BP writes down value of investment in Reliance Industries-operated KG-D6 by $770 million
BP Plc finds India's the new gas price formula a step in the right direction but it has written off $770 million from the value of its investment in Reliance Industries-operated KGD6 block as it perceives long-term uncertainty about gas pricing in the country.
"The third third-quarter result 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 IndustriesBSE 0.96 % in 2011. The charge arises as a result of uncertainty in the future long-term gas 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," the oil major said in its latest earnings statement on Tuesday.
"We expect further clarity on the new pricing policy and the premiums for future developments to emerge in due course," BP said. The government has announced a premium on pricing of natural gas from future discoveries in challenging terrains such as deep-water regions. The oil ministry said this would be calculated in a transparent manner * with the help of experts.
BP India said that the parent company had to write down the value of asset because of accounting policies and regulatory requirements. Also, the gas price was announced just before the quarterly earnings of the oil major.
"The gas price decision increases the gas price applicable for existing production and is a first step towards creating the more competitive economic landscape required to encourage the development of India's gas resources. The timing of this gas price decision just prior to our 3Q stock exchange announcement and the requirement to understand the long term price-outlook to support future developments has led to the write down. This is in compliance with standard accounting policies and Securities Exchange requirements," BP India said in an emailed response to queries from ET.
The Cabinet approved a new gas pricing formula, with which the price would rise to $5.6 per unit from $4.2. Earlier, the UPA government had approved the Rangarajan formula, which would have raise the price to more than $9 per unit.
In the new formula the government has excluded the price of LNG imports into India as it felt there would be a conflict of interest if a company that produces gas in India is also an LNG importer. This change alone reduced the price by $2 per unit.
While exploration firms expected higher prices, industry executives say the switch from a fixed price to a formula that is linked to international benchmarks is an improvement although they want free market pricing.
Source: The Economic Times
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