John L. Kennedy
Editor
British Gas plc, London, is driving to boost the share of its business that comes from outside the U.K.
Non-U.K. activities accounted for about 10% of the company's business last year. By the turn of the century earnings from British Gas's non-U.K. exploration and production activities are expected to be about in line with those from the U.K. core business.
In addition, the company's global gas business unit-acquisitions, sales of British Gas technology worldwide, and power generation from gas-will contribute significantly to overseas earnings.
"The change in business mix will result in part from a forced reduction in our traditional U.K. gas business," Chairman Robert Evans told Oil & Gas journal in an exclusive interview earlier this month.
The U.K. Monopolies and Mergers Commission (MMC) has begun a review that could require British Gas to separate its trading operations from its pipeline operations (OGJ, Aug. 10, p. 18), a move already under way within the company.
But aggressive pursuit of foreign ventures will be just as important in shifting the focus of the company. Current projects in Kazakhstan, Russia, Thailand, and Indonesia promise to make British Gas not only a more international player but a company more heavily involved in oil than ever before.
"We're very light in oil now-about 80% gas, 20% oil," said Evans. "It would be much better if we were 5050. "
The core U.K. gas business currently accounts for 84% of revenues, exploration and production for 9% and the global gas business unit for 7%. Evans predicts rapid growth in both E&P and global gas earnings. The ultimate mix will be influenced by the outcome of the MMC review.
KAZAKHSTAN VENTURE
"Kazakhstan is an enormous venture," said Evans of the proposal to develop, with Italy's Agip SpA, Karachaganak oil, gas, and condensate field in Northwest Kazakhstan. British Gas and Agip expect to invest $6 billion in the project during the next 10 years and $20 billion during the 40 year life of the field.
Reserves are estimated at 2 billion bbl of oil and 20 tcf of gas.
"It's not our only interest in the C.I.S., but we want to succeed in Kazakhstan before moving on to other big projects," Evans told OGJ.
Evans expects to conclude the agreement with Kazakhstan by this time next year.
One of the issues to be settled is transportation of oil and gas from the field. Because a pipeline must transit Russia and Ukraine, negotiating those arrangements will take some time, said Evans. Suggestions that British Gas and Chevron Corp. cooperate on a pipeline through Russia to the Black Sea "make a lot of sense." Chevron plans to further develop Kazakhstan's giant Tengiz oil field on the northeast coast of the Caspian Sea.
Questions also still remain-and legal documentation is required-on Karachaganak production levels, how revenues will be shared, and other issues. But technical appraisals of the field by British Gas and Agip were similar, Evans said. In process now is a due diligence study of wells drilled, what has been done, and what needs to be done.
Although important issues must still be resolved, Evans is confident a satisfactory agreement will be reached with Kazakhstan within a year.
"The will is there on the Kazakh side, and it is certainly there on our side," Evans said. "This is not a question of having a 'rough idea' of what we want to do. It has been a very detailed approach and there is already agreement in principle.
"The Kazakhs have signed on to our ideas about law, taxes, and other business issues."
RUSSIA, THAILAND
In Russia, British Gas has a 25% share in a Gulf Canada Resources Ltd. venture in the Timan-Pechora region to boost production in Vozey and Upper Vozey fields through well workovers and reevaluation of seismic data. The venture has been delivering oil to Germany since the beginning of the year.
Other thrusts outside the U.K. include a $300 million gas fired cogeneration plant to serve petrochemical and refining complexes in Thailand, Negotiations were suspended earlier (OGJ, Aug. 17, Newsletter), but "the difficulties have now been overcome," said Evans.
A contract was awarded in mid-August.
"This project is something of a breakthrough," said Evans. "It shows the potential for private power generators not only in Thailand but in other countries around the Pacific Rim."
"We want to be involved at all levels of the global gas business," said Evans, including exploration, development, transportation, and distribution. "Then we can then take that expertise anywhere in the world."
EUROPEAN GAS
At home, British Gas intends to be "a very big factor in the market." The size and shape of the U.K. and continental European gas market is hard to assess, however. And regulatory change is ahead.
British Gas is ready, says Evans. "We're confident of the market."
But he isn't as certain about the outcome of the MMC review. British Gas is prepared to separate its gas trading from its transportation/storage operations, but "so-called bundled services are highly regarded by many customers," he said.
Evans cited a survey by Ernst & Young that said although gas users support government efforts to increase competition in the market, they are concerned that rapid change will erode the ability to provide efficient service. Other producers still must rely on British Gas for transmission, storage, and distribution.
Although regulatory approaches to transmission and distribution have been widely discussed, the Ernst & Young report said the storage issue has not received the attention it demands.
"There are misconceptions about bundled services. There is value in comprehensive service," said Evans.
"Providing storage, for example, is very expensive. Larger companies are better able to make the capital investment required, and much of the cost can be absorbed when it is 'bundled' with other services."
Open access, said Evans, "is deeper and broader in the U.K. than in the U.S. But in continental Europe, there are no signs at all that open access for natural gas pipelines and the unbundling of services has any support from government or industry."
The power generation segment in the U.K. offers potential, said Evans, but unless some coal plants are retired, there is likely to be a surplus of power generating capacity in the mid-1990s and beyond. Coal plants will require enormous refits to meet U.K. and European Economic Community environmental standards, said Evans, but the written down value of coal-fueled generating plants might still make those investments possible.
"It's not clear what the capacity situation will be." The direction of regulation during the next 6 months and expected coal prices will determine the future of gas in power generation.
British Gas is a major supplier to independent power producers, who are investing in smaller units, said Evans. "But enthusiasm for gas-fired power generation is not as evident as it has been."
Evans is much less optimistic about growth in gas and petroleum product markets than he was 12 months ago.
"The economy is the most important factor. The world recession is even having an impact in the Far East," he said.
Demand growth in the developing world will lag because of recession in industrial nations, Evans said. There won't be any significant upturn in oil prices in the next 5 years. Prices may increase slightly faster than inflation.
Evans agrees there will be pressures to use more gas than oil. Gas can help in the short term to meet environmental standards in Europe.
But he opposes a carbon tax: "It might help gas in the short term, but it would not be in the consumer's best interests because it disguises the real price of competing energy sources."
An end to the recession and new oil supplies from Iraq, Kuwait, and the C.I.S. will determine the shape of markets in the near term.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
