British Gas abandons pounds 1bn claim

British Gas suffered a double blow yesterday as it abandoned a pounds 1bn compensation claim against the Government and a top executive in its pipeline business, TransCo, was forced to resign because of ill health. The company said it had dropped its legal action against the Department of Trade and Industry for repayment of Gas Levy because it was satisfied the tax had been applied correctly.

The news came as TransCo announced that its managing director, Harry Moulson, had retired with immediate effect for health reasons. Mr Moulson has played a key role in preparing the business for demerger from British Gas's trading arm. He was also involved in TransCo's decision to take its prices dispute with the industry regulator, Ofgas, to the Monopolies and Mergers Commission.

The climb-down on the Gas Levy claim prompted immediate speculation that British Gas was close to a breakthrough in negotiations with North Sea oil companies over its pounds 40bn take-or-pay contracts. When British Gas issued its writ against the DTI for refund of Gas Levy the DTI immediately counter-sued, issuing "protective writs" against 27 oil and gas companies in case the claim went against it. In response the DTI yesterday also dropped its action.

Several of the oil companies named in the DTI writs had been preparing their own counter-claim against British Gas, arguing that liability in the contracts could be passed back. One of these firms, Lasmo, welcomed the news.

Although British Gas has consistently denied that its legal action was linked to the take-or-pay negotiations, it was widely interpreted as a manoeuvre to put pressure on the oil companies to reach a deal. There is mounting speculation that British Gas Energy, which will inherit the take-or-pay liabilities on demerger, is near to a deal on renegotiating up to a quarter of the contracts.

The deal is likely to involve British Gas auctioning off some of its interest in the Morecambe Bay gas field off the north-west coast. British Gas contracted to buy the gas from North Sea suppliers at prices of around 20p a therm compared with spot prices of under 10p earlier this year.

The take-or-pay problem has been considerably eased in recent months by a strengthening of spot prices to between 14p and 17p depending on the delivery date. The writ related to 24 old supply contracts between British Gas and North Sea oil companies covering eight gas fields on which it claimed it had overpaid Gas Levy, a tax of 4p a therm introduced in 1981.

Comment, page 19

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