LONDON – Centrica won’t have much change left after selling all the spare fuel it keeps at a North Sea gas facility it’s decided to close.
The so-called cushion gas, sitting in a reservoir 29 km off the English coast, is worth about £750-million pounds, according to Lakis Athanasiou, a utilities analyst at Agency Partners LLP in London. But the eventual cost of decommissioning Rough will probably come in at about £300-million, with the rest disappearing in taxes and running costs, he said.
The facility was previously an offshore gas field but it’s been used as a store for the fuel since 1985 to benefit from higher prices during winter. Centrica will close the site permanently because its wells are degrading to the point where they’re not safe. After taking a 176-million-pound impairment for Rough in the first half last year, the company hasn’t ruled out further writedowns and losses for its storage unit are poised to widen this year.
“At least the cushion gas will allow Centrica to pay for the decommissioning costs,” Athanasiou said. He values Rough at zero, but without the cushion gas it would be a big liability, he said.
The sale will take several years, Ross Davidson, a spokesman for the Windsor, England-based utility, said on Tuesday. He declined to comment on the value of the gas.
Rough contains approximately 183-billion cubic feet (5.2-billion cubic metres) of gas right now, the company said in a statement. That’s almost 7% of the country’s consumption last year.
“For Centrica, this is positive as they can close a loss-making asset and extract value from it,” said Deepa Venkateswaran, an analyst in London at Sanford C. Bernstein & Co. But during future gas shortages, such as in cold snaps during winter months, the closure of the site will put greater upward pressure on gas prices to divert liquefied natural gas cargoes to the UK, she said.
Facilities such as Rough once generated healthy profits because they charge gas traders a fee to inject during the summer when prices are supposed to be low and take gas out during winter when prices have traditionally been much higher. Centrica’s profits turned to losses partly because the gap between summer and winter prices narrowed, Athanasiou said.
Getting approval to close the site may take several months, according to Davidson. The UK doesn’t plan to stop Centrica from going ahead with its plans, a government official said.
About 40% of Centrica’s revenue from the cushion gas will be paid as tax, Athanasiou said.
The amount of gas Centrica has in the store means the company has a big incentive to just shut the site and extract the fuel, Graham Freedman, principal analyst for European gas and power at Wood Mackenzie in London, said by phone.
“Commercially they obviously decided it is the best way forward for them,” he said. “There will be a short period when they can extract gas and make some short-term gains.”