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BP Trims Fair Value of RIL Assets on its Books

  • Estimated fair value of assets and liabilities arising out of the deal cut to $4.5 billion in Dec from $5.28 billion in SepLondon-based energy conglomerate BP Plc has recognized a reduction of $785 million in the net fair value of the “identifiable assets and liabilities” acquired by it through its partnership with India’s most valued company Reliance Industries Ltd (RIL).RIL, controlled by billionaire Mukesh Ambani, sold a 30% stake in 21 oil and gas blocks it operates in India last year to BP for a consideration of $7.2 billion, the largest foreign direct investment in the country. The deal was announced in February 2011 and completed in August.
  • BP’s December quarter earnings statement last week said the $785 million adjustment and a few others “reflected new information obtained, including further understanding of the acquired assets and potential development options.”The fair value of an asset is an accounting concept defined as a rational and unbiased estimate of the potential market price of a good, service, or asset taking into account factors including acquisition, production and distribution costs; actual utility; risks; cost of and return on capital, among other things.According to the BP earnings statement, the estimated fair value of BP’s assets and liabilities arising out of its deal with RIL was $4.5 billion at the end of the December quarter, down from the estimated $5.28 billion in the September quarter.
  • “Our view on the value proposition (of investing in RIL’s assets) has not changed. It is consistent with our judgement earlier and we have not overpaid,” Mark Salt, BP’s press officer based in London, said in a phone interview on Wednesday.An email sent to RIL on Wednesday remained unanswered.BP’s statement and a subsequent earnings call last week did not yield further clarity on the reasons for the reduced fair value estimate of the Indian assets and liabilities acquired from RIL. The acquisition included a stake in RIL’s D6 block in the Krishna-Godavari (KG) basin off the east coast.
  • “Reduction on BP’s fair value estimate of its assets in India indicates a potential cut in KG-D6 reserves,” a 12 February report by oil and gas sector analysts Niraj Mansingka and Kiran Tulasi of Mumbai-based brokerage Edelweiss Securities Ltd said.The KG-D6 offshore gas field is the country’s largest gas find till date and RIL’s most productive gas reservoir. Gas supply from the field has been progressively declining. It produced 45 million standard cubic metres per day (mscmd) of gas in the quarter ended 31 December, much below the originally envisaged peak production of 80 mscmd.
  • “There may be some decline in production in the short term but we expect it to rise in the medium term through the development of multiple proven blocks in KG-D6 and NEC-25,” BP’s press officer Salt said.The Edelweiss report stated that during a call with analysts, BP management said it has always been aware of the “rapid decline” at D6 and the rationale behind the deal with RIL was to gain access to a fast growing Indian gas market, including a big opportunity in sourcing and marketing of gas.
  • Salt added that in addition to being able to unlock the promise that these “prolific” oil and gas reserves in India by utilizing its expertise, BP also saw vast potential in meeting the country’s energy demands through a 50:50 joint venture.In November, BP and RIL formed an equal joint venture called India Gas Solutions Pvt. Ltd to source natural gas globally and to transport and market it in India.As a result of “market access and other benefits arising out of the business combination”, BP also recognized an increase of $854 million in the “goodwill arising on acquisition.”Goodwill is another accounting concept that implies the intangible but quantifiable prudent value of an entity over and above the value of its assets. It arises in a company’s financial statement when it acquires an identifiable asset for more than its fair value.
  • The goodwill arising on acquisition recognized by BP in the September quarter was $1.66 billion.The London-based company also accounted for a $69 million increase in the fair value of the future consideration it will have to pay to RIL contingent on the success of future explorations. In the September quarter, BP had termed the fair value of the same contingent consideration as “insignificant”.This, according to the Edelweiss report, was a positive for RIL as an increase in the fair value of this future payment “indicates higher probability of exploration success”.
  • Under the deal struck between the two companies, up to $1.8 billion of the total investment made by BP in RIL’s assets will be payable on future exploration success in those oil and gas blocks.Another noteworthy observation made by the BP management during the analyst call, according to the Edelweiss report, was that the company hoped the prices of natural gas in India would rise in 2014.“BP said that last week a proposal had been made by the Indian government to increase the gas price to $7 per thousand cubic feet in 2014,” said the Edelweiss report. Currently, D6 gas costs $4.2 per million British thermal units, equivalent to a thousand cubic feet.An email sent to the oil ministry on Wednesday remained unanswered.Salt said BP expected further reforms in gas prices in India to unlock the potential for development of gas producing assets and there was already evidence of such reforms being possible through discussions with the government.

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