Watching the World The unequal split of British Gas

With David Knott from London Facing competition in U.K. gas markets, restrictions by government regulations, and massive gas contract debts, British Gas plc will split into two companies. The former U.K. gas supply monopoly, privatized in stages beginning in 1986, will split into a large company, to be known as Transco International plc, and a smaller unit, British Gas Energy plc. Chairman Richard Giordano said, "This demerger is about the creation of two separate companies that will manage our

Feb. 12, 1996

3 min read

With David Knott
from London

Facing competition in U.K. gas markets, restrictions by government regulations, and massive gas contract debts, British Gas plc will split into two companies.

The former U.K. gas supply monopoly, privatized in stages beginning in 1986, will split into a large company, to be known as Transco International plc, and a smaller unit, British Gas Energy plc.

Chairman Richard Giordano said, "This demerger is about the creation of two separate companies that will manage our business more effectively to the advantage of our customers, shareholders, and employees."

But some pundits say the move is designed to protect the company's profitable businesses from losses in long term take or pay gas purchase contracts.

Ahead of gas market deregulation, U.K. operators developed gas fields to support their plans to supply gas directly to end users. Trading in gas began among companies. And with the glut of new gas the spot price fell.

Assets shareout

Because of the low spot price, British Gas is said to face losses of 1.5 billion ($2.25 billion) on long standing contracts worth a combined 40 billion ($60 billion).

The new Transco unit will get the biggest asset, British Gas' transportation and storage business, along with most of the exploration and production assets and the potentially lucrative power generation business and international operations.

British Gas Energy will be a comparative runt, given only the parent's supply and trading business. This is where it faces intense competition from new suppliers and big losses on gas purchase contracts.

British Gas Energy also will get U.K. Morecambe Bay producing gas fields, which a spokesman said would allow it to compete with independents in liberalized markets.

Two fields with original reserves amounting to 6.6 tcf of gas, one of which has been on stream since 1985 and one since 1994, does not seem a great deal with which to take on fierce competition-particularly when British Gas estimated its reserves in 1994 at almost 2 billion bbl of oil equivalent.

Public outcry

British Gas said the smaller company will receive no exploration assets or expertise in the transfer. So it will face an immediate problem in replacing reserves to remain competitive.

Transco is to be like a utility with steady returns, while British Gas Energy will be more like a consumer company with ups and downs in income. And everybody knows how quickly a consumer business can die.

The breakup has been overshadowed in the British press by the news that Cedric Brown, British Gas chief executive, is to retire Apr. 30.

Following a furor over Brown's 75% pay hike in December 1994, Britons are now incensed by reports that he will get a 4 million ($6 million) retirement package and will be retained as a consultant for the demerger.

Government's original idea in privatizing British Gas was supposed to be to make a cumbersome giant efficient and profitable. This latest mess is a warning against following political dogma to the detriment of practical considerations of gas supply.