U.K. SHOWS PROGRESS IN MOVING TOWARD PRIVATE GAS INDUSTRY

Roger Vielvoye
International Editor

Transformation of Britain's gas utility industry from a state controlled monopoly to a competitive business has reached a crucial stage.

A new structure for the industry has evolved since state owned British Gas Corp. was sold into the private sector in 1986 and the government set up a regulatory office to encourage competition in the industrial market.

Under surveillance of this regulatory authority, Ofgas, the state company's successor, British Gas pic, is shedding its inherited resistance to gas-to-gas competition in the marketplace.

This competition comes from new, direct sales organizations that have sprung up to market offshore gas reserves, initially made available by a government ruling that only 90% of U.K. field reserves can be sold to British Gas. The remaining volume, under the so-called 90:10 rule, may be sold independently.

The new independent gas companies can bid for business only with industrial and commercial users of more than 25,000 therms (2.5 billion BTU)/year. Such customers make up about 25-30% of the market for British Gas, which remains the sole supplier to the residential sector.

The link between the new gas companies and potential customers in the industrial markets is also in place. The nationwide British Gas transmission and distribution network is now open to third party customers at reasonable tariffs.

In addition, the first privately owned transmission lines outside the control of British Gas are in advanced planning stages.

ELECTRICAL POWER MARKET

The key element in the future of the U.K. gas industry is completion of the sale of the state's electrical power assets to the private sector.

The breakup of Britain's power generation and distribution monopolies was accompanied by a move toward building gas fired cogeneration capacity by the new companies that will operate in the privatized industry.

Outline contracts for first gas supplies have been signed with power companies, but the new gas supply companies and the offshore suppliers now need to know how many of the long list of proposed gas fired cogeneration projects will become reality.

British Gas concedes that if all contracts between new suppliers and their customers currently under negotiation are confirmed, about 40% of the gas committed for sale since June 1989 would go to buyers other than British Gas.

Key to the development of the independent market will be gas supplies. Currently all the short term marketing efforts by direct supply companies are constrained by shortage of supplies because existing U.K. offshore gas fields are subject to contracts with British Gas that cover total reserves in most cases.

Quadrant Gas, a joint venture by Shell U.K. Ltd. and Esso U.K. plc, is the only organization that has been able to start sales to industrial customers. It's selling small volumes of associated gas from Clyde field in the North Sea.

BP Gas Marketing Ltd. will begin selling to industrial customers in the fourth quarter of this year when Welland gas field goes on stream in the southern basin of the North Sea. This will be the first producing field in which 90% of reserves were sold to British Gas and the remaining 10% left for independent marketing.

More independent marketing gas will become available during 1991 and 1992. And the non-British Gas market will begin to gather momentum in 1993 when production facilities built with the new onshore market in mind go on stream, and the first contracts to supply the cogeneration plants are activated.

John Yurkanin, manager of direct gas sales at BP Exploration's European gas unit, reckons that in the second half of this decade 20-30% of the U.K. industrial market could be in the hands of non-British Gas suppliers.

THE IMPORTS ISSUE

One area of doubt that remains for direct marketing companies and U.K. offshore producers is the future attitude of British Gas toward imports and the effect this could have on the U.K. market.

British Gas, while subject to competition in the industrial market, will continue to dominate the total U.K. business. And starting in 1994-95 the company will need to acquire substantial new gas supplies to supplement today's contracts.

If British Gas continues to acquire most of its new supplies from U.K. waters, the 90:10 rule will ensure there is enough gas available to keep independent suppliers in business.

However, British Gas believes, as a private sector company free from direct government control, it has the right to seek the lowest prices for new supplies to ensure the best deal for its customers.

That could take the company outside the U.K. in search of new supplies.

Norway, facing a phaseout of its Frigg field gas sales contract with the U.K., is anxious to retain a foothold in the British market and keep gas moving through the Frigg pipeline. But there is also the possibility of acquiring supplies from the Soviet Union. Norway and the Soviet Union could provide British Gas with a base load supply of relatively large volumes of gas for longer periods that smaller fields in the U.K. North Sea would find difficult to match.

Britain's Department of Energy would be unhappy to see offshore gas development schedules disrupted by significant imports from any source. At this stage, however, British Gas has made no concrete proposals for imports and DOE has made no official announcement on import policy.

Some operators believe attempts to import gas would constitute abuse of market dominance and provide grounds for action by either the government or Ofgas.

NEW ATTITUDES

British Gas is rapidly coming to terms with the fact that its market domination, built in its days as a state owned monopoly, does not give it the right to block the move toward a more competitive marketplace.

The key to competition has been winning access to the country-wide gas transmission network built and operated by British Gas.

At first there were fears that British Gas would stifle competition with tariffs that discouraged use of the system. But with the assistance of Ofgas, pioneers have pried open the national network.

British Gas has accepted the situation and is promoting its pipeline network among potential customers.

In February, British Gas announced that to enable "genuine" customers to assess marketing opportunities, maps will be made available for each region of the national transmission system and, if required, for regional transmission systems.

British Gas said it was anxious to make information about its system available to bona fide companies seriously considering third party carriage. Those arrangements, it said, should make the data available quickly and conveniently.

British Gas followed this action by announcing cuts of 20-40% in its tariffs in a detailed table of charges that covers a range of load factors.

The company said since its gas transportation unit was set up in March 1989 it had handled more than 4,000 requests for transportation charges from coastal reception terminals to more than 2,000 sites.

In some areas the British Gas network is heavily loaded. To carry more volume the system would require reinforcement. British Gas would have the right to make a charge against the customer, although in the current climate it might be unlikely this would happen. The most serious problem would be delay while the work was carried out.

Direct sale gas companies, however, are keen to use the British Gas system because it would give them access to most parts of the country where large industrial consumers are located. Under the terms of legislation covering common carriage, British Gas is obliged to maintain the supply to customers in the event of an interruption in supply from direct sale companies.

CONTRACT TERMS

Introduction of the 90:10 rule on gas reserves has forced British Gas to reappraise its purchase contract strategy.

In its monopoly days British Gas bought the entire reserves of a field but now concedes that in the new competitive industry this is no longer appropriate.

The company is prepared to sign contracts for specific volumes of gas during a stated period of years supplied from one or more sources or to buy the residual gas from a reservoir from which a substantial sale has been made to another customer.

Also on offer will be contracts suitable for delivery of winter peak supplies, following the contracts for peak supplies from Shell-Esso's Sean fields and success of its own Morecambe Bay field which operates only during the winter.

Finally, British Gas is prepared to produce standard contracts suitable for spot purchases. In addition, it is speeding its process for contracting and simplifying and standardizing contract terms where possible.

ELECTRICAL POWER MARKET

Breakup of state monopolies in the U.K. power generation industry has created two private sector companies in England and Wales, National Power and PowerGen, which have taken over the assets of the former Central Electricity Generating Board.

The free market also allows new companies to enter the power generating field and sell power through a separate company running the national transmission grid to regional distribution companies, which can become involved in generation.

Privatization of electricity has coincided with the need to replace some older coal and oil fired generating capacity and with environmental pressures to clean up discharges from coal fired power stations that still provide the bulk of Britain's electricity.

The new industry has turned to cogeneration. Fifteen power station projects have been proposed to operate in the new private sector generating business. With a combined capacity of 7 million kw, all but one of them is to be gas fired.

Three have completed all the regulatory stages and are ready to proceed. Another seven have DOE approval to burn gas, the first stage in acquiring the required permits.

Many of the new power generators want new gas fired capacity on stream in 1993-94 but gas supply will play a major part in ensuring there is an orderly buildup in this sector of the market.

U.K. use of gas for power generation, very small at present, will start to accelerate in 1993. By the turn of the century about 1.7 bcfd of gas could be sold to power stations.

Rapid penetration of the power market will be largely instrumental in boosting total U.K. gas demand from about 5.3 bcfd this year to 7 bcfd by the turn of the century.

Ian Wybrew-Bond, head of Shell U.K. Exploration & Production's natural gas division, said new power station operators will seek supply profiles and conditions that are different from the ones offshore producers have become accustomed to in sales to British Gas.

The market for electrical power from the private sector was created just last April, and there is considerable uncertainty about the price level when new power stations go On stream in 1992-93. That causes uncertainty among gas producers.

"All this means a more exciting world for those involved in supplying gas," Wybrew-Bond said. "Increased uncertainties mean higher risks for producers, which in view of the investment involved must lead to higher rewards if new projects are to be developed."

Most of the relatively large U.K. offshore fields have been found and developed, he said, and the trend is toward smaller, more complex fields, which are more expensive to develop.

"And there can be no certainty there will not be further legislative changes to reinforce the government's wish to increase competition."

DEDICATED FIELDS

One of the best indicators of operator confidence in the long term future of the U.K. gas market came from a group led by Amoco U.K. Exploration. It plans to spend about l billion ($1.68 billion) to develop two offshore gas fields and lay a pipeline to Northeast England to service a long term contract to supply gas to a large cogeneration project.

Amoco has signed an outline agreement with Enron Corp. and ICI to supply gas for the cogeneration plant to be built on ICI's Wilton petrochemical complex site at Teesside.

Gas for the power station will be supplied by the Amoco group from Everest and Lomond gas fields in the southern part of the Central North Sea. Amoco has applied for development approval for the two fields and plans a fast track project to move first gas ashore in October 1993. The two fields will be linked by a 36 in., 240 mile pipeline to a reception terminal at Teesside.

The project includes a riser platform in U.K. North Sea Block 22/9 near the Everest platform, which will allow other fields in the area to move gas through the pipeline to be known as Central Area Transmission System (CATS).

Initially, Amoco envisaged transporting 1.5 tcf of reserves from the two fields through CATS to a Scottish landfall. But the longer off-shore route was chosen to meet the demands of the Enron-ICI project, which are expected to average about 300 MMcfd when the unit is fully operational.

The power station will have a capacity of 1.725 million kw. ICI expects to take about 340,000 kw of power and the steam from the generating plant.

Although Lomond and Everest are sweet gas fields, the CATS line is being designed to carry sizable reserves of sour gas.

ARCO British Ltd. has also agreed in principle to sell the entire output of its 85 bcf Pickerill field in the southern basin of the North Sea to PowerGen to fuel a 900,000 kw cogeneration unit at Killingholme on the east coast of England.

The field, only 40 miles offshore, will be developed with two platforms linked by a dedicated pipeline to Conoco (U.K.) Ltd.'s existing reception terminal at Theddlethorpe, Lincolnshire. At peak rate Pickerill will produce 210 MMcfd.

Onshore, Pickerill gas will be transported by a pipeline venture put together by Conoco in partnership with PowerGen. The new company, Kinetica Ltd., will lay and operate a 31 mile pipeline to transport gas from Conoco's Theddlethorpe terminal to a new 1.02 million kw cogeneration plant planned by PowerGen at Killingholme,

The new competitive situation presents a new opportunity for offshore group.

In this situation, Total Oil Marine and Conoco have failed to agree on development and sales plans for Caister field in Block 44/23a in the southern basin.

Total and two partners in the development, Canadian Oxy North Sea Petroleum Ltd. and Ultramar Exploration Ltd., sold their 89% share of Caister gas to National Power to supply a 600,000 kw cogeneration plant at Killingholme, which is due on stream in fall 1993.

Based on this agreement, Caister would be developed as a stand-alone field with a 100 mile pipeline to the east coast of England. Conoco wants Caister developed in conjunction with its Murdoch area prospects, where gas has been found recently.

One of the first and most innovative projects to emerge from the new gas market is Ranger Oil (U.K.) Ltd.'s plan to develop the marginal Anglia gas field in the southern basin.

The project includes development of offshore reserves, offshore transportation, and redevelopment of a power station at South Denes, Great Yarmouth, as a 35,000-450,000 kw cogeneration plant.

The offshore partners have taken PowerGen into the group to develop the power station and are seeking bids for the generating equipment ahead of final agreements, expected shortly, that will bring the project to fruition.

QUADRANT SALES

Quadrant said the key to early start-up of its independent gas sales was signing of an agreement that gives it access to the British Gas transmission system.

Fra Cooke, Quadrant's managing director, said the company started sales to customers in Scotland shortly after signing the agreement with British Gas in February. Ten to 15 customers have signed up, and by July the number should rise to 18.

All the customers are in Scotland and northern England because gas available from Shell-Esso comes ashore at St. Fergus, Scotland, and moves south through the trunk transmission system.

Later, as supplies become available from the southern North Sea, Quadrant expects to supply consumers in the Midlands and southern England.

The process of selling gas outside the British Gas network is well under way. But sales are limited by the volume of gas that is available.

Cooke says industrial customers have been anxious to take advantage of competition offered by newcomers.

He added that Ofgas stood in the background as a referee during negotiations between Quadrant and British Gas on common carriage terms for the pipeline system. The referee was not needed.

BRUCE SALES

BP Gas Marketing made the first gas sale under the 90:1 0 rule. It sold the smaller share of 2.6 tcf of gas reserves from Bruce field to one of the new breed of generating companies, Corby Power, a joint venture between East Midlands Electricity and Hawker Siddeley that plans to start up a 350,000 kw cogeneration plant in October 1993.

BP gas sold the supplies on behalf of six companies involved in Bruce field. The gas will move to Corby through the British Gas system under a common carriage agreement.

BP, the U.K.'s biggest gas supplier, meets about 12% of the country's requirements from its interests in 15 fields on production, six of which are BP operations. It is developing other fields.

BP's independent deliveries of gas will begin in the fourth quarter of this year from Welland field in the southern North Sea. Ten or 12 customers will receive Welland gas through the British Gas network.

Yurkanin said BP has a number of projects under consideration that would provide more gas beginning in 1993. But it also plans to borrow gas from BP affiliates that have access to supplies from the company's offshore operations. The volumes are to be repaid when new fields go on stream.

Margins in the industrial market are attractive, Yurkanin said, but probably will decline as more competition emerges.

He expects this competition to come mainly from large players in the offshore gas business. Because there are relatively few companies with gas available in the North Sea, smaller independents will find it difficult to carve a niche in the market.

At the moment, the novelty of competition has brought potential customers to the door of sales companies. The short term shortage of gas has, he said, meant that non-British Gas suppliers have not met head to head.