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UK: BP abandons small firms to concentrate on bigger picture

BP has decided to pull out of supplying small British manufacturers with industrial gas as thousands of businesses are being hit with a near-doubling of energy bills.

Amid alarming volatility in the gas markets, the oil and gas major is withdrawing supplies for some firms to focus on wholesale markets and large industrial customers. A BP spokesman said: "We will not be renewing contracts for some industrial and commercial customers on our metered system as the agreements expire over the next six to 12 months."

The news will be a blow to thousands of companies that have delayed signing contracts with energy suppliers this year amid soaring gas and electricity prices. "The fewer players you have in the market, the more product margins are likely to rise," Mike Coulten of the Energy Information Centre said.

Gas prices have soared over the past 18 months as North Sea reserves have declined and Britain relies increasingly on gas flowing from the Continent. The prospect of a 50pc to 60pc increase in energy prices has led to thousands of businesses waiting to sign contracts in the hope that the surge would be short-lived.

Roger Handley, who runs Handley Printers, a jigsaw manufacturing and printing company in Stockport, said he is facing "a financial crisis" after waiting since August to renegotiate a contract with German utility E.on, owner of Powergen.

He said: "We heat the factory with gas as it needs to be temperature controlled for the printing work. Over the past few months I have been offered three gas contracts showing price increases of up to 58pc. After accepting each offer it was withdrawn shortly after because prices were moving so quickly. I've now accepted a 90pc increase, taking my bill to £44,000 compared with £23,000 last year.

"There are only two major companies that manufacture jigsaws in the UK and at this rate there will only be one," Mr Handley said.

Far from falling back, wholesale gas prices are at "absolutely crazy levels", analysts at John Hall Associates warn. The energy consultancy said the outlook is bleak with little relief from volatility and high prices expected over the next two years.

Ratings agency Fitch echoed the comments in a recent report, predicting greater price volatility in coming years and "limited price relief until 2007 to 2008" when new liquefied natural gas terminals and pipeline capacity comes online. Mr Handley said: "I've contacted brokers but all the suppliers are in the same boat. No one could offer me a better deal."

Ofgem and the European Commission are currently investigating whether trading through the sub-sea pipeline connecting Bacton in Norfolk to Zeebrugge in Belgium has been manipulated, with imports of cheaper Continental gas being withheld to force UK gas prices higher.

The watchdog wants to know why European companies opted to store gas rather than take advantage of higher prices to sell on to the European market. Britain's liberalised competitive trading arrangements are in stark contrast to the rigid European markets dominated by former monopolies. This is an increasing source of friction.

Mr Coulten said: "It's disgraceful. There's plenty of gas in Europe, it's a case of the EU's former nationalised energy groups over-contracting to protect themselves from competition. It also looks as though British gas producers have been sitting on their hands."

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