Enron draws one, loses one in U.K. gas supply tiff

Enron Corp., Houston, and interest holders in the U.K. North Sea J-Block fields, led by operator Phillips Petroleum Co. U.K. Ltd., have found a commercial solution to a bitter feud over gas contracts. The settlement involves Enron paying Phillips and co-venturers $440 million in cash, while the gas producers have reduced the price per unit for gas delivered and changed the type of contract.

June 16, 1997

4 min read

The settlement involves Enron paying Phillips and co-venturers $440 million in cash, while the gas producers have reduced the price per unit for gas delivered and changed the type of contract.

The agreement was disclosed early this month and seen as a climb-down by Enron. Before Enron had time to recover, however, a U.K. court decided another case against Enron, over transport arrangements for J-Block gas.

Background

The J-Block dispute started in September 1995, when Phillips was forced to delay start-up of production from Judy and Joanne fields, after Enron decided to take no gas for the first year of its purchase contract.

Judy/Joanne gas was allocated to Enron under a take-or-pay contract concluded before U.K. gas market liberalization led to a gas price collapse.

This made Enron's J-Block gas relatively expensive (OGJ, Sept. 25, 1995, p. 38).

Subsequently, Enron also challenged the owners of the Central Area Transmission System (CATS) pipeline, through which J-Block gas was to have been delivered, through court action.

In both U.K. and U.S. courts, Enron tried to claim that CATS facilities, operated by Amoco (U.K.) Exploration Co., were not ready to deliver gas when the J-Block contract demanded (OGJ, Apr. 15, 1996, p. 31).

What it means

On June 2, Enron Chairman and CEO Kenneth Lay said, "Renegotiation and settlement of the contractual issues now allow the gas to be taken at consistent volumes, assuring us a very significant, long-term supply at favorable fixed prices consistent with long-term contracts in the North Sea market place."

Lay said the price of gas under the new deal was confidential but noted that it was fixed at a rate significantly below the original contract. The contract has been changed from life-of-field to specific-term contract.

Beginning July 1, Enron will receive 260 MMcfd of gas from Judy and Joanne through the CATS pipeline under the new 15-year agreement. Lay said Enron was still better off after the settlement than if it had taken gas from the scheduled start of the contract in April 1996.

Lay said that while the dispute was under way, much of the Judy/Joanne gas has already been placed on the London spot market. The remainder will be sold as part of Enron's U.K. gas portfolio.

Enron had also threatened legal action against Phillips over the producers' decision to reinject associated gas in Judy and Joanne, as a way to begin oil production without delivering gas to Enron. This action was also canceled.

Lay also said the agreement with Phillips would not be affected by the outcome of the CATS group litigation: "Once the CATS judgment is received, all litigation will be dropped, including a House of Lords hearing due in November 1997."

Phillips began production from Judy/Joanne last month (OGJ, May 12, 1997, p. 30). Following the settlement, the operator said, beginning in July output would be 95,000 b/d of liquids and 260 MMcfd of gas.

J-Block interest holders are operator Phillips 36.5%, Agip (U.K.) Ltd. 33%, and BG Exploration & Production Ltd. 30.5%.

Enron to pay CATS

The loss of the CATS transportation case means Enron will also have to pay money it has withheld to the CATS group since March 1995.

Enron withheld due payments, claiming the pipeline was not ready for delivery.

Following the hearing on June 3, Amoco announced that Enron would have to pay all money it has withheld and would not be entitled to reclaim earlier payments.

This second decision means Enron must pay more than £150 million ($240 million) to the CATS group, which consists of operator Amoco 29.5289%, BG 51.1835%, Amerada Hess Ltd. 17.7174%, Phillips 0.663%, Fina Exploration Ltd. 0.5684%, and Agip 0.3388%.