London (Platts)--5Feb2013/906 am EST/1406 GMT

The UK's BG Group no longer expects to meet a medium-term production target of more than 1 million b/d of oil equivalent by 2015, the company said Tuesday, as short-term production issues in Egypt and the UK continue to weigh on BG's upstream.

BG, presenting its fourth-quarter results, said it produced a total of 58.9 million boe (an average 640,200 boe/d) in the fourth quarter, down 2% year-on-year, primarily because of the problems with reservoir performance in Egypt and facility shutdowns in the UK North Sea.

Production for 2012 as a whole averaged 657,000 boe/d, and BG has set its guidance for this year with that volume at the high end of the range of between 630,000 boe/d and 660,000 boe/d.

"Year-on-year production is expected to be slightly down in the first half [of 2013] and lower in the third quarter, when the group performs most of its maintenance program," BG said.

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It expects output this year to then "grow strongly" in the fourth quarter, driven by the ramp-up of two FPSOs in Brazil, and significant volumes from the Jasmine field in the UK North Sea and Margarita Phase 2 in Bolivia.

However, output may be impacted by a maintenance shutdown at the giant Karachaganak gas and condensate field in Kazakhstan.

BG said it hopes it can resolve some of its short-term production issues.

"Egypt and the UK were the drivers of the production shortfall in 2012," CEO Chris Finlayson told reporters at a London press conference.

In Egypt, its WDDM project has suffered from significant reservoir problems.

"The recent decline is due to water breakthrough," Finlayson said.

To fix the fall in output at the field, BG is planning to drill more development wells targeting an additional 2 Tcf of gas.

"Production will decline in Egypt until the new development wells come on stream in 2014," Finlayson said.

While its plans for Egypt remain, for now, unaffected by the recent unrest in the country, Finlayson said BG remained vigilant.

"We continue to monitor the situation in Egypt," he said.

Asked whether BG had increased security at its installations in Egypt and also Tunisia due to the recent deadly siege in Algeria, Finlayson said safety was paramount.

"Obviously we have -- as have others -- got to take account of what happened in Algeria," he said.

He said the company's assets in Tunisia and Egypt were in "very different locations" from that of the remote, desert facility attacked in Algeria.

"But we are keeping close watch," he said, declining to comment on specific security measures in place.

UK ISSUES

BG's output last year was also impacted by the closure of the Elgin/Franklin field complex in the UK North Sea and the timing for resuming production remains unclear, Finlayson said.

Total, the operator, closed the fields in early 2012 after a gas leak and has said the fields should resume production in the first quarter of this year.

"The exact timing and number of wells to be brought back online remain key uncertainties," Finlayson said.

However, given that the fields will likely resume in the near future, Finlayson said BG expects production in the UK to be higher in 2013 than last year.

But the production problems, as well as an expected write-down of its stake in the Queensland LNG project in Australia to China's CNOOC, means BG will miss its 2015 output targets.

"Given this starting point in 2013, and adjusting for the CNOOC deal, the group's previous guidance of more than 1 million boe/d will not be reached in 2015," Finlayson said.

BG said the Queensland LNG project would have its first gas in plant by year-end, meaning first sales can take place in the second half of 2014.

BG said it expected to make an operating profit of $2.9-3.1 billion in 2013 from its LNG business.

This, the company said, assumes supply volumes from long-term contracts of around 11.3 million mt of LNG, 0.3 million mt lower than 2012, primarily related to lower supply from Egypt.

"This volume forecast also assumes minimal spot cargoes, given current tight market conditions," BG said.

Analysts said the 2013 production guidance could mean BG would underperform this year.

"It suggests some downside risk from earlier guidance in October that 2013 production would be in line with 2012," analysts at Morgan Stanley noted.

On LNG, Morgan Stanley said the 2013 guidance was below its forecast for the year of $3.3 billion.

"This suggests that the unwinding of hedges will have a smaller positive impact and/or the reduction in volumes will have a larger negative impact than we had estimated," they said.

STRATEGIC REVIEW

Finlayson said BG had also started a review of its long-term strategy, which will be presented to the market on May 14.

"Our strategy will build on our distinctive strengths, which clearly differentiate us from the majors in the industry: world class exploration, a unique LNG model and our commercial agility," Finlayson said.

He stressed that BG has an "unparalleled set of long-term assets to develop."

BG's fourth-quarter 2012 net profit dropped by 29% to $1.03 billion from $1.46 billion in the same period of 2011, primarily as a result of a one-off $277 million tax credit in 2011, the company said.

Excluding this tax credit, underlying earnings fell by 13%, broadly in line with the 12% decline in total operating profit.

BG also said it plans capital expenditure in 2013 of some $12 billion: $5.5 billion for Australia; $2.7 billion for Brazil; $3 billion for base producing assets; and $0.8 billion for other projects.

--Stuart Elliott, stuart_elliott@platts.com
--Edited by James Leech, james_leech@platts.com

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