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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

Analysts

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

Jason Gammel - Macquarie Research

Jason Kenney - Grupo Santander, Research Division

Lucy Haskins - Barclays Capital, Research Division

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

Hootan Yazhari - BofA Merrill Lynch, Research Division

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

Irene Himona - Societe Generale Cross Asset Research

Martijn Rats - Morgan Stanley, Research Division

Kim Fustier - Crédit Suisse AG, Research Division

Lucas Herrmann - Deutsche Bank AG, Research Division

Jon Rigby - UBS Investment Bank, Research Division

Neill Morton - Berenberg Bank, Research Division

BG Group (OTCQX:BRGYY) Q1 2012 Earnings Call May 3, 2012 7:00 AM ET

Frank J. Chapman

Good afternoon, ladies and gentlemen. I am pleased to report that we are making a significant progress with our growth program. I'll take you briefly through key developments before handing over to Fabio, who will take you through the key financial data and also update you on the funding and portfolio rationalization program.

Back in February, we outlined our growth plans to the end of the decade and we explained how our fixed 8% average annual growth rate out to 2020 is achievable through the delivery of key projects and our exploration and appraisal program. Already this year, we have brought 4 new projects onstream. Momentum has continued on our major growth projects in Brazil and Australia and we have enjoyed further exploration and appraisal success.

Let's look at the new projects that have come onstream in Norway, Thailand, Bolivia and Egypt. Once on plateau later this year, these projects will add around 50,000 net BOE per day to our production rates. The startup of the Gaupe field offshore Norway signaled first production from a region where we gained our first license 9 years ago.

By the end of the year, Gaupe is expected to contribute around 9,000 BOE per day net to the group. Additionally, the newly commissioned facilities at Greater Bongkot South in Thailand and Margarita in Bolivia, will ramp up during the year to deliver a further combined production rate of over 30,000 BOE net. Phase 2 of the Margarita development now sanctions are due [ph] onstream at the end of 2014 is expected to add around another 18,000 BOE per day. And in Egypt, the facilities for Phase 7 of the West Delta Deep Marine Development are currently delivering around 7,000 BOE per day and are ready for the increased flows from Phase 8b planned to be onstream later this year.

The development of our big 5 fields in the Santos Basin offshore Brazil and our QCLNG project in Queensland, Australia continues to make good progress. In Brazil, a fourth producing well has recently been connected to FPSO 1 on the Lula field in the BM-S-11 concession. In March, we commenced a new extended well test within the same concession area, which will last for 6 months. The well has been producing at around 12,000 barrels of oil per day constrained by facilities capacity.

In April, we completed the ROS appraisal well, also in BM-S-11, good quality oil samples confirms the westerly extension of the accumulation and demonstrated the high potential of reservoirs within that area. Elsewhere, the construction and conversion program for the remaining first phase FPSOs continues to advance in line with our plans. The second FPSO currently in Brazil for final integration work is over 85% complete and on target for deployment on the Sapinhoa field in early 2013. The whole conversion for FPSO 3 has been completed in Singapore, and the vessel is due to sail to Brazil for topsides integration in the second quarter, again, in line with plans to bring the unit into production in 2013.

The hull conversions for the fourth and fifth unit plans for startup in 2014 are ongoing in China, and hull fabrication for the remaining 8 FPSOs continues at the Rio Grande do Sul shipyard in Brazil with topsides modules and is recently received and now under evaluation. So clear and tangible progress as we move towards the goal of 2.3 million BOE per day of installed capacity by 2017.

Turning to Australia, you will have seen in this morning's statement that we have revised our CapEx guidance on the project to $20.4 billion, about 1/2 of this increase is due to a 20% appreciation in the Australian dollar notified in 3Q 2011, with the remainder due to the effects of local market cost pressures, the increased costs of regulatory compliance and some scope change.

In the quarter, we invested $1.1 billion. Some 800 wells have now been drilled, with over 70 wells drilled in the first quarter, 31 of which were completed in March as drilling capacity increased in line with plans. This ramp-up in drilling activity will continue as the rig count increases from 6 to 11 in the second half of this year.

Elsewhere, the first water treatment plant was commissioned, significant progress was made with construction and contract awards for the field compression stations and central processing plants and all of the 42-inch gas collection pipeline totaling almost 200 kilometers is now being strung out along the route with welding and laying ongoing. Work on the Liquefaction plant itself is moving ahead on schedule, with the construction on Curtis Island and fabrication continuing in Thailand. In Thailand, construction of the first 47 modules is progressing well, with module delivery scheduled to begin in the second half of the year. While on Curtis Island, dredging in and around the jetty is complete and the construction of the 2 LNG storage tanks is ongoing. The QCLNG project is therefore, making good progress towards the first LNG in 2014.

In addition to project delivery, the group continued to enjoy exploration success, maintaining our position as one of the industry's leading explorers. Offshore Tanzania, we enjoyed our fourth consecutive exploration success with the Jodari-1 well located in Block 1. To-date, gross mean recoverable reserves to some 7 tcf is being discovered, very encouraging progress since our entry into the region a little under 2 years ago.

And now over to Fabio for a summary of the financials.

Fabio De Oliveira Barbosa

Thank you, Frank, and good afternoon, ladies and gentlemen. As you have seen, the group posted a strong set of results for the first quarter, with total operating profit up 21% to $2.4 billion. Operating profit in our E&P segment increased by 16%, reflecting the benefits of higher realized prices in a tight market, a 5% increase in production volumes and a lower exploration charge. Our LNG segment posted strong results in the quarter with total operating profit up 42% to $812 million. This was a result of continued strengthening of demand for the group's LNG cargoes, especially from Asia. This outcome was consistent with the expected seasonal phasing underpinning our full year guidance for the LNG segment in 2012 of between $2.6 billion and $2.8 billion.

Gas generated by operations in the quarter increased by 47% to $2.6 billion as a result of higher profit and lower working capital cash outflow. Earnings of $1.3 billion were 55%, higher reflecting the increase in operating profit combined with a lower tax rate past the first quarter of 2011 includes $195 million charge resulting from changes in the U.K. taxation. The current year effective tax rate of 45% is in line with the underlying rate for the first quarter of 2011.

The group's extensive investment program continues, with organic capital investment on a cash basis up 20% in the quarter to $2.5 billion and an ongoing focus on our projects in Australia and Brazil. As we have stated in today's release, following the update on the costs for the QCLNG project and refinements to the group's portfolio rationalization program, the group's capital investment guidance for the 2012 to 2013 period is now increased from $22 billion to $23.5 billion on a cash basis. We expect around $900 million of this increase to be incurred in 2012, taking the total this year to around $11.5 billion.

Another important point to highlight is the steady execution of the group's funding plan. In fact, important milestones were met in the delivery of our portfolio rationalization program, with agreements that once completed, will imply a total capital release of around $3.3 billion or almost 70% of our $5 billion target until the end of 2013. This morning, we announced that through the execution of a Memorandum of Understanding, we reached an agreement with the Brazilian company, Cosan, a major energy player in the country, to sell our stake in Comgás for approximately $1.8 billion. If we add to this figure, Comgás' net borrowings of $1.1 billion that are fully consolidated in our balance sheet, this transaction will lead to some $2.9 billion reduction in the group's net debt.

Last week, we signed an agreement for the sale of our aggregate stake in the Quintero LNG terminal in Chile for $352 million. Earlier this week, we sold the group's entire shareholding in Senex Energy Limited in Australia for $78 million, and we are also moving further ahead with our plans to divest our interest in gas-fired power plants in the Philippines. We expect to conclude all these transactions during 2012. The execution of our funding plan was complemented by the receipt in March of initial approval from BNDES for up to $1.8 billion in long-term financing to fund part of our interest in the pre-salt Santos Basin offshore Brazil. In April, we also signed a $500 million credit agreement with export development of Canada. This agreement further diversifies the group's long-term international funding sources and helps underpin the delivery of our global growth program. We ended the quarter with the cash of $3.5 billion, net debt of $11.6 billion and the group's dealing ratio at 26.6%, slightly lower than the ratio at the end of the fourth quarter of 2011.

Finally, I would like to draw your attention to the additional information provided in this release on exploration expenditure, capital investment, depreciation and amortization and LNG cargo deliveries, as well as our views on industry trends. Our intention, once again, is to help further the market's understanding of our business performance and we hope you find it useful. Thank you very much for your attention. That concludes my remarks, and now back to Frank

Frank J. Chapman

Yes, thank you, Fabio, and now we'll be happy to take your questions. [Operator Instructions]

Question-and-Answer Session

Operator

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

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

It's Theepan from Nomura. Three questions, please. Firstly, just on the U.K., could you talk about performance of Buzzard in the quarter and going forward after the problems last year. And can you confirm what you'd assumed in for Jasmine for the exit rate for this year? I'm assuming on Jasmine it was a pretty minor contribution to the $750 million exit rate. Secondly, just on Egypt, I think there was recent news, there about the country terminating their contract with Israel. Again, can you talk about BG's discussions with the government on gas volumes and whether you may be under more pressure to put volumes into the domestic market? The third question comes back to Australia and the increasing CapEx. Where do you think QCLNG now fits in terms of returns within the BG portfolio? And is there an argument to reduce your stake there a little bit to reduce capital commitment going forward, or should we assume you're happy to develop QCLNG at current ownership levels?

Frank J. Chapman

Yes, okay. Theepan, U.K. performance at Buzzard, actually we've had one or 2 very minor interruptions, but Buzzard is actually producing in line with our plans. So the issues that we had with Buzzard, particularly during the commissioning of the new facilities last year, those have all now been dealt with and the unit is producing in accordance with plan. So that is a good sign. In terms of our exit rate for the year, it's correct that Jasmine, which was coming on right towards the end of the year, is not a large factor. I mean, we did have some account in our estimates for Jasmine. However, we are not changing our guidance of 750,000 barrels a day exit rate. It makes it a little more difficult, but we certainly are exploring other possibilities and have other contingencies in our program to cover that. Egypt, the termination of the contract with Israel, that, of course, takes some pressure off of local gas demand situation. So that's a -- well certainly as far as Egypt and Egypt’s supplier is concerned, a somewhat positive and somewhat unexpected development. Australia increasing CapEx, we fully expect this project to deliver strong returns. It still is on -- measures a top quartile unit development project. If you look at this in terms of unit F&D costs. I would add as well that as presented in February this year, when we entered Australia at the beginning and became involved in -- with QGC, we were looking at 2P reserves to 5 trillion cubic feet of gas. Now today, I know we had some modest amounts of sort of risked resources associated with exploration. Today, as we presented actually in February, we got 25 trillion cubic feet of gas. So clearly and notwithstanding still the attractive economics of what we have, a $9 per BOE development going forward, we have also this additional potential and exploration -- and additional exploration potential that could take us to 25 tcf and, indeed, beyond. So absolutely, Australia remains a key area in our portfolio. And one, which I believe will generate very substantial core earnings for the group as we go forward. In terms of our shareholding level in Australia, in QCLNG, as is normal, we wouldn't speculate on any initiatives that we may or may not have for any of our assets.

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

Frank, can I just come back to -- I mean, you talk about contingencies in the exit rate. I mean, in the last couple of years, the group has somewhat disappointed on production. I'm just wondering, do you believe you've got more contingency in 2012 than in previous years?

Frank J. Chapman

Well, I mean we've seen the issues in previous years that which have been -- for example, the Buzzard issues last year, we've had second world war ordinance closing down part -- there's a whole series of issues last year which affected aggregate production for the year. What we've done this year is to try to say we have to recognize the fact that we have got projects coming onstream, the timing in which those projects come onstream and the way they build up will affect the aggregate production for the year and could affect it quite markedly. And therefore, what we've done is to go for a more pragmatic approach, which is to say this is where we're starting the year, this is where we'll hopefully end the year, 650 to 750. The fact that Jasmine, we've been advised by the operator, has moved into 2013 makes that a little more tight. But essentially, we are comfortable with maintaining that target for the moment.

Operator

Our next question comes from the line of Jason Gammel from Macquarie.

Jason Gammel - Macquarie Research

I just had some questions on the LNG business. You've done a pretty remarkable job in shifting cargoes into the highest priced markets, but I do notice there's still roughly 7 cargoes going into the U.S. and Europe. Are you pretty well maxed out in terms of what you can direct into the higher-priced markets? And then the second part to the LNG question. I believe the prices in North Asia are actually better than in South America on an absolute basis. I could be wrong about that, but can you address whether on a net-back basis, you're getting a strong amount of economics going into South America as you would be into North Asia?

Frank J. Chapman

Well, look, first off let me say that the cargoes, there are in -- they were 5 cargoes going into North America out of a total of 53. The number of cargoes that we've been taking to North America has been gradually reducing, as we've been working with customers and infrastructure owners to connect some of these stranded customers into the backbone gas transmission network. That work is continuing, for example, in Georgia, such that some of our longer term customers at Elba Island can, in fact, be satisfied in the future more readily from pipeline infrastructure, and that will further then give us the opportunity to release some of those cargoes. So that sort of work about releasing some of this U.S. long-term demand for our cargoes is ongoing. The European trades, these are trades that clearly we will be doing, measuring the opportunities that's available and the margins that are available in locations, and here I would emphasize that taking averages for what one thinks happened in the market over a period of time doesn't necessarily tell the whole story about individual point-to-point single trades. I'm not really -- I don't really want to say very much about the margins in South America versus the margins in Asia. We did take a significant number of cargoes. I think it was 12 out of the 53 cargoes in this quarter we took to South America. And as you can see from the financial results overall, we are achieving a good financial performance from our LNG business. I don't want to comment more particularly on the relative margins in across different parts of the world for obvious reasons.

Jason Gammel - Macquarie Research

Yes, understood. Frank, just if I could just follow-up, obviously the earnings in the quarter were significantly better than annualized number based off of guidance. I assume that it's too early for you to be giving us any update there, but based upon trends and pricing, do you think there's some upside to the number?

Frank J. Chapman

We're one quarter in yet. No, I think this is seasonal effect is pretty much in line with what we'd expected. So it'll be too soon to give any alternative guidance. We're sticking with our $2.6 billion, $2.8 billion at this point in time, Jason.

Operator

Our next question comes from the line of Jason Kenney from Santander.

Jason Kenney - Grupo Santander, Research Division

It's Jason from Santander. So I was just wondering if you could be a bit more specific on when you think Comgás might close, would it be yearend or Q3? Secondly, on Latin American expropriation risk, we're seeing something happen in Bolivia for Red Electrica of course and next door with Argentina YPF. I wonder if you could make a comment on your views of nationalization risk in Latin America. And then finally, one for Fabio perhaps. Cash from operations, obviously very strong delivery. I don't know if you have an idea of what run rates could be this year for cash from operations on current oil gas prices, or alternatively where you expect gearing to be by the yearend based on the cash run rate and maybe current plans for divestments?

Frank J. Chapman

I'll let Fabio answer that one and give you the views about Comgás. With respect to Latin America and what's going on in Argentina and the recent announcement in Bolivia. Let me just say this, I mean, we've been working in Bolivia for a long time. In the 2005, 2006 period, the government expressed its concerns about the fairness of the terms in some of the upstream contracts and some of these contracts were renegotiated at that time. We felt as if we were dealt with very evenhandedly. Our contracts were not amongst those that were more, let me say, asymmetric, with regards to value sharing. And so therefore, our contracts were in fact -- were affected by a relatively small change. Those discussions went very well, they were very constructive. In the period that followed, we've actually been supported and assisted by the authorities and government, YPFB, in moving out developments forward, both from La Vertiente and for Margarita. We've always been paid on time and the operations are going, I would say, very smoothly. Now I can't comment on what other people are doing with their franchises. That's a massive [ph] [indiscernible] between them and the government and the regulatory authorities that they serve. But we are doing very much what we said we would do. We've been very successful in finding material resources, which are liquids-rich and getting on with the developments and we're earning good margin. So at the moment, I would say it’s going exceptionally well and I would not extrapolate things that are happening in particular circumstances in other countries or in other utility sectors. Fabio, do you want to say something about Comgás and the cash?

Fabio De Oliveira Barbosa

Okay. Well, Comgás, as indicated, our best estimate today is that it will close before the end of the year. We need some consensus and regulatory approval and we're applying our -- the average taxation of the procedures that are required for a transaction like this to be executed. So I think the best estimate that we can provide is the one that I just mentioned in my speech that we should conclude all these transactions, actually, by the end of the year. On the cash flow, I think it's a combination of events. First, the very strong economic environment under the implied oil price. So it seemed that average oil prices in the first quarter were about 20% above our referenced conditions that are indicated in our strategy presentation. Indication that, really, demand is very strong and affecting, of course, the revenues and our profit, and also, to some extent, our cost base, our OpEx and also our CapEx through the exchange rate impact of a stronger currency in some countries. In the case of the OpEx, we were able to keep costs under control and well within our indicated -- our guidance in terms of costs this year between $9.20 to $9.60 range, and we managed to stay within this range and despite the cost pressure that we face. So I think that the cash flow, the strong cash flow generation has to do with this overall very positive environment. Our ability to deal with the costs, and also to some extent, through the lower working capital requirement associated with the margin costs that we didn't have this year, contrary to what happened in the first quarter of 2011.

Jason Kenney - Grupo Santander, Research Division

Did you have a comment maybe on the gearing levels by the yearend, perhaps?

Fabio De Oliveira Barbosa

No. The gearing was 26.6% at the end of the first quarter.

Jason Kenney - Grupo Santander, Research Division

And are you expecting a higher gearing at the yearend 2012 or...

Fabio De Oliveira Barbosa

We will inform you some time about it. I think, Jason, it's fair to say that you should factor in the very strong cash flow performance as you rightly pointed out, plus what we indicated in terms of the execution of our portfolio rationalization plan. And I would draw your attention to the fact that not only the proceeds of Comgás, once completed, will be applied to reduce our debt. But actually, we are going to remove from our balance sheet some $1.1 billion in Comgeás there that today is fully consolidated in our accounts. So you have to do the math there. I'm sorry I cannot be more precise, but I think that you have all the elements in place.

Frank J. Chapman

Yes. I mean, just to say the numbers once again so everyone gets it clear. Yes, I mean, the $1.1 million, the $1.8 million, giving $2.9 billion capital release associated with Comgás we got Quintero LNG regasification terminal, proceeds with, yes, Senex, we've also got a line of sight on a deal with the Philippines, which is getting very close to being executed, and we've got an ongoing process down in India with regards to Gujarat Gas. So if we just take, in fact, Senex, Quintero and the deal on Comgás, we're already about 70% of our way through the $5 billion capital release that we've talked about just a few months ago. So we're very comfortable that we are making the right sort of progress that we need to make in order to deliver our program.

Jason Kenney - Grupo Santander, Research Division

Maybe just a follow-up, Frank, just because it's on that theme. What is happening with Gujarat?

Frank J. Chapman

Well, I didn't really plan to give an update. We are in the process -- and we continue with that process. As with all things in India, this area takes a little longer, but we're bitterly working away with it. As you've seen elsewhere, we are making good progress and satisfactory, sufficient progress, I would say, to leave our funding plan and our intentions in that regard in a good place, actually.

Operator

Our next question comes from the line of Lucy Haskins from Barclays.

Lucy Haskins - Barclays Capital, Research Division

Two questions on EXCO, please. I think there was some suggestion you might be looking at divestments of the EXCO midstream, and I wondered if there was any progress on that. And also I think EXCO have been talking about moving to more sort of liquids-rich parts of their portfolio. Is that something you can participate in as well through your JV?

Frank J. Chapman

Divestment on the midstream, I think, is pretty well-known that we are pursuing the divestment at TGGT, so we're doing that. In terms of moving our interest into more liquids-rich, at the moment, we are not contemplating further investment in shale assets in the U.S. We are focusing very much on the other elements of our development portfolio, and we are also being quite judicious in terms of the funding that we're applying to new drilling with the current prices in line [ph] with the Marcellus, notwithstanding the fact that these are very good sets of assets, which are relative to the overall universe of shale assets -- very excellent assets. But we, at this stage, are pausing. And as we said in February, we're trying to balance now our exposures to this market by pursuing the opportunities that flow from manufacturing of LNG from shale gas, which of course, in terms of sort of being passed, have received now all the clearances for that project to go ahead. So that we're really focused on those areas right now and pausing and reflecting and observing how the pricing dynamic in the E&P -- shale gas E&P side is developing onshore.

Lucy Haskins - Barclays Capital, Research Division

Perhaps, could I have just one follow-on question in terms of LNG? Obviously, at the end of the year you talked about still being substantially hedged for 2012 before moving into a substantially un-hedged position in 2013. Would you actually give us some indication of what proportion of your volumes were hedged at 1Q?

Frank J. Chapman

Yes, Fabio is waving his finger at me. So the answer is no. I think at the moment we're saying $2.6 billion to $2.8 billion, we're very comfortable with that guidance. We're making progress. We will be, in 2013, in a completely different position with regards to the hedging and that's pretty much what we disclosed in February.

Operator

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

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

Just back on QCLNG Australia, and obviously we've seen the cost go up. You also mentioned in there about the benefits of the early implementation and contracting strategies, which have been an offsetting factor to this morning's revision. Could you -- can you quantify that or talk about the sort of savings that you have actually driven out here? And then secondly, just focusing back on the Iara West appraisal well just last month, I'm just curious to know if you were positively surprised by the results of that appraisal well.

Frank J. Chapman

Well, Iara appraisal well, by the way, of course the evaluation is still going on. But what we are pleased is that we proved the presence of oil in the western extension, and that's always good news. This is a very substantial accumulation, and it's very good news to go and drill somewhere over there and find you've got continuity of reservoir and good quality oil in place. So that's really the main message. The amount of appraisal work -- it's a very, very large structure, so the amount of appraisal work that needs to go on course is significant still, but it's a very good result. Regarding QCLNG, what can I say of course is that about half of the CapEx increase that we announced today is associated with the Australian-U.S. dollar FX, which we disclosed last Q3 last year. Of the remainder, the increase is a 19% increase in underlying costs. That is a consequence of the 3 factors that we mentioned in the release, which is the inflationary effects, rising cost for local goods and services, increasing cost of compliance with significantly more onerous regulatory requirements and some scope growth, which I will put in a single percentage -- single-digit percentages area. Now in terms of that 19% underlying cost growth, I would say it would be fair to split that, probably 2/3 upstream, 1/3 pipeline and downstream. And that 1/3 pipeline and downstream lower effect, if you like, is a consequence of being first and putting into place strategies which locked in, for example, labor rates for the LNG plant. That hasn’t shown benefits but simply because of the way the sequence in which this project is being built, it was not possible, land access being one reason, to tie down the upstream cost in the same way as we managed to mitigate these market effects in the midstream pipeline and LNG plant areas. So we have been exposed to more of the market effects in the upstream. So once again, mostly in the upstream and of that, mostly to do with market effects. I mean essentially, if we stand back from this a little further, what we're really seeing here is principally an effect of strong commodity prices driving large capital investment in Australia and demand for Australian dollars, and that of course is causing the Australian dollar to appreciate. But of course within Australia, it's all of the demand FDI flowing in demand for local goods and services, which is causing somewhat overheating in the local market. Now of course, that is all driven in the beginning by the fact that commodity prices are strong and this market is a commodity-driven economy. So that's essentially the backdrop. And once again, what we're talking about here in terms of underlying scope growth, we're talking about single-digit percentages. So this is not a story about loss of projects implementation control or very large overruns. This is a question about market forces, which are directly related to commodity price.

Operator

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

Hootan Yazhari - BofA Merrill Lynch, Research Division

Two areas of questions I wanted to ask. First of all, starting with Australia. Given that a lot of the factors that you've mentioned today were actually quite well known, as you indicated. You talked about the currency moves in the third quarter, and we have seen inflation being a key trend in Australia for quite a while. Why did you choose to announce it today rather than along with the strategy presentations a few months ago? Surely, things couldn't have changed that much. And the second question I have regarding Australia was really around the third train. And to talk around what you're thinking there at the moment, just to give us an update on what's holding back your decision on announcing a third train, which would obviously bring in some economies of scale there. And then the last question I had was a simple one. We saw your unit depreciation cost in the upstream go up pretty sharply the first quarter. Can you give us an indication as to why that happened and whether that's likely to be sustainable going forward from here?

Frank J. Chapman

Yes, I'll ask Fabio to talk about unit depreciation. Yes, Australia, why didn't we announce the currency effect in the February strategy presentation? Well of course, we did. We announced the 20% appreciation and changed in fact our reference conditions and reflected those changes in our CapEx -- group CapEx profile. We did all of that in the February strategy presentation. What we didn't do in the February strategy presentation was to change the underlying cost estimate quite simply because we initiated towards the end of last year a very detailed cost and schedule review of the entire project, which included a module of work, which was looking in detail at the market -- local market effects, particularly on the cost of contract in the upstream. And we wanted to verify and validate the unit cost in this market by actually going out and letting contracts, tendering contracts, letting contracts. Over this period, we have established the cost for about 50% of the upstream through processes carried out during this period. So therefore, we've got to a place now of confidence that we would not have been at the end of 2011. Of course, we've taken those -- that information, the results of that analysis. We have incorporated the scope changes. We have incorporated the market effects. We've factored in these considerably more onerous environmental -- principally environmental permitting processes. We've factored all that in. We've made contingency allowances on top of that for further factoring in other changes that we might expect to see in the future, notwithstanding the fact that we really tested very extensively the market in these last 3 or 4 months. We've done all of that, and we're now in a position to come out and say, "Right, this is it. You knew about the half of it, which is the exchange rate-driven effect. The other half that you don't know about is the 19% increase in underlying cost. A few percentage points of that are to do with scope. The rest has to do with market and regulatory issues." So now we are in that position to make that disclosure with a level of confidence and supported by a lot of details, analysis, which we would not have been able to do in February. So I know it seems like a short period, but I do think that when you do these types of things, you need to be sure when you've got the answer that it is the right answer. With respect to the third train, nothing's really changed since we made our announcement on this in February, which is we aim to be driving our total LNG portfolio forward. We will, with Sabine Pass coming on, get to 20 million tonne target in 2015. And in fact, as we go through 2016 and '17 and see the full benefit of Sabine coming through, we'll be sitting on the portfolio at that time without any further development of around 26 million tonnes per annum total LNG portfolio. So there is no doubt that the LNG business, in terms of its underlying volumes, the momentum is being driven forward. So the pressure to do something with the third train isn't there in terms of maintaining underlying growth momentum with this business. So we've been looking at the third train, as I said in February of this year, on the basis of balancing on the one hand the cost efficiencies that can be achieved by doing a rollover development against on the other hand, taking more time to understand the resource development opportunities so that we get those in the right order. And I'm very happy with some of the results that we've been getting from the Bowen Basin, for example, recently. The staff were drilling tight gas, we've seen interesting, encouraging gas -- we've encountered gas in these wells. We have to take time now to decide which of these developments is going to be generating the best returns and get this in the right order, and decide for ourselves which is going to be better, the push on straight away with Train 3 and maybe risk not getting the sequence exactly right, or to take more time to do the appraisal. And that's really the same story that we discussed in February this year. Now Fabio, depreciation.

Fabio De Oliveira Barbosa

Depreciation, Hootan, is basically the result of our larger asset base. We are -- we increased since March 31, 2011, our property, plant and equipment by roughly $10 billion. So this is reflected naturally in the depreciation that we charged that we have in our accounts plus some other minor elements, but I think that's the bulk of it.

Operator

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

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

It's Brendan Warn from Jefferies. Actually just following on from Hootan's question, again I'll bring it back to, I'll call it, my favorite part of the world, Australia. And just in terms of the optionality of timing of the Train 3. Obviously, with the rollover of crews directly onto the third train from your own project side is optimal, but can you give us an idea, if the crews were utilized on other projects, when effectively could they come back to your project? And then just secondly, at what sort of the reserve coverage are you comfortable with for the third train? And just how much of that are you expecting to come from what looks to be deeper, more expensive Bowen base or the deeper sort of gas sands? And are we to expect a higher upstream CapEx for Train 3 based on sort of the deeper Permian sands? And then just lastly, just within the last sort of 6 to 12 months, what has actually changed in Australian regulatory conditions or environmental approvals since FID to make it more expensive for you? Has there been a change, or are we still in the same conditions we've been in since FID?

Frank J. Chapman

No, I think -- to answer that question, I don't think we are in the same place. I mean, given the fact that the coal seam gas industry is developing very rapidly, there has been, in parallel with this, developing regulatory rules, frameworks coming both from federal government and state government, simultaneously. And these have, at times, provided overlapping requirements, and some of these requirements I would describe as a being quite onerous. And there's no doubt that in the area of environmental permits, because we do deal with a lot of land owners, we do a deal with large land areas, environmental permits and particularly the whole framework for the development, treatments disposal of water and the monitoring of aquifers, this has actually become significantly more complex than we have had envisaged. But I don't want to overplay this. This is not the principal cause of the market impact -- or the impact on the cost which is, as I said earlier on, has to do principally with appreciation of the Aussie dollar and local market effects. Now in terms of which resources are going to be developed first and so -- and I mean, you're asking the question I want to have an answer to as well, which is -- which we'll only get when we've got further with our appraisal process. You do point out another issue which is quite interesting. When we first came to look at this whole process, the idea of following on from Train 2 to 3 is being a very efficient way of managing development. Of course when there are subsequent projects sitting right behind you developing some trains, there is of course an increased opportunity, increased window of opportunity to access some of those cost efficiencies without necessarily building the train immediately following on 6 months after you finished Train 2. So these are all things that we are contemplating at this time. Meanwhile, the momentum in the LNG business is being driven strongly, as I said, from alternative ventures in this case, most recently Sabine. So we have now a question from Irene, I think.

Operator

Yes, the next question comes from Irene Himona from Soc Gen.

Irene Himona - Societe Generale Cross Asset Research

I had a question, first, looking at the cash flow and depreciation, we are running about $100 million higher year-on-year in Q1. For the full year 2012, is a $400 million increase appropriate? Secondly, back to capital expenditure, you sold $3.3 billion of assets, roughly how much CapEx in 2012 was associated with that, please? And looking at the new increased CapEx budget, do you include anything at all in there for the significant new development opportunities in Karachaganak, which is a project that you did refer to in the strategy meeting?

Frank J. Chapman

Yes, I mean, Irene, I'll get Fabio to comment on the depreciation. There's nothing in the Karachaganak, I think, that will take longer. I think that we will hopefully conclude these agreements in the middle of the year, which will open the way for further discussion on engineering and development concept, but there will be no significant CapEx in the current sort of 2-year capital program, and I doubt actually if there will be much in 2014 or '15 either. These things take quite a while to get going. In terms of disaggregating CapEx by asset, I don't think we're going to do that. What we've simply done here today is to say, "Look, you've got this CapEx quantum increase in QCLNG that's trading [ph] through. We've got some changes in the way that we are -- the sequencing and timing of some of these asset disposals.” And when we put that in the mill, you get a 7% increase in CapEx over 2012 and '13, meaning it goes from 10.6% to 11.5% and I think it's 11.4% to 12% in 2013, and that's it. Basically that's the disclosure we're giving. We're not going to break this down by line item, sorry. Depreciation?

Fabio De Oliveira Barbosa

On depreciation I think, Irene, that the point is that we formed our charge in the first quarter. And as we also indicated to you, we have a CapEx program being executed in one side and the other side, we have some assets that we are disposing. And there are some -- consequently, there are some moving pieces. So I would suggest you to look at this first quarter as a reference number, but taking in consideration that we have meaningful changes moving forward considering the size of our CapEx program and the effectiveness of our portfolio rationalization program, okay?

Operator

Our next question comes from the line of Martijn Rats from Morgan Stanley.

Martijn Rats - Morgan Stanley, Research Division

I have only one question. Given that you're making so much progress with the disposal program but on the other hand, have some CapEx creep in Australia, I was wondering whether you'd be looking perhaps to increase the target for disposals from $5 billion to something higher. Or alternatively, would you say, well the $5 billion program will still leave the balance sheet at its peak gearing at some point during this CapEx cycle at a very manageable level, that is not necessary. Which of these 2, would you say, is the more likely one?

Frank J. Chapman

Martijn, it's very kind of you to give me a multiple choice of an answer. But no, I mean the $5 billion capital release program does -- I mean to be very clear, does provide sufficient financial flexibility to accommodate the QCLNG CapEx increases. Clearly, when we did this, we've built a model that had to accommodate certain contingencies, and we're quite happy to do that. And of course, we should also keep in perspective the absolute numbers are not small. But we do have to keep in perspective that if we get a 5-year business plan, you are spending at the rate of the 2012 program. We spent $57 billion or something like that over a 5-year period. Of course this increase -- underlying increase that we talked about today, the 19% underlying increase is -- which wasn't included in our program, of course the appreciation of the Aussie dollar was, when we take the other piece that wasn't, that represents about 5% of the program over 5 years using, just to illustrate, the 2012 CapEx run rate. So it is a substantial absolute number, but in terms of -- just to keep it in perspective, it's a fairly low percentage of the overall group's capital program.

Operator

Our next question comes from the line of Kim Fustier from Credit Suisse.

Kim Fustier - Crédit Suisse AG, Research Division

I have 2 questions, please. Firstly, just going back to Australia again, you've maintained your guidance of a 2014 start-up for QCLNG. Can I just ask where you stand on drilling in Queensland? Are you still confident that you can catch up on lost time due to the extensive flood last year? And just as a follow-on to that, has the recent performance of your CSG wells contributed in any way to the increased upstream CapEx there? My second question is on U.S. LNG, I've seen that the U.S. DoE has recently delayed the decision on non-FT exports until late summer. I believe you were expecting non-FTA decision by year end on Lake Charles, is that still your expectation?

Frank J. Chapman

The non-FTA approval, I'm very relaxed about that. As I said earlier on in response to a question about Train 3, we got plenty of momentum in the LNG business in the moment. We've got contracts in place to take the 26 million tonnes. There's plenty of time to absorb these further periods of reflection and deliberation by the authorities in the U.S. I'm not concerned about that at all. Well performance, these wells are coming in, in line with our expectations. There are no changes there. And that is not one of the drivers behind the scope growth, which is more related to infrastructure actually than anything else. So far, we have drilled 800 wells. We drilled 70 in the quarter. We just drilled 31 in a month. And we're going to double the rig count from -- in the second half of the year. So I'm not worried about well count.

Operator

Our next question comes from the line of Lucas Herrmann from Deutsche Bank.

Lucas Herrmann - Deutsche Bank AG, Research Division

Frank, Fabio, 2 or 3, if I might. Firstly, just going with QCLNG, can you just give us an idea now of what you think the split is in CapEx between upstream and downstream, given the different tax regimes that are likely to apply to the 2? Secondly, I wonder if you could talk a little bit about Brazil and the start-up of Sapinhoa. I mean, you've taken 18 months to hook up 4 wells to the 2P pilot. It's not a criticism, but it's just trying to work out -- you talked very much about capacity onstream but -- or capacity in place. But I just wonder how should we be thinking about a ramp-up of Brazilian production as the different FPSOs come onstream. And thirdly, if I might, just if you want to make any observations around Elgin and the extent to which that's likely to impact second quarter performance production-wise?

Frank J. Chapman

Yes, okay. Look, upstream and downstream split in Australia, let me refer you back to the February strategy presentation where we gave some facts and figures. The upstream unit development cost has gone up to $9 per BOE. And even -- you will clearly recognize that in terms of an F&D cost that is clearly very much a top-quartile number and remains a top-quartile number even if you add in the total cost of acquisitions and all [ph] some cost in the past we still have here, a top quarter F&D unit cost project. I have no doubts about that and that underpins of course, sound economics for this project going forward even without taking the benefit of the very substantial resource base that we're building in the very many exploration appraisal opportunities that are now emerging. In terms of Lula, we have to encourage you, Lucas, to catch up and transition to the name Lula. That's all right. I know it is hard. Are you going to get to Sapinhoa? That's the next one that you got to get to. As Fabio says, I'm managing all right here. Basically, it has taken a while but as I've said in previous announcements, it is a fact that we are having to prioritize the drilling of production wells against the drilling of appraisal wells and other components of the undertakings we've made to ANP in order to ensure that we retain all of these licenses and all of the resources in them. I think I said this on several occasions before. We are having to cut and dice depending on how these opportunities are evolving. But as we work through 2012, we will be leaving a period of appraisal, and we will be entering a period where we are focusing absolutely on development drilling. I mean it is fair to say although, this hasn't been announced, that if I take the 12,000 that the extended well test has been producing, we are well over 100,000 BOE per day now in the BM-S-11 concession. As regards to Elgin, now let me just think now -- get some numbers. I'm thinking that so far this year, we produced about less than 1.5 million BOE, about 1.3 million BOE. The original plan forecast that we will produce 6.4 million over the whole year. So after the 1.3 million, there is in the plan another 5 round number, 5 million BOEs, and of course that is under threat, notwithstanding the fact that both Total and other partners believe that we can be capable of restoring some of Elgin production by the end of year, but not all of it, by the end of the year. So that's -- let me not speculate too much on that because we have not -- we don't have a crystal ball on that one, but hopefully that will give you some idea onto this result.

Lucas Herrmann - Deutsche Bank AG, Research Division

Frank, can I just go back to Sapinhoa for a moment? I mean in terms of your current plans, are you willing to give any guidance when you think you will actually be producing at 120,000 at capacity?

Frank J. Chapman

Now the unit is onstream. The unit is on schedule for delivery. In fact, it's running a little ahead of schedule, and it will be in the field in 2013. I'm not going to go beyond that at this stage. I'm sorry.

Operator

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

Jon Rigby - UBS Investment Bank, Research Division

I have 3 questions. The first is again just on Australia, sorry about this. Can you just confirm if the disclosure today has an issue of timing around, i.e. that half of the difference between the last time you talked about Curtis and now is already incorporated in the CapEx figures you talked about in February i.e. the Australian dollar movements. So the $5 billion we already got about half of that in the outlook that you gave in February as I understand what you were saying. The second is, did the issues on delivery of this project or the concerns around it have any influence on the management changes that you announced at the start of April in Australia? And the third is just on some background really on the U.S. As you discuss and negotiate your way around trying to get Lake Charles, as well as Sabine Pass as an export terminal, is it right as an outsider we don't see what you see, is that the politics of this thing will mean that being first or second or third to get your project away is going to be important or there will be some political obstructions to the fully economically rational export suite of projects coming out of the U.S.?

Frank J. Chapman

I don't quite see it like that. I mean, I think that we are in an election period in the U.S. Everyone's opinion will be taken seriously by the government, and the government will ensure that it doesn't set any traps for itself as it works its way towards an election. I think the authorities will take their time, and I think we should all be patient. Meanwhile, we are doing what we can, and we're not particularly bothered about the little bit of extra time it's taking, okay? I'm very relaxed about Lake Charles. It's going to be a very economic project. We'll just take our time with it and it will come -- in my view it will come in good time. So I'm quite relaxed about that. Now I don't really want to speculate more on the way this is going to go. It's safe to say that I think it's very unlikely that the government will close down in the fullness of time all the opportunity and revenues, jobs that will be prorated by allowing such an industry to develop. I don't expect on the other hand, this to be like developing at such an enormous rate as some people are imagining. These things always take longer than you may think. The issues in Australia, firstly the timing. There are timing issues here. We did indeed announce the FX thing in November last year, and that was incorporated in our February strategy presentation and was incorporated in the CapEx profile that we presented to the market in February. So you are -- the answer to your question is yes, I think there. Issues on deliveries, is that responsible management changes? No, as I've tried to emphasize here, this is not about a loss of control or a project drastically overrunning. This is a small -- single-digit percentage increase in scope which has mainly to do with infrastructure plus FX and market cost of goods -- local goods and services. These are the principal effects here. We've made the change in management because we are rapidly moving towards an operational phase. And we've moved somebody out who has a very strong government relations, commercial background for somebody that has a very strong technical background. Cath Tanna is still working with us as a Chairman and overall in terms of interfacing with all the key stakeholders, ensuring their priorities are included in our plans. That role continues.

Operator

Our final question comes from the line of Niell Morton from Berenberg.

Neill Morton - Berenberg Bank, Research Division

Just one question left. Just in light of your comments about very strong LNG momentum. I thought I'd invite you to spend some more money. I wondered if you had an interest in Eastern Mediterranean? I think Noble Energy is looking for a partner to develop their big gas discoveries there. Would you consider that, or would sort of politics sort of mitigate against it?

Frank J. Chapman

Yes, again, I mean I'm not speculating on any of these sort of things. We have no ongoing initiatives in this area. Let me be very clear. We're focused on our program. I'm very pleased that we've made a lot of good progress with the funding program. I've seen some rumors this morning that concerns about QCLNG CapEx profile. I thought you'd have questions about does that mean our people are concerned now about rights issues and so on. Let me be very clear. As we said at Q4, one should never ignore any of the generic funding options available for our company, but the right issue is not part of our current plan, and the funding program that we have in place is going along very nicely indeed and can accommodate the increases in our CapEx that we've announced today. So that really is in response to some messages, which I am being fed actually while we are on the line here.

Right, I think that we now have to bring this Q&A session to a close. I want to thank you very much for the questions. I'd like to summarize the main achievements so far this year as a set of significantly stronger financial results, new production from 4 projects across the portfolio, material progress in Australia and Brazil, further exploration success and really, I would say excellent progress with our funding and portfolio plans with now already a clear line of sight on the 70% of the $5 billion of capital that we are going to release.

So thank you, once again, for taking part in the conference today. And I would like to remind you that we will be announcing our second quarter results on the 26th of July. Thank you, and goodbye.

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