British Gas has called for government support to renegotiate long-term contracts with North Sea producers which are forcing the company to buy more gas than it can sell. Cedric Brown, chief executive, also said the "unprecedented" decline in spot prices on commodity markets for gas, compared with contract prices, had helped rivals undercut British Gas and caused an accelerating decline in the company's market share.
Mr Brown said consumers and other companies may have to help shoulder the "pain" borne so far by British Gas shareholders. He said the contracts were largely entered into before British Gas was privatised and the company had to buy enough gas to supply its monopoly market.
Mr Brown also suggested the Government might abolish the levy that British Gas pays for supplies from some older gas fields. He acknowledged that it would not be easy to renegotiate contracts but he said the company had the "sympathy" of Tim Eggar, minister for energy and industry.
Mr Brown was speaking as British Gas announced a decline in profits after tax to pounds 635m in the first half of the year, from pounds 664m a year earlier. The company said the problem of surplus gas and the severe decline in prices would have an even greater impact in the second half of the year.
The interim dividend was held at 6.4p "to reflect the uncertain market conditions". The company also said that full-year earnings were expected to match last year's before exception items were taken into account. Shares fell 8.5p to 265.5p.
By the end of this year, British Gas will have paid cumulatively for almost pounds 700m of gas which it must put under the "take or pay" contract conditions but cannot yet sell. According to one City analyst, the figure could hit pounds 1.3bn by 1998.
Roy Gardner, finance director, said the company would have to take a view as to the value of the excess gas once it was eventually traded and it was likely to have to make a charge of pounds 50m to pounds 100m.
Mr Brown blamed the company's problems on the Government's drive to promote competition in the industrial and commercial gas market. It also faces an earlier than expected challenge because of ministers' plans to open the domestic market in stages from April next year. He said the situation had also forced the company's own exploration and production arm to limit its output, which would constrain its performance.
Government policy towards British Gas since it was privatised in 1986 had led to the current oversupply of gas.Reuse content