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Reliance Industries (RIL) has written down almost $6 billion (Rs 39,570 crore) of investments in its Krishna Godavari Basin D6 block and US shale gas assets attributing it to change in accounting policy.
In the past, the billionaire Mukesh Ambani-led company had to write down investments in the KGD6 block on account of steep declines in output and also in its shale gas assets in the US as prices plummeted.
But the write-down reported by the company is believed to be significantly higher in the December quarter due to its transition from Indian Generally Accepted Accounting Principles (IGAAP) to Indian Accounting Standards (Ind-AS).
RIL said that while IGAAP recognises two methods of accounting for oil and gas activities, namely, full cost method and successful efforts method, the new method under Ind-AS only recognises the successful efforts method which resulted in the huge write-down.
“RIL and its subsidiaries have adopted Ind-AS with effect from April 1, 2016 pursuant to the notification issued by the Ministry of Corporate Affairs. The impact of Rs 39,570 crore is entirely on account of change in accounting policy from full cost method to successful efforts method (SEM)," an RIL spokesperson said in response to an ET query. The write-down constitutes Rs 20,114 crore on domestic oil and gas assets, mainly the KG-D6 fields.
“Major differences impacting such change are in the areas of expenditure on surrendered blocks, unproved wells, abandoned wells and expired leases and licences and seismic cost which has been expensed under SEM; and depletion on producing property is calculated using Rs Proved Developed Reserve, as against Rs Proved Reserve' in full cost method,“ the company explained.
RIL's upstream business has been a drag on the company as it remains a “low volume-low price“ business. The company's flagging KG-D6 field produced 0.26 barrels of crude oil and 24.4 billion cubic feet of natural gas in the third quarter of FY17, a reduction of almost 30% year-on-year. Its shale gas production in the US also declined 9% sequentially. Realisations, though, witnessed some improvement.
In a result review report, JM Financials said, “We roll forward to December 2017 to arrive at a target price of Rs 1,155 as we believe long-term investments into upgrading the refining complex and increasing the petrochemicals capacity based on refinery flue gases are long-term positives; while in the near-term the stock performance will depend on news flow on telecom.“
RIL's consolidated net profit rose 3.6% to Rs 7,506 crore in the December quarter driven by petrochemicals business. Its consolidated turnover grew 16% to Rs 84,189 crore, aided by a growth in other income that rose due to profit from the sale of investments in fixed asset instruments.
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