BP writes down $770-mn of KG block value

BP Plc, a 30 per cent partner in the Reliance Industries' operated Krishna-Godavari gas block, has written down $770 million in the value of its shareholding there.

This follows a lower than expected gas price increase announced by the central government on October 18.

In its third quarter results, BP said, "(This) included a $770-million charge (which we classify as a non-operating item) to write down the value ascribed to Block KG-D6 in India, as part of the acquisition of upstream interests from Reliance Industries in 2011."

BP said the charge arose as a result of uncertainty in the long-term price outlook, following the introduction of a new formula for Indian gas prices. "Although, we do see the commencement of a transition to market-based pricing as a step in the right direction. We expect further clarity on the new pricing policy and the premiums for future developments to emerge in due course," the company said.

In 2011, BP had farmed into 21 hydrocarbon blocks of Reliance Industries (RIL) with a 30 per cent interest for $7.2 billion.

The company said it expected further clarity on the new pricing policy and the premium the government has promised to pay for future deep-sea and complex gas discoveries.

On October 20, after the gas price announcement, the share price of Canada-based Niko Resources fell 47.95 per cent to C$0.38 a share. It later rebounded. Niko has entered into a definitive agreement with a subsidiary of Ophir Energy for the sale of Niko's interests in seven Indonesian production sharing contracts for a cash consideration of $31 million, with further payments of up to $56 mn, based on future exploration success.

Niko and BP are partners with RIL in the latter's fields, including the K-G basin and NEC-25. Niko holds 10 per cent stake in the fields. It had said: "The company will be evaluating the impact of the new domestic gas pricing policy on its assets in India."

The revised gas price formula by the Indian government, effective November 1, does not include any Asian liquefied natural gas benchmarks, which typically command higher prices. Instead, its references are Canadian and Russian domestic gas prices. As a result, the new formula results in a lower price than the expected $8.40 per million British thermal units (mBtu). Rates for the gas produced by upstream companies in the country will be revised every six months, with the next review happening on April 1, 2015.

The $4.2 per mBtu rate, fixed in 2007, was for the first five years of production from the KG-D6 fields which began pumping out gas from April 1, 2009.

For RIL, the government's decision to withhold the gas price increase at its largest producing block at the K-G) basin was credit-negative, said rating agency Moody's, as it delays the increase in revenue arising from the rise.