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THE WALL STREET JOURNAL: UK Lawmakers Turn Sights On Oil Cos' Profits ( Posted 26 Jan 05




LONDON -- U.K. lawmakers questioned consumer groups and big oil companies Tuesday about last year's spike in U.K. natural gas prices, threatening higher taxes and greater regulation, but outlining no specific plans.


The House of Commons' Trade & Industry Committee Chairman Martin O'Neill said that oil and gas companies might be subject to a windfall tax, a one-off tax born of unusually robust profits.


John Browne, Chief Executive of BP PLC (BP) recently described his company's performance as "staggering" in a newspaper interview, and some analysts expect BP to report pre-tax profits next month of GBP13.5 billion, a rise of about 47% on the previous year.


Some of that profit is due to a rise in U.K. wholesale natural gas prices, up by nearly 70% over the past year, leading to a 20% rise in domestic fuel bills.


"I'm not sure what you have done differently but now you're making all this money, huge profits." O'Neill said, suggesting a windfall tax would be appropriate even if companies were not found to be manipulating the markets.


BP and Royal Dutch Shell Group (RD, SC) executives said at the hearing that a tax would deflate investment in the North Sea. They also pointed out that seven years ago oil was selling at a dismal $10 a barrel.


Still, some consumer groups have said U.K. natural gas, among the most expensive in the world, exceeds the logic and supply and demand.


The Committee focused on a particular spike in the price of natural gas last October.


Every autumn large consumers of natural gas, such as chemical companies, go to large producers like Shell and BP to sign long-term contracts. Those contracts are a vital source of stability for businesses that can attribute half of their expenses to fuel. But for several years in a row, natural gas prices have suddenly spiked in October just as industry has begun renegotiating their long-term fuel contracts with the oil companies.


For example, in October natural gas to be delivered in January ran up 30% in less than two weeks to 70p per therm, a record high for the year. By December, the price of January gas had plummeted to half that. Many companies signed on for a years worth of gas at twice today's prices.


"We have no confidence in the gas market so we are buying spot this year," said Tom Crotty Chief Executive of Ineos Chlor. "It's quite new for us."


Ineos decided to forgo the long-term contract altogether, but this means the chlorine producer is buying natural gas every day in the market, as opposed to locking it in at a predictable price.


Judith Hackett, Chief Executive of the Chemicals Industry Association, said many buyers were given little time by producers to accept on a contract and few prices were quoted. What's more, in October prices shot up because there were simply fewer sellers in the market.


So while many big industrial users were clamoring for contract last autumn, big producers were unwilling to sell.


"There was reticence on the part of the sellers," said Alan Hayward, an executive in exploration at BP. "The market was unclear about the supply and demand balance." Britain is slowly using up its natural gas, and will have to import the fuel for the first time in 2006. But short of a mechanical failure, there was little chance of a shortfall this winter.


Hayward implied that buyers were concerned that the winter might be exceptionally cold and this drove up the price, but would only say "uncertainty" drove suppliers to keep their gas off the market last autumn.


"I'm skeptical that everyone was so worried about a one in thirty winter," said Robert Smith, a Committee member from the Liberal Democrats party.


Several Members of Parliament suggested stricter regulations might be in order to monitor prevent the recurrent price spike.


O'Neill also questioned the wisdom of having the government agency, the Department of Trade & Industry, regulating offshore oil and natural gas companies.


"There does seem to be a conflict of interest with the DTI," he said. "They have regulatory responsibility and they are there to promote industry."


-By Nina Sovich, Dow Jones Newswires; +44 (0)207-842-9353; 

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