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Angus Barry

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Zafar Aziz

Bg Group Plc Ads (OTCQX:BRGYY) Deutsche Bank's Depositary Receipts Virtual Investor Conference March 19, 2013 1:15 PM ET

Zafar Aziz

Hello, and welcome to our next presentation by BG Group from the U.K. My name is Zafar Aziz, Head of DR Market Solutions at Deutsche Bank Depository Team.

Before I introduce you to the next presentation, a few quick points. During the presentation, please feel free to submit questions in the small Ask a Question box below the speaker photo. There's no need to wait until the end of the presentation, just type in your questions. Please also remember that after the presentation and the Q&A session, don't log out. You'll automatically be transported to the BG Group booth where you can continue the conversation via the chat box and access additional investor material.

On a final note, all of today's presentations we've recorded and are available for replay at your convenience by the Deutsche Bank website, www.adr.db.com.

At this point, I'm very pleased to welcome Angus Barry from BG Group, Investor Relations Manager. Over to you, Angus.

Angus Barry

Thank you. And good afternoon, ladies and gentlemen, and welcome to this presentation about BG Group.

My name is Angus Barry, and I've worked at BG for over a decade and have been in my current role as an Investor Relations Manager for almost 2 years.

What I'm aiming to achieve today is threefold: number one, give you an introduction to BG Group; secondly, highlight the group's core characteristics; and finally, showcase some of our key project developments, which will drive the group forward over the next few years.

This presentation will take approximately 15 minutes, and I hope to take as many questions from you as possible.

Included in this presentation is a legal notice, which I will leave you to read at your leisure.

So please let me start by providing an introduction to BG Group. BG is a global gas major. Its core business segments are exploration and production, E&P; and liquefied natural gas, also known as LNG. It is listed on the London Stock Exchange and is currently the 10th largest company by market capitalization, which, today, stands at around $60 billion. In the U.S., BG Group has established a sponsored Level 1 ADR program. The ADRs trade on the premiere tier of the over-the-counter market.

In 2012, the group's daily production rate was around 650,000 barrels of oil equivalent with approximately 70% of the production, gas; and 30%, oil. The company headquarters are based near London, in England. And today, BG has a workforce of around 6,000 employees based around the globe.

To try and provide some metrics for the group, this next slide provides our financial highlights for the last year, the 12 months to the 31st of December 2012. In 2012, BG Group delivered total operating profit of over $8 billion split approximately 2/3 from our Upstream business, Exploration and Production; and 1/3 from our LNG, Shipping & Marketing segments. Cash generated from operations was up 10% year-on-year to over $10 billion whilst earnings increased 3% year-on-year to almost $4.4 billion.

And finally, as part of the introduction section, this slide illustrates the countries where we have operations. The group currently has oil and gas production in 12 countries with the highest producers last year being Egypt, Kazakhstan and the U.K. Despite our legacy as a U.K. business, only 15% of our production last year came from the North Sea. Going forward, we expect this diminishing trend to continue as our key growth projects in Brazil and Australia ramp up production. In Brazil, we have only commenced operations from our big 5 oil fields in the pre-salt Santos Basin. Whilst in Australia, we are constructing a 2-train LNG project, which is expected to start production in 2014. I'll come back to both of these key projects later in the presentation.

I will now turn to BG Group's core characteristics. What has made BG the company it is today? Well, from the 1st of January this year, we have a new CEO, Chris Finlayson. He was appointed by our board, chaired by Andrew Gould, who you may know as the former CEO of Schlumberger. Chris has been with BG Group for over 2 years, having spent most of his career at Shell. And in the first presentation as CEO to investors last month, he stressed that he wanted to build on the group's distinctive strengths. He used this slide, reshown here, which highlights a world-class exploration team, a unique LNG model and the commercial agility which resides within this organization given our heritage as a gas company. Leveraging off these strengths and continuing to actively review our portfolio, we aim to deliver industry-leading growth in shareholder value. And we expect to see significant volume and cash flow growth from Australia and Brazil in 2014 and 2015.

Let me now provide a little more detail on these 3 distinctive strengths. The first thing Chris Finlayson did on being appointed CEO was to promote the Head of Exploration. Malcolm Brown who's been Head of Exploration at BG Group for 12 of the last 16 years now sits on the Group Executive Committee reporting directly to the CEO. Testament to his success is an independent study performed by Wood Mackenzie looking at the respective performance of oil and gas companies between 2001 and 2010. This study recognized BG Group's exploration performance sustained over the past decade, which places our company ahead of the majors in terms of value creation at $25 billion over the last 10 years, return on the investment -- return on exploration investment at 24% and reserves replacement averaging more than 300% per annum.

This relative performance paints a clear picture of BG Group delivering top quartile performance for over a decade, confirming the group's capability as one of the industry's leading explorers.

Most recently, you may have read about our success in East Africa offshore Tanzania where we have drilled 7 exploration wells in the last 2 years, and we have had 7 successes. Going forward, we hope to drill our first exploration well offshore Kenya by the end of this year.

Now let's turn to our LNG business. BG Group's LNG activities are founded on an understanding of our target markets and customers along with a unique combination of LNG assets, flexible supply, shipping capacity and marketing capabilities. We have one of the largest LNG fleets of any international oil and gas company, consisting of up to 28 owned or chartered modern vessels. In trying to simplify this area of the business, our LNG segment makes money because through our long-term supply source contracts, we are able to purchase LNG at a relatively low price based on the Henry Hub Index and then sell that same LNG to customers at a relatively high price based on an oil index.

Although originally focused in the Atlantic Basin, the flexible nature of our portfolio of assets has allowed us to access premium markets globally. The arbitrage opportunity has, in fact, been created by the U.S. shale gas revolution that has caused significant price distortions between the regional gas markets. This has allowed BG Group to leverage off our LNG asset base and divert cargoes originally intended for Lake Charles in Louisiana to fast-growing energy-hungry markets in Asia.

Now, the third core competency I highlighted earlier was commercial agility. This in part stems from our gas heritage. Monetizing gas is generally a lot harder than monetizing oil. Therefore, we have a significant in-house commercial team within our organization. It also stems from the fact that we are still a relatively small company able to make quick decisions or move projects forward at speed.

As examples, I will use the 2 key growth projects I highlighted earlier. Australia, where from entering the country in 2006 -- 2008, sorry, we now expect to be exporting LNG in 2014, just 6 years later. And in Brazil, where from the first significant discovery in 2006, we started production in 2010, and now just 7 years later, have commitments for 15 FPSOs to be onstream by 2018.

Let's look at as Australia first in a bit more detail. The Queensland Curtis LNG project actually represents the integration of 4 parallel projects. It starts with the off-stream development with initially 2,000 wells and gas and water treatment facilities in the Surat Basin. These are the orange areas in the bottom half of the map. To quantify our progress so far, we have drilled around 1,160 wells through the end of 2012 out of the 2,000 required. Secondly, we have 400 -- 540 kilometers of main pipelines connecting the gas fields to Curtis Island. This is represented on the map by the dotted orange line in the gas fields and the thick orange line running northeast towards the coast. On the coast, a 2-train LNG plant is being built by Bechtel on Curtis Island with capacity of 8.5 million tonnes in the first phase. And finally, market development, which has so far secured 10 million tonnes per annum of LNG sales into high-value Asia Pacific markets: Japan, China and Singapore.

Over 2 years on from project sanction, the group is well on track for LNG sales to start in the second half of 2014. We have completed over 1/2 the 2-train project and more than 60% of the scope required to fill the first train. 94% of the project is now covered by contracts and other agreements. Consequently, with significant remaining contingency on a project that is on schedule, we remain confident that we will deliver within our budget at $20.4 billion.

Now, let me turn to Brazil. BG Group has a long history in Brazil, dating all the way back to 1994. In 2000, with our partners, we were awarded the BMS-09 and 11 blocks in the pre-salt offshore Santos Basin. These blocks have, in many ways, transformed the organization. In 2006, the Lula Field was discovered with Carioca, Sapinhoá, Iara, and Iracema all following in the next 3 years. In 2010, production commenced on the first floating platform storage offloading vessel, also known as an FPSO, on Lula with Sapinhoá being second of the big 5 into production earlier this year. Iracema is due on production next year with Carioca and Iara expected to follow thereafter.

In Brazil, we are also making good progress. We continue to see excellent reservoir performance. These are some of the best barrels in the business now underpinned by more than 65 million barrels already produced. An independent certification of BG Group's reserves and resources has confirmed a mid-case 6 billion barrels of oil equivalent and an upside of 8 billion barrels of oil equivalent. Last year, the partnership added 2 further FPSOs to its plans, meaning that 15 FPSOs with a total capacity of some 2.5 million barrels of oil equivalent will be in place by 2018.

So to conclude this brief presentation, please let me recap with a key slide, which sets out the group's distinctive strengths: a world-class exploration team, a unique LNG model and commercial agility.

Before we go to any questions, please let me give you a couple of dates for your diary. On May 2, BG Group will be releasing our Q1 results. And on May 14, we'll be holding our Strategy Presentation in London, which will be available via webcast where our new CEO will set out his vision for BG Group. Finally, if you are interested, please feel free to check out other contents on BG Group at the following sites.

Thank you. And I will now turn to the Q&A.

Question-and-Answer Session

Angus Barry

Okay, the first question we have here is from Bill Yeger [ph]. It says, are there further plans to work on more collaborative projects with Ophir Energy?

Well, I think, so far, we have established a very good relationship with Ophir. We farmed into Blocks 1, 3 and 4 in Tanzania in 2010. We had 3 successes in 2011 and a further 4 in 2012, all offshore Tanzania. At this point in time, our focus is really with them on those assets. And there was a news release this morning from BG Group around the flow test at Jodari, which are encouraging and will hopefully underpin an energy export project out of Tanzania.

Next question I have here is from Emma [ph] Cogen [ph]. She asks, what would you say BG's distinctive development strengths are?

This is a good question and one that was asked of our new CEO, Chris Finlayson, at our Q4 results from the 5th of February. The question there was, wouldn't you consider developments one of your core attributes. And his answer was that we do consider it to be a skill within the organization, but we probably, while aspiring to be in the top quartile, actually reside outside of the top of the second quartile. Now given the amount of capital that we're spending in both Australia and Brazil, he sees developments as actually fundamental to driving growth in BG Group. Therefore, the onus is really very much on this organization to highlight to the market and provide milestones to indicate how we are progressing. So for instance, if you're interested, and it's on our website, which is www.bg-group.com. On the presentation that we gave on the 5th of February, it has milestones for Australia on a quarter-by-quarter basis about what we expect to do in terms of drilling wells, in terms of bringing the gas and water gathering systems on, in terms of the pipeline and in terms of the LNG facility on Curtis Island. So what we're trying to do is provide the market with more information about how we are delivering these projects. Now, we always get a lot of questions around Brazil. And often they are concerned with the supply chain in that country. But what we can say is that we have had a terrific business relationship with Petrobras. We have seen FPSO 2 come onstream this year. We have seen -- well, FPSO 3 is due on in May later this year. We have seen road bumps in terms of getting everything joined up from the supply side. But where there is the case, we have the ability to go to international markets. We have that flexibility because of the priority of these fields in Brazil to make sure that the project stays on schedule. Emma [ph], I think it's a very good question. I kind of answered that in a little bit of a preamble. But our view is that developments as a -- is distinctive as something that we have as an organization. You look at Egypt where we went from discovery to LNG export in 6 years. We're doing the same in Australia. But it's something that we can be better at and we're going to strive to be better at.

Next question from John Siato [ph]. He says, can you please elaborate a bit more on BG's relationship with Petrobras. I am a current Petrobras shareholder.

Well, I touched on it a bit in the last answer. I mean, I think the first thing to say is that we have found Petrobras to be a world-class operator offshore Brazil. I mentioned in the presentation how Lula was discovered in 2006 and it was onstream in 2010. I mean, this represents world-class performance, comparable with anything that occurred in the North Sea or the Gulf of Mexico, that she outstrips those 2 basins in terms of the speed with which these fields are being developed. We are in the relatively fortunate position of having been one of the first players into Brazil with our contracts BMS-09 and BMS-11 in -- signed in the year 2000. And what that means is that we're at the front of the pre-salt queue. And we are seeing Petrobras prioritize these blocks exactly because they are the best barrels -- well, they're certainly the best barrels in our portfolio. We assume they're the best barrels in their portfolio as well. And the other partners, Repsol, Galp, et cetera, we are all fully aligned on prioritizing the pre-salt Santos Basin and fast tracking these developments. So we find Petrobras to be an excellent operator. The other thing I would say about them is that they are excellent at commercial and procurement. I mean, the scale of the assets that we have in Brazil are pretty enormous. I mean, I talked about 15 FPSOs. What you're doing is replicating the same thing time and again. And they drive down costs in a very efficient manner. So I think, we've also probably been helped [ph] with das Gracas as the new CEO who's a technical individual. She promoted Formigli to become the Head of E&P. He previously was the head of the pre-salt Santos Basin and we see him as an excellent operator and again someone who understands and has lived [ph] with these fields for some time. So our working relationship with Petrobras, I would say, is excellent. It needs to be excellent given the importance. And as a non-operator, we try and assist them wherever we can. One of the interesting things about Brazil is that a lot of the exploration risk is being removed from the basin whereas what you see in a lot of places, there is exploration risk here, there really hasn't been hardly any dry holes at all. So what's happening is all companies are putting money to development risk. So we're all looking at various projects and working together to see how we can reduce the costs because there are significant -- these are billion, multibillion-dollar investments, and therefore if we can have savings on 1 FPSO that we can place it across whether at subsea water or whether that's actually using 3 rigs rather than one to drill the wells, you have specialist rigs to drill the top hole then to drill for the salts and the further rigs to complete. There's all sorts of things that as a consortium we're looking at to ensure that these things are as cost effective as possible.

Angus, can you dive a little deeper into your operations in the U.S. as they relate to shale gas drilling? That is also from John Villani [ph].

I can. I mean, we entered the U.S. shale. We have assets in both the Haynesville in Texas and Louisiana, and the Marcellus up in Pennsylvania and West Virginia. And initially, we were ramping up rigs and expecting to be running with up to 35 rigs by this time. However, with the falling LNG -- falling Henry Hub price, one of the beauties of the U.S. is that it is flexible, so we have ramped back down such that we are now running with about 5 rigs in the U.S. with our partner EXCO Resources. So I think as an organization, we're in the fortunate position that we, with our LNG business, that actually low Henry Hub prices help our LNG business repurchase much of our LNG on a Henry Hub basis. Additionally, as a commercially agile company, one of the things that we have done is we were the landmark offtaker for the Sabine Pass LNG export facility, which Cheniere have in the Gulf of Mexico. And we were the first company there, took 3.5 million tonnes for 20 years and then followed that with another 2 million tonnes. So we're going to take 5.5 million tonnes of LNG starting up in 2015 from that Sabine Pass facility. So to answer your question. Yes, we still do have a U.S. shale gas business, but we have turned it right down in response to the relatively low Henry Hub prices that we've seen. As a business, we continue to make money in our LNG energy business with low Henry Hub prices. And in fact, we have strived be an LNG exporter both at Sabine Pass, as I said, where we were the first to sign the landmark agreement. And we also have our own export project at Lake Charles in Louisiana where we have applied for non-FTA approval. So that is currently in the fiscal system, so we hope to hear from that shortly.

Go down the list of questions. There's one here from Lisa Hanson. So it's when will the recently announced Tanzania LNG terminal come online and expected impact on business?

Well, again this is a very good question, very topical. You may have seen in the news releases, only yesterday BG Group, with its partner, Ophir, highlighted the well test capabilities out the Jodari discovery in Block 1 offshore Tanzania. So from BG Group's perspective, we are very keen to push forward as fast as we can. We're also conscious that Statoil with their partner, Exxon Mobil, have found significant quantities of gas. There was another announcement from them yesterday as well, in Block 2. So I think in that regard, this is good news for Tanzania. It's good news for BG Group. But there is still a long way to go. Building LNG trains, they are capital intensive and they require a number of things including partner and politics all to be aligned. But what I can say is Tanzania is very well located in terms of selling LNG. It points directly at India. It's why we were on the East Coast of Africa in the first place, having moved some of our exploration team from the West Coast of Africa. So it is very well located in that regard. And some of the geological risk has been removed with the discoveries that are being made to date. At the same time, I would say, we have put, we've done greenfield LNG in both Trinidad and Tobago and Egypt, and therefore, we are reluctant at this point in time to give a start date. At this time, we are really focused on trying to provide an LNG site on the coast where we could build a 2-train terminal and we are in discussions with other partners and parties in Tanzania. One of the most important things here as well is we need ensure that all the -- everything is going to line up so that the country of Tanzania and all the international oil and gas companies can make a return from their business here. It's no good starting something and then finding that things aren't in balance and then things are skewed later on. What we want to do is make sure that everything is right upfront. And therefore, that means us assisting with the government in terms of their gas master plan and really working with them to ensure that the development -- the LNG development in Tanzania assists all parties involved. So, sorry not to give you a direct answer. But it's one of the -- within our portfolio, it's one of the exciting LNG growth options. We also have a potential train 3 in Australia. We are looking at Western Canada where we have a site at Prince Rupert Island. And I also mentioned our Lake Charles facility in Louisiana where we are trying to turn an import facility into an export facility.

I'm conscious that I've almost had my half hour. But I would like to thank you all very much for the questions that you've sent. I will be available once we go off-line in the chat room. So please feel free to continue to send me your questions, and I will answer as I can. All right. Well, thank you very much indeed.

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