Iraq chose a Chinese company for a multibillion-dollar oil supply deal, while the Arab nation seeks funds to sustain a staggering economy with the collapse of energy prices triggered by the Coronavirus.
SOMO, which oversees oil exports from Iraq, chose a Chinese company after receiving offers from several traders, the official Iraqi News Agency reported, citing an interview with SOMO chief Alaa Al-Yasiri. While INA did not name the company or specify whether Prime Minister Mustafa al-Kadhimi signed the deal, Bloomberg reported last month that ZhenHua Oil Co., a subsidiary of China’s largest state-owned defense company, was the winner.
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“There was intense competition between two European and Chinese companies, and the Chinese company won,” said Al-Yasiri, citing INA.
It is the first time that Baghdad has sought a prepayment agreement, in which oil is actually used as collateral for a loan. It is also the latest example of China’s loans to distressed oil producers through state-controlled commercial companies and banks.
SOMO has offered to supply around 130,000 barrels a day of oil for five years, according to a letter sent to translators in November. It wanted prepayment for one year of supply, which at current prices would yield more than $ 2 billion, according to Bloomberg calculations. The winner gains flexibility in choosing when to send crude oil for a year, said Al-Yasiri. This mechanism was approved by the cabinet, he said.
A spokesman for the prime minister did not immediately respond to a request for comment.
Although all major oil exporters have suffered from falling prices since March, Iraq is in one of the weakest positions. OPEC’s largest producer after Saudi Arabia, its economy was projected by the International Monetary Fund to contract 11% last year. The government weakened the dinar by almost 20% against the dollar in December – the first devaluation since the 2003 US-led invasion – when its foreign currency reserves shrank.
Iraq’s problems make it more difficult for the government to raise money in a more conventional way through the bond market. The country’s dollar yields an average of 8.2%, one of the highest levels for any sovereign.
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The oil supply deal attracted 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 allows the winner to send oil wherever he wishes for a year. Typically, Middle Eastern oil is sold under strict clauses that prevent traders and refiners from reselling the barrels to different regions.
“Iraq received $ 2 billion at zero interest with a price premium,” said Al-Yasiri. “The flexibility that Iraq has given companies is the freedom to determine the day of shipment for shipments, the destination of exports, the possibility of resale.”
The Organization of Petroleum Exporting Countries is due to meet on Monday to assess production levels. While the group of 13 nations has cut production since April to boost prices, Iraq has broken its quota on several occasions, angering Saudi Arabia.
Although these cuts have boosted 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.
– With the help of Khalid Al Ansary
(Updates with business details in the fourth paragraph.)