By Andrew Callus
LONDON, July 26 (Reuters) - International gas and oilproducer BG Group Plc flagged its concerns about theimpact of instability in Egypt as it reported a 3 percent fallin second quarter net profit.
Net profit dropped to $986 million, beating expectations of$963 million.
The UK-based international gas producer depends on Egypt forabout a fifth of its production - a source of revenue for itsexpensive new projects in Brazil and Australia.
Its offshore Egyptian reservoirs are suffering decline, andthe country is gearing up to consume more gas at home,increasing the possibility that BG might have to shut part ofits two Liquefied Natural Gas (LNG) export operation there.
Meanwhile the military coup of July 3 that ousted presidentMohamed Mursi and the fact that BG is owed $1.3 billion by Egyptfor domestic gas sales - up from $1.2 billion in the firstquarter - have heightened the company's anxiety about its futurein the country.
"Events in Egypt remain a primary concern and will continueto be so as the political, social and business environmentevolves," said BG chief executive Chris Finlayson in a resultsstatement on Friday.
"While our offshore operations continue unaffected, higherthan agreed gas volumes were diverted into the Egyptian domesticmarket during the quarter, impacting volumes available for LNGexport," he said.
Analysts focused on BG's stronger than expected result,which was driven by higher than expected production and goodprofit margins in the new barrels coming onstream in Brazil.
BG shares were up 0.13 percent in early trade.
"Look at Iraq, Libya and Venezuela. A government needs thehydrocarbons to flow or it won't be in power for very long",said Oswald Clint of Bernstein, who also pointed out that all ofBG's big new projects were on course.
"Good numbers. I think good reason to be exposed to thecompany, the operational momentum still there and a goodunderlying delivery," agreed Santander analyst Jason Kenney.
BG is working to re-energise flagging production in itsEgyptian fields, but in the second quarter, more gas wasdiverted to Egypt's domestic market, reaching a maximum pipelinecapacity of 900 million cubic feet a day (mmscfd) up from 700million mmscfd in the first quarter, and resulting in reducedsupplies for its LNG export operation.
BG had a deal with the ousted government under whichdomestic offtake will not increase before September 2013, andunder which the government contributes to the shortfall in thefourth quarter via reduced domestic diversions and replacementcargoes.
Five such cargoes of which two are allocated to BG are beingprovided by Qatar for the period July through September.