Centrica battles to save pounds 150m in taxes

Centrica, the British Gas supply business which starts life as an independent company today, is negotiating with the Government to slash its tax bill in a move that could boost its profits by around pounds 150m a year.

The discussions are part of Centrica's drive to lessen the huge financial burden from its "take-or-pay" contracts with the leading oil companies to buy gas at well above market prices.

The new tax deal revolves around huge sums in petroleum revenue tax levied on gas production in Centrica's vast Morecambe Bay fields, which represent the newly demerged company's main asset.

Under an agreement struck in 1986 with the Oil Taxation Office (OTO), an offshoot of the Inland Revenue, British Gas had to pay tax and royalties on gas it supplied itself from Morecambe based on a price believed to be about 27p a therm. However since 1994 the price of gas has slumped to around 13p.

A senior Centrica source confirmed that negotiations were going on with the OTO. "We are trying to bring prices down in line with those in the market." However the source added that it would be a tough job to find a solution.

The OTO has the right to set the company's notional gas price for tax purposes because the internal contracts to buy gas from Morecambe Bay only involve Centrica itself. The Government aims to prevent the group from setting an unrealistically low internal price to cut its tax liability, a tactic known as "gaming".

The sticking point in the discussions is the difficulty of putting a value on Morecambe's gas, which provides around 7 per cent of the UK's entire supply. The fields are unique in providing for the massive swings in demand during the year seen in the domestic market, where Centrica has an almost total monopoly. It means Morecambe's gas price is likely to be higher than the spot price in the energy markets.

The dilemma explains why Centrica is seeking to offer a stake in Morecambe Bay to either Esso or Shell as a bargaining tool in its take-or-pay negotiations. The two producers are expected to be the next companies to agree to renegotiate some of the contracts.

Simon Flowers, head of utilities at NatWest Securities, suggested a cut in the Morecambe price of 25 per cent would net Centrica pounds 150m a year with a corresponding loss to Treasury coffers. Over the life of the field, until around 2020, he predicted it would save the company about pounds 1bn in current prices.