Rebel march in Libya to ease crude surge, cut govt's subsidy burden

The entry of Libyan rebels into the capital city Tripoli, and a possible fall of Muammar Gaddafi’s regime may drag down crude oil prices. The development, coming about two weeks after a rating downgrade in the US, is expected to improve sentiments, as Libya’s crude oil production may get restored.

The cooling of global prices could help India, which imports 80 per cent of its requirement, though it buys a minuscule quantity of crude directly from Libya. When the Libyan crisis started in March this year, Brent crude touched as high as $125 per barrel. Thereafter, it slipped and the impact of the US downgrade put further pressure. Brent crude on Monday fell by about a dollar to $107 per barrel. The Indian basket that gives Brent a weight of 35 per cent has already fallen by more than $10 to around $103 a barrel since April, when it had touched a high of $122. This may bring some relief to the government on its subsidy burden.

Of its 160 million tonnes annual crude oil imports, India imports just around a million tonnes from Libya. Indian refiners, especially Bharat Petroleum which imports 500,000 tonnes crude from Libya, had to make alternative arrangements, since the daily output in Libya dropped from 1.6 million barrels to less than 100,000 barrels after the war. Libya accounts for around two per cent of the global crude oil production.

Chances of restoration in Libyan supply could put pressure on prices. “India hardly imports any crude from Libya but the development will improve sentiments,” said P K Goyal, director (finance), Indian Oil, the country’s biggest oil refining and marketing company.

Another official from ONGC Videsh Ltd (OVL), the overseas arm of ONGC, said following the drop in Libyan output, other oil production nations had shored up output. “Once Libyan production is restored to normalcy, there will be extra supply, which will impact crude prices,” he said.

OVL, which had declared ‘force majeure’ in its four exploration blocks in Contract Area 43 in Libya, expects to resume work once the situation improves. Invocation of the force majeure clause allows a contracting party to be exempt from fulfiling its contractual obligations in case of developments beyond their control. These developments usually include natural calamities or political events.

The company had invested approximately $36 million till March 31, 2010. Contract Area 43 was awarded to ONGC Videsh under the licensing round in early 2007. The contract area is spread over 7,449 square kilometres. OVL holds 100 per cent participating interest in the Contract Area, with operatorship. The acquisition of 1011 LKM 2D and 4,000 square kilometre 3D seismic data has been completed.