British Gas turns corner on demerger road

Tunisia Acreage [28367 bytes]

British Gas plc has disclosed a number of moves that suggest it has turned a corner in its planned transformation from a monopoly shackled by government into an international oil and gas firm.

During December, the company has released detailed proposals for its planned demerger, agreed to new terms for some of its disputed long term gas contracts, and disclosed new projects in Tunisia and the Philippines.

On Feb. 17, 1997, British Gas intends to split into two companies, one holding its profitable U.K. gas transportation and growing international business, and one holding U.K. gas sales, trading, and retail businesses.

This plan was unveiled in February and greeted as a transparent attempt to create one strong company from British Gas' best assets and ditch expensive long-term gas contracts in a weak company (OGJ, Feb. 12, p. 33).

The detailed plan is essentially unchanged from February, although new formal and trading names do nothing to clarify the picture. Here are the main points:

British Gas plc will be renamed BG plc and hold the lucrative U.K. gas transportation and storage business, plus all exploration and production activities apart from U.K. Morecambe field, along with all international downstream, research and technology, and property activities.
A new company, Centrica, will be created to take over U.K. gas sales and trading and retail business and operatorship of U.K. Morecambe gas field.
Centrica will continue to use the British Gas brand name for U.K. activities, while BG will call itself British Gas for overseas operations.

Meanwhile, British Gas awaits a decision from U.K. government's Monopolies & Merger Commission on proposals by Office of Gas Supply (Ofgas), the U.K. gas industry regulator, to reduce transportation charges (OGJ, Oct. 14, p. 24).

Contracts deal

British Gas' long-term take-or-pay contracts with gas producers were agreed upon before the U.K. government decided to liberalize the U.K. gas market.

With liberalization, a flurry of new gas fields was developed, causing spot gas prices to fall dramatically, leaving British Gas buying gas at high rates.

But when British Gas disclosed its latest demerger plans, it also reported it had renegotiated some of its long term take-or-pay North Sea gas contracts with BP Exploration Operating Co. Ltd.

BP is one of British Gas' main gas suppliers, and the deal will lower the price paid for gas under some long-term contracts. BP has been amenable to discussing lower prices, while other producers have insisted the contracts remain valid.

British Gas is currently taking legal action against Shell U.K. Ltd. and Esso Exploration & Production Ltd. in a bid to escape further long term contracts. Their upstream joint venture, Shell U.K. Exploration & Production, is British Gas' largest gas supplier.

The agreement with BP enables British Gas to reduce its purchase of gas on some contracts the next 5 years and cuts gas prices in other contracts to market levels for the next few years.

To compensate for these concessions, British Gas has agreed to pay BP £293 million ($483 million).

Commenting on the agreements, Roy Gardner, executive director of British Gas, said, "They will relieve some of our take-or-pay obligations and lead to reduced costs as we prepare for market liberalization. These renegotiations bring greater certainty to the U.K. gas market and we will continue to address this problem."

Announcing third quarter financial results at the end of November, British Gas said it had taken an exceptional charge of £294 million ($485 million), to reflect expected losses on gas purchased under its long term take-or-pay contracts.

Following the agreement with British Gas, BP Exploration Chief Executive Rodney Chase said, "We have modified the structure and timing of our contracts, and we are satisfied that this agreement meets our objective of retaining value for BP's shareholders as well as creating extra flexibility for our gas marketing business.

"For British Gas, the revisions provide a better alignment between market access and contractual supplies and between market prices and its contract prices. The new terms provide a more-balanced commercial basis for both companies that reflects current market realities and the value inherent in the original contracts."

Tunisia exploration

British Gas' strategy is to expand overseas business to compensate for enforced loss of revenues in the U.K. gas supply market.

Now British Gas has become the largest foreign holder of Tunisian exploration and production acreage, with the award of the Ulysse concession in the Gulf of Gabes.

The new permit covers 1,912 sq km, bringing total British Gas Tunisian acreage to 6,528 sq km.

It holds a number of onshore and offshore tracts and began production last year from Miskar gas field on the Amilcar block (OGJ, Sept. 4, 1995, p. 31).

Ulysse interests are operator British Gas 50% and state firm Entreprise Tunisienne d'Activites Petroleum (ETAP) 50%.

Although license obligations have not been disclosed, British Gas said the Ulysse permit covers an initial 4 years of exploration, during the first phase of which it will carry ETAP's share.

Philippines project

In the Philippines, First Gas Holdings, a 60-40 joint venture of local conglomerate First Philippine Holdings and British Gas, has let contract to Siemens AG, Munich, to build a power plant.

The £310 million ($510 million) contract calls for construction of a 990-MW, combined-cycle gas turbine plant at Batangas, 100 km south of Manila.

Siemens will also operate the plant once it comes into operation. This is expected early in 1999. Electricity will be supplied to local utility Meralco. The plant will initially be run on condensate provided by Enron Corp.

Meanwhile, British Gas is negotiating gas supply to the plant that would come from Malampaya and Camargo fields off the Philippines, operated by Pilipinas Shell Petroleum Corp. and Occidental Petroleum Corp. (OGJ, Oct. 10, 1994, p. 38). The company said earliest possible gas supply to the plant would be in 2001. It is also studying potential to use liquefied natural gas to fuel the plant. Enron's condensate will be used as a back-up fuel once gas supply is secured.