.7 billion when Hugo Chavez, President of Venezuela, nationalized the company's holdings.^[32] In Russia, national oil company Gazprom has stated that it will buy BP's $20 billion share of TNK-BP by the end of 2008 - though BP has never negotiated with the company and has no intention of selling.^[33] Russian government raids into BP and TNK-BP's Moscow offices, supposedly for investigating allegations of industrial espionage, suggest that the government is backing Gazprom by intimidating BP. If the less developed countries (LCDs) that BG Group operates in, like Trinidad, Egypt, and Nigeria, decide to take control of their resources in the same way as Bolivia, Venezuela, and Russia, BG will have trouble.

BG Groups' operations in Nigeria, Trinidad, and Egypt are also threatened by radical political and religious movements. Over the course of 2008, for example, oil companies in Nigeria have been the targets of several attacks by revolutionary groups; in June, Shell was forced to shut down production on one of its deepwater rigs, after rebels made an unprecedented attack 75 miles offshore, cutting the country's oil output by 10%.^[34] BG Group signed an agreement in 2007 to buy 2.25 million tonnes of LNG per year for 20 years from an in-construction Nigeria LNG processing facilities.^[35] If the company's pipeline is hit by a rebel attack and damaged to the point where it can't transport LNG, its supply deal (and, therefore, money) would go down the drain. Terrorism in Islamic countries, like Trinidad and Egypt, would have similarly detrimental effects to the company's operations.

Competition

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.

Note: Specific data for natural gas and crude oil production and reserves for BG Group are unavailable; only total, barrel of oil equivalent numbers were available. The majority of the company's 2007 production, however, was of natural gas.

Notes

1. ↑ BG Group: Business Segments: Liquefied Natural Gas
2. ↑ "As Bolivia Nationalizes Oil & Gas, is Mining Next?"
3. ↑ Telegraph: " Shell shuts Nigerian oilfield after rebels attack"
4. ↑ The Press and Journal: "Ocean Rig sets new deepwater semi day-rate record"
5. ↑ Upstream Online: "Petrobras scores big at Tupi"
6. ↑ BG Group Annual Report
7. ↑ BG Group Annual Report
8. ↑ BG Group Annual Report
9. ↑ BG Group Annual Report, Page 84
10. ↑ BG Group Annual Report
11. ↑ BG Group Annual Report
12. ↑ BG Group Annual Report
13. ↑ BG Group Annual Report
14. ↑ BG Group Annual Report
15. ↑ BG Group Annual Report
16. ↑ BG Group Annual Report
17. ↑ BG Group Annual Report
18. ↑ Reuters: "Oil surges over $134 on supply woes, weak dollar"
19. ↑ Oil Prices Chart
20. ↑ Upstream Online: "Petrobras scores big at Tupi"
21. ↑ BG Group Press Release: "BG Group announces further success in Santos Basin, offshore Brazil"
22. ↑ Rigzone: Offshore Rig Day Rates
23. ↑ The Press and Journal: "Ocean Rig sets new deepwater semi day-rate record"
24. ↑ Market Sense: "Pound touches all time high against US dollar"
25. ↑ BG Group Annual Report, Page 30
26. ↑ BG Group Annual Report
27. ↑ BG Group: Liquefied Natural Gas (LNG)
28. ↑ International Herald Tribune: "As U.S. utilities switch to gas, energy prices expected to increase"
29. ↑ BG Group: Business Segments: Liquefied Natural Gas
30. ↑ BG Group Web Site: Where We Operate
31. ↑ "As Bolivia Nationalizes Oil & Gas, is Mining Next?"
32. ↑ COP 2007 10-K, Page 11
33. ↑ "Gazprom set to buy TNK-BP for $20 bln by yearend - paper"
34. ↑ Telegraph: " Shell shuts Nigerian oilfield after rebels attack"
35. ↑ BG Group Annual Report, page 2
36. ↑ COP 2007 10-K
37. ↑ RDS 2007 10-K
38. ↑ XOM 2007 10-K
39. ↑ CVX 2007 10-K
40. ↑ BP 2007 10-K
41. ↑ LUKOIL Company: General Information
42. ↑ E 2007 Annual Report
43. ↑ Total 2007 Results Press Release
44. ↑ CEO 2007 20-F
45. ↑ BG Group Annual Report, Page 16

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