Financial data available for the first time show the gas transportation business of British Gas plc is much more profitable than similar operations in other large gas companies worldwide.
But the company is not making enough money to cut its transportation costs to customers-as required by U.K. regulator Office of Gas Supply (Ofgas)-without dramatically affecting its financial performance.
Sheffield Energy & Resources Information Services (Seris), Sheffield, U.K., said it has for the first time been able to isolate financial data for the transportation functions of a group of international companies.
Seris compared the results of British Gas Transco with those of 13 other similar gas companies from Australia, U.S., Canada, and Argentina.
Transco was found to have an operating profit of 80¢/Mcf of throughput, while its nearest rival returned just less than 50¢/Mcf.
Ian Rutledge and Philip Wright, directors of Seris, concluded that Transco's return on assets was 16.1% in 1995, while the average for the comparable group was 10.7%.
Tough target
Rutledge and Wright said that if Transco's rate of return was reduced by regulatory action to the average for the other companies, this would allow a 13% reduction in U.K. gas transportation charges.
But Ofgas has set a tougher target. British Gas has rejected proposals by Ofgas to cut the company's transportation charges by 20% in 1997 and 2.5%/year the subsequent 5 years (OGJ, Oct. 14, 1996, p. 24).
The company referred the issue to government's Monopolies and Mergers Commission, which has until Apr. 13, 1997, to decide by what amount transportation charges will be lowered.
British Gas Chairman Richard Giordano said, "Ofgas' proposals would not have allowed British Gas sufficient resources to sustain the quality and integrity of the pipeline network and meet the company's statutory obligations.
"The proposals would have meant a reduction in average annual cash flows, after tax but before interest dividends, of £400 million ($640 million) or more over the formula period."
Assets difference
Seris highlighted a major difference between British Gas and the other companies: "Transco's assets are made up not only of long-distance, high-pressure pipelines but also of a massive network of distribution and service lines, thereby significantly increasing its capital."
Wright said one way out of the problem for TransCo could lie in drawing a new distinction between transportation and distribution pipelines. These are more arbitrarily divided in U.K. than in the U.S.
By removing gas distribution and service lines from its portfolio, said Wright, Transco might still be able to match the other companies' return on assets in the future, despite the enforced reduction in transportation charges.
But Wright said some analysts see takeover and breakup of British Gas as a more likely option: "Once a large company is dismembered, the bits become vulnerable to takeover by an Enron, say, or a U.S. electric utility."
Copyright 1997 Oil & Gas Journal. All Rights Reserved.
