By Ed Crooks

This is not a good time to be in the gas business. Rising supplies from new projects coming on stream have met faltering demand from businesses battered by the global recession, creating a “gas glut”. While the price of oil has risen this year, the price of gas has continued to decline. This year the benchmark gas price has dropped about 40 percent in the US and 51 percent in the UK. Yet BG Group, the exploration and production company spun out of the old British Gas, is coping well under the pressure.

Its first-quarter profits showed a much gentler decline than the falls of about 60 percent reported by BP and Shell. Post-tax profits were down 13 percent at £690m. Even allowing for the favourable effect of the fall in the pound against the dollar, which boosted profits by about 20 percent, that was a significantly better result than for BG’s larger rivals.

In spite of the collapse of gas markets worldwide, BG was able to reassert its guidance that profits from selling liquefied natural gas, which last year hit a record £1.52bn, are expected to be only about 5 per cent lower this year and about 18 percent lower next year.

Frank Chapman, BG’s chief executive, is probably Britain’s most admired — and certainly its best-paid — energy boss. By shifting 80 percent of BG’s LNG production on to contracts, most at fixed prices, he has done his bit to deserve that acclaim.

“It wasn’t really rocket science: it was pretty obvious that there was all this new supply coming on to the market,” he told the FT. Other companies’ huge projects in Qatar, as well as others in Russia, Indonesia and Yemen, are coming on stream after years of construction, adding 30 percent to global LNG production capacity.

Until recently, BG sold up to 80 percent of its LNG on the spot market, taking advantage of that flexibility to go wherever the returns were highest. By signing contracts, many of them for several years’ supply, it has now guaranteed demand and protected its prices for a period when there will be a flood of new gas looking for a home.

That protection has turned out to be particularly valuable in the economic downturn. “It has worked pretty well,” Chapman said. “Now that the downturn has come, the measures that we have taken have provided extra assurance in some tough markets.” With the financial security provided by its LNG contracts, BG feels confident enough to plan a big increase in its capital spending programme, which will rise from £3bn last year to £4bn this year.

All that is at a time when even the largest oil companies are generally sticking with previous plans, and most smaller ones are cutting back. That spending is in part going to two growth prospects. These are Brazil, where BG has positions in the most exciting region for new oil development this decade, and Australia, where it is building a new business extracting gas from coal seams to be converted to LNG.

In Brazil, the first commercial oil was produced from BG’s Tupi field, the first of the country’s new deep-water prospects to be developed. “It is important not to look outside and be scared of the economic environment, but to take advantage of conditions and be prepared for the economic revival that will surely come,” Chapman said. BG has less cause to be scared than most.

Chapman’s total remuneration was about £11m last year, including salary, bonus and £7m worth of shares under a long-term incentive plan. That is almost four times the pay of Tony Hayward, chief executive of BP, who runs a company with more than twice the market capitalisation and which employs 15 times as many people.

Chapman is also paid more than Jeroen van der Veer, chief executive of Royal Dutch Shell, whose remuneration for last year was €10.3m (£9.2m). Few have suggested that he is overpaid. He became chief executive in October 2000, and since then BG’s shares have risen fourfold.