BG Group is an international energy group with a turnover of around $ 15 billion a year. Its main business is the supply of natural gas. This is ‘a ‘clean’ fuel, and because the worldwide demand for energy is growing, sales are expected to rise significantly over the next 10 years. To meet this demand, BG has to continually find and develop new reserves.
National governments generally regard gas fields as a vital strategic resource, so they keep tight control over them. To develop a field, government divide it into blocks and then invite energy companies to bids for exploration rights. BG, along with every other energy company, has to decide whether to bid for exploration rights in available blocks , and how much to bid. These are important decisions that are characterised by high costs ( typically hundreds of millions of dollars ), long lead times ( typically 5 years before a project starts earnings money), limited lifetime ( there is a finite amount of gas available) and complex tax and contractual arrangements.
BG considers many factors in each decision. Firstly, there are qualitative factors, particularly their rigorous ethical guidelines and business principles. These are important in showing how BG Group does business and what it stands for – and how it deals with issues such as gas finds in sensitive environments, conflicts zones or areas where indigenous people are contesting land rights.
Other qualitative questions concern the availability of alternative projects , structure of the company’s long-term portfolio of fields, partnerships, public perception of the company, effect on share value, and so on.
Secondly, there are quantitative factors. These focus on 2 issues:
(1) Risks – where geologists look at the chances of finding gas and the likely size of discoveries, engineers look at the potential difficulties with production , health and safety look at safety and environmental risks , and economists look at likely demand , prices and commercial risks.
(2) Rate of Return from the project – starting with basic formula :
net cash flows = revenue – costs – taxes
Managers review the results from both qualitative and quantitative analyses before making any decision.