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BG Group plc (ADR) (OTCQX:BRGYY)

Q2 2013 Earnings Call

July 26, 2013 7:00 am ET

Executives

Bruce Connery

Chris Finlayson - Chief Executive Officer, Executive Director, Chairman of Governance Committee, Chairman of Investment Committee, Chairman of Exploration & Appraisal Committee, Member of Chairmans Committee and Member of Finance Committee

Den Jones - Executive Director, Chairman of Risk Management Committee, Member of Chairmans Committee, Member of Finance Committee and Member of Investment Committee

Analysts

Oswald Clint - Sanford C. Bernstein & Co., LLC., Research Division

Brendan Warn - Jefferies LLC, Research Division

Jason Gammel - Macquarie Research

Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division

Thomas Yoichi Adolff - Crédit Suisse AG, Research Division

Michael J. Alsford - Citigroup Inc, Research Division

Jon Rigby - UBS Investment Bank, Research Division

Michele della Vigna - Goldman Sachs Group Inc., Research Division

Anish Kapadia - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Rahim Karim - Barclays Capital, Research Division

Frederick Lucas - JP Morgan Chase & Co, Research Division

Andrew Whittock - Liberum Capital Limited, Research Division

Irene Himona - Societe Generale Cross Asset Research

Alejandro Demichelis - Exane BNP Paribas, Research Division

Jason Kenney - Grupo Santander, Research Division

Matthew Yates - BofA Merrill Lynch, Research Division

Neill Morton - Investec Securities (UK), Research Division

Operator

Welcome, ladies and gentlemen, to the BG Group plc 2013 Second Quarter Results. [Operator Instructions] Just to remind you, the call is being recorded. I'm now pleased to hand over to Bruce Connery. Over to you, Bruce.

Bruce Connery

Good afternoon, ladies and gentlemen, and welcome to BG Group's Second Quarter Results Conference Call. During the course of this call, our Chief Executive, Chris Finlayson; and our Interim Chief Financial Officer, Den Jones, will take you through the quarter's key business highlights. And then Chris and Den will answer your questions. During this call, we'll focus on our business performance results, as highlighted in our results statement.

We'll also be making various forward-looking statements. Factors that could cause our actual results to differ materially from the results we currently expect are set out in detail in the principal risk and uncertainties section of our 2012 Annual Report and Account, and also in the results statement published this morning.

Please note that we have produced a brief set of slides that support today's announcement, and you can find them in the results section of our website.

Thank you, and now over to Chris.

Chris Finlayson

Thank you, Bruce, and good afternoon, ladies and gentlemen. Thanks a lot for joining us today on this call. You will have seen our results statement published this morning. And in a few minutes, I'll hand over to Den to run through the key financial and operational information. But first, I like to update you on the progress we've made on our key milestones, on our major growth projects and in our base assets. We've responded to requests for more information on our production profile and have broken down production by country for the half year in our statement today. And I hope those of you who -- that have asked this find this useful.

Back in February, I outlined our key priorities for 2013. These included 10 key production milestones for the year. And I'm pleased with the progress we've made against them, as well as the progress we've made with our major growth projects. For the second quarter, both key production milestones have been delivered. In Brazil, we started commercial production from the third FPSO operating on our pre-salt center Santos Basin discoveries. And in Kazakhstan, the planned maintenance shutdown and restart at Karachaganak was completed ahead of schedule and, very importantly, with 0 safety incidents. And this is a notable achievement with more than 2 million man hours worked and over 3,000 employees and contractors working on this turnaround at peak. So all 5 first year -- first half year, rather, milestones have now been delivered to schedule. And the remaining 5 for the year continue to progress in line with our plans, including those related to the startups of Bongkot in Thailand, Jasmine in the North Sea and Margarita in Itaú in Bolivia.

Clearly, our major growth projects in Brazil and Australia are of critical importance because these will be the projects which will be the driving force in delivering our goal of industry-leading growth and shareholder value. And the achievements in the quarter and in the year-to-date have been impressive. I was in Brazil last week and saw firsthand the progress being made. The latest appraisal well on the Iara has been drilled and tested with excellent results. It demonstrated delivery characteristics which are very significantly better than the first Iara discovery well. And these results are very positive for potential recoverable reserves and resources from this giant field, which I'll remind you has oil in plays similar to Lula.

Our FPSO program also continues to advance in line with plans. The next 2 FPSOs, Numbers 4 and 5, which will be used on the Sapinhoá and the Iracema fields, respectively, are on track and on budget, with one already in Brazil for topsides integration. The 3 operating FPSOs are producing as expected. I was on FPSO 2, last week and saw it operating at 98% production efficiency after only 5 months onstream. And so in total, gross production from the 3 operating FPSOs is running at around 150,000 BOE per day gross.

We're not limiting our future, though, in Brazil to the Santos Basin. On the same day as our strategy presentation, we won operatorship of 10 blocks in the Barreirinhas Basin off Brazil's northern coastline. These are new frontier blocks which further extend our inventory of high-impact exploration prospects and fulfill our commitment to adding one new material exploration opportunity on average each year. We're partnering with Petrobras and Galp in 4 of the blocks, building on our existing successful relationships. In the remaining 6, we're initially sole operator and are evaluating the options for partnering and exploring in these blocks.

Our QCLNG project in Australia has shown similarly impressive progress, with key project milestones met as planned. We've now drilled 3/4 of the 2,000 wells needed for the first 2 trains at start-up, whilst the critical path water treatment facility at Kenya has been commissioned and brought into operation. The essential gas collection and export pipeline infrastructure is also making good progress. The entire 200-kilometer gas collection header network is complete. And around 70% of the 340-kilometer export pipeline has now been lowered into the ground. At the LNG site on Curtis Island, the roof for the second storage tank has been raised. And all modules for Train 1 and the common facilities are in place. So this is material progress, which keeps Phase 1 of the project firmly on track for both first LNG in 2014 and within the $20.4 billion budget.

Turning to Egypt. In our statements today, we have given a very detailed breakdown of our assessment of the operational risks. Clearly, the safety and security of our colleagues in Egypt is our #1 priority. And I'm pleased to say that all our employees and contractors are being kept safe during the unrest. On an operational front, our offshore production and drilling operations have continued unaffected. However, we have experienced a lower than planned output at Egyptian LNG as higher diversions to the domestic market have been requested by the Egyptian authorities. We've been advised that this is going to continue to the end of the third quarter. We have received notice that the shortfall in gas volumes available for LNG export will be mitigated through 5 compensatory LNG cargoes from Qatar, 2 of which have been confirmed for BG Group, and through reduced domestic diversions in the fourth quarter. The LNG plant will continue to operate, albeit at reduced capacity. Naturally, we will continue to monitor developments very closely indeed.

Elsewhere across our portfolio, we have had an eighth successive discovery offshore Tanzania, and our total gross recoverable resource estimate for all our discoveries has been increased to around 13 tcf. We also continue to make good progress with the site selection process for the proposed onshore LNG plant.

In Canada, we have secured a very attractive site for our proposed LNG facility at Prince Rupert in B.C., and we've also applied for an export license. Discussions are ongoing with potential customers, partners and upstream suppliers.

Finally, we delivered the first-ever commercial LNG cargo to Singapore in May as part of our sole aggregator role for the country's first 3 million tons per annum of LNG demand.

That concludes my summary on our second quarter progress. And now I am going to hand over to Den for a run-through of the key financial and operational data.

Den Jones

Thanks, Chris, and good afternoon, ladies and gentlemen. Unless otherwise indicated, all of my comments relates to the second quarter rather than the half year.

As you will have seen, the group's total operating profit for the second quarter was down 5% to $1.8 billion. Upstream total operating profit for the quarter of $1.25 billion was 7% lower. This reflected a 2% reduction in volumes, as well as lower realized oil and liquids prices, together with high unit operating and depreciation costs.

Volumes in the quarter are in line with our guidance. Production was lower in Kazakhstan, reflecting the planned shutdown and the equity in the U.S. due to the scaling back of drilling operations and also in Egypt due to reservoir decline. These reductions were partially offset by the new developments that came onstream in the last 12 months, including the continued ramp-up in Brazil. As we have previously guided, the third quarter will experience lower volumes due to the substantial planned maintenance primarily in the North Sea.

E&P unit operating expenditure increased, reflecting the impact of higher royalty costs from the new developments in Brazil and Bolivia and higher lifting costs in the U.K. The unit depreciation charge increased due to a combination of new developments coming onstream and the impact of a number of minor reserve revisions. Our reference conditions, our full year guidance ranges for both these metrics has increased by $0.50 per barrel. The revised unit operating expenditure range is $10.5 to $12 per barrel, and the unit depreciation range is $11 to $11.5 per barrel.

LNG Shipping & Marketing total operating profit of $521 million in the quarter was 1% higher. Whilst the results benefited from lower hedging losses and lower business development costs, this was largely offset by fewer cargo deliveries. So far this year, disruptions in Nigeria have resulted in the loss of 5 cargo liftings, including 2 in July. There have also been fewer than expected liftings from Egypt LNG due to the higher than agreed volumes diverted to the domestic market, as mentioned earlier by Chris. Despite this, the LNG Shipping & Marketing total operating profit for 2013 is expected to remain in the $2.5 billion to $2.7 billion range. This outlook assumes a reduction in Egypt domestic take in the fourth quarter, the receipt of 2 cargoes from Qatar and no further disruptions to Nigeria LNG supply. All other guidance for the year also remains unchanged.

Earnings for the group were down 3% to $986 million, reflecting a decrease in operating profit, partially offset by slightly lower effective tax rate. Cash generated from operations decreased 11% to $2.8 billion as a result of reduced operating profit and a lower working capital cash inflow.

During the quarter, the group's portfolio rationalization program progressed, with the completion of the sale of our interest in Gujarat Gas in India for $422 million. We also signed binding agreements with CNOOC for the sale of certain additional interest in our QCLNG project in Australia for $1.93 billion. On completion, which we expect before the end of the year, CNOOC will also reimburse the group for its share of project expenditure incurred from the 1st of January, 2012.

The group's cash and investment on a cash basis of $2.6 billion in the quarter was up 9%. At the end of the quarter, the group's net debt and gearing ratio was $11.2 billion and 25.2%, respectively.

And in line with our established policy, the board has approved an interim dividend of $0.1307 per share, which is half of the 2012 total dividend. The dividend will be paid on 6th September in sterling, which amounts to 8.51p per share.

Thank you very much for your attention. And both Chris and I are now happy take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Oswald Clint at Sanford Bernstein.

Oswald Clint - Sanford C. Bernstein & Co., LLC., Research Division

Chris, could I just ask about Egypt, please, and specifically just about Phase 9a in terms of how that's going, how many wells you've drilled so far and just to make sure that, that development fee is still progressing? Secondly, on Brazil, could I ask about Iara? And should we -- or could we expect an update on these recoverable volumes after this high-angle well is completed and post analysis? And maybe just a third one for Den on the numbers, in terms of the OpEx slight increase here or the tweaking for 2013, part of it is U.K., which feels a little bit one-off or 2013-specific. Could that reverse as we go into 2014? And how much of the $0.50 per barrel uplift is due to the U.K.?

Chris Finlayson

Okay, thanks a lot. So if I take those in order, 9a first, I can confirm that we continue to develop 9a flat out. We have 3 rigs operating on Phase 9a at the moment. The first 3 wells have been completed. And all of those have drilling results in line with the pre-drill expectations. There is a campaign to hook these wells up next year. So you will not see them coming into production until next year because of the subsea infrastructure that we need to put in place. But, yes, the project is ongoing and is completely in line with plan. Turning to Iara, I'm very excited by the results of Iara-4. To give you a bit more color to that, we flowed the well at up to 7,000 barrels a day, constrained by the tubing. And we got productivity results, which are very much in line with the best results we've seen in the Santos Basin, so significantly better than we've seen in the first well. As you say, we're now drilling a further well which is slightly bizarrely at Iara-6. There isn't a 5. Don't worry about that. You haven't missed anything. And this will be a high-angle well through the reservoir, which, in a different part of the reservoir, will check deliverability through this development method. Now thereafter, we will be working together with the operator to come up with the necessary development plan for the declaration of commerciality, which is due sometime next year. Clearly, I am optimistic that we will be able to expand the development there, but this is also up to the operator to advance their preferred program for us to comment on it. So I can't go further than that at the moment. Den?

Den Jones

On operating costs and the impact year-to-date to the half year, 1/3 is due to mix or the increased volumes from Bolivia and from Brazil. And 2/3 is the impact of the kind of one-off costs you're seeing coming through on the U.K. side. So the slight tweak on the guidance kind of follows that through to the full year.

Operator

The next question comes from the line of Brendan Warn at Jefferies.

Brendan Warn - Jefferies LLC, Research Division

It's Brendan Warn from Jefferies. Look, just following on from the question on Phase 9a, just in terms of availability of expatriate personnel or safety of them within Egypt, can you just talk around, obviously, the installation of the subsea, whether you see any risk of delay? Just secondly and you might just help me with my math, I appreciate you've given million scuffs [ph] a day reduction because of the division to domestic. But even if you just talk, call it, half year on half year, what sort of number of lost cargoes are we talking about in terms of being made whole by the government? And what's the risk? And then just lastly, just looking longer term, obviously, you've spoken in and around Prince Rupert in terms of sites, but if you make any comments or give us an update on Lake Charles LNG, just your commitments to that project, personnel involved, if you could, please.

Chris Finlayson

Okay, fine. So starting back on Phase 9a, we've been pretty -- very open, saying that we have reduced our manpower within Egypt to critical personnel only. So we've gone down from around 150 staff plus dependents to around 55 expatriate staff. The -- our major contractors have followed a similar route. And at the moment, all our projects, all our rigs are continuing to operate normally. Certainly, on the subsea side, these are operations which are heavily run by Egyptians rather than with a major expatriate presence. And we continue to be on schedule as we move forward. So we -- obviously, in a situation as volatile as you have in Egypt, you cannot make definitive statements for the years out. But as of now, we move forward on schedule and on budget. Turning to your question on Lake Charles, I think it's where we are at the moment is we're awaiting for the DoE judge ruling. They have made a statement that we can expect to receive those in about every 60 days. And on that basis, we are the next in the queue. They've made that clear. And we would expect to get a go-ahead from the DoE hopefully very soon. I'd remind you that's only the first stage in the process. Once you have a DoE ruling, you have to do a tremendous amount of work, maybe somewhere between $100 million and $200 million worth of pre-FEED and FEED work to allow your FERC application, the environmental application, to be processed and approved. And that will take somewhere between 1 to 2 years. So we're on track. We have a pre-FEED ongoing, as we speak. We're very excited and positive about the prospect. But clearly, we are waiting for the ruling from the DoE. And it's important to remember, as I say, that, that is the first stage of the process and that companies, not just ourselves but others who are proposing these types of projects, will need to invest a significant amount of money before their proposal is finally approved through the FERC ruling.

Den Jones

Just going back to your question on LNG, I mean, we reiterated our guidance of $2.5 billion to $2.7 billion. And additionally, from Nigeria LNG, you've actually lifted 2 cargoes in July, the last one on the 20th of July, so...

Brendan Warn - Jefferies LLC, Research Division

Okay. And in terms of diversion or loss of cargo, just how many do you believe will make you, call it, whole, using your language?

Den Jones

Well, we are whole based on what we believe will get delivered over the next kind of, obviously, 6 months. We believe that. We're reiterating our guidance. So the confidence in our guidance, we had additional 2 cargoes from Nigeria LNG in July, so...

Operator

The next question comes from the line of Jason Gammel at Macquarie.

Jason Gammel - Macquarie Research

A few more in Egypt, I'm afraid. First of all, it looks to me like you're probably now putting somewhere around 350 million cubic feet a day into the LNG facility. At what point, operationally, would it make sense to begin running only 1 train rather than 2? And then somewhat related, I believe that you're entitled to 100% of the offtake from Train 2. And another party is entitled to 100% of the offtake from Train 1. Would you essentially just be taking pro rata share of the output of the facility right now? And then a final question on this, my understanding is that one of the ways that you essentially get paid by the Egyptian government for the domestic gas is via LNG proceeds. So as the domestic diversion continues at a high level and the LNG essentially stays at a low level, would you expect that your receivable would build?

Chris Finlayson

Okay. Let -- I'll answer the first 2 parts of your question, and Den will talk about the receivables. So at the moment, we have both trains running. And it's important to recognize that one of the features of what we have at the moment is actually a very variable level of domestic take. So between 1 day and another, it can vary by as much as 200 million standard cubic feet per day. That's why it makes sense to keep both trains running because we want to be able to take advantage of the periods when there is a level of supply which is too high to run through a single train. So we will continue to keep 2 trains running if circumstances do not change significantly. And indeed, the output is essentially divided 50-50 between the 2 offtakers.

Den Jones

Just on the receivables, I mean, the year-to-date, at the end of June, we received something like 65% of what we received on the total of last year. So even though the debt has gone up at the end of the quarter, it's kind of equivalent, so where we were at the end of last year. We have actually received cash since the kind of change in regime as well. So we do continue to get paid. But obviously, we keep it under constant review as well.

Jason Gammel - Macquarie Research

Okay. And clearly, the receivable didn't grow by much in -- at the end of the 2Q versus the end of the 1Q, so is that something that we should expect moving forward?

Den Jones

It depends on the business that we do in the domestic take and the offtake. So we'll see how the business goes through. I mean, I expect it to remain roughly around that level as we go through the rest of the year, depending on the level of business we do.

Chris Finlayson

I think just to broaden the point out slightly, clearly, a lot of the people that we are dealing with are the same people that we dealt with in the last government. Most of the people within the ministry, within EGPC and within EGAS have not changed though we -- obviously, we have a new minister. Therefore, they're aware of the situation. And we see no difference in the commitment that we saw before to meet the obligations that they have put in place. So really, the situation has not significantly changed. The new minister is somebody who is very familiar with the gas industry. And I think that is helpful because he certainly recognizes the challenges and also recognizes what is necessary to ensure that foreign investment continues in Egypt.

Operator

The next question comes from the line of Theepan Jothilingam at Nomura International.

Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division

Two questions actually. Firstly, just coming back to production, thank you for the greater disclosure. I just wanted to touch on sort of the U.S. gas production number year-to-date. And the outlook there suddenly seemed a bit higher than where I had sort of forecasted. So could you talk a little bit about rig activity, what you think the exit rate may be in terms of production for year end? Secondly, just a point of clarification, could you just -- is there any destination clause on the 2 Qatari tankers? And then thirdly, just in terms of Brazil, if you could just give a bit more color on the intended timing of the hookup if the subsea buoys, the subsea buoys I believe, are already in-country. Could you just talk a little bit about what's left there in terms of the hookup?

Chris Finlayson

Thanks, Theepan. Yes, now you know why we don't want to give you more information on production. You just ask even more questions. It is not really a reflection of increased levels of drilling activity because we haven't. But what we did at the start of the year was to -- we had a backlog of wells to be hooked up, which is probably what your model is not showing you: that, that gave us more volumes in the first half of the year. So we are only, in terms of guidance, we only reiterate our overall production guidance. We're not talking about exit rates in individual assets. But as we said in the release, we reiterate our guidance. Now secondly, you were asking about Brazil. And in Brazil, the first of -- there are 4 BSRs. The first 2 have been delivered or in-country. And the first one of those is due to sail sometime today to the location for its installation. The second one will follow. Installation process, which means sinking this buoy, to somewhere around 250 meters below the surface of the water, tethering it in place and then connecting it to steel catenary risers coming up from the seabed, with flexible jumpers across -- to the FPSO, will commence at the end of that, hopefully, around a 3-week period. And the program that the operator is holding is to have 2 further wells onstream before the end of the year. Clearly, this is a double process. We will see how the timings go as we go through. And this will clearly be an -- have an impact particularly on our fourth quarter volumes. But if we meet the medium that we expect to do, then we should see a very nice reflection in our year-end exit rates there.

Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division

And just the flexibility on those Qatari cargoes, is there any destination clause on that or...

Chris Finlayson

That's commercially confidential. We wouldn't discuss that.

Operator

The next question comes from the line of Thomas Adolff at Crédit Suisse.

Thomas Yoichi Adolff - Crédit Suisse AG, Research Division

Three questions, please. First one, on Tanzania, I was wondering if you intend to drill the outboard well this year? If not, will it be in '14? And if your answers are no to both, can you explain why? And then just going back to Brazil, I've got 2 questions there. The first one, on Libra, what are your thoughts on Libra and whether you can comment on the oil/gas ratio and CO2 content? And just finally, a question on taxes in Brazil. Your IR team tells me that you treat all 5 fields as separate ring-fence areas, which is not quite consistent with the current contractual regime in Brazil, in some ways boost your cash flow, and more importantly, your internal view of MPV for Lula and Cernambi. You obviously have a view that the issues around Lula and Cernambi will be resolved over the time frame you look to potentially monetize these assets. But I was just wondering, in the case this doesn't happen, what it means to your intention to monetize these. And I'm asking just because Sinopec has clearly not paid up for Galp's stake for what might be in terms of Lula and Cernambi ring-fencing. And both Galp and Petrobras have a much more cautious view on this issue. And it's obviously relevant given how consensus value stood on Cernambi.

Chris Finlayson

Okay. Well, let's start with your simpler question on Tanzania. There isn't an outboard well. We should be clear on that. What we have is a program to address the prospectivity across Blocks 1, 3 and 4, where we have a very good degree of alignment with our joint venture partner, Ophir, and where we now have the rig resources in place to continue in continuous operation for much of the balance of this year, including, I think, if I'm right in saying, 1/3 production test going together with the 2 excellent tests that we've had earlier this year. So we're very comfortable with our forward program. And we will simply drill the best prospects that we see as we mature them and develop them and the like.

I would reiterate, we are well aligned with Ophir on this. In terms of Libra, I'm afraid I'm not going to comment. There's a prospect has been put up for -- under a PFC regime by the Brazilian government. And we, and many others, of course, will be looking at that and looking at the data and deciding what we want to do with it. But that's all I would be prepared to say about Libra at this point in time. In terms of the values of Lula and Cernambi, I mean, there is, as you'll be aware, and what you're essentially saying is there is a debate about whether Lula and Cernambi form 1 or 2 fields and whether, as such, the 2 of them should be ring-fenced or not. All I can say at this time is that our views are completely aligned with those of Petrobras. And Petrobras as operator will be pursuing a resolution for this issue. How this comes through in terms of valuations, we will wait and we will see with time. But our views and the operators' are as one on this.

Thomas Yoichi Adolff - Crédit Suisse AG, Research Division

Just to follow up on this, I mean, in terms of your cash flow guidance that you've provided at the strategy update for the period '15 and '17, do you assume 1 or 2 ring-fence areas in this instance?

Den Jones

No comments on that.

Operator

The next question comes from the line of Michael Alsford at Citi.

Michael J. Alsford - Citigroup Inc, Research Division

Two, please, if I could. Firstly, just on Australia, could -- you obviously mentioned good progress in the quarter, but could you maybe talk a little bit about what are the critical path items in order to get you to, I guess, gas commissioning at the end of the year? And then I guess, looking forward, could you maybe talk a little bit about the plans in terms of the ramp-up of the project, third-party volumes are obviously -- or own equity volumes, given, I guess, the recent, I guess, production data you've got from the wells you've been drilling? And then just your follow-up on a point on Brazil, you've talked a little bit about the hookup plans to the end of the year. But could you maybe talk a little bit about your view on how quickly you can get to plateau production on those vessels there? So is the 18 months still valid? Could you think -- could you sit quicker than that? Maybe a little bit more color on that would be great.

Chris Finlayson

Okay, fine. Thank you for the question on Australia. We began to think that people had forgotten about half -- nearly half our investment program. The progress for the rest of the year -- what defines the critical path is very clear now. It is the pipe. We have completion of the pipeline. That's why we gave quite some detail, and you'll see in the backup slide deck that we've put on there, there are some very detailed intra-project milestones for Australia given there. But clearly, however good your progress with upstream is, unless you have the pipeline completed, you can't export the gas. So that is the critical path. We are making good progress there. As of this morning, talking to the guys in Australia, we have some 80 kilometers left to lay of the main export line. We have quite a large number of small -- largely small crossings to make of roads, creeks and the like. We're mobilizing more resource to that to make sure that we meet our deadlines. But we're confident that we can do so. When we start exporting, which we still target as we said in the strategy presentation at around the end of the year. We only require, in terms of initial supply, some 20 million standard cubic feet because that's the commissioning volumes that we need for the first 2 to 3 months because, of course, you commission by starting up your power generation equipment and then moving through the process. So you don't need to have all your flow stations, all your CPPs available once the pipeline is filled and exporting. And at the moment, our critical path analysis shows that we will have the gas available that we need. As you say, getting a train filled and exporting at the highest rate possible as quickly as possible is really the value creator in this process rather than the absolute beta or start-up. And we are making sure that we are working all possible angles here, whether it be our own gas, as you see. Our drilling progress has been good. About 75% of the wells we need now are complete, no surprises in terms of average well deliverability. The type curves are very much where we expected them to be. And at the same time, we are negotiating a number of third-party supply agreement so that we are as well placed as we can possibly be to fill those trains to the brim as soon as they start up. You also talked a little bit more about the hookup -- sorry, the ramp-up time. I think what I would say to that is that you've got remember that the ultimate number of wells that are required to fill these FPSOs early in their life is much less than the total number of wells to be installed. So you need hooked up between probably 4 or 5 producers, a gas export line and an injector line. And it is likely that on that basis, the vessel will be full for the initial period because then we hook up more wells at a later stage, but it won't give you additional capacity. It will just ensure that your capacity stays filled. Petrobras have been indicating 6 weeks to 2 months for the hookup of each of the wells. Clearly, there's been an initial period since start. It was to be 1,000 being put in place. And from that, you can calculate the -- yes, it's not going to be that far off for 3 and 4 of the 18-month ramp-up period. We'll know a lot more when we talk to you next time at the Q3 results because by then, we should be well through the process of installing the BSRs and connecting up the first wells.

Operator

The next question comes from the line of Jon Rigby at UBS.

Jon Rigby - UBS Investment Bank, Research Division

Can I ask 2 questions? The first is on the arrangements around the Qatari liftings. Are you able to just give a little bit more color about how this works? Obviously, it's a very unusual arrangement, clearly. And then secondly, whether there are any discussions or potential for it to extend beyond the arrangement that you've indicated in the release today? The second is, can you just give a bit of forward-looking guidance on your exploration activities for the rest of this year, both drilling, seismic appraisal, et cetera?

Chris Finlayson

Okay. In terms of the Qatari liftings, I think it is important to remind everyone that this is a government-to-government deal, where the revenues from that deal are then put into compensators into the mechanisms for LNG. So we can't say there will be more liftings of cargoes because that is a negotiation that goes on between the Egyptians and the Qataris. What I can say is that we know that there are ongoing discussions with the Egyptian governments with the Qataris on further liftings. But I have no line of sight on the results of those. What is important to say is that our LNG guidance is given on a very clear set of circumstances. Reiterating the guidance we've given is of no further Qatari cargoes and reduced stake in Q4 as the temperatures drop and domestic demand falls and no further disruption in Nigeria LNG. And since there was the force majeure put in place, which is now being lifted, we have lifted 2 cargoes from Nigeria. So those are the criteria that go together with the guidance that we have given.

Jon Rigby - UBS Investment Bank, Research Division

All right. Just quickly on that before we go to the exploration, are they going to be lifted on your ships or on Qatari ships?

Chris Finlayson

I think we're going to have to come back to you and remind you that. Off the top of my head, I actually don't -- I think it's our ships, but I'm not sure.

Jon Rigby - UBS Investment Bank, Research Division

Right. And exploration?

Chris Finlayson

Now in terms of exploration, well, I don't think it's appropriate to go through all the details of the exploration program. But we have an active program for the balance of the year. Obviously, the big event for the second half of the year will be the completion of the Notus well in Egypt. It's a 6,000-meter deep exploration -- a legacy exploration well. We're currently close to the tops of the reservoir while there. And of course, it's a major prospect if successful. So we will see how that one comes out. For the rest, we have further exploration planned in the North Sea on non-operated exploration and further exploration also in Thailand, and also exploration elements to some of the work that's ongoing in Bolivia. On the seismic side, we will complete the exploration, the major 3-D seismic survey in Uruguay as soon as we come out of the winter period. And that's a big one for us. It's the largest 3D we've ever shot and will hopefully lead to some high-impact wells coming from there. In terms -- in East Africa, we will continue to operate, as I've said, with the Deepsea-Metro firstly in Tanzania and then moving up to Kenya, where we have potentially 2 high-impact wells to be drilled before the end of the year.

Operator

The next question comes from the line of Michele della Vigna at Goldman Sachs.

Michele della Vigna - Goldman Sachs Group Inc., Research Division

I was wondering if you could give us a guidance on the gearing that you expect at year end, assuming that the CNOOC transaction closes before then and also whether you could quantify the impact of maintenance on your Q3 production.

Den Jones

On gearing, we're not going to give a forecast at the end of the year. I mean, you're seeing where it's been at the end of Q2. I was 25.2%. So we're not going to give a forecast at the end of the year.

Michele della Vigna - Goldman Sachs Group Inc., Research Division

Understood. And anything on maintenance?

Chris Finlayson

Well, that is it. I wouldn't just characterize maintenance. We have a number of significant shutdowns in -- coming up in the North Sea, both operated and nonoperated, including -- still further work around the tie-in of Jasmine. So that's not maintenance. That's new field work. We have indicated that Q3 will be our low quarter. We've said that very clearly at the start of the year. And we've reiterated it today, and we've reiterated our full year production guidance.

Operator

The next question comes from the line of Anish Kapadia at Tudor, Pickering, Holt.

Anish Kapadia - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

I've got 3 questions. Firstly, I was just wondering if you get an update on your thoughts for CapEx and OpEx for the Santos Basin, in particular, BMS-09? Repsol yesterday estimated an average OpEx and CapEx for the life of the Sapinhoá Field of $25 per BOE, which seems a fair amount higher than what you said in the past, so just an update on that. Secondly, just wondering what your strategy timing is for acquiring resource in Canada to feed the LNG plant. And thirdly, just a question on the exploration expense, significantly below the kind of the full year run rate of $800 million, I'm wondering if $800 million is still realistic given the activity in the second half of the year.

Chris Finlayson

Sorry, I'm not going to give you too insightful answers into this. In terms of Canada, yes, we are engaged in a number of different discussions. But I can't tell you any more than that because it's commercially confidential. In terms of exploration, we reiterate our year-end run rate or outturn. I don't -- there's also -- it's just phasing in there, so nothing of insight, no change there. And in terms of Brazil, we have nothing new to add. We reiterate what we've said before, low unit cost development, excellent reservoir characteristics, high capital efficiency, and our CapEx, '13 to '18, of around $3 billion per year.

Anish Kapadia - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

So you'd continue to be below that $25 per BOE that Repsol talked about?

Chris Finlayson

I'm not commenting on that.

Operator

The next question comes from the line of Rahim Karim at Barclays.

Rahim Karim - Barclays Capital, Research Division

Two questions, if I may. Just the first on the cash flow and specifically, working capital seems like you've been able to manage that relatively well so far this year. I was just wondering if there was anything that we should be looking out for in terms of that during the course of the year with everything that's going on in Egypt or the start-ups of the significant projects. And the second question was just about Australia. At the strategy presentation, Chris, I think you talked about the potential of looking to sell down certain mystery matters and perhaps also on further parts of Australia. Clearly, a lot of progress has been made and we're getting to the point at which something like that might be making sense. I was just wondering if you could give us any color around that or any developments that you've been able to make.

Chris Finlayson

I'll comment on that one then hand over to Den on the working capital. What we said at the strategy presentation that we would look at items such as the water treatment plants and the pipelines as assets where it was potential to do -- that the sale and leaseback to infrastructure-type funds might well make sense. We are doing lots of work and looking at that and how to take that forward. But we also said at the strategy presentation that, that was not going to be possible because of the nature of these types of buyers until there was an income stream to show with it. And as such, you would have to be after they came onstream. As you can see from the water treatment plant, we are making progress. But clearly, we're not going to get income from the pipeline network until next year -- potential income from the pipeline network until next year. So we're working on it. But it's a little premature to bring those to conclusion.

Den Jones

Look, on working capital, it's also something we monitor and we manage as much as we can. There's nothing specific. Looking forward, we obviously, manage those as we go forward as well. So there's nothing really specific to add. I mean, we're in a good position. We'll continue to monitor it.

Operator

The next question comes from the line of Fred Lucas at JPMorgan.

Frederick Lucas - JP Morgan Chase & Co, Research Division

Can I just circle back to Egypt and also Nigeria just for clarification. On Egypt, have you actually met the new petroleum minister? And whether you've met him or spoken to him, have you been able to get him and his team to reaffirm the commitments given to you by their predecessors regarding the pattern of diversions in 2013, also the receivable payment schedule? And on Nigeria, just so I understand, by the end of the first half, were you down 7 cargoes. But is this your expectation as you caught up 2? And do you expect to catch up the other 5 through the second half?

Chris Finlayson

Yes. Okay, so very briefly, Sherif Ismail, who is the new Minister of Petroleum is well known to us. He is an expert on gas affairs. He's been there before. He has already been met by people in BG. I haven't met him myself yet, and -- but in the initial discussions, they've acknowledged all the agreements that have been made by the previous administration. And as I said, there's actually a tremendous amount of continuity in the ministry and in the national oil and gas companies between the different administrations. So nothing has changed, as I said earlier on. What was -- I'm sorry. I've forgotten your second question.

Den Jones

On LNG, I mean, we -- the 5 cargoes down on our expectations as it says in the release, and the 2 are not a 2 additional ones. They were 2 we were expecting anyway. The thing is there. It's just helping us to say -- to reiterate our LNG guidance of $2.5 billion to $2.7 billion.

Chris Finlayson

We don't assume we will get any additional cargoes from LNG for the rest of the year. We simply assume that those cargoes that we have got programmed will be delivered.

Den Jones

Yes, so we don't recover the 5.

Operator

The next question comes from the line of Andrew Whittock at Liberum.

Andrew Whittock - Liberum Capital Limited, Research Division

Andrew Whittock from Liberum. Just a couple of quickies, I hope. Can I, first of all, Den, just confirm that the charges you took in the second quarter all relate to the U.S.? And secondly, of this progress towards sale from the first train at QCLNG, can you just talk a little bit about the timing of the second train? Should we expect sales there what 6 months after sales from the first one? And is there going to be a ramp-up here attached to that?

Den Jones

Look, on the charges, it's across a number of assets. So some of them are relating to the U.S. and some of them across a number of other assets. The second part, sorry, was...

Andrew Whittock - Liberum Capital Limited, Research Division

The timing of sales from QCLNG Train 3, still...

Chris Finlayson

Train 2, you mean?

Andrew Whittock - Liberum Capital Limited, Research Division

Sorry. Yes, Train 2, sorry. Yes.

Chris Finlayson

I mean, we are not making anything further than we said in the strategy presentation about relative timings. Clearly, we will move. As we commission Train 1, we will look to commission Train 2 as soon as we can thereafter. And we will be looking for opportunities to accelerate and to fill that train. Clearly, the faster we can go and the faster we can fill them both, the more rapidly we get our cash flow in there. So we know what we're trying to do. We have no negative updates, no negative news to share. And we'll see how we get -- go in the next 6 to 9 months as we come through with Train 1 and then thereafter with Train 2.

Operator

The next question is from the line of Irene Himona at Societe Generale.

Irene Himona - Societe Generale Cross Asset Research

My first question is an Iara, if I may. Chris, in the past, you called it a massive but neglected and undervalued assets. Now you've obviously drilled a very successful well, which confirms it is massive. I wonder if you can help us in terms of how should we think about volume something like Iara or, indeed, future sort of new discoveries in Brazil in an environment where clearly, Petrobras has a massive bottleneck in terms of new developments? And my second question was just very quickly on LNG, if there's anything you can say in terms of the hedge positions this year and into 2014. And did I hear correctly mentioning that you have reduced the hedging losses in that division?

Chris Finlayson

Okay. I'll deal with Iara and then Den will talk about the hedging position. So thank you. I'm glad you picked up on the really good news coming from Iara. But I don't agree with your hypothesis thereafter about what is the value given Petrobras' position. Petrobras are fully aligned with us of bringing this field into a development plan by the end of next year. In fact, it's required by the authorities during next year. And as we've said all along, Petrobras are delivering on our development plans on time and on budget in the fields that we're developing together with them. So I sort of don't recognize, if you like, the scenario you're painting. I think that we will get a development plan for Iara and we will then pursue it.

Den Jones

On the hedging position, obviously, for 2012, we were substantially hedged. And then for 2013, we've moved into a position where we are substantially unhedged. So that position has changed. We expect these hedges to run off into Q1 2014. So you're seeing some kind of benefit there.

Operator

The next question is from the line of Alejandro Demichelis at Exane BNP Paribas.

Alejandro Demichelis - Exane BNP Paribas, Research Division

Just one follow-up from the previous question and one clarification. As a follow-up from the previous question, from what you were saying, you don't expect much change in the forward kind of development plans for your long-term assets even if Libra gets kind of slotted into the development plan of Petrobras. That's the question. And the clarification is, in terms of the restarts of the nuclear plants in Japan, is that captured in your guidance that you have reiterated on LNG as well?

Chris Finlayson

Okay. You're correct that I am saying that I don't think that Libra, where there will be a development phase which will come after most of the first phase of developments that we're doing with Petrobras will impact at all. I don't see that as an either/or type of prospect. And Petrobras, to be fair to them, are very clear that they are committed to developing the BMS-09 and -11 fields on appropriate early technical timing. And really, there's not much more to be said about that. In terms of the nuclear restarts, clearly, it -- I'm not sure which timescale you're talking about. The likely restarts this year are really probably fairly limited. And our assessment of the longer-term restarts suggests that at best, some 2/3 of the installed capacity will come back and it will take up to 4 years for that to happen. So I think what we would say is that for this year, we see robust prices going forward. And for the next 3 or 4 years, we also continue to see LNG being short, giving declines in existing projects, given delays in some projects across the world coming onstream. And we think that, that should give really attractive opportunities for us in our -- with our trading model and with our new volumes coming onstream firstly through Australia and then after that in Sabine Pass.

Operator

The next question comes from the line of Jason Kenney at Santander.

Jason Kenney - Grupo Santander, Research Division

So going back to Australia, I also noted your earlier comment on the real value creator offered by a fully filled train exporting LNG. And I suppose my question really is, if you were able to quantify the value added of a fully filled operating train in Australia and maybe in terms of an earnings at best or a cash flow delivery or otherwise once at plateau. And then on the back of that, looking at the group outlook, is it best to be thinking of BG Group moving to a free cash flow positive position in early 2015 or sooner or later, obviously, on your base assumptions?

Chris Finlayson

Yes. I mean, we've clearly lots of moving parts. So I'm not going to make comments about sort of individual months in Australia between 2014 and 2015. It's just a truism that getting a train filled as rapidly as possible will clearly create the most value. And that is what we shall pursue. If you look back at our strategy presentation, there's a slide in there which talks about when QCLNG -- with the build up and be cash positive by 2016, we're clearly sitting on plateau there. And there's really not much more that I can say about that.

Operator

The next question is from the line of Matthew Yates at Bank of America.

Matthew Yates - BofA Merrill Lynch, Research Division

Just a couple of short clarification questions, please. I think at the full year 2012 results, you just spoke about 11.3 million tonnes of contracted LNG this year. Can you just update that number given the issues you've talked about on this call? The second question, in part of your cost guidance, you talked about a reserves downgrade. I'm sorry if I missed it. Can you just clarify exactly what field or country that relates to and why? And then finally, again, probably for Den, on the cost guidance, you used the word one-off in some of your early comments. Can you still elaborate a little bit more what issues maybe get easier going into next year?

Chris Finlayson

Yes, on the reserves tanker, just across -- there are minor revisions across a number of fields there. And on the cost guidance, I think we've given quite a -- kind of -- it's mainly to do with the helicopters in the North Sea. So I believe they've been resolved. And it would be resolved next year. So don't expect that to impact our OpEx number in 2014. What was the other one, sorry?

Matthew Yates - BofA Merrill Lynch, Research Division

The 11.3 million tonnes, volume-wise, that was factored into your guidance?

Den Jones

Yes, I mean, our guidance still remains on the profit side of $2.5 billion to $2.7 billion. On the volume side, it would obviously depend on a number of things. But at the moment, our guidance remains the same at $2.5 billion to $2.7 billion on the profit side.

Chris Finlayson

Remember, that was an overall managed figure and that will depend on how many spot cargoes we succeed in in-sourcing over the balance of the year, which is why we didn't make it a firm target.

Operator

The next question is from the line of Neill Morton at Investec.

Neill Morton - Investec Securities (UK), Research Division

Just a couple of questions left. Firstly, in the second quarter, the liquids realization fell quite sharply. Was that just a function of the maintenance at Karachaganak and we could expect it to recover versus benchmark from here on? And then just secondly, with regards to the sale of Gladstone to CNOOC, clearly, the CapEx to be reimbursed is rising all the time. Where would you expect that figure to be, assuming the deal completes at year end?

Den Jones

Okay. Well, on the QCLNG, if it was completed by the end of the year, expect the total number to be around the high 3s, to $3.7 billion. So the deal itself is $1.93 billion. And then expect somewhere around $3.7 billion to $3.8 billion to come through. Sorry, the first part of your question?

Neill Morton - Investec Securities (UK), Research Division

It was just the...

Den Jones

Karachaganak on the realization. Absolutely, I mean, you hit the nail on the head there. It's the volumes linked into Karachaganak and the shutdown there.

Operator

And speakers, it appears there are no further questions at this time. I will return the conference to you for any closing comment.

Chris Finlayson

Thank you very much. And to everyone, thank you for your questions. I think we had some good questions there. Hopefully, they gave you some insights, if not quite all the answers you'd like to have. And in conclusion, I'd like to summarize the key points from today's announcement. Firstly, of course, the successful delivery of all our key production milestones for the quarter and in the half year with a good progress on derisking the remainder of our 2013 milestones. I hope you've got a very clear view of the material progress on our major growth projects in Brazil and Australia. And indeed, I would commend to you some of the backup view graphs that were in the pack on the website there; project delivery on schedule and on budget in both of these major growth projects; excellent results as we've discussed from our well test on the giant Iara field. And clearly, the biggest challenge that we have in the short term, keeping a continuing close brief on future developments in Egypt. But overall, I'm very pleased with the progress we've made so far this year. And I look forward to seeing as many of you so can make it at our exploration and LNG Capital Markets Day on Monday, the 9th of September. Thank you today for your time, and goodbye.

Operator

Ladies and gentlemen, this now concludes the call. Thank you, all, for attending. Participants, you may disconnect your lines now.

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