BP writes down value of KG-D6 stake over pricing issues

British explorer BP Plc has written down the value of its investment in the eastern offshore Krishna-Godavari D6 block by $790 million, besides another $830 million in impairment charges, following lower-than-expected gas price hike.

Announcing its fourth quarter and full 2014 results, BP said, "Third quarter, fourth quarter and full year 2014 include write-offs of $375 million, $20 million and $395 million respectively relating to block KG-D6 in India. In addition, impairment charges of $395 million, $20 million and $415 million for the same periods were also recorded in relation to this block."

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

In October 2013, BP had attributed the write down to "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."

Last October, the government had approved a new formula for pricing of all domestic gas. After 1 November when the new rate comes into effect, it would be $5.61 per million British thermal unit against the prevailing $4.2. The price is lower than the $8.4 approved by the previous UPA government.

Reliance Industries is the operator of the KG-D6 block with 60 per cent stake, while BP holds 30 per cent and the balance 10 per cent is held by Canada's Niko Resources. Output at KG-D6 block has fallen over 80 per cent to around 12 million standard cubic meters per day due to water and sand ingress in the wells.

BP, Europe's third-largest oil company, also said it will reduce exploration expenditure and postpone marginal projects in the upstream and downstream segments.

For 2015, the company has pared its capital expenditure to around $20 billion, significantly lower than previous guidance of $24-26 billion. Capital expenditure in 2014 was $22.9 billion, lower than initial guidance of $24-25 billion.

"We have now entered a new and challenging phase of low oil prices through the near and medium term," said Bob Dudley, BP group chief executive. "Our focus must now be on resetting BP: managing and rebalancing our capital programme and cost base for the new reality of lower prices while always maintaining safe, reliable and efficient operations," Dudley added.

BP today reported its results for the fourth quarter and full-year 2014. Underlying replacement cost profit for the fourth quarter was $2.2 billion compared with $2.8 billion for the same period in 2013. Full year underlying replacement cost profit was $12.1 billion compared with $13.4 billion reported for 2013.

BP took a $3.6 billion post-tax net charge for non-operating items in the quarter, mainly relating to impairments of upstream assets reflecting the impact of the near-term lower oil price environment, revisions to reserves and other factors. As a result, including this charge and other effects, BP reported a replacement cost loss of $969 million for the fourth quarter of 2014.

BP said it is continuing its work to streamline activity and increase efficiency throughout the Group. Total cash costs for the group fell by over $1 billion in 2014 and BP is in action to deliver further efficiencies in 2015.

In December 2014 BP said that it expects to incur restructuring charges totalling $1 billion over the next five quarters.