Diseño Experimental

and La Vertiente in Bolivia (2.7 mmboe). Excluding the Indian fields (Panna/Mukta and Tapti) acquired in early 2002, production rose by 19%.

In 2001, production volumes rose to 108.8 mmboe, an increase of 6.3 mmboe (6%), compared to 2000, resulting in a £93 million growth in turnover. Production increases were delivered mainly by fields within the UKCS (Blake (3.4 mmboe), Elgin/Franklin (3.5 mmboe) and Easington Catchment Area (ECA) (3.1 mmboe)), together with the Rosetta field in Egypt (2.4 mmboe). All of these fields, with the exception of the ECA fields, commenced production during 2001. These increases were partially offset by lower production at the Everest and Lomond fields (2.3 mmboe) and the J-Block fields (1.4 mmboe) in the UKCS and the Karachaganak field (1.7 mmboe). Whilst oil prices in 2002 were broadly in line with 2001, gas price realisations were affected by low UK spot prices, and there was a consequential reduction in take from certain supply contracts as customers switched to purchase spot market gas at lower prices.

Prices for the majority of BG’s UK gas contracts are reset annually on 1 October. For the year beginning 1 October 2002, activity is conducted through gas

contracts that are not directly linked to short-term movements in the oil price. The Argentine Peso, Brazilian Real and US$ all weakened over the course of the year. BG’s results will continue to reflect the impact of these, and other, market factors.

E&P

E&P’s turnover increased by 21% to £1 555 million from £1 283 million in 2001 and £1 188 million in 2000. The 2002 increase was underpinned by 25% higher production (£328 million), offset by lower realised prices (£49 million). The 2001 increase was due mainly to higher production (£93 million) and favourable US$ exchange rate movements (£22 million).

Production volumes rose by 25% (27.3 mmboe) to 136.1 mmboe, contributing £328 million to the increase in turnover in 2002 relative to 2001. This growth included new production from the Jade (3.9 mmboe), Panna/Mukta (3.8 mmboe), Tapti (2.6 mmboe) and North Coast Marine Area (NCMA) (1.9 mmboe) fields, higher production from fields which started during 2001 – Elgin/Franklin (5.8 mmboe) and Blake (3.4 mmboe) – together with greater production from existing fields, Karachaganak (6.7 mmboe)

average prices are expected to be around 12% lower than the 2001/2002 gas year. This compares to an increase of 9% in 2001. Average realised overseas gas prices fell during 2002 because of a change in mix and the time lag effect of oil price movements reflected in certain contracts. Average realised overseas gas prices rose in 2001.

Total operating profit in 2002 increased by £125 million (21%) to £731 million (2001 £606 million; 2000 £513 million). The increase in 2002 reflected strong production growth of 25%, partially offset by the impact of lower realised gas prices. Excluding the impact of price changes, operating profit in 2002 would have increased by 29%. The improvement in 2001 was mainly the result of higher production volumes.

Unit lifting costs were £1.04 per boe in 2002 compared to £1.05 per boe in 2001. Unit operating costs were £2.09 per boe in 2002 against £2.05 per boe in 2001, reflecting the impact of an increase in tariff costs, principally from transportation and processing fees on production from the Jade and Blake fields (which started production in February 2002 and June 2001 respectively). Prolonged periods of firm oil prices typically create cost pressure on oil exploration and production

2002 2001 2000 Production volumes (mmboe)

– oil 22.5 13.4 9.9

– liquids 19.4 14.7 14.9

– gas 94.2 80.7 77.7

136.1 108.8 102.5

Average realised

– oil price per barrel (£/$) 16.67/24.86 16.63/23.97 18.42/28.07

– liquids price per barrel (£/$) 7.96/11.87 9.43/13.60 11.32/17.25

– UK gas price per produced therm (p) 15.91 16.85 15.06

– international gas price per produced therm (p) 12.49 13.62 11.92 – overall gas price per produced therm (p) 14.26 15.48 13.84

Lifting costs per boe (£/$) 1.04/1.55 1.05/1.51 1.12/1.70

Operating expenditure per boe (£/$) 2.09/3.12 2.05/2.96 2.09/3.19

Development expenditure (£m) 704 585 464

Gross exploration expenditure (£m)

– capitalised exploration expenditure 274 77 85

– other exploration expenditure 65 59 54

339 136 139

Lifting costs represent operating expenditure excluding royalties, tariffs and insurance.

TOTAL OPERATING PROFIT

(excluding exceptional items*)

200 400 600 800 1 000

* for further information on exceptional items, see note 5, page 90. 00 688 02 888 01 833 (£m) 0

broke even during the year. This was mainly because of lower US gas prices in the first half of 2002 and the cost of establishing the new shipping and marketing business at Lake Charles. The Lake Charles business performed well for its first year of operation with 44 cargoes received and processed and a further six cargoes delivered to other destinations to take advantage of market opportunities.

The segment results included the contribution from BG’s share of the operating profit of Atlantic LNG (ALNG), an associated undertaking (2002 £29 million; 2001 £30 million; 2000 £30 million) which exports LNG to the USA and Europe. The ALNG Train 1 2002 profit reflected a 5% increase in volumes, offset by lower prices. ALNG Train 2 commenced production, in start-up phase, in the third quarter of 2002. In 2001, the £4 million increase in profit came from growth in shipping and marketing activity (an increase from £13 million to £22 million) offset by higher business development expense (a £5 million increase in costs to £23 million). ALNG’s 2001 profit, compared to 2000, reflected higher volumes and commodity prices, offset by increased commodity costs.

T&D

T&D’s turnover in 2002 was £541 million compared to £834 million in 2001 and £766 million in 2000. Turnover in 2002 included the impact of the devaluation

of the Argentine Peso (£292 million) and the Brazilian Real (£84 million).

Excluding MetroGAS, T&D’s turnover was £407 million in 2002 (2001 £364 million; 2000 £281 million). The increase in 2002 reflects a 14% increase in Comgas’ turnover where a 31% rise in volumes was offset by the exchange impact of the Brazilian Real referred to earlier. Higher transmission volumes led to a 76% increase in volumes at Gujarat Gas in 2002. The higher turnover in 2001 compared to 2000 mainly reflects a 32% increase in Comgas’ turnover from higher volumes (up 33%) following the expansion of its distribution network and increased power generation demand. Excluding the impact of the weaker Brazilian Real, Comgas’ turnover increased by 50%. Gujarat Gas’ volumes increased by 27% in 2001.

MetroGAS’ 2002 turnover fell because of the devaluation of the Argentine Peso and the effects of the country’s adverse economic and regulatory environment. In 2001, MetroGAS’ turnover fell by 3% mainly as a result of higher rainfall leading to the displacement of gas-produced power by hydroelectric power. Demand in the final quarter of the year also began to see the adverse impact of deteriorating macroeconomic conditions in Argentina.

Total operating profit including BG’s share of profits in joint ventures and associated undertakings in 2002 was services and it is estimated that this,

together with the impact of prices on royalties and tariffs, has contributed around 25 US cents per boe to unit operating costs compared with BG’s cost target assumption.

Unit lifting costs in 2001 fell by 6% compared with 2000 to £1.05 (a fall of 9% excluding the impact of the US$) reflecting lower costs and higher volumes. Unit operating costs were £2.09 per boe in 2000.

Of the 25 exploration and appraisal wells completed in 2002, 18 were successful, representing a success rate of 72% (2001 success rate of 71% with 14 wells completed). Well write-off costs were £12 million (2001 £13 million). In 2000, BG’s exploration and appraisal drilling programme achieved an industry leading 100% success rate and consequently there were no well write-off costs in the year.

LNG

LNG’s turnover more than tripled in 2002 to £309 million (2001 £81 million; 2000 £31 million). LNG shipping and marketing activity accounted for the majority of the increased turnover in all three years (including the Lake Charles activity from 1 January 2002).

Total operating profit of £8 million in 2002 was £21 million lower than in 2001 (£29 million; 2000 £25 million). The decrease in 2002 reflected lower profits from shipping and marketing which, following a profit of £22 million in 2001,

operating and financial review

£50 million (2001 £119 million; 2000 £78 million). The result in 2002 reflected strong growth at Comgas, offset by the foreign exchange impact of the weakening Brazilian Real and of the Argentine Peso on the results of MetroGAS. The increase in 2001 reflected improved performance across the segment, most notably at Comgas, Phoenix Natural Gas (Phoenix) and the Bolivia-Brazil pipeline. In addition, business development and overhead costs were lower than in 2000. Comgas continued to see an increase in Sterling reported profit with operating profit up 88% to £32 million (2001 £17 million; 2000 £4 million loss). The increase in 2002 reflected strong volume growth and gross profit improvement, offset by the significant impact of the Brazilian Real depreciation. Excluding the impact of the weaker Brazilian Real, Comgas’ underlying operating profit increased by £24 million (141%) in 2002 compared to 2001 and by £31 million in 2001 compared to 2000.

The £72 million fall in profit from MetroGAS, to £3 million

(2001 £75 million; 2000 £74 million), reflected the impact of the Argentine Peso devaluation, and the country’s adverse economic and regulatory environment. The small increase in the 2001 profit compared to 2000 reflected higher prices and lower costs offset by lower volumes (7% lower).

The Argentine Government has imposed a number of economic and political measures (as described on page 19) which may restrict BG’s ability to exercise its control over MetroGAS and management is monitoring this situation closely. T&D’s share of profits in joint ventures and associated undertakings was £33 million (2001 £29 million; 2000 £24 million). The increases in both 2002 and 2001 were mainly attributable to Mahanagar Gas in India and to the Bolivia-Brazil pipeline.

Power

Power’s turnover was £189 million in 2002 compared with £192 million in 2001 and £183 million in 2000. Turnover in all three years was mainly attributable to Premier Power in the UK.

Total operating profit of £124 million (2001 £104 million; 2000 £102 million) included BG’s share of profits in joint ventures and associated undertakings of £93 million (2001 £81 million; 2000 £73 million) – attributable to the power plants at Seabank (in the UK), Santa Rita and San Lorenzo (in the Philippines), Serene (in Italy) and Genting Sanyen (in Malaysia).

The 19% increase in total operating profit in 2002 reflected increased profitability across the segment. At Premier Power, profit increases were driven by a reduction in costs following the planned closure of an existing unit during the year and one-off credits amounting to around £4 million. The San Lorenzo power

station entered into full commercial operation on 1 October and was the main contributor to the increase in BG’s share of the operating profit in joint ventures and associated undertakings.

The 2% increase in total operating profit in 2001 reflected the commencement of full commercial operations at Seabank (Phase 2 commissioned in January 2001) and Santa Rita (fully operational in August 2000), together with the receipt of lower cost reimbursements on the Santa Rita and San Lorenzo projects.

Storage

On 28 November 2001, BG disposed of BG Storage Limited (BG Storage). Further details of the sale are given in ‘Exceptional items – profit/(loss) on disposals – continuing operations’, below. Storage’s turnover up to the date of disposal in 2001 was £75 million, compared with £77 million in 2000. Turnover in 2001 benefited from higher capacity and commodity sales at the Rough storage facility, offshore UK. Operating profit to the date of disposal was £21 million compared to £3 million in 2000. Increased profits in 2001 reflected a lower depreciation charge (following a £200 million impairment of assets in mid-2000) and lower decommissioning costs.

Other activities

Other activities comprise New Business development expenditure, certain corporate costs and activities relating to certain long-term gas contracts.

In 2000, Premier Power incurred exceptional charges of £29 million relating to restructuring costs incurred following the conclusion of all agreements necessary to proceed with its CCGT project. This charge was included within the Power segment. In 2000, the carrying value of the Rough offshore storage facility was impaired by £200 million in the light of trading conditions during 2000 and following a review of the longer term prospects of the business. This was treated as an exceptional operating charge in Storage’s results.

The total operating loss of Other activities in 2000 included an £85 million exceptional charge in respect of

demerger related costs. An analysis of these costs is set out in note 5, page 90. EXCEPTIONAL ITEMS – PROFIT/(LOSS) ON DISPOSALS – CONTINUING OPERATIONS Profits/(losses) on the disposal of fixed assets and investments are reported as exceptional items.

In 2002, the loss on disposal of fixed assets and investments of £14 million (2001 £98 million profit; 2000 £280 million profit) included the £7 million loss on disposal of BG’s 100% investment in Iqara EcoFuels Limited and a loss of £2 million relating to the disposal of part of the Rose field. The 2001 profit included the disposal of BG Storage and associated assets and a 24.5% share in Phoenix. BG Storage

provided gas storage services in Great Britain and its assets included the Rough offshore storage facility, salt cavities in Hornsea and an interest in processing facilities at Easington. The associated assets sold included the remaining interest in the processing facilities at Easington, the Amethyst gas processing condensate transport agreement and BG’s interest in the offshore York discovery. The sale of BG Storage generated proceeds of £421 million which gave rise to a profit of £78 million. The sale of part of BG’s interest in Phoenix, the Northern Ireland natural gas distribution company, reduced BG’s interest in Phoenix to 51% and realised a £21 million profit. Profits in 2000 included £305 million on the sale of BG’s share of Dynegy Inc., an associated undertaking.

INTEREST – CONTINUING OPERATIONS BG’s net interest payable was £80 million compared to £63 million in 2001 and £80 million in 2000. The 2001 charge of £63 million included a £17 million receipt in respect of the House of Lords judgment in favour of the CATS partners (see ‘Litigation’, below). Excluding this 2001 exceptional receipt, the 2002 interest charge was in line with 2001, reflecting a higher level of borrowings offset by lower interest rates and lower unwinding charges on discounted provisions. The underlying 2001 charge was in line with 2000, reflecting higher levels of borrowings offset by a lower charge in respect of discounted provisions The total operating loss in 2002 was

£25 million compared to £46 million in 2001 and £33 million in 2000. The 2002 loss was due principally to New Business expense partially offset by the release of a provision on certain long-term gas contracts no longer required. The operating loss in 2001 arose mainly as a result of an increased corporate provision for bad debts in the fourth quarter of £20 million and higher levels of

expenditure on New Business compared to 2000. These 2001 increases were partially offset by a £7 million operating profit on certain long-term gas contracts, prior to their disposal, and the release of that portion of the provision no longer required in respect of these contracts (£13 million). The loss in 2000 arose mainly on New Business expense and activity under certain long-term gas contracts.

EXCEPTIONAL ITEMS – OPERATING RESULTS – CONTINUING OPERATIONS

There were no exceptional operating items in 2002.

In 2001, the House of Lords ruled in favour of the Central Area Transmission System (CATS) partners (BG’s share 51.18%) in their dispute with Teesside Gas Transportation Limited (an Enron Corp. subsidiary). This gave rise to income of £34 million in the E&P segment which is presented as an exceptional item within turnover. See ‘Litigation’, below, for further information.

operating and financial review