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The Sunday Times: Cooking with gas: BG keeps growing

EXTRACT: …this has led to suggestions that it would be simpler for a rival to gobble up BG. Shell has been the favourite candidate for many years. BG has been racking up double-digit production growth and Chapman is confident the company can raise production by up to 10% a year between now and 2012. This far outstrips BP and Shell, which have admitted that safety and security problems will stymie their growth to a measly 2% over the period.

THE ARTICLE

June 10, 2007 

Ten years after British Gas was broken up, the group’s profits have soared from £160m to £3 billionGrant Ringshaw

FEW FTSE 100 chief executives who have seen a near-twentyfold rise in operating profits in the past 10 years would down-play such a stunning achievement as a “foundation stone”. But then Frank Chapman, the boss of BG Group, the integrated gas giant, is a hard taskmaster.

“We want to be a great company,” he said. “We will measure our success by decades of performance, not years. When we’ve had 10 years of outperformance, I regard that as the platform for the future. We’ve built the foundation stone.”

The statement underlines the huge ambitions of Chapman, one of the lowest-profile but most respected of FTSE 100 bosses. Since the sleepy old British Gas was split up through the demerger of Centrica in 1997, BG’s operating profits have rocketed from £160m to £3.1 billion last year, a compound annual growth rate of almost 40%. Since Chapman, the son of a West Ham lorry driver, took over the top job in October 2000 after the demerger of the Transco pipeline business, the group’s market value has soared from £8.5 billion to more than £26 billion.

Chapman said BG’s success is due to a strategy of being an integrated gas giant, from exploration and production to power stations and gas distribution. “The strategy is simple. We identify high-value gas markets that we want to supply and find low-cost resources to connect to them,” he said.

BG’s model, which includes some oil production, has been deliberately different from what Chapman calls the “oilman’s thinking” of some of his rivals. “Our competitors come from the view of accumulating licences and chasing exploration acreage. Our approach is how to supply markets. When we start to drill a well we already know the market we are trying to supply.”

The result has been a complex and tightly managed web linking potential markets to sources of supply with operations in 25 countries.

There have been imitators, but to succeed they would need to replicate BG’s culture and this has led to suggestions that it would be simpler for a rival to gobble up BG. Shell has been the favourite candidate for many years.

Chapman argues that BG’s strategy allows it to be big enough to undertake projects that would fit in with a super major 10 times its size, but with the “flexibility of a smaller company to be nimble and take decisions fast”.

BG has been racking up double-digit production growth and Chapman is confident the company can raise production by up to 10% a year between now and 2012. This far outstrips BP and Shell, which have admitted that safety and security problems will stymie their growth to a measly 2% over the period.

One of BG’s biggest money-spinners has been the fast-growing export of liquefied natural gas or LNG. Last year profits in this division soared 94%. BG is the biggest LNG exporter to America after building the business from scratch in 2002. It is constructing a huge terminal at Milford Haven in Pembroke-shire, due to come on stream this year.

The big issue is whether BG can maintain its stunning growth. Some analysts fret that the pace may slow after some big fields came on stream in Egypt and Trini-dad or that BG’s management could be overstretched by all the projects it has in the offing.
LNG BOOMS

The global hunger for energy has led to explosive growth in the LNG market. Poten & Partners, an energy consultant, expects the market to grow by an average 13% a year between 2005 and 2010 – almost double the 1980-2004 rate. Until recently, LNG was a niche market serving countries such as Japan and South Korea, which completely rely on imports for their energy needs. The market has changed dramatically. As gas reserves in America and Britain have declined, those countries have become more dependent on imports. Demand has been further boosted by the booming economies of China and India. America is expected to become the world’s largest LNG importer within 10 years.

The Gulf state of Qatar is the biggest LNG exporter.

Chapman admits that sustaining growth is an issue, but points out that BG has gas-field assets that have long lives, which will reduce the rate at which production slows.

It also has other cards up its sleeve. Production has recently started at Buzzard, the North Sea field that could be Britain’s largest oil discovery in a decade. BG has also made a potentially huge oil discovery off the coast of Brazil, and has new exploration projects in China, Libya, Algeria, Mad-agascar and Nigeria. Meanwhile, its integrated strategy has led it to expand into power stations in America with two acquisitions worth $700m (£355m) last year.

Even so, some analysts argue that BG needs to secure more gas assets in the Pacific basin. “It’s an area that they need to address, but the competition for assets in the Far East is fierce,” said one leading analyst.

Another big challenge is “resource nationalism”, as countries tighten control of their energy reserves. Again, Chapman argues that BG’s integrated approach gives the group an edge over its rivals. “We want to be seen by governments as different – not as a company that wants to exploit their reserves, but as one that spends time trying to understand their agenda and also to make a reasonable return on capital. The crucial thing is that we bring them access to the markets we serve.”

Security of supply has also been forced up agendas of countries that consume a lot of gas, especially after Russia, which has the world’s largest gas reserves, temporarily cut off supplies to Ukraine and Belarus in a highly charged row that mixed energy supply and politics. Chapman said the nervousness about gas supply was “unhelpful”.

“Russia has to realise that if governments think gas [supply] is unreliable they will look for alternatives. That would work against the industry realising its full potential,” he said.

So far, BG has concentrated on organic growth. Yet speculation persists of a takeover or even that BG might pull off what some see as a dream deal – buying Wood-side of Australia.

Chapman is adamant that there will be no change in strategy: “History shows that a lot of mergers and acquisitions do not create shareholder value. I’m hardly sticking my neck out on that one. At BG we have a simple policy that says the greatest source of shareholder value is through organic means.”

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article1908993.ece

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