British Gas set for clash with producers

NORTH SEA gas producers are expecting a fresh onslaught from British Gas over controversial "take-or-pay" contracts in the wake of its planned break-up, announced last week.

The producers, who have British Gas in a contractual stranglehold, see the inclusion of the Morecambe Bay gas fields in its proposed demerged trading company, British Gas Energy, as the last high-profile manoeuvre before serious talks begin.

It was described by some as a looming threat designed to push them to the bargaining table. "It's a ticking timebomb," said one gas economist with a major US-based producer. "The question is how loud will that bomb tick."

Others said they were not worried about British Gas Energy collapsing because they expect its problems to be solved by rising prices. They interpreted the demerger, which will cost British Gas pounds 50m, as a negotiating ploy.

"They've been dragging their feet," said an official from a major oil and gas company. "We think they were waiting for the demerger to send a signal about how far they were willing to go."

Under the Gas Act, British Gas was required to ring-fence revenues from its regulated pipeline business, but the demerger will mean many of its other assets, including international gas developments, will be insulated from the potentially loss-making UK supply market.

Instead, British Gas officials are backing the estimated pounds 1.8bn in potential liabilities from the long-term gas contracts with its Morecambe Bay assets, which it is valuing at pounds 2.6bn. But gas economists with the producers said the book value of Morecambe Bay could be as low as pounds 1.8bn, and warned that it is possible the new company could prove unviable if prices remain weak.

British Gas officials insisted that British Gas Energy will be viable, and vehemently denied that the demerger was a way to palm off its potential liabilities. Chairman Richard Giordano said it was designed to focus each management's attention on the separated businesses' key problems. "We've been like fire-fighters, rushing from one fire to the next," he said.

The company complains that a combination of early deregulation and falling gas prices have put it under severe strain. It is demanding that producers give it a break by slashing their legally binding prices.

But the producers charge that the problems faced by British Gas are largely of its own creation. When competition was introduced into the commercial and industrial gas market, the utility was reluctant to release gas on long-term contracts to its rivals, forcing them to encourage expanded production thus causing today's gas bubble.