British Gas plc has taken a dispute over its take or pay gas purchase contracts to court.
At issue is whether it will pay wellhead prices that exceed current market prices in the U.K.
British Gas signed the contracts with producers when it held a monopoly on the U.K. gas market. Now, the market is poised for decontrol and spot prices have slipped below British Gas purchase contract prices.
The company expects to pay 520 million ($780 million) for U.K. gas under purchase contract but not purchased last July-September.
Gas producers believe their sales contracts with British Gas are legally binding and see no reason to change.
Meantime, U.K. Energy Minister Tim Eggar told U.K. gas producers he expects long term supply contracts with British Gas to be renegotiated in the runup to market liberalization next year.
Court case
British Gas last month issued an originality summons, a form of writ, against Shell U.K. Ltd. and Esso Exploration & Production U.K. Ltd., its main gas suppliers.
Under the summons, British Gas challenged Shells and Essos interpretation of notification procedures detailed in its gas purchase contracts covering Strathspey and Brent fields.
Strathspey, a comparatively small field, produces about 50 MMcfd. However, Brent gas flow is about 450 MMcfd and expected to increase as the field undergoes a redevelopment program (OGJ, Apr. 12, 1993, p. 28).
Shell declined to comment on how gas contract renegotiation could affect economics of Brent redevelopment while the court case is pending.
Smith Rea Energy Analysts Ltd., Canterbury, U.K., foresees a confrontation between British Gas and its suppliers, with government standing on the sidelines.
Smith Rea compared the current situation in the U.K. with the U.S. gas market of 1983-86, when a mixture of contract defaults, court actions, out of court settlements, and official interventions saw the take or pay contract give way to the spot market as the arbiter of the natural gas business.
Governments stance
Eggar told an Association of British Independent Exploration Companies (Brindex) meeting last month the issue is not whether take or pay contracts are renegotiated but when.
It must be in everybodys interests that discussions and negotiations among the involved parties are open and realistic, Eggar said. At the moment I get the impression there is a fair amount of posturing and not enough detailed discussion. There is rumor, suspicion, and even the occasional outrageous claim about the governments position.
Eggar then admitted government has neither the power nor the desire to impose a solution. He said, We believe strongly that sensible commercial renegotiation among the interested parties will result in a far better outcome for all.
British Gas cost
Announcing third quarter financial results, British Gas complained of obligations under its take or pay purchase contracts.
In the 9 months to the end of September, the company booked a pretax profit of 422 million ($654 million), compared with 578 million ($896 million) in the same period last year. This years figure includes an 83 million ($129 million) writeoff to cover the difference between what British Gas is paying for gas under its long term contracts and the current spot price for gas.
British Gas is increasingly concerned with a surplus of gas on the U.K. market. The surplus stems from a rash of field development projects designed to provide gas to independent marketers before full decontrol goes into effect (OGJ, Nov. 20, p. 37).
Richard Giordano, British Gas chairman, said, Restructuring of the U.K. gas business continues well ahead of schedule, and nongas costs have continued to fall. We expect to achieve savings of more than 200 million ($310 million) for the year compared with 1994.
Nearly 7,500 people have voluntarily left the company so far this year, bringing the total to over 18,600 out of the planned reduction of 25,000. On this basis, we shall be able to meet our manpower reduction target by the middle of 1996 (OGJ, Sept. 4, p. 31).
Decontrol delayed
Giordano reported the British government has delayed by 3 months the start of operation of the domestic gas grid under a code allowing transport of independent suppliers gas volumes.
Department of Trade & Industry has put back the appointed day to Feb. 1, 1996, Giordano said, due to the delay in finalizing legislation. This casts doubt on the possibility of an Apr. 1, 1996, start date for competition.
Giordano called for government help in persuading current suppliers of gas to British Gas to renegotiate take or pay contracts. He said take or pay provisions are not appropriate after Feb. 1, when the company will still have purchase obligations but no resale obligations.
Government has taken decisions to change the structure of the market, Giordano said. It is appropriate that they support the need for renegotiation, and we expect them to do everything in their power to ensure that contracts are renegotiated.
We have begun discussions with producers aimed at balancing our future purchases with expected sales at prevailing prices. n
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