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Executives

Frank J. 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 De Oliveira Barbosa - Chief Financial Officer, Executive Director, Member of Group Executive Committee, Member of Chairmans Committee and Member of Finance Committee

Siobhán Andrews -

Analysts

Jon Rigby - UBS Investment Bank, Research Division

Rahim Karim - Barclays Capital, Research Division

Simon Hawkins

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

Brendan Warn - Jefferies & Company, Inc., Research Division

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

Theepan Jothilingam - Morgan Stanley, Research Division

Michael J. Alsford - Citigroup Inc, Research Division

Paul G. Spedding - HSBC, Research Division

Irene Himona - Societe Generale Cross Asset Research

Hootan Yazhari - BofA Merrill Lynch, Research Division

BG Group plc (OTCQX:BRGYY) Q3 2011 Earnings Call October 25, 2011 7:00 AM ET

Operator

Good afternoon, and welcome to the BG Group Quarter 3 Results Call. [Operator Instructions] Just to remind you, this conference call is being recorded.

Today, I'm pleased to present Sir Frank Chapman, Chief Executive; Fabio Barbosa, Finance Director; and Siobhán Andrews, Deputy Head of Investor Relations.

Siobhán, please begin your meeting.

Siobhán Andrews

Thank you. Good afternoon, ladies and gentlemen, and welcome to BG Group's third quarter results. During the course of this conference call, our Chief Executive, Sir Frank Chapman; and our Chief Financial Officer, Fabio Barbosa, will take you through the quarter's key business highlights. And Sir Frank and Fabio will take your questions.

During the call, we'll be focusing on our business performance results as highlighted in our results statements. 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 identified in detail in BG Group's annual report and account for 2010.

Thank you, and now over to Sir Frank.

Frank J. Chapman

Good afternoon, ladies and gentlemen. I'm pleased to report that we are making material progress across the portfolio in advancing our growth program. I'll take you briefly through the key developments before handing over to Fabio to guide us through the financial highlights.

I'll start with Australia where we invested $1.3 billion in the quarter and where engineering, procurement and construction are all moving ahead in line with a 2014 first production goal for our Queensland Curtis LNG project. In the Surat Basin, activity is ramping up as the state recovers from the extensive flooding in Queensland at the start of the year. In the third quarter, drilling activities regained impetus with 51 wells drilled using 4 drilling rigs. This trend is set to continue with up to 12 drilling rigs now planned for 2012. Momentum is also being restored elsewhere across the project.

In the upstream, good progress continued with the start of construction on the first 2 field compressor stations and with significant advances with the water treatment and storage facilities. The first water treatment plant at Windibri is now complete and ready for start-up. Construction is underway at the Kenya water treatment plant, and we have also awarded a turnkey EPC contract for the northern water plant. Further engineering and procurement work also progressed in support of the imminent award of a contract for the construction of 6 field compressor stations and 1 central processing and compression plant.

At the LNG terminal site on Curtis Island, less than one year on from project sanction, site preparation for the LNG plant is complete. Construction is underway on the foundations for the LNG storage tanks and for the living quarters, which will house the construction workers. Additionally, fabrication of the modules for the LNG facility has begun with propane condenser units being assembled in Thailand.

In parallel, progress continues with the main trunk line and gas collection network where all of the 42-inch steel pipe is being coated, shipped and now hauled to infield locations ready for welding and trenching, so demonstrable progress on multiple fronts on the road to first LNG in 2014.

In Brazil, equally significant advances have been made in the development of our interests there. Commercial production from the Lula field via the first permanent FPSO increased to over 35,000 barrels oil equivalent per day from a single producing well, further demonstrating the prolific nature of our Brazilian pre-salt discoveries. Further producing wells are due onstream by year end.

During the quarter, the 216-kilometer Lula Mexilhão gas pipeline was brought onstream, a key element in the first phase infrastructure supporting development of BG Group's 6 billion BOE net reserves and resources in this pre-salt play.

Elsewhere, the EWT on the Guará Field again demonstrated the prolific nature of our Brazilian discoveries, achieving production rates of up to 30,000 BOE per day from this single well. On completion, at the end of July, the Guará well test had produced a cumulative total of 2.8 million barrels of oil equivalent over an effective producing period of just 5 months. Earlier this month, another EWT commenced this time at the Carioca discovery. Alongside excellent production and testing results in the Santos Basin, significant progress is also being made on the construction and procurement of other vital infrastructure. The next 2 FPSO modules are on track as around 70% complete. In fact, the first of those vessels is already on its way to Brazil scheduled to arrive in December this year for commencement of the final fabrication and integration work. Both these 120,000 barrel of oil per day FPSOs are scheduled to be deployed in 2013. In addition to these units, we have also signed letters of intent for the supply, charter and operation of 2 150,000 barrels per day FPSOs units 4 and 5, with both scheduled for start up in 2014. This means that contracts are now committed for all 13 of the first phase FPSOs, in line with the plans outlined by BG Group last December. These 13 FPSOs will all be onstream by 2017 and will deliver an aggregate production capacity of some 2.3 million BOE per day in this, the first phase of our Santos Basin pre-salt program. So progress across the piece that continues to de-risk the development of our world-class interests in Brazil.

We also see this good progress being mirrored elsewhere across our global portfolio with a focus on near-term production, the successful commencement of Phase 8A in the West Delta Deep marine in Egypt represents a further milestone in the development of our interests there, excellent progress in light of the civil unrest earlier in the year. Phase 7 of this development is also due for commissioning by year end, and Phase 8B will further contribute to 2012 performance.

In Thailand, new facilities for the Bongkot South development are on schedule for start-up in 2012. And in the U.K., we saw good results from drilling at the Jasmine field along with advances with the construction of facilities also due for start-up in 2012.

Elsewhere, we reached a landmark agreement for long-term LNG sales to India, one of the world's fastest growing energy markets. And in the U.S., the Department of Energy granted authorization for potential LNG export from the Lake Charles terminal.

And now I'd like to hand over to Fabio for a summary of the financials.

Fabio De Oliveira Barbosa

Thank you, Frank, and good afternoon, ladies and gentlemen. I will start as usual with the E&P segment. Revenues of $2.5 billion were 28% higher than the third quarter last year, reflecting the benefit of higher realized prices and the 1% increase in production volumes. E&P total operating profit of $1.2 billion in the quarter was 55% higher as a result of the increase in revenues, partially offset by higher operating costs.

Production volumes were 1% higher as increased production across the group's portfolio was largely offset by the impact of shutdowns, third party-operated infrastructure restriction and planned commissioning activities in the U.K. North Sea.

Production from the U.K. in the quarter was approximately 4 million barrels of oil equivalent, some 39% lower than the planned. Buzzard, where new facilities are being commissioned, operated at significantly lower than full capacity during the quarter. And shutdowns, largely for asset integrity maintenance, were completed at a number of fields including Armada, Everest and Lomond.

In the first 9 months of 2011, production from the U.K. North Sea was approximately 11 million barrels of oil equivalent lower than we planned or some 29%. With Buzzard production reestablished, U.K. facilities are now back onstream. And our net output from the North Sea is some 90,000 barrels of oil equivalent per day, higher than the average observed in September. Achievement of the group's production growth guidance for the year will largely depend on the North Sea performance continuing for the remainder of the fourth quarter.

Excluding the U.K. North Sea, production volumes for the group were 6% higher than 2010, consistent with our growth plans, with the effects on production of civil unrest in North Africa and flooding in Queensland early in the year being successfully offset throughout our portfolio.

Turning now to prices. BG's average realized oil and liquid prices increased by 52% and 44%, respectively, whilst BG's overall realized gas price increased by 19% year-on-year.

As for the U.K., the average realized gas price was just under $0.39 per produced therm, reflecting the current mix of contracted and spot sales. It is important to note, however, that U.K. gas production represents about 5% of our group's revenues.

Unit operating expenditure rose to $8.96 per barrel of oil equivalent. The increase, compared to last year, reflects the U.K. North Sea shutdowns, the impact of higher commodity prices on both tariff and royalty costs, together with changes in the production mix.

The third quarter exploration charge of $127 million was broadly in line with 2010. As before, we expect our gross exploration expenditure for the full year to be around $1.4 billion, excluding acquisitions with around 1/2 of this being excess.

In our LNG segment, total operating profit for the third quarter was $620 million. Shipping and marketing operating profit of $572 million was 15% lower than last year, but ahead of our expectations as favorable market conditions enabled us to sell more cargoes to global market outside of the United States than we have planned. During the quarter, we sold only 11% of our LNG cargoes in the United States compared to 22% in 2010. Our share of operating profits from liquefaction activities increased by 7% to $81 million. As a result of the continued strong performance of the LNG segment as a whole and based on current market conditions, we now expect total operating profit in 2011 to be above our previous guidance at some $2.4 billion.

Turning now to transmission and distribution. Revenues were up 16% in the third quarter, principally reflecting favorable foreign exchange movements in Comgás in Brazil and higher volumes and prices in Gujarat Gas in India. However, total operating profit in the same period fell by 34% to $130 million. This was the result of the timing effect of gas cost recovery in Comgás where $72 million were paid back to customers in the quarter, compared with a net recovery of $67 million in the same period last year. Excluding this timing effect, total operating profit at Comgás increased by 42%, mainly reflecting higher margins and favorable foreign exchange movements.

For the group as a whole, total operating profit of $1.9 billion in the quarter was 17% higher than last year. Earnings per share increased by 4% to $0.301 per share, reflecting the increase in operating profit and lower finance costs largely offset by higher tax charge for the period.

Net finance cost of $50 million for the quarter were $73 million lower than last year, primarily as a result of foreign exchange movements.

Our effective tax rate for the third quarter was 45%, and we continue to expect the group's underlying effective tax rate for the full year to remain at around this level.

Cash generated by operations in the quarter increased by 59% to $2.7 billion as a result of higher profits and the continued reversal of prior period margin calls on the group's hedged LNG contracts.

The group's extensive investment program continues with organic capital investment up 39% in the quarter to $2.9 billion, focused on our major projects in Australia, Brazil, the U.S.A. and the U.K. At reference conditions, our expected full year capital investment remains at around $10 billion.

We ended the quarter with cash of $1.6 billion. Net debt was $10.8 billion with an average maturity of around 7 years. And the group's gearing ratio was 27%.

In October, we issued $3 billion of bonds into the U.S. debt market, demonstrating attractiveness of the group's credit and providing material long-term funding. These bonds, which were issued in 3 tranches maturing in 5, 10 and 30 years, were rated mid-single A by each of Moody's, Standard & Poor's and Fitch. Also during the third quarter, the group's committed facilities, which remain undrawn, were increased to $5.75 billion with extended maturities of between 2012 and 2018.

That concludes my remarks. And now Frank and I will be pleased to take up questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Theepan Jothilingam of Nomura.

Theepan Jothilingam - Morgan Stanley, Research Division

Just 2 areas where I'd like to make some questions, please. Just firstly on LNG. You continue to be on guidance on LNG. I think in the quarter, you've had 35 cargoes going into Asia. I was just wondering whether you think this type of performance could be sustainable into 2012, or do you see some sort of one-offs in 2011 that won't be repeated? Secondly, just on production. If you could talk a little bit about the performance of the U.S. business and production there given the low prices and then any sort of comments on 2012. I mean, looking at the slide on growth from February, it suggests quite a steep increase in production for next year, potentially this is going to be more than double digit. I was just wondering if you could make any comments on that, if you're confident that you can make that type of price off?

Frank J. Chapman

Yes, maybe I'll take the last couple of questions and then we'll hand over to Fabio for the LNG. On 2012, the production guidance there, we don't have a 2012 target, as you know. What we're trying to do, of course, is to achieve 6% to 8% growth rate over period that goes out to ending date beyond 2020. What we can say is that 2011's production issues were not reserves driven. They were confined to the U.K. for a series of reasons, which we've set out in the release and which we've discussed previous quarters. But these weren't reserves related. Also we know that during 2012, we will have a number of new projects, which I mentioned in my remarks earlier, that will come onstream: Bongkot South; we got a full year of production from the Buzzard enhancements; Gaupe Norway's quite small, but still a new contribution; Jasmine, which will come on quite late in the year; Margarita Phase 1; we talked about West Delta Deep Phases 7, 8A and 8B. So quite a lot of things coming through in 2012. And I should add, of course, that not all these things are coming on in the 1st of January. They're spread out through the year and some of the bigger contributors like Jasmine actually plan to come on quite later in the year. So that would give you some sort of indication of the drivers for momentum in 2012. Regarding U.S. performance, outside of the U.K., as I also mentioned in the release, production performance has been, on average, across the portfolio excluding the U.K., absolutely in line with our plan, grew by 6%. And there were some swings and roundabouts there. We lost a bit early in the year in North Africa. We've lost some, which haven't been recovered in Australia, but that has been offset. We've actually managed to recover the situation in North Africa, and we've managed to offset the Australian losses elsewhere in the portfolio. The U.S. has been progressing in line with our development plans. As you know, we're sitting there on some of the best acreage in the Haynesville, and I'm quite pleased to report that very positive results from our latest drilling in the Marcellus Shale as well. So Fabio, perhaps you could comment on the LNG?

Fabio De Oliveira Barbosa

Certainly. Theepan, as you noticed, Asia is really a major driver of the market today, and this is actually reflecting the multispeed world that we live in. We have a more bearish scenario here in Europe and the U.K. and to some extent in the U.S., but elsewhere, there's a lot of activity. GDP is growing faster. And as you can see by our numbers, we increased our cargoes to Asia this year on the first 9 months of the year by roughly 1/3. And in the South America, the same, basically, Brazil and parts -- in Argentina. So we have a very strong performance elsewhere that is helping us to deliver a stronger result in our LNG business. And moving forward, we haven't changed our perspective about LNG, as we indicated previously to the market, but the fact is that this pattern of growth in GDP by different regions of the world should continue. So let's see how it develops. But we continue to see Asia and Latin America growing faster than the average developed economies.

Operator

Our next question comes the line of Brendan Warn of Jefferies International.

Brendan Warn - Jefferies & Company, Inc., Research Division

This is Brendan Warn from Jefferies. Just a couple of questions. Just I guess an update, if we can, on the Phase 3 negotiations in Kazakhstan. And just second question, more relates back to reference conditions and just the estimates for CapEx, certainly, for this year and going into 2012. Obviously, you've given some guidance of the split of Aussie dollar-denominated work in Australia, but are we looking at a sort of 20% increase in CapEx if we talk in actual conditions? Is that the right ballpark, please?

Frank J. Chapman

Well, I think the guidance for 2012 and onwards, we'll talk about when we come to February. The issue about Australia, of course, is that we actually don't know today what the final outturn CapEx will be since 70% or thereabouts of the CapEx is going to be deployed in Australian dollars. And of course, the Australian dollar, relative to our U.S. dollar CapEx external estimate, the Australian dollar, of course, is moving and we won't know the final cost in U.S. dollars until the program is complete. But I think it's fair to say that you know from our reference conditions the exchange rate we use there for U.S. dollar to Aussie dollar. You know what it is today. You know what the forward curve is, and you know that 70% of the $15 billion that we notified the market about at the beginning of the project sanction, around 75% -- sorry, 70% of that is going to be denominated in Australian dollars. So that will give you an idea of the sensitivity of our $15 billion program to movement in the Aussie dollar.

Brendan Warn - Jefferies & Company, Inc., Research Division

My question also extends to your group level CapEx of the $10 billion. Obviously, oil prices are high, inflation's higher around the world. Are we expecting a 15% to 20% CapEx increase on the $10 billion that's the reference exchange rate?

Frank J. Chapman

No. I think what we're seeing here in the context of the group's overall program is not material.

Brendan Warn - Jefferies & Company, Inc., Research Division

Okay, and Kazakhstan?

Frank J. Chapman

Kazakhstan, we are now in, I would describe them as continuous negotiations. And I believe that, as I said before, that the dialogue is constructive. I believe an amicable solution is possible. I'm very keen to make sure that we do not set unrealistic goals for the timeframe to conclude these discussions. It's much more important to get the right outcome. So we're taking our time, and I'm optimistic that we are converging on a conclusion here at some point in the next, say, 6 months or so.

Operator

Our next question comes from the line of Hootan Yazhari of Bank of America Merrill Lynch.

Hootan Yazhari - BofA Merrill Lynch, Research Division

Two questions, please, starting with Brazil. Obviously, the Lula 1 platform, the connected wells are producing at a higher rate than initially anticipated. Can you give us an indication as to whether this is going to be the run rate that you expect from further wells that will be attached, or will you see the flow rates brought down to sort of 20,000 to 25,000 barrels a day that was more in line with what Petrobras was indicating? And on another point, you make some pretty strong comments on your bond ratings and looking at maintaining your mid-single A rating on that front. Can you give us an idea of what sort of actions you'll be prepared to do? Is that more in line with further refinancing or is it more about having to sell down assets if that's what's required?

Frank J. Chapman

Okay. On Brazil, I don't think anyone really here or in Petrobras is actually surprised about the rates that we're getting. Of course, different areas of the fields, we will see different production potential as we've already indicated from some of the production testing that we've done. What we do know, and we said this very, very clearly at the middle of the year, is that the very positive results that we're getting from the EWT points absolutely clearly towards a lower well count overall. We're going to need fewer wells. This is not the first time that I mentioned this. I mentioned this at the time of the significant reserves upgrade that we published in June. There's no doubt that we will produce -- that we will require less wells to produce. Now for this first FPSO, we've had some mechanical problems with the second producer. Hence, its due onstream, if not already onstream, but it's due quite soon. In total, there will be 6 oil producers and 2 water alternating gas injectors and 1 gas injector. That's the number of wells that we foresee to provide also some redundancy and the appropriate drainage pattern. That's what we'll need in the first part of the development for this particular first FPSO. All of those well pothole sections are being drilled or are in process of being drilled and we'll see those all come onstream in the process of the next year. We'll have all of those things onstream. So that's really it in a nutshell. I mean, prolific is the only word to describe really these reservoirs. They are exceptional reservoirs. And as we get more experience with that, we will confirm, I believe, the significantly lower well numbers required for the development of our resources.

Fabio De Oliveira Barbosa

As for the rating, Hootan, what I would comment is that the 3 bonds that we issued are a clear demonstration of our access to markets, and they were substantially oversubscribed. The book amounted to -- the total book amounted to $9 billion. So what we meant by our statement was that we will continue to strive to improve our debt profile, restating our access to credit markets, diversifying our source of funding. We are also actively managing our operating costs. And as you could observe in the last several years, we have been implementing portfolio rationalizations such as the sale of our power assets in the U.S. and more recently in the Philippines that we hope to conclude sooner rather than later. So we are actively managing our balance sheet, and we are happy with our standing before the markets.

Frank J. Chapman

Yes, it's worth also mentioning, Hootan, that obviously we will prioritize investment in the most capital-efficient projects first. So there is a rank order of capital efficiency, and we will take judgments on that from time to time.

Operator

Our next question comes from the line of Irene Himona of Societe Generale.

Irene Himona - Societe Generale Cross Asset Research

I have 2 questions for you. So first on FLNG in Brazil. I think last quarter, you were indicating that you were hoping to decide at least on the sequencing of pipeline versus FLNG by year end. I was wondering if there is any progress on that? And secondly, Buzzard, what exactly went wrong for that project to be so much behind your plan? I mean, you indicated the U.K. out with 39% below target. Obviously, Buzzard is key in that. Can you just explain what happened, and what you expect will happen going forward with Buzzard?

Frank J. Chapman

Well, I'm not sure if you said 39%. The number is actually 29%. Still a very big number, of course, but just to get the number right. On Buzzard, we have had a significantly more challenging time commissioning these new facilities. Now these new facilities are being built in order to allow areas of the field with a higher H2S content to be processed and for that crude to be conditioned suitable for transporting the faulty system. And of course, getting this platform up and running, improving the quality of the product fit for export through that pipeline system has been more of a challenge than we'd anticipated. That's really the issue there with Buzzard. Today, the platform is producing, I want to say, around 215,000 barrels a day and we're inching this up to its design capacity, which is 225,000. So the history here has been rather good in terms of production efficiency on Buzzard. And we've gone through a difficult period commissioning new facilities. We will be keeping a careful eye on this clearly as to how our performance progresses from now on. With FLNG in Brazil, there, I believe, it's fair to say that FLNG is one of a number components of gas export -- gas injection. WAG, we've got -- it's water alternating gas as well as just straightforward gas injection. We have export by the Lula Mexilhão pipeline. There are also 2 other pipeline export routes being contemplated, studied at present, and there then is, in addition to that, FLNG. We don't have to do FLNG, but it is a component. My guess at the moment is that FLNG will not be sanctioned, as we said, at the end of this year -- towards the end of this year nor we will get to a decision on the timing of it, I believe, at the end of this year. I think the way things are moving at present, we will probably be pursuing more of the pipeline auctions in this phase, and FLNG will be held in reserve as an additional flexibility to be deployed a little later. So that's my reading of it at this point, but things between the partnership are still not fully settled, and these are still discussions and debates that are ongoing. I would say that the work that we've got from the 3 parallel feed competitions has been excellent. And 2 of these studies are, I would say, presenting compelling cases for an FLNG solution. So that's really where we are today.

Operator

Our next question comes from the line of Michael Alsford of Citigroup.

Michael J. Alsford - Citigroup Inc, Research Division

Just a question actually on Australia. Could you maybe provide a bit more guidance around the key synergy. Clearly, posted that you've reiterated 14 as the start-up, but it seems to me that the delivery of that project -- key risk is the upstream phase of the project. How many wells do you think you need to get to first gas from that project? And could we, maybe as a contingency, see BG looking to sign third-party sales agreements to be able to manage that and guess ramp up more effectively?

Frank J. Chapman

Well, we've already signed 10 million tonnes of LNG contracts, which exceeds the capacity of 2 trains. And we've just signed another new contract as certainly at heads of terms, as we announced in this release, with an Indian customer. So we have more than enough demand. Now we don't need new trains of LNG actually to be able to supply that. We will have, by the time the 2 trains come onstream in -- by the back end of 2014, we will have 20 million tonnes in our portfolio and can supply all of these customers from that flexible supply. So we've done enough, if you like, marketing work to solidly underpin the development programs that we currently have in train.

Michael J. Alsford

But on the supply side that's actually providing the gas to the plant in Australia onshore, how would you go about providing a sufficient level of supply into the plant to be able to deliver those long-term contracts?

Frank J. Chapman

Oh, yes. So as I said earlier on, I mean if we look at the various phases of the plant, so the plant itself is doing extremely well. The pipeline is doing extremely well. Our drilling activity was interrupted by the flooding, access to sites and actually also the logistical infrastructure, transportation infrastructure, a huge amount of damage in Queensland from the flooding, which is being remediated over this -- over the period since then. And that -- all of that has contributed to a significant loss of momentum, which is now being restored with respect to drilling. We will hope to drill this year now about 150 wells in total. That's significantly less than we had originally planned for this year, but we are moving up to a 12-rig program with the aim of drilling something of the order of 500 wells next year. So we are -- we have a recovery plan in place. We are working that recovery plan. Other facilities such as water treatment, compression, the gathering networks, the conditioning equipment for gas conditioning, all of this work is making progress.

Operator

Our next question comes from the line of Oswald Clint of Sanford Bernstein.

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

Just back on Brazil. Frank, you have mentioned in the past about the flanks of the Lula discovery being higher productivity and have a higher reservoir quality. So I'm just wondering, with a lot of the testing you've done this year on Guará and Iara and Carioca, would you have enough information yet, or could you make any similar conclusions about the flanks of those discoveries done in Brazil? And then the second question, just on the Indian LNG contracts, I realize you're not going to give specifics, but just in terms of modeling, how should we think about that contract? Is it more akin to the Chinese or the Singaporean-type contracts where a typical pricing structure that we see out at Asia Pacific?

Frank J. Chapman

Yes. I think, essentially, we're looking in an Indian contractor an oil-indexed pricing structure. So similar to the pricing structures that we see in other Asia Pacific customers. With respect to Brazil, the Lula and Guará fields are much more advanced in terms of our understanding. There, we have seen really excellent results. And of course, we've drilled more wells in Guará this year and also performed an extended well test there, which once again confirmed very high productivities. In fact, Guará and Cernambi look to be really, at an extreme, the very best of the reservoir we've seen. But Lula, itself, throughout all of the tests we've done, looks to be really quite excellent in terms of the reservoir interconnectedness and the reservoir quality. Iara's quite a long way further behind, but we are very optimistic about Iara. We have to do a lot more work in terms of seismic activity. We plan to drill another well next year for testing, which is further down. You mentioned the flanks, which is further off the crestal area, and that will provide us with the important new information to help to answer the question that you've just asked. So can't say anymore about the flanks of Iara at this moment, but as far as other areas are concerned, extremely pleased with what we're seeing.

Operator

Our next question comes from the line of Anish Kapadia of TPH.

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

Just a few questions. Looking at Australia, first of all, I was just wondering where you see growth production for next year versus your original guidance of around 50,000 barrels of oil a day equivalent. And given the well results to date, how confident you are in the 1,800 wells will be required for first production and 6,000 for total production? Second question on the U.S., just given where gas prices are at the moment, I was wondering if you're looking to cut the planned growth rate for 2012. And just finally on Brazil, I was just wondering if you could give us an update on your thoughts about potentially selling down part of your Brazilian asset base?

Frank J. Chapman

Right, that's quite a list of questions. Let me see where we can start on that. Very briefly, I don't recall, actually, and maybe I'm wrong here. I'm looking at my colleagues around the table. I don't recall saying that we will be producing in 2012 50,000 barrels a day from Australia. But you may have picked that off of one of our charts, I guess, in the early days. Regarding the number of wells that we require, I believe we have something like 500 wells already throughout the field. We're going to drill 500 next year. There's 1,000 wells there. And then will be -- that will be by the end of 2012. So as we go through '13 and into '14, we will be reaching the sort of numbers that you mentioned. U.S. prices, I mean, at the moment, today's prices are, I would describe, as being at the low end of our expected range. We're currently in the process of planning next year's program. And of course, we'll be discussing that. We are discussing that with EXCO. I suppose you could say that if we were to believe that the current prices would be sustained over a longer period, then despite the, what I would describe as prolific acreage that we have in the Haynesville and some really excellent results we've achieved recently in the Marcellus, despite that, it would be, I guess, economically rational to slow the pace of investment in shale production at least for the time being. But we haven't reached that decision. We haven't reached a definitive view on how long we think prices will be at these extreme -- at this extreme low end. But we will update our plans and our view on the U.S. and inform the market of our views in February. Brazil, the other one was in Brazil, wasn't it? I almost lost that one. Look, I know there's been a lot of speculation on this, but you know what I'm going to say to you? As is appropriate in a business like ours, we will keep all of the assets in our portfolio under review and we won't speculate on any particular asset. We're going to review all of the portfolio as and when we actually sign some sort of deal over something. Then, as in the past, we will keep the markets updated. So we're not going to speculate.

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

Okay. So just going back to the Australian question, what was I was just trying to figured out was you've drilled a number of wells today, how has performance of those wells been versus your expectations? Do you think you'll need same amount of wells, less wells, more wells in order to meet the targets?

Frank J. Chapman

No, I think that we are pretty happy with the sort of number wells. We think that we'll need, overall -- over the whole field life about 6,000 wells. We'll obviously be focusing on the sweetest spots to reduce the well count for the initial start-up. Now we're pretty happy. And when we get to February, we'll show you how we're doing on our 2P reserves figures, which will give you some idea of how things are going. So not as much progress as I'd hope this year on drilling, but momentum being reestablished.

Operator

Our next question comes from the line of Simon Hawkins at MF Global.

Simon Hawkins

Just a couple of questions. One is on the export of LNG from the U.S. I just wondered if you could give us a little bit more color on that, especially timing, volumes or anything like that. And secondly, just on the U.K., whether there's any planned maintenance for Q4 coming up at all?

Frank J. Chapman

Yes. So what was the second question there, Simon?

Simon Hawkins

U.K. planned maintenance up in E&P, just wondering if there's anything planned for Q4 coming up, which maybe we should take into account?

Frank J. Chapman

No. We've got a little bit of work going on, but it's not material on the Lomond platform. It's not material in the sort of overall production picture. I mean, it is significant to say that, I think, we mentioned it in our release that current production from the U.K. is near to what we call the lowest maximum potential production, the LMPP, which is theoretically as much as you can get out of it, which is around 156,000 barrels a day at the moment as pretty close to the maximum we can get. And that's sort of 90,000 barrels a day more than we produce on average in September. So there's been quite a shift in the amounts of production on stream in the U.K. Export of LNG, well, clearly as spreads widened between Henry Hub and crude oil prices, the case for export of LNG from the U.S. has been further strengthened. That's all I would say at this stage. We have FTA approval to export LNG, to develop LNG export facilities at Lake Charles, 2 FTA countries, in Singapore and Chile. Two of our markets are of course FTA countries, and we are pursuing further freedom to export to non-FTA countries. But I think the case strengthens, essentially.

Operator

Our next question is from Rahim Karim of Barclays Capital.

Rahim Karim - Barclays Capital, Research Division

Two questions, if I may. The first is around gearing. So you're up at 27%, I was just wondering how you were thinking about the evolution of that gearing in the context of your 30% ceiling. And with activity picking up over the next few years, whether you're still with that 30%. And then the second is maybe just to see if you can provide a little bit more clarity just around outlook for U.K. volumes. I just want to understand are you expecting volumes in the U.K. to be up in the magnitude of that 6% that you talked about the shortfall versus the plan for this year and whether that's a decent kind of point for us to look out for next year?

Fabio De Oliveira Barbosa

I'll pick up this question about gearing. And I'll say that, of course, we are -- and I state that we are increasing our investment program and that during this phase it's natural to have an increasing gearing. And actually, we expected that to happen. And we are comfortable with the excess to what we indicated to the market at 25% for some time. And as you're going to see by our bond issuance in the markets, we have full access to capital markets around the world. Very nice spreads and different maturities, so we are very well financed throughout the market. So it's natural to observe what is happening in our balance sheet, and we are managing our balance sheet as we indicated before.

Frank J. Chapman

Yes, I didn't quite understand, Rahim, that this is about 6% U.K. volumes. I wasn't quite sure about that. But let me just tell you in the U.K., when we get around to February, what I wanted to explain to the market are 2 things about the U.K.: One is how the hub strategy is going where we're adding a lot of value through taking third-party business and satellite producers over our platforms like Armada and we're now working on Lomond to do a similar thing. I want to show you that. And I also want to explain a little bit about what we're doing, and I refer to this in the release, about enhancing long-term production efficiency in some of these facilities. We've done a lot asset integrity work in the North Sea this year. Some more of that is still to come as we move out into the future. I suppose what I should say is that we presented for the last few years the idea of maintaining 50 million barrels oil equivalent from the U.K. or more out to 2014, and we're still trying to extend it beyond that point. And I'm pretty confident -- pretty comfortable that, on average, out to 2014, we will actually do that. It may not be linear as we take opportunities to improve asset integrity and improve production efficiency, but I'm still comfortable that the reserves are certainly there and the production goal of more than 50 million BOEs over that period is, on average, a goal that we should be achieving.

Operator

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

Jon Rigby - UBS Investment Bank, Research Division

Just a quick question. I want to revisit this gearing portfolio again, if that's possible. Do you think that given, I think you've acknowledged some pressure in some areas on CapEx, increased opportunities around the world, I'm thinking East Africa, for instance, and also a fairly fixed aspiration of 6% to 8% is that you're sort of boxing yourself in a little bit in terms of your portfolio. And is it the case that running at sort of close to 30% actually would stop you exploring or going after other opportunities. And then so, for instance, wouldn't it be better just to step back and to be looking at trying to manage that gearing level down just to give yourself somewhat more flexibility over the next 2 to 3 years?

Frank J. Chapman

Yes. This boxing ourselves in, I'd don't think so. I mean, the issue is really for us to that we have a rising gearing level, which one would, of course, expect as we go through the most intensive investment -- capital investment program where we're likely to see. That expenditure program is closely attached to the situation in Australia, the situation in the U.S., the situation most particularly in Brazil. And we're going to go through a peak of expenditure in the years '13 and '14. Now if we, even on the fastest track possible, bearing in mind that our strategy is really to do organic, grow our business organically. Given that, it is very difficult to imagine how even on the fastest possible track, say Tanzania, for example, could demand significant CapEx before 2015. So we are working extremely hard on some of these things such as Tanzania, such as the developments of the Oligocene in Egypt, such as the exciting prospects there and in Trinidad, various things that we're working hard on our portfolio, more gas opportunities in Australia in different play types. But most of these things will chew relatively modest CapEx in terms of exploration and appraisal studies and that's how the things start to start to demand very large -- much larger in the success case CapEx as we get through the '15 period. Now we need those projects because ones these big projects we're currently investing in start to produce cash flows, then our gearing and our debt levels go right through the floor extremely rapidly. We will need new, big material projects to invest in. So if we -- short of us doing something like some inorganic thing, and you know that we have done that in the past, but have all been relatively modest acquisitions, what I will call half-cycle acquisition, things that you buy in order to further explore and prove up reserves. We've done those things, but we've never really engaged in wholesale, very large scale inorganic acquisitions. So given that, that's the case, as we stay with our organic program, these things that we're working hard to develop will slot in very nicely in time as the cash flow start to come from these investments. So that's really -- and just to reiterate what Fabio said earlier on, operating cost management prioritization of the highest capital, the most capital-efficient projects in our CapEx program and continuing with portfolio rationalization that's been ongoing for some time. These are the things that we'll do in order to keep our gearing level within bounds which support a straight A rating.

Jon Rigby - UBS Investment Bank, Research Division

Okay. Although it's notable that your disposal year to date have been fairly low in what I think most people would consider is a fairly attractive market for sellers? And you have the right portfolio to monetize if you wanted to.

Frank J. Chapman

Yes. I think we have to be a bit careful about that. I mean, these things take time. Portfolio rationalization and deals take time if you want to get the right price. I mean, anyone can sell anything on the market very quickly if you don't care about the price. So some of the opportunities we're looking at for nonstrategic assets that we have in the portfolio, we are taking our time. I'm not so sure that the view that the market is a very favorable place at the moment is correct either actually, Jon, because there are actually to date quite a lot of assets in the market -- on the market on the one hand and lines of finance for some of the smaller players who historically have been quite interested in buying these things. Those lines of finance are not so easily accessible perhaps in today's financial climate. So it's perhaps a little trickier than you might imagine. We're busy, and we'll be successful with what we want to do, I'm sure.

Operator

Our final question comes from the line of Paul Spedding at HSBC.

Paul G. Spedding - HSBC, Research Division

Just had a quick question in the hypothetical situation that you did dispose of some assets in Brazil, whether a straightforward asset disposal would suffer a different track treatment to the capital injection into a Brazilian subsidiary?

Frank J. Chapman

Paul, you being very well there, but I'm going to say to you I'm not going to speculate on any disposal. And I'm certainly going to go one step further and speculate on the structure we might use if that speculative thing is done. Answer is no. I'm sorry, I can't answer that.

Paul G. Spedding - HSBC, Research Division

Can I go for another one? Just an update on the...

Frank J. Chapman

Yes, you can go for another one. I'll be try to kinder next time.

Paul G. Spedding - HSBC, Research Division

Hopefully. I'm interested in an update on Tanzania drilling program, particularly the potential you see in the deeper plays there?

Frank J. Chapman

Yes, I mean, well, clearly, there are -- it's early days. One obviously has got the things initially, which is the tertiary plays, which is there we've had success. We're going to also be exploring the deeper Cretaceous prospectivity. We are in an intensive data acquisition phase and therefore the characterization of all this stuff is still something very much in train. Our next program of drilling will start right at the end of this year. We haven't quite agreed exactly how many numbers will be -- how many wells will be drilled in sequence. I haven't agreed that yet with our partners and we have a couple of different rig program options to pursue that program. So more on that again in February, but will get underway proper again in -- at the end of this year in December.

Operator

Okay. I will now pass back to Sir Frank. I return the conference to you now.

Frank J. Chapman

So finally then, to summarize. Third quarter total operating profit, up 17% to $1.9 billion. Cash flow from operations, up 59% to $2.7 billion. LNG operating profit for 2011 now expected to be above guidance at some $2.4 billion. And we are making material progress across the portfolio in advancing our growth program and indeed, the commercialization of our very large reserves and resources base. So thank you for taking part in the conference call today. And I would like to remind you that we will be presenting our full year results, together with our annual strategy update, on the 9th of February. Goodbye.

Operator

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

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