SCOTTISH Gas owner Centrica has highlighted its belief in the exploration potential of the West of Shetland area after profits in the energy giant’s oil and gas business more than doubled last year.

Centrica’s exploration and production arm grew profits by around 160 per cent to £521 million in 2018 from £201m in the preceding year as it benefited from increased oil and gas prices.

The division helped Centrica increase group profits by around 12 per cent to £1.4bn. However, the company lost around 700,000 household customers, as smaller players won business from giants.

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Shares in Centrica fell 12 per yesterday when chief executive Ian Conn said it will generate less cash than expected this year citing the impact of the energy price cap in the UK.

Mr Conn also said a production shortfall at the North Sea-focused Spirit Energy operation had weighed on Centrica’s performance. The company is focused on improving the performance and sustainability of the Spirit portfolio, which includes assets off Scotland and giant Morecambe Bay gas fields.

However, Centrica underlined the importance of the oil and gas business as a cash cow in the results announcement.

“E&P continues to play the role of providing cash flow diversity and balance sheet strength for the Group and the establishment of Spirit Energy in December 2017 has created a self-financing European E&P business,” it said.

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The company added: “Spirit Energy will continue to look at the potential for further opportunities to strengthen the business, which could include further consolidation with another party.”

The amounts of cash generated by the E&P division doubled to around £1 billion last year, from £500m.

Centrica made clear it sees potential to make huge finds in UK waters.

The company noted that it had bought into West of Shetland acreage in August that contains prospects it is thought could contain up to around 1.5 billion barrels oil.

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Centrica acquired a 50 per cent stake in territory held by Hurricane Energy, which has generated huge excitement in the industry with a pioneering hunt for oil and and gas in an under-explored area off Shetland.

Spirit will fund a $180 million drilling campaign on Hurricane’s Lincoln discovery and the Warwick exploration prospect, which will start in the second quarter of this year. The company expects to get initial indications of the results from the first well around the middle of the year.

Centrica also highlighted the impact of strong gas production from the Rough field in the Southern North Sea on profits. Rough is separate from Spirit, which employs around 350 in Aberdeen.

The group had 23.7m household energy customer accounts at the year end, against 24.4m at the start of the period.

It is aiming for operating cash flow to be between £1.8bn to £2bn in 2019, which is below the targeted range of £2.1bn to £2.3bn on average over 2018-2020.

On Tuesday Scottish Gas announced it was increasing standard variable tariffs after Ofgem upped the relevant price cap by £117 to £1,254 a year from April 1.Scottish Gas is raising its prices by 10.5%. The average dual fuel bill will increase by £119.12 a year, to £1,254 for the average SVT customer.

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Scottish Hydroelectric owner SSE yesterday became the last of the “big six” to raise its standard variable energy tariff, increasing the annual charge of a typical customer on a standard tariff by £117 to £1,254.

Centrica's Mr Conn said: "We are taking actions to strengthen the company in 2019 and improve underlying performance in 2020, including driving cost efficiency hard and delivering further divestments, and as a result net debt levels remain underpinned."

Centrica expects to make £250 million of savings in 2019 and is targeting an additional £500 million of savings beyond this year.

George Salmon, equity analyst at investment firm Hargreaves Lansdown, said Centrica’s warning about cash flow could affect shareholder payouts in the long term.

He said: "The dividend is starting to creak. It's been held at 12p this year, but Centrica is increasingly relying on cost-cutting and disposals to prop up the payment. Neither can continue forever."

Centrica bought Aberdeen-based Venture Production for £1.3bn in 2009. It has a majority stake in Spirit, with the remainder owned by German energy firms.

Centrica shares closed down 16.05p at 121.15p.