UPDATE 2-BG slashes shale drilling in weak gas price world

Thu Feb 9, 2012 4:25pm IST

Stocks

   

* 2012 LNG profit target increased 30 pct

* Weak gas prices prompts 80 pct cut in shale drilling

* Affirms 7 pct/yr output growth target to 2020

* Shares rise 2.7 pct, outperform peers

By Tom Bergin

LONDON, Feb 9 (Reuters) - Gas producer BG Group is to cut back shale gas drilling activity by almost 80 percent because weak gas prices are making its relatively low-grade reserves uneconomic.

The move, announced along with a 40 percent rise in fourth quarter profits on strong oil prices and a lower tax rate, will mean its 2015 output will be some 110,000 barrels of oil equivalent per day lower than earlier indicated.

UK-based BG reaffirmed its target of growing oil and gas production by an average 7 percent per annum out to 2020 but Chief Executive Frank Chapman, who is due to step down by the end of next year, said output growth would be muted to 2015 because of the shale drilling decision.

Output would ramp up sharply between 2015 and 2020, he said on Thursday.

BG's U.S. shale gas assets are largely "dry gas" and so yield little if any of the highly valuable natural gas liquids (NGLs) on which the economics of shale now depends.

With gas prices unable to cover drilling costs, operators make money by selling the liquids they produce in conjunction with the gas. While oversupply has killed gas prices, NGLs can be sold at prices that often exceed still-buoyant crude prices.

U.S. gas prices have been under pressure for the past couple of years because a production glut, caused in large part by shale development, and reached a 10-year low in January.

LNG BULLS

BG remained bullish about its liquefied natural gas (LNG) sales business, lifting its profit and production outlook for the division.

Strong demand for the fuel in Asia, as economies expand rapidly and the Japanese nuclear accident at Fukishima last year prompts a shift to gas-fired power generation, has lifted prices for LNG, natural gas which is cooled until it liquefies for easier shipping in special tankers.

BG said fourth-quarter earnings, which exclude one-offs and non-cash charges, were $1.48 billion against a consensus forecast of $1.11 billion from a company survey of analysts. Analysts at JP Morgan said that even stripping out the impacts of the low tax rate, BG outperformed expectations by 8 percent.

The company's shares traded 2.8 percent higher at 1,486 pence at 0917 GMT, outperforming a 0.9 percent rise in the STOXX Europe 600 Oil and Gas index.

Larger rival BP reported a 14 percent rise in underlying fourth-quarter earnings compared with the same period in 2010, while Royal Dutch Shell reported an 18 percent increase.

BG, which is based in Reading, outside London, reported a 1 percent drop in production in the quarter, due to technical problems in the North Sea.

It added that appraisal work showed its new discoveries offshore Tanzania contained 3 trillion cubic feet of resources, supporting hopes that the East African region could emerge as a major LNG hub, after other companies announced big finds in Mozambique.

BG lifted its full year dividend 10 percent and said it would sell around $5 billion of largely downstream, gas distribution and power generation and transmission assets, in the coming tow years.

It added capital investment would rise over the coming two years. Analysts at Citigroup said the increase was related to higher costs at its Queensland, Australia LNG project.