BP writes down KG-D6 value by $770 million

Says the new gas pricing formula, as a transition to market-based pricing, was a step in the right direction

BP plc has written down the value of its shareholding in the eastern offshore KG-D6 block by $770 million dollar following a lower-than-expected gas price hike which it saw as a transition to market-based pricing.

Announcing its third quarter results, BP announced a $770 million write down in value of KG-D6 although it said the new gas pricing formula, as a transition to market-based pricing, was a step in the right direction.

BP in 2011 bought 30% interest in Reliance Industries' eastern offshore KG-D6 as well as 20 other oil and gas exploration blocks for $7.2 billion. Bulk of this was for the producing block of KG-D6 and gas discovery area of NEC-25.

"The 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," BP said in a statement.

The charge, it said, "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 government had on October 18 approved a new formula for pricing of all domestic gas. The rate, when the formula comes into effect from November 1, would be $5.61 per million British thermal unit as against current $4.2.

The price is lower than $8.4 approved by the previous UPA government and general expectation of a rate around $6.5 after some deductions from that price.

A BP India spokesperson said, "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 Q3 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," the spokesperson said.

Both BP and RIL have been advocating market-linked gas pricing and had initiated an arbitration against the government for not revising rates from the due date of April 1, 2014.

The $4.2 per mmBtu rate, fixed in 2007, was for the first five years of production from KG-D6 fields. KG-d6 fields started gas output from April 1, 2009.

BP said it expects further clarity on the new pricing policy and the premium that the government has promised to pay for future deepsea and complex gas discoveries.

"We expect further clarity on the new pricing policy and the premiums for future developments to emerge in due course," the statement said.