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organisation via performance contracts as an integral part of our business performance ethic. Performance is assured through monthly reports on health, safety, security and environment to the Group Executive Committee and quarterly reports to the Board.

Health

Our assets continued to make steady progress with health risk assessments during 2002. Approximately 32% of assets already report having completed their first health risk assessment programme. Remaining assets are intending to complete these assessments during 2003.

Reported figures for occupational illness remain low, but a study is planned for 2003 to establish whether these are a true reflection of the current position or if there is an element of under-reporting. In 2002, our health strategy for BG was revised and re-issued to reflect organisational changes. Emphasis has been directed to promotion and development of occupational health in the assets, within the company-wide framework.

A co-ordinated wellness programme has been run from our Head Office with different monthly topics. A substantial programme was created for the European Week for Safety and Health in October 2002. Assets are now being encouraged and assisted with health promotion programmes of their own. debates and participates in them. We

are confident that our commitment to our Business Principles will remain a strong foundation for our approach to the evolving dimensions of corporate social responsibility.

HEALTH, SAFETY, SECURITY AND ENVIRONMENT

We believe that the protection of the health and safety of our employees and all those affected by our business and the protection of the environment and security of our assets are critical to our overall success. Our aim is to raise our practice to world standards in all countries in which we operate. Our approach to delivering good performance in these areas is based on the principle of continuous performance improvement. Our continuous improvement process is driven by strong management commitment and employee involvement and is enabled by a number of tools including our Health, Safety, Security and Environment Management System and Directives and the 14-Point Profile. The 14-Point Profile provides the framework to develop asset specific and business-wide Performance Improvement Plans. Contractors and partners have adopted our 14-Point Profile tool during 2002, notably in Kazakhstan, Egypt, India and LNG Shipping, to assess and improve their performance.

Challenging stretch targets are then derived and cascaded down through the

Safety

Our drive to deliver superior safety performance was sustained in 2002, with a reduction in the frequency of lost time injuries (staff and contractors) per million man-hours worked frequency (LTIF) to 0.7 compared to 0.9 LTIF in 2001; this is a 72% improvement since 1999. Our goal for safety management is that no harm is suffered by employees or contractors, or by those associated with our activities. We continue the drive to protect the safety of our employees and contractors. We deeply regret the two contractor fatalities in Kazakhstan during 2002. Thorough investigations of these incidents have led to changes in methods of work and implementation of specific solutions to avoid recurrence. The lessons learnt were shared across BG and with our partners and contractors. New initiatives are being developed and implemented by our assets and skill centres to help achieve a step change in our safety performance. These include the update of the 14-Point Profile tool and the carrying out of climate surveys to establish the maturity of our assets in relation to safety awareness and to prepare for the introduction of behavioural-based programmes.

Security

The protection of our employees and assets is integral to our business. Our security policy has been revised to incorporate our commitment to the UK/US Voluntary Principles for Security

and Human Rights. We evaluate the risks of operating in varied conditions worldwide.

During 2002, economic instability in South America and tension both in the Middle East and between India and Pakistan provided security challenges. Effective risk assessment and good mitigation processes allowed our businesses to continue whilst minimising losses of revenue. We monitor closely the continuing threat of world terrorism and the potential for conflict around the world, aided by advice from governments and by interaction with others in the oil and gas sector.

Environment

Our core business, the production, supply and distribution of gas, has a potential net beneficial impact on the environment because gas is a relatively low carbon and clean fuel, capable of high efficiencies. However, our activities also have the capacity to produce negative environmental impacts. We operate within a company-wide environmental management system to minimise negative effects. Recognising the advantages of independent

assurance of the systems, we have made a commitment that all major controlled activities will achieve external

certification of their environmental management systems. During 2002, certification to ISO 14001 was received by: BG Bolivia; Comgas, Brazil; Phoenix

Natural Gas, Northern Ireland; the Rosetta field, Egypt; and the Hibiscus development, Trinidad and Tobago. Climate change is a major environmental issue for BG. New developments allow gas to displace higher carbon fuels with a net reduction in greenhouse gas emissions. During 2002, we increased capacity to supply gas by commissioning Atlantic LNG Train 2 and expansion of the transmission and distribution networks in South America, India and Northern Ireland to new customers. Direct emissions from BG-operated facilities during 2002 were 5.7m tonnes CO₂equivalent, a 6% decrease on 2001. Greenhouse gas emissions will present both a financial liability and opportunity as policies to control emissions, including emissions trading, are introduced. To reflect the financial significance of emissions, we have collected greenhouse emission data on an equity share basis from operated and non-operated activities.

Conservation of biodiversity and access to sensitive areas present a challenge to extractive companies. We have developed a pilot Biodiversity Action Plan in Egypt and are working with partners to minimise impacts in sensitive environments in the North Caspian, Bolivia and Indonesia. We have adopted the environmental position to go beyond compliance, seeking to meet internationally accepted good practice. Managing local environmental impacts, including air emissions and water

pollutants, in line with this position will minimise impacts and maintain good relations with local communities and regulators, so reducing the risks to operations and projects.

HUMAN RESOURCES MANAGEMENT BG people are a critical part of the BG proposition, a key source of competitive advantage. We employ 4 606 people around the world, 3 884 of whom work outside the UK and 3 599 of whom are non-UK nationals.

Building and continuously developing a high-calibre, multinational workforce is essential to the continued growth of the Company and success of our integrated gas major strategy.

We have put in place a range of cohesive HR policies and programmes, designed to engage our people with the aims of the business, the needs of our customers, the interests of shareholders and the well-being of the cultures and communities in which we operate. We are committed to developing the BG culture, where the power of diversity, collaborative working, creativity and a strong sense of individual discipline and responsibility are valued as key factors in the delivery of our performance. More specifically, our people agenda commits us to:

• attracting and retaining the best people, helping them to realise their potential;

HIBISCUS PLATFORM (LEFT). SAFETY IS TAKEN SERIOUSLY IN ALL OUR EGYPTIAN OPERATIONS.

corporate responsibility

opportunities that the gas market is currently generating and is predicted to generate in the future.

Key elements of this leadership programme include formal leadership training, mentoring and coaching initiatives. In 2003, we will be supplementing this with a formal modular-based management development programme targeted at our growing core assets. COMMUNITY INVOLVEMENT

We recognise that as an international company we have responsibilities to contribute to the communities where we do business. We make voluntary and contractual contributions to communities, sponsor local groups and run employee involvement programmes. We also undertake social impact assessments, develop community relationships and contribute to sustainable development. BG’s voluntary and contractual contributions to social projects in 2002 totalled £6.5 million, which is quantified by the London Benchmarking Group model (www.lbg-online.net).

Social and Economic Impact

The social and economic impacts of oil and gas exploration and development activities can be substantial. We recognise that understanding the potential social impacts of our activities will become increasingly complex as our operations grow globally and can be located near remote and vulnerable communities.

• encouraging the development of leadership capability throughout the organisation;

• aligning individual performance with the aims of the business and the interests of shareholders; and

• providing a supportive working environment.

During 2002, we developed the DOING framework, which underpins all our HR policies and practices. DOING – which stands for delivering, outperforming, integrating, networking and growing – is designed to create a BG ‘mindset’, ways of thinking and behaving that will help to deliver our business goals and create shareholder value. The DOING ethos is at the heart of our appraisal, development and reward programmes.

We have also put a number of processes in place to develop a genuinely international management team and create opportunities for local managers in all the countries in which we operate to realise their potential. Such programmes enable BG to benefit from access to a worldwide pool of employees who are able to combine knowledge of local culture and business with the BG mindset.

During the year, we invested in the development of a Group-wide leadership programme, with a particular focus on doing new things in new ways. By developing leadership capability throughout the organisation, we will be able to take advantage of the

Community Investment

We seek to support social and economic development in the communities where we operate. The (non-charitable) BG Foundation was formed in 1998 to develop and manage our community investment programme. The BG Foundation provides structured funding for community initiatives that support our skills transfer theme and are aligned to BG’s business objectives.

The BG Energy Challenge has now raised over £1 million since its inception in 1996. The 2002 event brought together 23 teams from the oil and gas sector, raising £156 500 for the international humanitarian charity, CARE

International UK.

We offer various employee involvement programmes. The matched funding scheme, CareShare, allows employees to increase the money they raise up to a maximum of £250 per person per year. In 2002, the CareShare scheme contributed a further £7 651 to £23 018 raised by 34 employees benefiting 27 charitable causes. UK payroll employees use our payroll-giving scheme and contribute a monthly average of £45 from pre-tax salary to charities of their choice.

Mandatory Commercial Initiatives Community Investment Charitable Gifts Management Costs BG s 2002 CONTRIBUTIONS TO SOCIAL PROJECTS (%) 3 7 10 16 64 GREENHOUSE EMISSIONS

FROM BG-OPERATED FACILITIES

0

(million tonnes CO2 equivalent)

00 6.469 01 6.216 02 5.591 6 4 2

INTRODUCTION

This Operating and Financial Review focuses on the continuing operations of BG. Sections discussing the consolidated results, including the results of discontinued operations in 2000, can be found on page 46 onwards. There were no discontinued operations in 2002 or 2001. A five year summary of the financial results of BG’s continuing operations is set out on page 126. The continuing operations of BG comprise: Exploration and Production (E&P), Liquefied Natural Gas (LNG), Transmission and Distribution (T&D), Power Generation (Power) and Other activities. In November 2001, BG disposed of the assets comprising the Storage segment.

Discontinued operations in 2000 comprise those activities demerged to Lattice, including Transco and BG’s property, leasing, technology and energy services businesses.

This Operating and Financial Review should be read in conjunction with the consolidated Financial Statements and related notes included elsewhere in this report.

OPERATING RESULTS – CONTINUING OPERATIONS EXCLUDING EXCEPTIONAL ITEMS BG’s turnover in 2002 was £2 610 million compared to £2 508 million in 2001 (2000 £2 272 million) – an increase of 4%. Total operating profit in 2002 was £888 million compared with £833 million in 2001 and £688 million in 2000. This represents increases of 7% and 21% respectively. Excluding the impact of changes in upstream gas and oil prices, total operating profit would have increased by 13% in 2002 and by 22% in 2001.

BG’s post-tax return on average capital employed (ROACE) was 10.9% (2001 13.4%; 2000 12.8%). Excluding the impact of the North Sea tax surcharge (see ‘Taxation – continuing operations’, below), ROACE in 2002 was 13.2%.

BG’s 2002 results were impacted by a number of factors including gas and oil commodity prices and foreign exchange rates (in particular the Argentine Peso, Brazilian Real and US$ movements against Sterling). BG’s exposure to oil prices is partly mitigated by the predominance of gas in its portfolio. A significant part of BG’s upstream

operating results

GROUP TURNOVER (a) TOTAL OPERATING PROFIT/(LOSS) (b) 2002 2001 2000 2002 2001 2000

£m £m £m £m £m £m

Continuing operations Excluding exceptional items

Exploration and Production 1 555 1 283 1 188 731 606 513

Liquefied Natural Gas 309 81 31 8 29 25

Transmission and Distribution 541 834 766 50 119 78

Power Generation 189 192 183 124 104 102

Storage (c) – 75 77 – 21 3

Other activities 66 90 54 (25) (46) (33)

Less: intra-group sales (50) (47) (27)

2 610 2 508 2 272 888 833 688

Exceptional items (d) – 34 – – 34 (314)

2 610 2 542 2 272 888 867 374

Discontinued operations (e)

Transco – – 2 361 – – 698

Other activities – – 165 – – 65

Less: intra-group sales – – (99)

– – 2 427 – – 763

Total 2 610 2 542 4 699 888 867 1 137

(a) Gas trading activity within the E&P segment has been re-presented on a net basis, see note 1, page 81. (b) Total operating profit/(loss)

includes BG’s share of operating profits less losses in joint ventures and associated undertakings.

(c) In November 2001, BG disposed of the assets comprising the Storage segment. (d) For further information on

exceptional items, see note 5, page 90.

(e) Includes exceptional demerger related costs of £43 million in 2000.