WATCHING THE WORLD THE BRITISH GAS CONTROVERSY

With Roger Vielvoye from London Relations between British Gas plc and its regulator, the Office of Gas Supply (Ofgas), have sagged to an all time low in a controversy over the price and supply of gas to the newly emerging U.K. electrical power generation market. The tough stand taken by the director general of gas supply, James McKinnon, over introduction of competition to the U.K. natural gas market made conflict inevitable. British Gas formerly dominated the market from supply through

March 18, 1991

3 min read

Relations between British Gas plc and its regulator, the Office of Gas Supply (Ofgas), have sagged to an all time low in a controversy over the price and supply of gas to the newly emerging U.K. electrical power generation market.

The tough stand taken by the director general of gas supply, James McKinnon, over introduction of competition to the U.K. natural gas market made conflict inevitable. British Gas formerly dominated the market from supply through distribution-even appliance supply and service.

CRUCIAL MOVES

McKinnon forced British Gas to open its nationwide pipeline network to third party customers and was instrumental in publication of tariffs for industrial customers.

Both moves were crucial to formation of independent gas companies that are starting to sign up industrial customers. Those customers include a new breed of power station operators that has sprung up with privatization of the U.K. power generation industry.

But activities of independent marketers are limited by the restricted volumes of gas available. Years of monopoly buying rights in the North Sea ensured that most of the gas available in the short term was in the hands of British Gas.

New fields will be developed off the U.K., of course, but supplies from British Gas still will be needed to keep the power station market fully supplied.

British Gas at first took the view that interest in gas fired power generation would subside. But interest is as high as ever, with more operators looking to British Gas, the country's biggest gas supplier, for fuel.

British Gas said the only way to control this fast rising demand is through price. Last month it told power station operators negotiating for fuel they had a week to sign long term supply contracts before a 35% increase in price went into effect.

Three groups met the deadline, but two that failed appealed to Ofgas, which told British Gas to sign supply contracts at the previous price. A group led by Ranger Oil (U.K.) Ltd. has canceled plans for a gas fired power station at Great Yarmouth.

British Gas is now disputing the regulator's authority to order contracts to be signed, and it appears a legal battle will be needed to establish McKinnon's powers.

NORWEGIAN BENEFICIARIES

The biggest potential beneficiaries of the current conflict are Norwegian gas producers whose share of the British market is rapidly tailing off as Frigg field production declines.

Even in Norway, gas for early delivery is scarce. But reserves and transportation are available to operators or groups of operators prepared to make long term commitments, something British Gas is not anxious to entertain.

It is a situation that will help focus industry attention on talks currently in progress between BP Exploration and Den norske stats oljeselskap AS on the part of their alliance covering joint gas marketing.

BP-Statoil could become an extremely potent force in a market where the principal player has ruled itself out of one of the fastest growing sectors.