BRITISH GAS PLANS GLOBAL GAS UNIT EXPANSION

Roger Vielvoye
International Editor

Developing a global gas business is the second strand in British Gas plc's strategy for evolving from a state owned U.K. gas company into a privatized worldwide oil and gas giant.

By 2000, BG's global gas business is expected to provide 20% of its revenues, compared with 40% each from its exploration and production operations and its U.K, gas business (OGJ, May 6, p. 27).

The global gas unit (GGU) plans to meet its targets mainly through acquiring holdings in gas transmission and distribution companies around the world.

In the 12 months since GGU was established, it has made two such major acquisitions in this area. BG acquired Consumers Gas Co. Ltd., Ontario, Canada's biggest natural gas distribution company, for $943.5 million. It also took a 10% stake in Catalana de Gas SA, Barcelona, the largest privately owned gas utility in Spain and in terms of number of customers, the fourth largest in western Europe.

BG also is targeting additional revenues from developing gas fired cogeneration systems in developing countries with gas reserves but no established transmission and distribution systems.

Other revenue sources will be sale of expertise and technology developed from the 80 million ($133.6 million)/year BG spends on research and development and its On Line Inspection Center's (OLIC) international high pressure pipeline inspection business that uses intelligent pigs.

WIDENING BASE

George Langshaw, GGU managing director, said the basic reason for establishing the unit was to widen BG's base from its narrow domestic market position.

Langshaw sees future acquisitions more along the lines of the 10% stake in Catalana than the 100% control of Consumers Gas, which he described as an almost unique investment opportunity.

In the early years of its expansion, GGU will pursue investments in established companies as well as some grassroots developments.

The targets will be companies with an ample supply of gas and opportunities for expanding markets. It will also look for companies whose technology lags that of British Gas.

"We are looking to add value to a company with our experience and technology," Langshaw said.

If the strategy is successful, GGU will acquire small to medium sized stakes in a lot of companies.

In the case of distribution companies, Langshaw does not expect the BG holding to be more than 50%, because it does not necessarily want control.

"But there has to be a certain size where it is worthwhile to invest. It is probably going to be about 25%. You can then influence the company. You don't control it, but you help direct the way things are done, and you have a large enough stake to make the returns worthwhile."

Langshaw said GGU would take a conservative, careful approach to acquisitions, pointing out that when building a multinational company from the ground up there is no room for mistakes in the early years.

North America is the only place in the world where a controlling interest in distribution activities could be bought. Langshaw said BG would be interested in a Consumers style acquisition in the U.S.

"At this moment the regulatory legislation is fairly difficult to live with. Even outside the utility operation in the states, there is a sort of catchall legislation, almost like a poison pill."

In the U.S. transmission business, Langshaw said, BG might be interested in a pipeline company because "we have plenty of experience in running the world's best pipeline system."

"But until the regulatory changes are through, it is unlikely we shall look at anything."

E&P, TECHNOLOGY, POWER LINKS

GGU works closely with the E&P division in four core areas of the world with each unit looking for opportunities to operate together.

"Having discovered gas, GGU can help a country take the gas to market and build that market. Having a sister company out finding the gas is a big advantage," he said.

Global gas is also looking to offer technology as a hook to catch investment opportunities in the transmission and distribution businesses.

BG engineers are running conversion and expansion of the gas distribution system in Turkey, and it recently had a small team in eastern Germany demonstrating BG techniques for fitting plastic liners to existing gas pipeline systems.

Langshaw says that companies that come to know BG through its technology are more likely to look favorably on the company when opportunities for equity investment appear. In addition, BG has been in the technology transfer business for many years, but since privatization it has been conducted on a more commercial basis.

OLIC has stepped up its operations with intelligent pigs and is working on pipeline inspections in eight or nine countries at any one time.

Langshaw also sees gas fired cogeneration plants playing a major role in the development of gas reserves in developing countries.

The division also is responsible for BG ventures in power generation in the U.K., which Langshaw says will provide experience for international operations.

Electric power generation will be one of the primary uses of gas in any developing economy. A country such as Thailand is surrounded by gas producing areas and generating electricity provides the easiest and quickest way of putting gas into the economy.

GERMAN VENTURE

Closer to its British base, GGU is investigating opportunities in eastern Germany and the rest of eastern Europe.

The company has been offered a 5% stake in Verbundnetzgas (VNG), the former East Germany transmission company, and is negotiating to take a stake in the distribution companies that serve Berlin and Leipzig.

Six European companies have each been offered a 5% stake in VNG in addition to larger holdings for German companies. Each of the companies offered a 5% stake will get a seat on the board.

Langshaw said BG is going through terms and contract provisions but would almost certainly accept the offer.

Langshaw said some of the biggest names in the European gas industry coming together on the VNG board should help get the former East German gas transmission business quickly up to generally accepted European standards.

The old East German network presents problems to modern gas operators, because there are three sources of gas each transported and distributed in a different network: high quality Soviet imports, poor quality gas from local fields, and town gas, which is produced from locally mined lignite and is a major source of environmental pollution.

The new eastern Germany distribution utilities will be a combination of German and foreign companies and the municipalities they serve.

Langshaw said BG was one of the few foreign companies interested in the local distribution business and would almost certainly be invited to take an equity shareholding.

CANADIAN ACQUISITION

Although BG currently is sole owner of Consumers Gas, terms of an agreement under which it was allowed to make the purchase require a 15% public stake in the company be restored before September 1992. Before the BG buyout, 17% of the shares were in public hands.

As the new owner, BG is unlikely to make significant changes. Langshaw said it was a good company with a good reputation and good engineers. The Consumers Gas network covers 1.1 million customers in southern Ontario, western Quebec, and northern New York state.

BG might be able to help with aspects of refurbishing and replacing the distribution network and might offer some input into marketing.

But it will not be one way traffic. BG is interested in advances made by Consumers in compressed natural gas for vehicles, a market barely touched in the UK and is also impressed with the Canadian company's experience with common carriage.

About half the gas passing through the Consumers network is carried for third parties, providing the company with experience that BG might be able to use in the U. K.

DOMESTIC SUBSIDIES

One of the problems facing any company wanting to develop a global gas business is the extent of government control and subsidy in domestic gas markets.

Langshaw said that in the long term, governments must end subsidies. A market left to free market forces is the only universal model that works, although distorted markets can be made to work temporarily, he added.

GGU is also able to make use of the privatization process it went through when the U.K. government sold its 100% holding to the public.

Eastern Europe has some good gas industries that are now candidates for sale to the public, Langshaw noted. He said BG, the U.K. Department of Energy, and U.K. gas regulatory body Office of Gas Supply, are now giving advice on how to sell off a publicly owned gas network.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.