Investing in natural gas: drilling down into the risks
A BG Group case study

Page 1: Introduction

Investment decisions involve weighing up the risk and the likely rewards of various options. It is often the riskiest alternatives that yield the highest possible gains while the least risky options may yield smaller rewards. Business decision makers therefore have to weigh up risk so as to provide the most suitable rewards for stakeholders including shareholders and customers. The starting...
Read full page

Page 2: More than just finance

Ethical decisions are integral in making investment decisions. BG Group's Statement of Business Principles sets out the fundamental values and ethical principles within which the company operates. BG Group will only enter countries where the company can operate in accordance with its Business Principles. The example below gives an outline of the important statistical and financial procedures...
Read full page

Page 3: BG Group

The gas industry is today in the private and public sector and there are a number of companies competing in the industry. Some of these companies are government owned. Others are owned by private shareholders who appoint directors to represent their interest. The directors appoint professional managers to run the business. Like electricity and telecommunications, gas is a 'network industry'. In...
Read full page

Page 4: Field development

The gas business has a number of characteristics that are particularly important in relation to investment decision making: It is very capital intensive so that decisions may typically involve a spend of several hundred million pounds. There are long lead times between the start of a project and the receipt of earnings from that project, typically over five years from first investment to first...
Read full page

Page 5: Investment appraisal

Discounted cash flow is an important technique for investment appraisal. The discounted cash flow approach is a way of valuing the future returns on investment by assessing the values of these returns in terms of their value today. It places emphasis on the cost of funds tied up in a project by considering the timing of cash flows. For example, we all instinctively know that £1 in the...
Read full page

Page 6: Economic modelling

Economists can then develop models projecting the likely costs and revenues of developing new fields. Essential components of these models are: revenues (price x volume) costs government take (e.g. taxes because the blocks that companies bid for are government property). Revenues less costs,less government take = the net cashflows which are discounted to give the NPV. BG Group then uses...
Read full page

Page 7: Portfolio considerations

At this phase of the investment decision a number of factors must be considered. The overriding goal of the company is to create shareholder value. In order to achieve the optimal growth for an acceptable level of risk the company invests on a portfolio basis. This means that it will invest in a number of different wells and at times share the costs and working interest with partners in order to...
Read full page

Page 8: Conclusion

The gas market is an exciting one to be involved in. The world's demand for energy is growing rapidly and it is imperative that it is supplied with clean energy reserves by principled companies. BG Group is a major world player in this market and it constantly needs to make the right sorts of investment decisions which balance the needs of global consumers, its shareholders, the communities...
Read full page

Related: BG Group
Case studies in Business Case Studies



Downloads

You can download resources for this case study below

Newsletter

Subscribe to our newsletter for current business news including lesson plans and activity ideas.