Home japan financial crisis Iraq signs $ 2 billion oil prepayment deal with Chinese ZenHua Oil

Iraq signs $ 2 billion oil prepayment deal with Chinese ZenHua Oil

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Through Salma El Wardany to 1/3/2021

Abdul Mahid and Xi Jinping

(Bloomberg) – Iraq has selected Chinese company for multibillion-dollar oil supply deal, as Arab nation seeks funds to support economy reeling from collapsing energy prices caused by the coronavirus.

SOMO, which oversees Iraq’s oil exports, chose a Chinese company after receiving offers from several traders, the state Iraqi news agency reported, citing an interview with SOMO chief Alaa Al- Yasiri. Although the INA did not name the company or say whether Prime Minister Mustafa al-Kadhimi had signed the agreement, Bloomberg reported last month that ZhenHua Oil Co., a subsidiary of the world’s largest defense contractor in the ‘Chinese state, was the winner.

“There was intense competition between two European and Chinese companies, and the Chinese company won,” INA said quoting Al-Yasiri.

This is the first time that Baghdad has sought an early repayment agreement, in which the oil is effectively used as collateral for a loan. It is also the latest example of China’s lending to struggling oil producers through trading companies and state-controlled banks.

SOMO has offered to supply about 130,000 barrels of crude per day for five years, according to a letter it sent to traders in November. He wanted an upfront payment for a year of supply, which at current prices would bring in more than $ 2 billion, according to Bloomberg’s calculations. The winner has the option of when to ship the crude for a year, Al-Yasiri said. This mechanism has been approved by the cabinet, he said.

A spokesperson for the prime minister did not immediately respond to a request for comment.

While all major oil exporters have been hit by the drop in prices since March, Iraq is in one of the weakest positions. OPEC’s largest producer after Saudi Arabia, its economy was predicted by the International Monetary Fund to contract by 11% last year. The government weakened the dinar by nearly 20% against the dollar in December – the first devaluation since the US-led invasion in 2003 – as its foreign exchange reserves dwindled.

Iraq’s woes make it harder for the government to raise funds more conventionally through the bond market. The country’s dollar yields average 8.2%, one of the highest levels of any sovereign.

The oil supply deal has generated widespread interest among major traders, according to people familiar with the matter. The contract will be one of the largest of its kind in recent history and it allows the winner to ship rough wherever they want for a year. Normally, Middle Eastern crude is sold with strict clauses preventing traders and refiners from reselling the barrels in different regions.

“Iraq got $ 2 billion interest-free with a premium on the price,” Al-Yasiri said. “The flexibility that Iraq has given to companies is the freedom to determine the loading day of shipments, the export destination, the possibility of resale.”

The Organization of the Petroleum Exporting Countries is due to meet on Monday to assess production levels. While the group of 13 countries have cut production since April to support prices, Iraq has repeatedly exceeded its quota, angering Saudi Arabia.

Although these cuts pushed up the price of oil, it still fell about 25% last year. Brent is trading at $ 51.80 a barrel, well below what Iraq needs to balance its budget.


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