DON'T YOU JUST LOVE BEING IN CONTROL!

Specialist pipeline contractors fear that British Gas's latest restructuring will have a dramatic effect on contracting opportunities. As BG divides the country into 30 larger working districts, rather than the former 90 operating areas, a further shake-out of contractors is anticipated in what is already a very competitive specialist sector.

Trebling the size of districts means that the number of contracts on offer will shrink correspondingly, while medium and large contractors can anticipate maintaining or even boosting workloads - albeit in more focused centres, smaller competitors risk being squeezed right out of the market.

In March, British Gas set about replacing its existing unwieldy structure, which was centred around 12 regional bases and a multitude of districts, with six national business streams. As a result, the interface between BG and private gas pipeline contractors shifts from a plethora of regional directors to BG's new Transportation & Storage business division.

The reorganisation has fully focused T&S's pipelaying and engineering staff on the fact that transporting gas is a business in its own right. T&S moves gas on behalf of 30 different customers - competition that is intended to keep British Gas on its toes.

T&S owns and maintains the pipeline system, right from the coastal terminal where gas first comes ashore, through to the meter in the gas user's home. Both the high-pressure and the low-pressure distribution network has to be maintained, along with the range of diurnal and seasonal storage units.

Led by Harry Moulson, md, and Chris Le Fevre, director (transportation services), T&S has a national headquarters in Solihull.

The top brass are served by four regional bases: Dorking, Gloucester, Hinckley and Newcastle-upon-Tyne.

Despite contractors' nervousness about the change within BG, there are shining opportunities on the horizon. Encouragingly, Le Fevre says: 'We are looking for the opportunity to do more outsourcing - the percentage of work placed outside the company will increase.'

Such a move is hardly surprising since BG's restructuring document says 20,000 jobs must go over the next years, a savage shift which means T&S's existing workforce of 21,000 will be trimmed to under 15,000.

Today, British Gas's T&S business, as viewed by contractors, is worth œ400 million, with T&S's Distribution Period Contracts falling into three main categories:

l Main laying - installation and renewal. In all, 3,000km are laid each year, 60% by contractors.

l Service laying - both new and relaid. In all 500,000 service pipes are installed annually, 50% by contractors.

l Repair and maintenance. The annual job tally in this category comes to 250,000, with contractors taking a modest 10% share.

While contractors should be heartened by the prospect of an increasing share of T&S's total workload coming their way, they worry that the total amount of work offered by T&S hinges on a major political uncertainty - and that is the verdict of Clare Spottiswoode, the director-general of Ofgas, the gas regulator.

The Monopolies and Mergers Commission is pushing a hard line, arguing that BG should be allowed no more than 7.5% rate of return on its investments. BG, on the other hand, wants a 9% figure. The greater the rate of return, obviously, the more BG will spend on improving its pipeline infrastructure.

Spottiswoode's verdict seems likely to be accelerated, with an announcement possible as this article went to press.

There are 15 major gas pipeline specialist contractors, the list including such names as Murphy, Alhco, Amec Utilities, Summers, RS Kennedy, Biggs Wall, Pipeline Constructors Group and OC Summers.

Alhco ranks alongside Murphy and Amec Utilities as one of the top three players in the sector, with a turnover of œ18 million a year from gas contracting work. Turnover was higher, at œ24 million three years ago and John Clarke, md, expects there to be more cuts as BG's capital programme is trimmed back further still.

Clarke, while full of praise for BG as a client, slams the government for its ham-fisted intrusion into the gas industry. 'British Gas is suffering from uncertainty as a result of muddle management by Government,' he believes. 'It's a pity that those in Government who make decisions don't have a practical commercial background because they are messing about from a position of total ignorance.

'Margins in gas work are very tight, but but because of the way BG operates, we can work on tight margins. BG's work planning and standardisation is good, so we can predict and rationalise our workforce. Hence a gas contractor can accept less margins than with other types of work.

'Comparing gas with the other utilities, water is also stable and well managed. The sewer sector is only just beginning to emerge, while cabling tends to be difficult and is full of cowboys.'

Derek Pitts, group marketing director of Pipeline Constructors Group, reveals that gas work accounts for œ12 million of PCG's total œ40 million annual turnover. Three-quarters of PCG's income from both water and gas utilities comes from period work.

As with Alhco, PCG's gas work is 30% down on peak because of the way BG has halted its capital programme and has virtually reached the end of its renewal programme.

Looking for an optimistic note, Pitts argues: 'The push to shed 20,000 jobs means BG will have to outsource more as some of its own direct labour goes.

'Under the old system, regional differences within BG weren't big because there had already been a gradual harmonisation - I'd say we were 80% down the standardisation line already.

'However BG's plan to cut back from 90 to 30 working districts is causing a lot of uncertainty - we are in five of the 90 now, but when each district is three times the size it is today, and BG only wants one contractor per district, there will be a significant cut in the number of contractors they use. It will be the smaller ones who are squeezed out.'

The players in gas contracting have been relatively stable - a contrast with the picture in the water industry of late, where the big boys have competed for increasingly smaller contracts.

'As an example, look at Birse, Tarmac and Wimpey,' suggests Pitts. 'They've dropped the minimum size of contract that they'll chase in water. Gas has steered clear of such a shift. I reckon it's because water work involves more traditional civil engineering.'

Margins in gas work may be tight, but at least they have edged up a little over the past three months, largely as a consequence of the fact that prices for gas utility period work are covered by the Baxter Index.

For contractors, the good news is that BG's money flows as soon as the tap is turned on, the utility having a reputation for paying quickly once a sum has been agreed - there are no late payment headaches here.

Contractors hope that the establishment of the T&S business within British Gas will not trigger a fall in BG's admirable payment standards.

Firms working for a range of utilities note that it has been the oil majors who have led the way over contracts that involve both client and contractor working together in a closer relationship.

Arthur Reed, secretary of the Pipeline Industries Guild (a voluntary grouping of contractors, consultants and utility companies), hopes that T&S will follow the oil sector's encouraging lead.

The current contract between BG and its contractors, introduced 18 months ago, is based on ICE, but with BG's own schedules. It was developed by the client in conjunction with the Society of British Gas Industries (the contractors' organisation).

'The national contract has had a mixed reception,' reveals Phil Smith, T&S's area director for the south. 'Amendments to the contract will be looked at in 12 months' time as part of a regular review.

'The fact that it drew a mixed response is only to be expected when you look at the wide range of contractors. Ranging from the very big to the small, they all have different wishes.

While the big players want the contract in computer format, smaller contractors want a pencil and paper system. The big names want more involvement in planning but smaller firms have no wish to be involved in this way as they don't carry that many specialists.

'When we drew up the current national contract there were a considerable number of changes made to involve contractors more - that was their wish.'

John Ilott, md of RS Kennedy, likes the national contract and is enthusiastic about the streamlining that British Gas has put in place. 'In the past, I've thought the 12 regions were a bit of a nonsense,' he admits. 'If, in future, there are fewer tiers of management on both sides, then that's fine by me.

'We all work to a national contract now but regional variations are still allowed. For instance, the list of re-instatement materials permitted in Scotland has regard to the materials that are available there.'

Ilott feels that T&S will inherit a good standard of contractor. 'Those firms who have gone were hit by the recession, while others were not very good,' he says.

'All the survivors are conscious of safety and training, and have a good understanding of the New Roads and Streets Works Act.

'A result of British Gas's latest overhaul is that it looks on its approved contractors in a warmer light than it did previously.'

Over the past couple of years, British Gas has become much more choosy over which firms it will add to its Approved Contractors List.

The compilation, now kept at T&S headquarters in Solihull, sees no more than a few names added each year.

A new contractor must satisfy T&S that it has the necessary skills and management ability.

That hurdle cleared, it is next invited to tender for smaller, one-off projects and then, if work proves satisfactory, it is invited to chase a Distribution Period Contract.

Such contracts currently vary from œ1 million a year in some rural areas, to œ20 million a year in inner London, where high levels of replacement are proving necessary.