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Executives

Frank Chapman - Chief Executive, Executive Director, Chairman of Exploration & Appraisal Committee, Chairman of Group Executive Committee, Member of Chairmans Committee, Member of Portfolio Development Committee, Member of Sustainability Committee, Member of Finance Committee and Member of Investment Committee

Fabio Barbosa - Chief Financial Officer, Executive Director, Member of Group Executive Committee, Member of Chairmans Committee and Member of Finance Committee

Chris Lloyd - Head of Investor Relations

Analysts

Pete Harding

Iain Armstrong - Brewin Dolphin

Oswald Clint - Sanford C. Bernstein & Co., Inc.

Theepan Jothilingam - Morgan Stanley

Andrew Whittock - Liberum Capital Limited

Hootan Yazhari - BofA Merrill Lynch

Jon Rigby - UBS Investment Bank

Kim Fustier - Crédit Suisse AG

Michael Alsford

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

Lucy Haskins - Barclays Capital

Frederick Lucas - JP Morgan Chase & Co

Brendan Warn - Jefferies & Company, Inc.

Jason Gammel - Macquarie Research

BG Group plc (OTCQX:BRGYY) Q1 2011 Earnings Call May 10, 2011 7:00 AM ET

Operator

Hello, and welcome to today's BG Group First Quarter 2011 Results Call. [Operator Instructions] I'll now hand you over to Chris Lloyd, Head of Investor Relations. Chris, please begin.

Chris Lloyd

Thank you. Good afternoon, ladies and gentlemen, and welcome to BG Group's First Quarter Results. During the course of this conference call, our Chief Executive, Frank Chapman; and our Chief Financial Officer, Fabio Barbosa, will take you through the quarter's key business highlights, and then Frank and Fabio will answer your questions. During the call, we'll be focusing on our business performance results as highlighted in our results statement. We'll also be making various forward-looking statements. Factors that could cause actual results to differ materially from the results we currently expect are identified in detail in the Group's annual report accounts for 2010.

Thank you, and now over to Frank.

Frank Chapman

Good afternoon, ladies and gentlemen. I would firstly like to welcome Fabio Barbosa, our new CFO, to his first set of results for BG Group. You have seen our statement, and I would now like to spend a few moments taking you through the main points before I pass over to Fabio to take us through the financials in more detail.

This was a challenging quarter for our Exploration and Production operations, marked by ongoing civil unrest in North Africa, severe flooding in Australia, an unexpected increase in U.K. taxation and a shutdown in the North Sea.

Exploration and Production total operating profit was up 6% year-on-year, reflecting higher prices. However, the benefits of higher prices were partially offset by 5% reduction in production volumes caused by the factors referred to in our statement and to which Fabio will return in a moment. As a consequence of those factors, we are now expecting 2011 production growth to be modest. However, the plans that we set out just 3 months ago in our February strategy presentation remain unaffected, including the strong ramp-up in production beginning in 2012 and extending right out to 2020.

The delivery of this major program is supported by significant progress through the quarter in Brazil, in the U.S.A. and in Australia alongside further exploration and appraisal drilling success offshore Brazil and a further gas discovery offshore Tanzania. Capital investment in the quarter provides one measure of the positive progress with our growth program. This amounted to some $2.3 billion in the period, up 21% year-on-year.

During the quarter, the most significant advances in our growth program were made in Brazil. The first permanent production module on the Lula field is now producing around 25,000 barrels a day. Meanwhile, construction of the next 2 production modules is around 50% complete and well on schedule. We also expect to receive tenders for the fourth and fifth modules in this quarter, and work to construct the hulls for 8 further modules is progressing to plan.

We began the Extended Well Test on the Lula Northeast, the location for the second Lula FPSO, and are now producing 18,000 barrels per day constrained by facilities. We also saw further success with the Guará Norte well, where a Drill Stem Test confirmed a production well potential of some 50,000 barrels per day. We completed the Iara Horst well and appraisal of the very extensive Iara discovery, which encountered good quality oil in a thick reservoir section with substantially better characteristics than the discovery well. And we made a new discovery with the Macunaima well in Block BM-S-10.

Meanwhile, in the U.S., we continue to see good momentum in our shale Gas business. During the quarter, we spudded 46 wells in the Haynesville Shale in East Texas and North Louisiana, where we now have 22 rigs operating. We also spudded 7 wells in the Marcellus shale in West Virginia and Pennsylvania.

In Australia, progress continues with our Queensland Curtis LNG Project with engineering work, pipeline activities, procurement of long lead items, development of water treatment plant and clearing and civil works on Curtis Island. Together, these account for capital expenditure in the quarter of more than $750 million. The severe floods I mentioned in my introduction have primarily impacted the drilling program. Efforts to mitigate this are in hand with the 2014 first LNG date unchanged.

We concluded negotiations with Tokyo Gas for the supply of 1.2 million tons per annum of LNG from QCLNG and from our global LNG portfolio. Tokyo Gas has also become an equity investor in the upstream and the LNG plant. The transaction marks the first Japanese purchase of LNG manufactured from coal seam gas. We also signed an agreement with Chubu Electric for the sale of up to 122 LNG cargoes over 21 years starting in 2014 and to be supplied from our global LNG portfolio, including the QCLNG plant.

Meanwhile, we announced our third successive gas discovery offshore Tanzania. The Chaza-1 well is around 200 kilometers from our previous discoveries and enhances further our confidence in this important new play, which is well-positioned to access Asia-Pacific LNG markets. We also acquired 5,000 square kilometers of new 3D seismic data across our 3 blocks ahead of the second drilling campaign expected to start in late 2011.

In March, we signed a Heads of Agreement with the government of Kenya to acquire operated interest in 2 offshore blocks subject to negotiation of Production Sharing Contracts. Finally, in April, we added an additional license in Norway and in India we were identified as the qualifying bidder for new acreage off the West Coast.

Now over to Fabio for a more detailed look at the financials.

Fabio Barbosa

Thank you, Frank, and good afternoon, ladies and gentlemen. As Frank has commented, our results for the first quarter were impacted by a number of significant events. Total operating profit for the quarter of $2 billion was 1% higher than last year as the benefit of higher realized prices was largely offset by lower E&P production volumes and by a lower LNG result.

Earnings of $819 million were also significantly impacted by the increase in North Sea tax. This resulted in an additional charge of $265 million in the quarter, including our one-off charge of $203 million to restate deferred tax. Despite the challenges of the first quarter, the Group remains soundly financed, and our long-term growth plans are unaffected by this quarter's events.

I will now take a few minutes to highlight the performance in each of the Group's business segments starting with E&P. Revenues increased 9% in the quarter to $2.5 billion. This reflected higher realized prices, partially offset by the 5% fall in production volumes. E&P total operating profit of $1.3 billion was 6% higher than last year. The increase in revenues was partly offset by a higher exploration charge. Production volumes were principally impacted by the shutdown of the Everest and Lomond platform in the U.K. North Sea, largely for elective maintenance. Everest and Lomond are back on-stream, and the restart of the Erskine satellite is imminent.

Production in the quarter was also affected by civil unrest in 2 other countries where BG Group operates: Egypt and Tunisia. In Egypt, there was significant disruption to normal patterns of gas demand with a consequent impact on production volumes. In Tunisia, the restart of Hasdrubal was delayed. Unrest continues in these countries with a sporadic disruption to our operations. As a result, we now anticipate a delay of several months to projects scheduled for later this year on West Delta Deep Marine Phases 7 and 8.

Finally, you have seen reports of the serious flooding in Queensland in Australia. Unsurprisingly, given the magnitude of this disaster, production volumes in the quarter were down. However, our nominations were met.

Overall, we estimate that we lost 4.2 million barrels of oil equivalent compared with our expectations in the first quarter. We also expect some continuing shortfalls, particularly in Egypt as I have mentioned. As a consequence of these factors, we expect full-year production to be lower than anticipated. We expect modest production growth in 2011, ahead of the strong ramp up in volumes from 2012 through to 2020. Our average realized gas price that produced therm increased by 6% year-on-year to $0.395. This reflected market prices that were generally higher together with favorable changes in the production mix. Our average realized oil and liquid prices increased by 42% and 33%, respectively.

Unit operating expenditure in the quarter rose to $7.99 per barrel of oil equivalent. The increase compared with last year reflects the impact of shutdowns, changes in the production mix and higher prices that impacted our costs through higher royalties and tariffs. If the oil price remains around $100 per barrel for the full year, we would expect operating costs to be between $8.50 to $9 per barrel of oil equivalent.

The exploration charge of $184 million in the quarter was $80 million higher than last year due to the phasing of our program. In the quarter, we had 3 exploration and appraisal successes. However, the Titania [ph] well in China was dry. We intend to drill our third well offshore China later this year.

As before, we expect our gross exploration expenditure for the full year to be around $1.4 billion excluding acquisitions. We expect that about half of this will be expensed.

Total operating profit in our LNG segment was $570 million in the quarter. Shipping and marketing profits of $501 million were in line with our expectation. However, these were 14% below the reserves for the first quarter of 2010, which benefited from particularly strong weather-related gas demand in the United States.

We gave profit guidance for the LNG segment as a whole of between $1.9 billion and $2.2 billion for 2011. We now expect to be towards the upper end of this range. We also expect our performance to be heavily weighted to the second half of the year.

Turning now to Transmission and Distribution. Total operating profit increased by 4% to $145 million, with good revenue growth in both Brazil and India. At Comgás, $21 million were passed back to customers in the quarter. This compares with a net recovery of gas costs last year of $11 million.

Excluding the tiny effect of gas cost recovery, total operating profit at Comgás was 13% higher than last year. This mainly reflected higher volumes and the strengthening of the Brazilian real.

At the end of the quarter, $116 million are due to be passed back to customers in future periods. We currently expect this balance to drop around $45 million by the end of 2011. Net finance costs of $79 million for the quarter included foreign exchange losses of $22 million. We expect net finance costs for the full year to be around $260 million, and this excludes the impact of foreign exchange movements.

We now expect our full-year underlying effective tax rate for 2011 to increase to around 45%. This increase is primarily a result of the change in the U.K. North Sea taxation announced on the 23rd of March. Because of this change, we have also recognized a one-off tax charge of $203 million in the quarter arising from the restatement of opening deferred tax balances.

Including this one-off tax charge, earnings per share in the quarter decreased by 26% to $0.242 per share. Taking into account the impact of the North Sea taxation change, the Group's effective tax rate in the future years is expected to be around 43% to 44%. We expect this to decrease over time as more of the Group's profits are generated from outside the North Sea in the future.

Cash generated by operations in the first quarter was $1.8 billion. This was in line with the fourth quarter of 2010. However, it was 28% lower than last year, reflecting a higher level of working capital associated with margin costs on the Group's hedged LNG contracts. These outflows are due to reverse in future periods when the underlying LNG contracts settle.

We ended the quarter with a cash of $1.1 billion. Our gearing was 23%, and our net debt was $8.5 billion. We have matched our planned increases in CapEx with a soundly structured debt profile, which has an average maturity of around 9 years now, reflecting the Group's firmly established reputation in the capital markets.

We have highlighted the accelerating investment in the Group's major growth projects. The scale of which can be seen in our capital investment in the quarter. This was 21% higher than last year at $2.3 billion. Our capital investment included $319 million on acquisitions. This mainly related to the purchase of further shale gas acreage in the United States. At reference conditions, our expected full-year capital investment remains at around $10 billion.

Finally, you have seen the additional information provided in this release on depreciation, CapEx and LNG cargoes. We hope you find this helpful. Our intention here is to further the market understanding of our business performance. That concludes my remarks, and now Frank and I will be pleased to take your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] We go over to Theepan Jothilingam of Morgan Stanley.

Theepan Jothilingam - Morgan Stanley

A couple of questions. Just starting on the financials. Fabio, I was hoping perhaps you could give some guidance around depreciation for the full year given sort of your revised outlook on volumes, and how you see sort of depreciation per barrel moving in the next couple of years. And then secondly, just on Australia, I can see that you’ve had quite an amount of capital investment already go into QCLNG. My question was just relating to the a, the potential for a third train. How far down the line are we on the potential for a third train, and should we be looking for potential sanction on that in 2011? Thank you.

Frank Chapman

I'll take the third train if I may first, Theepan. As we said in February, we are already busy marketing or we continue our efforts in marketing. And you'll see 2 further disclosures this quarter for successful efforts in that respect. We said also at the fourth quarter results that we reckoned we had 18 months, 2 times 9 months effectively is the lead time gap. So we have effectively 18 months from the sanction of Trains 1 and 2 to catch, if you like, the deadline for sanctioning Train 3 and thereby, achieving the economies that go with sequential building. So the deadline, if you like, for us that we are trying to work to is a sanction of Train 3 by the middle of next year.

Now again, if you look back to the February strategy presentation, what we said at that time is that we had moved our reserves and resources, total reserves and resources from something like 5 trillion cubic feet to 20 trillion cubic feet since the beginning of 2008. And that 20, I forget exactly the number, 21 or thereabouts, is actually sufficient for 3 trains. The question really is the level of confidence that one has in that as a basis for sanctioning substantial capital investment. So the name of the game at the moment is the maturation of that reserves and resources base within this period. And of course, that has suffered some impact because of the flooding and the impact that's had on access to drilling sites, but we're still focused on moving some of that prospective resources to more higher confidence level to underpin a third train sanction.

So that's all I can say on that at the moment. Fabio, do you want to say something on the financials and the depreciation?

Fabio Barbosa

Basically, the depreciation, Theepan, it should track the CapEx disbursement that we implement throughout the year, the adjusting for the part of exploration, of course, that we are expensing. But basically, we should grow in line with our CapEx for growth.

Theepan Jothilingam - Morgan Stanley

Yes, that's fine. So are we looking at, let's say, relative to full year 2010, are we looking at...

Fabio Barbosa

You have another quarter of total CapEx for the year, and you know how much we are spending in exploration. So...

Theepan Jothilingam - Morgan Stanley

Okay, fine. That's perfect, thank you.

Operator

We now go onto Jason Gammel of Macquarie.

Jason Gammel - Macquarie Research

I had a couple of questions about your activity in the United States. First of all, can you talk in the Haynesville about roughly what percentage of your acreage is now held by production? And where your rig count might go once you hit full retention? And second, could you address which plays of the acreage you acquired during the quarter is prospected for?

Frank Chapman

Sorry, I didn't catch the last piece, Jason.

Jason Gammel - Macquarie Research

The shale acreage activity that you referenced during the quarter, the acquisition of acreage, if you could just address which plays you would be looking for.

Frank Chapman

Yes, the Chief and Hanley Bird acquisitions are Marcellus plays, and they are in what we regard as an area adjacent to some of the best drilling results we've had so far in the Marcellus. So that's -- on the percentage of our production in the Haynesville that's held by production, actually I don't know the answer to that, but I'll be happy to ask our people to follow up. Where we're concentrating, of course, at the moment is drilling wells in our core area of the Haynesville, Caddo, DeSoto, this area. And of course, those are areas which are already in production and our activities represent an intensification of that production by infield drilling. So that's really the main focus.

More general answer to your question is that we are not facing constraints or drop-dead, if you like, end-of-license constraints with respect to retaining our key core licenses. And therefore, we are able to focus our drilling campaign on the most productive areas.

Jason Gammel - Macquarie Research

Very helpful, thanks Frank.

Operator

We now go onto Jon Rigby at UBS.

Jon Rigby - UBS Investment Bank

Two questions. One on LNG and the guidance where you're very careful to sort of talk about timing through the year, and I just wondered what the driver of that guidance is. Is it the structure of the original hedges you put in place or is it something to do with how you see market? The second question is to do with Egypt, and just wanted to know a little bit more detail of what the constraint or the time line will be to getting production back on. Will it be your ability to mobilize rigs, et cetera, to complete the work we wanted to do or is it merely demand effects from the local economy?

Frank Chapman

Yes, I mean, Fabio will come to the LNG guidance in a moment. I mean, in Egypt, let's just be very clear. This is primarily an issue with the production facilities rather than drilling. We have had some suspension of drilling, but the suspension of drilling due to transit issues with expatriate crews was not of that long a duration. So that's not really had that significant an effect. But the real issue has been twofold with respect to new facilities. Firstly, expatriate supervisory personnel were evacuated for a period and have now remobilized. But also, the availability of craft labor, which has been affected by -- for a period these guys basically being absent. They were demonstrating with half the rest of the population. And although there is still some civil unrest prevailing, I would say that in terms of the craft labor, the situation has already largely returned to normal with a sort of sporadic productivity issues occurring from time to time. So I'm much more confident that, that situation is returning to normal. It has, however, had a significant effect on the degree to which Phases 7 and 8 will contribute to production during this year. But that's really the effect. I mean, in terms of years going forward, the reserves haven't changed. The production facilities that are being brought on-stream are the same production facilities. So the fundamental developments are going on as planned. But there has been some delay as a result of the people's revolution.

Fabio Barbosa

Now, Jon, on your question on LNG, no, it's not related to the hedges or the way they are structured. Actually, we are waiting, expecting that the sort of seasonality that prevails in the LNG business will also prevail this year, and we should expect results more weighted to the second half of the year. But this has no relationship whatsoever with the hedging structure.

Jon Rigby - UBS Investment Bank

Is it something to do with -- do you have a few more spare cargoes towards the sort of latter half of the year or during the summer period? Is that...

Frank Chapman

Well, really, I think really, it's a feature of the trades that we've done, the underlying value of the trades that we have done with these particular customers. And of course, whether the realization of profit falls in 4Q or 1Q, that is something that we have some facility in adjusting. And this year, different to last year, we will see a strong weighting, not only to the second half of the year but also to the last quarter in the year as opposed to the 2010 profile where we saw very heavily weighted in 1Q.

Operator

We now go onto Anish Kapadia of Tudor, Pickering, Holt.

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

A couple of questions. First, I was just wondering if you could update and give some details on your drilling plans for this year. So you have planned wells in Egypt, Algeria, Nigeria and Tanzania, if you could just give an update on those. Also, was interested if you are going to continue your Norwegian drilling campaign, and what you learned from the Brazilian and South China Sea exploration wells you drilled this year. And then just the second question relates to production. I was wondering how concerned you are about the kind of continued weak production even before the 1Q results, so back in 2010 from Egypt, U.K., Kazakhstan and India. Just wondering if this is due to a redirection of CapEx towards your new growth projects or there's some other issue over there.

Frank Chapman

Well, on production, Anish, you've just named virtually every country we're producing in and I don't actually think it's quite like that. We said last year that this was the year of pretty much flat production. This year is a year of transition. That transition will not be as marked as we had planned because of the events that we've laid out. The program from that point onwards is absolutely intact. The money’s going in. The resources are there. The opportunities to commercialize those resources are completely unchanged, and we are making absolutely solid progress with all of the key projects in the portfolio. So I mean, on production, that is the case. Update on drilling, I'm not going to go through the February this year presentation where we had all the wells. There are quite a number of wells, but you asked specifically about a couple of these areas. Tanzania, we've had a third gas discovery. I would say that in aggregate, and this is very preliminary, that we've discovered something in excess of 0.5 billion barrels oil equivalent to date. The discoveries, 2 are close together and one is in a different area. The 2 that have already being made in the north, those discoveries already we know are soundly economic as a floating LNG development. But we will, of course, be pursuing further drilling based upon 3D seismic, 5,000 square kilometers of which have already been shot this year, and new drilling campaign based upon that data we anticipate will commence before the end of this year. And that will be aimed at adding to the current resource tally with a view to underpinning a land-based, 2-train LNG project. We're sort of, if you like, 1/3 of the way with our first program, which I have to say is encouraging. Of course, we have to be a little bit measured in enthusiasm until we have explored some more. But that's really quite encouraging. Now in Norway, it is a disappointment that our Gullris prospect which was a very significant prospect, has been dry. We have a number of other important prospects. And of course, we have recently acquired a new license in the Barents Sea and therefore, our program in Norway will continue, including, of course, the further drilling out of appraisal prospects around the Jordbaer discovery, which itself is a successful, now sanctioned development. In China, we have a number of play types there that we are exploring. The first well, our first discovery was reported last quarter. The second well we drilled in these licenses was for a different play and we're currently -- which failed and we're currently analyzing the implications of that failure, and we're planning to drill yet another well, a further well, in China later this year. And so there's a little update for you without just going through all of the things that we presented in February.

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

Can I just follow-up on just a couple of other areas if you're still planning to drill 2 exploration wells in Egypt and also the Macunaima well in Brazil, if you can give some further details there.

Frank Chapman

Yes, Macunaima is reported in these results as a discovery, which was a good piece of news. And I believe that where we are with Egypt at the moment is we've got one well firmly in this year and one well that is I believe at this stage in the process straddling the end of the year. And this again will be some facet of a knock-on effect of the drilling program. We have long-term contracted rigs, and they're doing both development work and exploration work. So I think one well has now gone over into next year, but this is to be confirmed, if you like, Anish.

Operator

We now go onto Brendan Warn at Jefferies.

Brendan Warn - Jefferies & Company, Inc.

It's Brendan Warn of Jefferies. I just want to get an understanding in terms of Buzzard, whether that's factoring into the U.K. or the, call it the production downgrade, and whether that issue or you said that issue is going to be impacting the remainder of 2011. And just secondly, on Tanzania, thank you for a bit of color on that. But with the third well, the test of the Cretaceous, just wondering how much that well actually cost and whether with the second rig coming in the back-end of this year, will you be chasing oil going forward or is it now clear focus on gas in the tertiary?

Frank Chapman

I think well, firstly on Tanzania, the situation there is that we are, of course, faced with a completely virgin play. And there are all manner of different potential targets and different play styles and concepts. Just thinking about this as the tertiary and the Cretaceous is perhaps an over-simplification. And the other thing, of course, that we don't know about this play, because it is a virgin play, is what level of oil prospectivity exists alongside gas. So that’s all to be determined. Of course, we have theories about this, but none of this really is very meaningful until you've drilled some of the prospects. But look, as I said earlier on, on Tanzania, one has to be encouraged. I mean, I think probably our views are that there is potential in the tertiary alone to support an LNG scheme from prospects that we can see today. Much of the area is not covered with detailed seismic. If we take, then, into account the deeper prospectivity and prospectivity further out in deepwater, there is considerable testing here to be done. So I can't say anymore than that. We've got our sleeves rolled up. The guys are working up a bit of a sweat, and we'll see where it goes. On Buzzard, this is sort of breaking news. The situation as far as we have determined it with the operator is that we are going to be running at about half production level between now and some time in early June, at which point we will go back from about 80,000 barrels a day at the moment to about 200,000 barrels a day, beginning of June. And then we will go beyond that level to a maximum level after the change out of some Trula [ph] bundles, which are due on site in the first week of July. So I think the 3 months that was referred to by the operator yesterday is probably referring to the ultimate solution, which is the change out of some Trula bundles in July. So that's really the story there.

Operator

We now go onto Oswald Clint of Sanford Bernstein.

Oswald Clint - Sanford C. Bernstein & Co., Inc.

Maybe just on Iara, please, and your comments on substantially better characteristics at that field and after the Drill Stem Test finished in April, could you just talk about how your expectations for that discovery have changed as a result of all that new data coming in, please. And then secondly, I just noted in the press about your potential application to export LNG from the U.S. Maybe you could just talk about that. Is that a change in strategy? Is it just creating an option? And would it be related to your Haynesville gas if you were to get permission?

Frank Chapman

Yes, I mean, expectations for Iara I think that clearly, all of this data is coming in at present, and we're still processing that information. But we see this as very positive news for Iara. I think that also our partners have been expressing in line with us similar enthusiasm and ultimately, of course, this will have an effect on well density and recovery factor. Now I don't think we're ready yet to give further definitive, quantitative information. But we're all quite pleased with what's happened. I mean, Iara itself is a huge field and this is good, good news. In terms of -- and I'm sorry not to give you more, but we haven't given you more on Carioca. We haven't given you more on some of the other discoveries we've made because it's simply work in progress. I have to say that at every step of the way in Brazil at the moment, things are going very well indeed in terms of prospectivity, deliverability, progress with the facilities that we're constructing, relationships with Petrobras, relationships with the government, things are moving along very positively. In terms of the U.S., look, let me be very clear. Our current plans that we laid out to the city in February, they contained no assumption about exporting LNG from the U.S. And indeed, our first priority to our shareholders is to deliver the program that we set out in February, and in that respect, nothing has changed. So this is #1 priority. However, it is a fact that the spread between Henry Hub and oil continues to widen. And for that reason, we have taken the step of applying for an export license simply to provide a further future business option. I would say, however, that in a fully liberalized market like the U.S., irrespective of what we do, there is a massive force operating at the moment that's caused by the huge differential between the cost of oil and the cost of gas on an energy equivalent basis. And that huge difference is a massive driving force to cause changes in the pattern of demand and changes in terms of what people intend to do with their product. So there are many other proponents talking about not only exporting gas, but finding other uses for it in the U.S. So chemical feedstocks, we see quite a lot of gas demand growing at the moment in the U.S. for products that have in recent years not been manufactured any longer. So fertilizers, for example, would be one reasonable example. Plus the fact that with 9 million barrels coming in still to the eastern seaboard of the U.S., the case for metal distillate synthesis from gas to support high-value products is a strong one. And you see some players entering with that sort of play in mind. Suffice it to say that these are all responses to what is seen as a very wide value gap in the cost gap actually, and this liberalized market is responding. And I believe that, that response will serve to narrow that gap in time, and I think that, that will be good for owners of substantial gas reserves, which we are now in the U.S., whether it be as a consequence of deciding to do an export scheme or whether it be to continue to pursue what we said is our base case and that's where we are today, which is to supply what is the world's largest most liquid and in fact, most important gas market, the U.S. That's a little story, just to put the record straight.

Operator

We now go onto Michael Alsford at Citigroup.

Michael Alsford

Just a couple of questions, please. Just a follow-up really on QCLNG. Could you talk a little bit more about what you're doing to offset the delay that you've seen in the upstream piece of the project? Are you looking to get new rigs in to bring forward some of the drilling that you've missed out on? And then also just on the -- there's been a little comment about the industry about the kind of the tightness we're seeing in the local labor market there. Maybe could you talk a bit about how BG has been impacted and what you're looking to do to overcome that. And then finally, just a second question, just on Tunisia, just -- I know you were impacted in the first quarter, but is Hasdrubal now back up and running normally?

Frank Chapman

Yes, I mean, on the drilling, this is not basically rocket science. I mean, in common with pretty much every other operator, we've been unable to access some locations, some areas because of very poor ground conditions still existing quite a long time after the floods have abated. And really, it's not rocket science. We have to drill basically in the areas which are dry. So we’re having to, in fact, change the drilling sequence to some degree. We've got to prepare a well site in areas that we can access. We have to indeed think about accelerating the drilling program by using more rigs and so on and so forth. Bearing in mind, we have about 700 wells already. We've got to get to about 2,000. We do have time to catch up with this, and all hands to the pump at the moment to make sure that this particular aspect of the project doesn't cause a delay in the buildup profile. That's what we're talking about here, a change in the buildup profile rather than a change in the on-stream date. And of course, everyone's very focused on that. Now in terms of tightness in the labor market, that, of course, is something that we're not just thinking about now. We have been thinking about for a long time, and elements of the strategy that we've deployed to deal with that have been first and foremost to be first and at the moment, we believe we may be, well, we probably are, though I'm hesitant to say this, but we're probably 9 months in front of the nearest competitor in terms of our progress. And we are endeavoring to stretch out that lead by intensifying our activity and making sure that we get our critical activities. These are all sequential activities. You have to do excavation work. You have to do civils work, then you have to move on to steel work and then piping and then electrical and instrumentation. And we need that wave to be on the front of that wave. So that's one thing we've done. The second thing we've done is looking very carefully at the contracting strategy and I won't on this open call go into the specific details. But the way we've contracted this, being the first in line, will have an effect on our access and the cost of access of key craft labor. The third thing we've done is to reserve our fabrication capacity, for example, in Thailand, for example, in Turkey, early in the process so that we can get piping spools, some modules, so on and so forth in advance made up, shipped to Australia. And we've also been very active, very early in the process with getting on order all of our long lead materials, all of the pipeline materials, the large diameter pipeline materials. All of this stuff has been really expressed through the process to make sure that we don't bump into issues. Of course, the government's change in legislation with respect to overseas craft labor has been expanded in order to make it more straightforward to bring in overseas craft labor, in order to help with the remediation or the pressures that's put on craft labor supply through the remediation of Queensland infrastructure following the floods. And that facility is being made available to all users of craft labor, including ourselves and our contractors. So that's a little bit about the tightness in the labor market. Tunisia, what was the question on Tunisia?

Michael Alsford

It was just really, obviously, you had a little bit of, obviously, downtime at Hasdrubal. And I was wondering how it's going now in-country, obviously, post the social problems that they had.

Frank Chapman

Well, I mean, again, the issue in Tunisia was really about -- is the same as in Egypt. It was really about expatriate personnel and for the recommissioning works, essentially of Hasdrubal, and the presence of craft labor who were absent doing other things for a time. Now we've now got Hasdrubal back on-stream. It's actually working extremely well at the moment and that we regard now as a problem that's behind us. There's still, as was mentioned earlier, there is still some sporadic unrest, but largely now, I mean, for the moment, all of our production is operating in accordance with plan in Tunisia and indeed in Egypt, where the very dramatic fluctuations in system pressures that we saw during the crisis, with demand swinging up and down, did destabilize the network in such a way that it made it quite difficult to operate the domestic supply system and the way it's interconnected with LNG to operate that in a stable way. So although all of the -- in over quite a lot of this period, all of the production capacity was available, operating it in a stable fashion and having the demand to take the domestic supply, that was somewhat problematic. So situation is returning to normal but we have to be a little cautious and say that there is still some sporadic civil unrest.

Operator

We now go onto Fred Lucas at JPMorgan.

Frederick Lucas - JP Morgan Chase & Co

Two quick questions. First of all, what happens to the $10 billion CapEx guidance if we move from referenced conditions to current market conditions? And the second question is I think you mentioned a loss of 4.2 million barrels as a result of all the various disruptions in Q1. That's a 7% loss to volumes that I guess you were expecting to produce at the beginning of February to the end of March. I'm just wondering, Frank, if you feel you've got adequate internal management controls around the timely reporting of production issues within the group and whether in future you might be able to highlight these issues sooner in the quarter?

Frank Chapman

Yes, I mean, look, I'm not quite sure whether you're asking about our internal process or whether you're asking about our advice to the market.

Frederick Lucas - JP Morgan Chase & Co

Well, the 2 are connected.

Frank Chapman

Of course, they're connected. But, I mean, essentially, of course, the whole unfolding of the situation in Australia with the water, the Tunisia and Egyptian situations, those were a little more difficult to really understand what the implications would be for production, okay. So that picture, sort of unfolding picture. And Everest and Lomond, which accounts for about 2/3 of the loss, again, is a picture where we had a very minor actually condensate leak on Everest. And we decided to bring these platforms down to be sure that we didn't have any more of this type of issue a small ring away. And I think that's the right thing to do, and is reflective of a culture which puts safety and asset integrity first. So that's where we are. In terms of our reporting, of course, if we ever encounter production levels, which are so markedly different from what the market would expect then, of course, we will be obliged to advise the market in a timely way.

Fabio Barbosa

And, Fred, on the CapEx guidance, there are a lot of moving parts, and you just saw Frank's comments on how we are managing to implement, to execute our project in Australia in a very efficient way with planning and getting the best resources in place at a very reasonable cost. The same goes to Petrobras and BG's investments in Brazil. They just announced a very important expected reduction in the total cost of investment there, and there are changes in foreign exchanges around the operations that we are exposed to. So I would say that for the time being, it's a sensible approach to keep the number as it is.

Frederick Lucas - JP Morgan Chase & Co

How much of the $10 billion is locked in, Fabio?

Fabio Barbosa

In terms of?

Frederick Lucas - JP Morgan Chase & Co

Well, not exposed to any kind of inflationary process or currency...

Fabio Barbosa

Moving parts. We live in a world that we have inflation risk in Brazil. We'll have some less important effects in the U.S. and the U.K., for instance. So, moving parts. We cannot say precisely where is -- we don't have any exposure to any change in the economic environment. I wouldn't do that.

Frank Chapman

Again, Fred, if there are very material changes here, of course, we're obliged to and we would in any event keep the market appraised of that.

Fabio Barbosa

Yes, but for the time being, what we see is that we are comfortable with the guidance that we provide.

Operator

We now go onto Hootan Yazhari of Bank of America Merrill Lynch.

Hootan Yazhari - BofA Merrill Lynch

Two quick questions. Going back to Brazil, we're now beginning to see some gas flowing up through to Mexilhão. I just wanted to see when we should start to see the impact of your gas production coming into Comgás and when we can really expect to see any impact coming through there. The second question I had was really regarding your LNG marketing initiatives that you're undertaking at the moment. You're obviously gunning for a third train in Australia potentially moving on to a fourth train. What is the climate like at the moment? Are you still seeing huge demand for further trains of gas? Or are you finding competition from competing LNG projects making it more difficult to negotiate further from here?

Frank Chapman

Well, I mean, let's just take the LNG climate. As we said in our February strategy presentation, we have held the view for some time, and we believe this is borne out by practical experience over the last couple of years and indeed in the present day, that as one moves out beyond 2013, we see a structural short position in terms of LNG supply-demand balance. And what's happened, of course, in Japan is that you're looking at a situation there where we believe will be a knock-on global effect. I mean, you're seeing clearly some governments reconsidering nuclear programs. We can expect, I think it's fair to say on average, some delay after Three Mile Island in the U.S. We saw lead times for nuclear projects going out to something like 12 or 13 years. And of course, associated with that will be increased costs, and there will be increased costs associated with more stringent regulatory safety requirements I believe. I think that's a reasonable assumption. Now all of this I think will result in medium, long-term higher gas demand for power and as a consequence, extra demand for LNG. And this is going to cause a further tightening of a market situation, which we already regarded as quite tight. So that's the sort of perspective. And by the way, we are seeing more inquiries flowing today, not necessarily for trade now, although we are seeing trade in China, Korea, Taiwan, additional cargoes. But certainly, for new term contracts beginning some years out. So that's the picture as I see it. LNG marketing activity, we're still at it with the boys out there. They're doing a very -- boys and girls, they're doing a very good job. And we are being successful. As we said I think in February, the thesis that we maintain is that for good projects with reliable experience proponents, these projects will find good customers at market prices. That's basically the position we're in and the position that is underpinned by first-hand experience over the last couple of years. Brazil, all of our gas at the moment in Brazil is being injected into the reservoir. So it'll be a while before we see that appear as gas through the Mexilhão system and into Comgás.

Operator

We now go on to Tim Fustier (sic) [Kim Fustier] at Crédit Suisse.

Kim Fustier - Crédit Suisse AG

It's Kim Fustier from Crédit Suisse. I had one question, please, on Brazil. It seems there are very different levels of CO2 in the various pre-salt Santos Basin field and lower CO2 content on some fields is obviously good news, but it could also have implications on the ability to standardize the FPSO topsides. So my question is: do you see any risks that it could lead to lower standardization than initially planned and therefore to potential development delays?

Frank Chapman

Yes, I mean, let's just be clear here. On the current FPSO standard design, if you like, does have a number of variabilities. They're not all completely standard. I mean, some of oil is a different gravity, and we have different gas- oil ratios that can vary quite inconsiderably and different CO2 content. So they are -- although we standardize or trying to standardize where we can, we have to recognize that not all these FPSOs are going to be identical, and we'll try to make them so where they fall within a reasonable envelope. The units that we've got are actually very sophisticated, I would say, and that they have oil processing, water processing. They have gas removal and processing. They have CO2 separation. They have both gas, water, all of gas, water and CO2 injection capability. And, of course, as you know, that from your experience with miscible flood, CO2 is not always a negative component to have as a gaseous flow for the purposes of enhanced recovery and oil recovery, miscible flood schemes. So it is variable costs of field, some areas hardly have any CO2. Other areas have quite a bit, and we are going to vary the design of the FPSOs as necessary to deal with those differences. I think probably the biggest single difference is the fact that we are trying to decide whether we need to put CO2 handling equipment at all on the Cernambi field, which doesn’t, we think, have no CO2 in it or very little. And all of the others will have some CO2, to date in any event, have some CO2 handling capacity. So that's the picture there. I hope that gets you some sort of answer.

Operator

We now go ahead to Lucy Haskins at Barclays Capital.

Lucy Haskins - Barclays Capital

Just a very small follow-on. I know this all sounds very short-term, so I’m nitpicking through Frank. But on the sort of guidance for the modest growth this year, does that actually have some contingency in it for unplanned maintenance that you talked about, both are being breaking news. Would that be a risk to this new lower guidance?

Frank Chapman

Yes, I mean, our view is that this year was intended to be a year of transition from a flat position towards the 2012 and beyond where we see this ramp up, which is a strong ramp, in fact that extends right out for the rest of the decade. And that ramp up is driven strongly by a whole series of new projects that are coming on-stream. The money's going into those projects. The projects are being developed and that is coming. This year, we had expected to see a good transitionary year with a substantial increase in production. We now somewhat more cautiously are saying that's modest, so the transition will still be there. But it'll be a more modest transition than we had planned. And that's probably as much as we’re prepared to say.

Lucy Haskins - Barclays Capital

And perhaps just one follow on for Fabio. I recognize it's early days, but I wonder what's been the biggest surprise for you since you came on board to BG?

Frank Chapman

It was a pleasant one to meet a great team that I'm very proud to be part of.

Operator

We now go on Andrew Whittock of Liberum Capital.

Andrew Whittock - Liberum Capital Limited

Just 2 quick questions I think. It seems that the Philippine power sale has fallen through. I wonder if you can just say a quick word on why and whether we should expect the stations or the interest to be sold to someone else this year or next. And secondly, it seems to be a very significant increase on the balance sheet in trade receivables. Is that purely down to commodity prices or is there something else driving that?

Frank Chapman

Yes, I'll get Fabio to cover the second one. I mean, look, I'm not going to comment on the reasons the deal fell through. But I would say that in our business at the moment, the assets are being held for sale. So you can take it from that, that we are continuing to pursue a disposal route here and believe that we have the wherewithal to achieve that in the fullness of time.

Andrew Whittock - Liberum Capital Limited

So, Frank, would that be this year, do you think, or a fuller length of time than that?

Frank Chapman

Well, obviously, our objective is having decided to sell these assets. Our objective is to sell them as soon as it's practicable. But I wouldn't string myself up, if you like, by making it appear to others that there is a desperate need to dispose of these things at all costs. I mean, they are good assets. They're valuable assets. They are good contributors to our earnings stream, and there is no hurry to do this. But long term, the growth in value of our business is elsewhere.

Fabio Barbosa

And on the receivables, the major driver there are Egyptian receivables that we have in the market associated with higher prices.

Operator

We now go to over to Iain Armstrong of Brewin Dolphin.

Brendan Warn - Jefferies & Company, Inc.

Actually most of my questions have been answered, but I'm just trying to catch the point which Lucy was talking about with regards to have you got something else in the bag with regards to your guidance for the medium-term? Could you, for example, ramp up your production in 2012 faster than you were given guidance for?

Frank Chapman

No, I don't think we have anything else in the bag. I mean, the overall, what we have to look at here is what's the overall picture. And the overall picture is that between 2005 and 2020, over a 15-year period, our aim is to grow between 6% and 8%, compound. What we said in February is that we already have the resources, 16.2 billion barrels oil equivalent of resources and the ventures necessary to commercialize those resources in place. And that with those resources and with those commercialization opportunities, we can get to the midpoint of that range without a single further discovery. Now the program is on its way. We see the money going in, you hear the reports of progress. So I have no doubt that the company is going to deliver on its long-term growth ambition, and it will show that it can grow over this period of 5-to-20, 15-year period at these rates. And in fact, the growth rates at many points over the period between now and 20, you will know from the presentation we made in February if some of these rates get to quite high annual figures. So that's really it. This is the long-term investment proposition, and that proposition remains unchanged.

Iain Armstrong - Brewin Dolphin

I understand that. And just going back to unplanned maintenance in the North Sea, is any planned -- will you just tell us about the planned maintenance you've got for the rest of operations, for the rest of 2011 and in this quarter?

Frank Chapman

In just about every facility we have around the world, there are planned shutdowns as there are every year for remedial work. Sometimes these shutdowns are very extensive, sometimes they are less so. But I won't on this call go through each and every platform on what we're planning to do there. But there are, as normal, a good level of investment in the maintenance of our facilities.

Iain Armstrong - Brewin Dolphin

Is it a Macondo affect with regards to regulations across the globe?

Frank Chapman

Not a Macondo effect. I mean, I do want to reiterate that it is central to what we're doing. And you've heard me say this many times before that our culture is one that puts safety and asset integrity before any other consideration. If you have a minor condensate leak and it was a very minor condensate leak, of course, one does not want to be left with the uncertainty that you might have at any given time another condensate leak. Our systems, in this case, worked. The plant was shut down. We decided very quickly to conduct a full inspection of all similar pipework, and we did some remedial work and some maintenance work. This is the right thing to do when you have an unexpected occurrence with safety implications. So I'll make no excuses for that. It's how a good company should be run. With respect to general processes, we are evolving processes that enable us to take a more holistic view of the overall risk environment that exists in each of our facilities. And, in fact, last year, one of these projects to develop new tools to do this won an award at our Chairman's annual awards and those methodologies are now being put to work across our assets, and in fact, are now operating in the North Sea. And I think that's a step, a further step in the direction towards 0 injuries and 0 asset integrity incidents.

Iain Armstrong - Brewin Dolphin

One final question just on the comment about Egypt thing, there was significant disruption to nominal patterns of gas demand. Are you assuming that those disruptions are going to continue through the rest of this year in your modest growth assumptions?

Frank Chapman

Well, I think what happened, of course, was that half the population or more than half the population didn't turn up for work. They were demonstrating, so you can imagine that some days we saw gas down 1/3 or 1/2 of its normal level. And this was actually very erratic. Now that level of instability in gas demand has now passed, and we're seeing much more stable conditions. I can say that it won't occur ever again because that will be a facet of the success or otherwise of the processes now to follow, the democratic process. But all I can report to you is that things are settling down nicely. They are returning to normal, and we are seeing much more normal gas demand patterns.

Iain Armstrong - Brewin Dolphin

Do they have a lot of storage capacity in Egypt or that gas just not produced, just lost?

Frank Chapman

It was not produced. Some of it was diverted to LNG, but a lot of it was not produced. I mean, the fact is that when you get this erratic thing on a day-to-day basis, it's very difficult to plan the shift on a stable way, production from one place to another, schedule shifts and all this sort of stuff. It's very, very short-term and you just have to live with it. I mean, I would say that all of our emergency response processes were tested significantly, put to the test in these places, in Australia, in Tunisia, in Egypt. And I'm pleased to say they worked, and I'm pleased to commend the people in BG that worked hard to mitigate these effects and respond to pretty unusual circumstances, I would say.

Iain Armstrong - Brewin Dolphin

Good learning curve.

Frank Chapman

Good learning curve.

Operator

The final question is from Pete Harding of the Royal Bank of Canada.

Pete Harding

Just 2 questions and no follow-ups. Can you quantify the impact of the U.K. tax and its financial impacts, fiscal impacts on the Group? But can you just confirm whether you'd see any impacts of this on the longer-term operations in the U.K. and the expected investment profile, which was for the stable production. That's the first question. And the second question is, Frank, you mentioned to one of the earlier questions that there was some flexibility around Q4 last year and booking profits into the first quarter of this year. Can you quantify roughly how much that was in terms of profitability?

Frank Chapman

Hang on a minute. I didn't say that we were shifting profits. I don't think that would be legal. But what I was saying is that some trades, yes, when you're looking at your busy period 4Q and 1Q, maybe that some of the trades in a particular year fall in one place and then another year fall in the other quarter. So it's the pattern of trades that we -- and the delivery patterns that we have agreed with our customers and how they fall across those 2 quarters is what I really meant.

Pete Harding

Understood. But was that a big impact between Q4 and Q1 this year?

Frank Chapman

Absolutely. Q1 2010 was a very big quarter, right, and what we're saying is that if we look at this year, 2011, it's weighted much more heavily towards 4Q. So the heavy trade period, where we expect the central gravity of profitability to be this year, is not in the first quarter but rather in the last quarter. Okay?

Fabio Barbosa

On your question about tax, the impact on our earnings was $265 million and for the general question about investments in the future as Frank mentioned earlier, of course, it doesn't help. This additional taxation doesn't help the competitiveness of the U.K. economic environment. So what we are going to do as we usually do is to consider any investment alternative according to our criteria in terms of the financial robustness of the proposition as we always do. So this additional change in taxes, what it does is to reduce a little bit, maybe a little bit more than the competitiveness of projects in the region.

Operator

Okay, as that was the final question, gentlemen, may I please pass it back to you for any closing comments.

Frank Chapman

Well, thank you very much for your questions. Finally, I'd like to conclude with the fact that it was, as you all recognize, a very challenging quarter for our E&P operations. On the other side of the coin, we made really significant progress with our growth program, and our goals out to 2020 remain unaffected. So thank you for taking part in the conference call today, and I'd like to remind you that we'll be announcing our second quarter results on the 26th of July. Thank you once again, and goodbye.

Operator

This now concludes today's call. Thank you, all, very much for attending. You may now disconnect your lines.

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