DP101 | The Privatisation of British Gas and the Possible Consequences for the European Gas Market

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01/04/1986

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Abstract

The British Government plans to privatise the British Gas Corporation in the autumn of 1986. The paper attempts to predict the possible consequences for the European gas market of privatisation, and their consequent implications for the United Kingdom. Much will depend on whether the Government relinquishes its control over trade in gas, and in particular allows the construction of a pipeline link to the European gas grid. We examine possible reasons why the Government has opposed the construction of a link in the past. These include the argument that it represents an attempt to exercise market power in the European gas market whilst avoiding the problem of dynamic inconsistency which trade taxes would encounter. None of the arguments are convincing on social welfare grounds, though they can be explained as an attempt by the BGC to increase its bargaining power vis-a-vis the oil companies. Given the current system of gas taxation this power is no longer desirable, whilst changes in the European gas market make a link attractive to the United Kingdom. We conclude that as a matter of urgency the Government should reconsider its attitude to gas trade and remove the obstacles to the construction of a link before privatisation takes place. Possible benefits include encouraging Norway to exploit Troll and sell it to Europe via Britain, allowing a more efficient depletion policy for United Kingdom gas fields, gaining access to peak shaving gas from Groningen, and increasing the degree of competition and the flexibility of the European gas market.