Producers turn on British Gas

THE battle over Britain's gas bubble blew up at the weekend as critics accused British Gas of exaggerating the problem to bolster its bargaining position.

North Sea producers said British Gas's over-supply problem could lead it to windfall profits within two years - and help it to squeeze new domestic rivals.

Ray Harlow, chairman of Sun Oil Britain, said a pounds 500m, 150-mile interconnector pipeline from Norfolk to Zeebrugge in Belgium - due to be in place in 1998 - would mop up the surplus gas pool and was likely to raise prices enough to give British Gas a healthy return. "The interconnect will be able to handle up to 25 per cent of UK production," he said. "They'll be laughing all the way to the bank."

Demand on the Continent is forecast to increase to 450 billion cubic metres a year by 2010. Contracted supplies to Europe are projected to peak at 350bcm/year in the late 1990s, and the pipeline will have the capacity to add another 20bcm/ year. More competition from Algeria and Siberia is not expected until much later.

The resultant shortage is likely to drive up prices both on the Continent and in Britain. European long-term prices are already well above the 20p/therm average that British Gas pays its producers. Mr Harlow said the only question would be whether the increased price offset the interest British Gas was losing by paying in advance for the gas.

Larger producers agreed that British Gas's demand that they renegotiate its take-or-pay contracts was aimed at cutting costs without reducing the 80 per cent of UK production on which it now sits. That would leave British Gas and its beleagured chief executive, Cedric Brown, in a strong position when the domestic market is deregulated in 1998.

"The one certain way British Gas could substantiate its claims of hardship and premonitions of doom would be to dispose of its surplus gas contracts," said Mr Harlow.