International gas and oil producer BG Group Plc flagged its concerns about the impact of instability in Egypt as it reported a 3 percent fall in second quarter net profit. Net profit dropped to $986 million, beating expectations of $963 million. The UK-based international gas producer depends on Egypt for about a fifth of its production - a source of revenue for its expensive new projects in Brazil and Australia. Its offshore Egyptian reservoirs are suffering decline, and the country is gearing up to consume more gas at home, increasing the possibility that BG might have to shut part of its two Liquefied Natural Gas (LNG) export operation there. Meanwhile the military coup of July 3 that ousted president Mohamed Morsi and the fact that BG is owed $1.3 billion by Egypt for domestic gas sales - up from $1.2 billion in the first quarter - have heightened the company's anxiety about its future in the country. "Events in Egypt remain a primary concern and will continue to be so as the political, social and business environment evolves," said BG chief executive Chris Finlayson in a results statement on Friday. "While our offshore operations continue unaffected, higher than agreed gas volumes were diverted into the Egyptian domestic market during the quarter, impacting volumes available for LNG export," he said. Analysts focused on BG's stronger than expected result, which was driven by higher than expected production and good profit margins in the new barrels coming onstream in Brazil. BG shares were up 0.13 percent in early trade. "Look at Iraq, Libya and Venezuela. A government needs the hydrocarbons to flow or it won't be in power for very long", said Oswald Clint of Bernstein, who also pointed out that all of BG's big new projects were on course. "Good numbers. I think good reason to be exposed to the company, the operational momentum still there and a good underlying delivery," agreed Santander analyst Jason Kenney. BG is working to re-energise flagging production in its Egyptian fields, but in the second quarter, more gas was diverted to Egypt's domestic market, reaching a maximum pipeline capacity of 900 million cubic feet a day (mmscfd) up from 700 million mmscfd in the first quarter, and resulting in reduced supplies for its LNG export operation. BG had a deal with the ousted government under which domestic offtake will not increase before September 2013, and under which the government contributes to the shortfall in the fourth quarter via reduced domestic diversions and replacement cargoes. Five such cargoes of which two are allocated to BG are being provided by Qatar for the period July through September. Source: Reuters
