15 September 2010

The role of gas in meeting the UK’s energy and decarbonisation goals

Ashley Almanza, Chief Financial Officer, BG Group

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Legal notice

Certain statements included in this presentation contain forward-looking information concerning BG Group’s strategy, operations, financial performance or condition, outlook, growth opportunities or circumstances in the countries, sectors or markets in which BG Group operates. By their nature, forward-looking statements involve uncertainty because they depend on future circumstances, and relate to events, not all of which are within BG Group's control or can be predicted by BG Group. Although BG Group believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Actual results could differ materially from those set out in the forward-looking statements. For a detailed analysis of the factors that may affect our business, financial performance or results of operations, we urge you to look at the “Risk Factors” included in BG Group plc’s Annual Report and Accounts 2009. Nothing in these results should be construed as a profit forecast and no part of these results constitutes, or shall be taken to constitute, an invitation or inducement to invest in BG Group plc or any other entity, and must not be relied upon in any way in connection with any investment decision. BG Group undertakes no obligation to update any forward-looking statements.

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Volatility and relative gas prices

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

0

50

100

150

200

250

NBP Volatility NBP BAFA

p/t

h

UK Spot Prices vs German BAFA Contract Price

• Increase in import capacity and gas availability resulted in lower and less volatile gas prices in the UK Source: Wood Mackenzie

4

Norway, not Russia, supplies most of UK’s gas

Source: Wood MackenziePipeline thickness representative of historical flows

Gas from Mixed sourceGas from Norway

Gas from Russia

Gas Intersection

Gas from Algeria

Other Pipeline source

5

DECC central case: 15 GW of new gas build by 2025

2010

2013

2016

2019

2022

2025

0

10

20

30

40

50

60

70Total new build

Other renewables

Wind

Nuclear

Coal (ASC + CCS)

Gas CCS

New CCGT

GW

• 40% of UK’s existing generation capacity will shut down over the next 15 years

• DECC central case envisions this will mainly be replaced by wind and CCGTs over the next decade

• New nuclear and CCS plant will start to come online post 2020

Source: DECC, 2010 Energy and Emission Projections, Central Case

6

DECC central case enables meeting carbon targets

2010 2020 2030 -

20

40

60

80

100

120

140

0

50

100

150

200

250

300

350

400

450

500

Pumped storage

CCS

Other re-newables

Wind

Nuclear

Gas

Coal

Carbon in-tensity (g/Kwh)

Ge

ne

rati

on

ca

pa

cit

y (

GW

)

Ca

rbo

n in

ten

sit

y (

g/k

Wh

)

• This power mix meets CCC’s targets for 2020 (300g/KWh) and 2030 (100g/KWh)

• It puts the UK power sector on the right trajectory to fully decarbonise by 2050

• Post 2030 gas with CCS together with other low and zero carbon sources will become part of the mix

Source: Redpoint,DECC, 2010 Energy and Emission Projections, Central Case

7

New gas build ensures security of power supply

20102012

20142016

20182020

0

50

100

150

200

250

300

350

400

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Pumped storage

CCS

Other re-newables

Wind

Nuclear

Gas

Coal

Derated ca-pacity margin

To

tal e

lec

tric

ity

ge

ne

rati

on

(T

Wh

)

Ca

pa

cit

y m

arg

in

• Investment in CCGTs and wind during the next decade ensures the capacity margin remains at comfortable levels (ie. over 20%)

Source: DECC, 2010 Energy and Emission Projections, Central Case

8

New CCGT investment is challenging

20102013

20162019

20222025

20280%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Lo

ad

fa

cto

r

• New CCGTs will have to operate at low and highly uncertain loads

• Under the current market arrangements the likely returns do not appear good

• This is also recognized in Energy Market Assessment and Project Discovery

Source: Redpoint,DECC, 2010 Energy and Emission Projections, Central Case

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CCGTs will need to monetise flexibility value

• Gross margins earned by CCGT plant from wholesale market erode as low carbon generation grows

• Successful projects will realise value beyond wholesale market− Flexibility− Location− Grid services

• Market mechanisms such as capacity payments or long term contracts (from grid) can provide revenue certainty and lower investment risk

20142016

20182020

20222024

20262028

20300

20

40

60

80

100

120

Equity costs

Fixed costs

Wholesale market earnings

£/k

w (

rea

l 20

10

)

Source: Redpoint,DECC, 2010 Energy and Emission Projections, Central Case

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Natural gas: more than a transition fuel

• Natural gas is secure, flexible, available

• Natural gas can help meet renewables targets

• Natural gas can act as an insurance policy

• Natural gas is more than a transition fuel

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Thank you