UPDATE 3-BG Group's Q3 profit soars, costs delay key project

* Q3 earnings up 140 pct at 857 mln pounds ($1.36 bln) * Underlying profit ahead of forecasts * Production rises 11 pct

(Adds more detail, background, analysts' comments)

By Tom Bergin

LONDON, Nov 4 (Reuters) - UK gas and oil producer BG Group (BG.L) beat analysts' forecasts with a sharp rise in its third-quarter profit and gave a buoyant outlook, but rising costs have forced it to delay a key project.

BG said on Tuesday net profit rose 140 percent to 857 million pounds ($1.4 billion), underpinned by higher oil and gas prices compared with the same period last year, an 11 percent rise in hydrocarbon production and fat profits from shipping liquefied natural gas (LNG) around the world.

Excluding one-off items, the third-quarter result was 777 million pounds, which compared with an average forecast of 742 million given in a Reuters poll of five analysts.

But BG has postponed a decision on whether to proceed with Phase III of the Karachaganak project in Kazakhstan, which Chief Executive Frank Chapman said aims to lift oil production to 16 million tonnes per annum (tpa) from 11 million tpa.

BG said in July it would decide by its third-quarter results whether it planned to proceed with Phase III.

But the company is now in talks with the Kazakh state oil company KazMunaiGas about the rescheduling and gave no target for startup of Phase III production.

Delays in start-up of the Kashagan oil field prompted the Kazakh government to demand tougher terms from the partners in that project.

This echoes a decision by Royal Dutch Shell Plc (RDSa.L) last week to delay the expansion of an oil sands project in Canada, due to rising costs.

Price inflation for the goods and services used in extracting oil and gas and the recent collapse in crude oil prices from a record above $147/barrel in July to around $63/barrel now is forcing oil companies to rethink many projects around the world.

BG shares were up 2.3 percent at 924.5 pence at 1138 GMT, when the DJ Stoxx European oil and gas sector index .SXEP was up 2.5 percent.

SECTOR-LEADING GROWTH

BG doubled its operating profit outlook for the LNG business, a spokeswoman said and affirmed oil and gas production growth targets of 6-8 percent per annum to 2020.

The company said it expected to report a 60 percent rise in its proved plus probable reserves -- the best estimate of likely recoverable resources -- in 2008, just as most rivals struggle to keep reserves stable.

Reserve additions in 2008 gave it greater confidence it could grow production 6 to 8 percent annually out to 2020, it said.

"The update provides a timely reminder that BG remains a leading growth story in energy," analysts at Morgan Stanley said in a research note.

However, the total return on BG shares has been lower than the average for the oil and gas sector so far this year, BG's broker Cazenove said.

Richard Griffith at Evolution Securities said the statement was aimed at convincing shareholders that BG, a frequent subject of bid rumours, had a bright future as an independent company, after its the weak share performance this year.

BG said production rose 11 percent in the quarter to 587,000 barrels of oil equivalent per day, compared with falling output at most rivals. Shell's production fell 7 percent in the third quarter, while Exxon Mobil's (XOM.N) was down 8 percent. BG also said it was planning a more ambitious LNG facility in Australia to develop coal bed methane interests there.

Following the announcement that it now controls over half the shares of Queensland Gas, with which BG was planning to build an LNG plant, BG said this facility will have a first phase capacity of 7.5 million tpa, rather than 3-4 million tpa. ($1=.6322 pounds) (Editing by David Holmes and Greg Mahlich