Impairment for KG-D6 block likely for RIL

Against an expected 10 tcf of gas in fields D1 and D3, output has been only 2.1 tcf

The Mukesh Ambani-led Reliance Industries Ltd (RIL) might take a write-down on the KG-D6 block. Those close to the development said RIL might account for the losses in its books at the end of this financial year. For the quarter ended September this year, the company made a provision of Rs 2,659 crore (net of tax) for impairment of shale gas assets.

Earlier this year, Vedanta (earlier Sesa Sterlite) announced a Rs 20,000-crore goodwill impairment charge for the loss of value of Cairn India, its oil & gas business subsidiary, due to a fall in crude oil prices. The charge was the highest in the history of corporate India.

So far, RIL has invested about $9 billion in its KG block. But against an expected 10 trillion cubic feet (tcf) of gas in fields D1 and D3, it has produced only 2.1 tcf. "The write-off will help the company in reflecting the true and fair value of the asset on its balance sheet," said a source. Eventually, what RIL will get out of the KG block is only profit oil minus taxes, which will be the company's net cash inflow.

In response to an email query, RIL spokesperson said, "RIL adheres to accounting standards applicable to assessment for impairment. This takes into consideration a number of factors including the assessment of recoverable resources as well as the price environment. A discussion on possible future impairment at this time would only be speculative.”

The development follows the company facing charges of producing gas that flowed from the adjoining block of ONGC in the Krishna-Godavari basin.

A write-down is reduction in the value of assets, providing a clearer picture of a company's balance sheet to investors. No special tax benefits are granted for impairments; these are pure accounting exercises which, if not carried out when needed, inflate an asset's value.

In May this year, Tata Steel announced a Rs 6,500-crore goodwill impairment charge for the loss of value of operations in Europe, Canada and Mozambique. This was followed by JSW Steel taking a Rs 105-crore hit on its US and other subsidiaries.

Last year, RIL's partner BP had recorded a $810-million charge to write down the value ascribed to block KG D6 in India, as part of the acquisition of upstream interests from RIL in 2011.

"The charge arises as a result of uncertainty in the long-term gas price outlook, following the introduction of a new formula for Indian gas prices, though we do see the commencement of a transition to market-based pricing as a positive step. We expect further clarity on the new pricing policy and the premiums for future developments to emerge in due course," BP had said in its annual report for 2014.

BP has 30 per cent interest in four oil & gas blocks operated by RIL; it also partners RIL in a 50:50 joint venture for sourcing and marketing gas in India. When RIL tied up with BP in 2011, it had 23 blocks; of these, the government approved partnership in 21. Now, after surrendering the remaining blocks, the two companies hold only four blocks, including KG-D6.

The chief financial officer of a private oil & gas company said, "Impairment is allowed under Indian accounting laws. When your future cash flow is less than your capital expenditure on the asset, the differential can be written down or impaired…Impairments help bring down the depreciation component of assets significantly, which could help companies show high profit or better future earnings."

The KG-D6 fields, which began production in April 2009, hit a peak of 69.43 million standard cubic metres a day (mscmd) of gas in March 2010, before water and sand ingress shut some of its wells. The peak output comprised 66.35 mscmd from D1 and D3, the largest of the 18 gas discoveries on the KG-D6 block, and 3.07 mscmd from the MA field, the only oil discovery on the block. Gas production from the block has now fallen to 11.4 mscmd, with revenue from RIL's oil & gas business falling 31 per cent to Rs ,067 crore in the quarter ended September this year.
THE KG-D6 STORY

• KG-D6 block began production in April 2009
   
• The production peaked to 69.43 mscmd* in March 2010
   
• BP picked up 30% stake in KG-D6 and 20 other blocks in 2011
   
• 11.4 mscmd is the block's current average production
   
• $9-billion investment has been made so far
   
• Partners in the block: RIL (60%), BP (30%), Niko Resources (10%)
   
• Write-down by BP in 2014: $810 million: $415-million impairment charge and $395-million exploration write-off

*mscmd: million standard cubic metres a day