Centrica battles to save pounds 150m in taxes
Monday 17 February 1997
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.
- 1 Liam Gallagher brands Kanye West 'utter s**t' during BRIT Awards performance
- 2 Isis burns thousands of books and rare manuscripts from Mosul's libraries
- 3 People who sleep more than eight hours are more likely to have a stroke, research shows
- 4 Kanye West climbs on table at Nando's to crowd chants of 'Yeezus' before Brit Awards 2015 performance of 'All Day'
- 5 New theory could prove how life began and disprove God
Oscars 2015: Birdman beats Boyhood as Eddie Redmayne and Patricia Arquette win big - as it happened
New theory could prove how life began and disprove God
Half of Ukip voters say they are prejudiced against people of other races
'Cash for access' scandal: Sir Malcolm Rifkind says 'unrealistic' for MPs to live on £67,000 salary
Aqsa Mahmood branded a 'disgrace' by her parents after claims she recruited three UK girls flying to Middle East
Russia's roadmap for annexing eastern Ukraine 'leaked from Vladimir Putin's office'
iJobs Money & Business
£17000 - £25000 per annum: Recruitment Genius: An opportunity to join this new...
£18000 - £21000 per annum + OTE £45,000: SThree: SThree Group have been well e...
£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...
£36000 - £44000 per annum: Recruitment Genius: Encouraging more businesses to ...