Bad gas deal puts pressure on DONG

Energy authorities have ruled that enegy company’s transportation tariffs are too high and the ensuing fallout could lead it to make further cuts than expected

Energy regulators ruled yesterday that the transportation tariffs charged by Denmark’s leading energy company are too steep. The subsequent tariff reduction could result in increased natural gas activity in the North Sea.

The case was initiated in 2011 by AP Moller-Maersk, which complained that sate-owned Danish Oil and Natural Gas (DONG) was overcharging to transport natural gas in the country.

Initially, DONG reduced the tariffs from 0.13 kroner per cubic metre to 0.10 kroner, but Energitilsynet found the reduction inadequate and ruled that the tariff should be somewhere between 0.05 and 0.07 kroner per cubic metre.

Energitilsynet indicated that a further reduction would benefit the economy by making Denmark natural gas and oil industry more competitive.

“If the tariffs that DONG charges for transporting gas in the North Sea are too high compared with our neighbours, it could have adverse effects to investments in the North Sea,” Jeppe Danø, a department head at Energitilsynet, told Berlingske newspaper. “DONG has found that 0.10 kroner is reasonable. We disagree.”

Maersk was pleased with the result, but because the company wanted the tariffs reduced even further, to 0.03 kroner per cubic metre, it is leaning towards appealing the ruling.

“The decision means that it will be more attractive for us to expand our activities in the North Sea and send more gas onto the Danish market, something we look forward to,” Torben Nørgaard, the director of Maersk Energy Marketing, told Berlingske.

The decision for DONG, on the other hand, spells a loss of a forecasted billion kroner in earnings. Last year, 5.5 billion cubic metres of natural gas flowed through DONG’s pipes, securing it over half a billion kroner. But the tariff reduction would reduce that amount by about 150-250 million kroner a year.

“We need to go through the decision in detail. These tariffs are made up of different components, so we need to comprehend exactly what the reduction means,” Henrik Poulsen, the CEO of DONG, told Berlingske.

The news comes at a bad time for DONG, which has already announced intentions to cut some 600 jobs after losing 2.4 billion kroner during the first none months of 2012. A result Poulsen, who was just hired this April, deemed “unsatisfying”.

“It is equally unsatisfying that we’ve had to scale down our operating profit expectations for 2012. The downward trend in our 2012 performance has increased the need to strengthen DONG Energy’s income platform,” Poulsen said.

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