Iraq has selected a Chinese company for a multi-billion dollar oil supply deal as the Arab nation seeks funds to support an economy reeling from the Coronavirus-induced energy price collapse.
SOMO, which oversees petroleum exports in Iraq, chose a Chinese company after receiving bids from several traders, the official Iraqi News Agency reported, citing an interview with SOMO chief Alaa Al-Yasiri. While INA did not name or specify whether Prime Minister Mustafa al-Kadhimi had signed the deal, INA reported last month that ZhenHua Oil Co., a subsidiary of China’s largest state-owned defense contractor, was the winner.
Read more: China wants to save Iraq with multi-billion dollar oil deal
“There was fierce competition between two European and Chinese companies, and the Chinese company won,” said Al-Yasiri.
It is the first time that Baghdad has sought a prepayment agreement, effectively using oil as collateral for a loan. It is also the latest example of China providing loans to troubled oil producers through state-controlled trading companies and banks.
SOMO offered to supply about 130,000 barrels of crude oil per day for five years, according to a letter it sent traders in November. It wanted upfront payment for a year’s supply, which, according to Bloomberg’s calculations, would raise more than $ 2 billion at current prices. The winner will be given flexibility in choosing when to ship the crude for a year, Al-Yasiri said. This mechanism has been approved by the cabinet, he said.
A spokesman for the prime minister did not immediately respond to a request for comment.
While all major oil exporters have been hit by the price decline since March, Iraq is in one of its weakest positions. OPEC’s largest producer after Saudi Arabia, the International Monetary Fund predicted that the economy would contract by 11% last year. The government weakened the dinar against the dollar by nearly 20% in December – the first devaluation since the US-led invasion in 2003 – as its foreign exchange reserves dwindled.
Iraq’s misery makes it more difficult for the government to raise money in a more conventional way through the bond market. The country’s dollar averages 8.2%, one of the highest levels for any state.
Read more: Iraq’s devaluation may not be enough to save the shrinking economy
The oil supply deal has attracted widespread interest from major traders, according to people familiar with the matter. The contract will be one of the largest of its kind in recent memory and will allow the winner to ship crude oil to wherever they choose for a year. Normally, Middle Eastern crude oil is sold with strict clauses preventing traders and refineries from reselling the barrels to different regions.
“Iraq got $ 2 billion without interest at a premium above price,” said Al-Yasiri. “The flexibility that Iraq has given to companies is the freedom to determine the day of shipment loading, the export destination and the option of resale.”
The Organization of Petroleum Exporting Countries will meet on Monday to review production levels. While the 13-nation group has cut production drastically since April to keep prices up, Iraq has repeatedly exceeded its quotas, angered Saudi Arabia.
While those cuts have pushed up the oil price, it still fell by about 25% last year. Brent is trading at $ 51.80 a barrel, well below what Iraq needs to balance its budget.
– With the help of Khalid Al Ansary
(Updates with deal details in the fourth paragraph.)