Maturity of the U.K. gas market and its opening to competition have narrowed prospects for growth at home for British Gas plc.
Privatization of the former state monopoly in 1986 gave British Gas freedom to take part in developments overseas in return for its loss of control of the U.K. market.
At a presentation to analysts in London, the company detailed a strategy that reflects its new situation. British Gas' current program of drastic cutbacks at home are to be more than offset by growth abroad.
Long term, British Gas intends to raise production to about 150 million bbl of oil equivalent (BOE)/year. This is almost double last year's total of a little more than 80 million BOE.
Growth in the short and medium term is expected particularly from exploration and development. Returns on U.K. E&D during the past few years will help fund projects at home and abroad. Most of the 3 billion ($4.5 billion) it has spent on field developments and acquisitions since 1987 has been in the U.K.
Return on net assets is expected to double during the next few years. So British Gas expects an increase in earnings and net cash flow.
OVERSEAS STRATEGY
British Gas plans to replace U.K. reserves as it builds its overseas portfolio. Chairman Richard Giordano explained the thinking behind the strategy:
"The U.K. is one of the most intensively gas based economies in the world. Hence the outlook for further growth in gas demand here is modest.
"Penetration of gas as the fuel of choice in most parts of the world is still modest. This is particularly true in newly developed countries engaged in rapid industrialization, where rates of growth in gross domestic product are two or three times greater than in Organization for Economic Cooperation and Development countries.
"There are significant reserves of gas discovered but not developed throughout the world. Many developing countries are finding they are now within reasonable access of abundant supplies of gas.
"These developing countries are also (electrical) power hungry. Demand for power generation projects has helped revitalize the gas market and will continue to do so.
"Power generation projects present immediate, enormous demand for ,gas. They transform the economics of transmission and provide base load and economies of scale that provide low cost gas for further distribution into industrial, commercial, and domestic markets."
Increasingly, however, British Gas will focus on building a reserves base where it can also build a downstream business.
The company has three main requirements for overseas downstream gas projects. Such projects must:
- Serve growing markets where gas is a competitive, economic fuel.
- Tie in with British Gas upstream projects where possible.
- Allow British Gas to apply technical, managerial, and commercial skills developed in the U.K. and current international projects.
SPENDING
British Gas expects the strategy to lead to an increased share of its capital being spent overseas. About 4% of the company's capital is now employed overseas. This is expected to reach 10% by 1999.
Finance Director Philip Rogerson said British Gas expects to spend more than 10 billion ($15 billion) on developments and replacement work during the next 5 years.
U.K. transportation is expected to claim 35-40% of total spending, U.K. exploration and production 25%, and international operations 25-30%.
The company intends to focus overseas operations in South America, Southeast Asia, Europe, Egypt, Pakistan, Trinidad, Tunisia, and U.S. unregulated markets. Russell Herbert, British Gas executive director, said proposed projects include:
- A pipeline to ship gas from Southeast Bolivia to Sao Paulo, Brazil.
- A pipeline to take gas from Argentina's Neuquen Basin to Santiago, Chile.
- Supply of gas to Buenos Aires and electricity generation at the city's Dock Sud power station.
- Development of Gulf of Thailand gas fields and enhancement of the Thai gas grid.
- Involvement in development of offshore gas fields and a proposed liquefied natural gas plant in Trinidad.
- Construction of pipelines in Tunisia from Sfax north to Sousse and south to Gabes to carry gas from Miskar field developed by British Gas.
"The risks of pursuing opportunities among developing nations will be higher than incremental exploitation of slower growing, highly regulated markets such as the U.K. and U.S.," Giordano said.
"However, so will be the rewards if we are successful. Our risks will be reduced by the contribution of international finance to large infrastructure developments in developing nations. Our risks will also be reduced by contributions of local partners."
Giordano said the new strategy required a change in attitude by British Gas. The company will focus on its strategy, he said, and not fight dogged battles with U.K. regulators over market liberalization.
"We will be more dynamic and commercially astute. However, we will recognize our limitations, both financial and managerial, and not overstep those limitations."
British Gas operating cash flow was 3 billion ($4.5 billion) last year. Capital and replacement outlay of 2 billion ($3 billion) was financed partly by cash surplus plus U.K. divestments amounting to 300 million ($450 million).
Rogerson expects free cash flow to be 2 billion ($3 billion) in 1994, with restructuring costs higher than last year. Borrowings have been reduced by 1.8 billion through divestments.
Meanwhile, British Gas is being restructured into five business groups. From August 1993, when the company had 65,500 employees, it expects to have slimmed to 40,500 by the end of 1998 (OGJ, Dec. 27, 1993, p. 28).
