Iraq has selected a Chinese company for a million-dollar oil supply deal as the Arab nation seeks funds to bolster an economy due to the Coronavirus collapse in energy prices.
SOMO, which oversees Iraq’s petroleum exports, chose a Chinese firm after receiving an offer from several traders, the official Iraqi news agency reported, citing an interview with SOMO chief Alaa Al-Yasiri. While INA does not name or specify the company or whether Prime Minister Mustafa al-Kadhimi signed the agreement, Bloomberg reported last month that ZhenHua Oil Co., a subsidiary of China’s largest state-owned defense contractor, was the winner.
Read more: China to rescue Iraq with million-dollar oil division
“There was intense competition between two European and Chinese companies, and the Chinese company won,” INA Al-Yasiri was quoted as saying.
This is the first time that Baghdad has sought a prepayment agreement, in which oil is effectively used as security for a loan. It is also the latest example of China lending to struggling oil producers through state-owned trading companies and banks.
According to a letter sent by SOMO to dealers, SOMO offered to deliver roughly 130,000 barrels a day for five years. According to Bloomberg’s calculations, he wanted to pay in advance for one year’s offer, which at current prices would hold more than $ 2 billion. The winner gets flexibility to choose when the crude oil should be shipped 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.
Although all major oil exporters have been hit since March, Iraq is in one of the weakest positions. The International Monetary Fund, which was OPEC’s largest producer to Saudi Arabia, shrank by 11% last year, according to the International Monetary Fund. The government weakened the dinar by almost 20% against the dollar in December – the first devaluation since the US-led invasion in 2003 – as its foreign exchange reserves shrank.
Iraq’s woes make it harder for the government to raise more conventional money through the bond market. The country’s dollar averages 8.2%, one of the highest levels for any sovereign.
Read more: Iraq’s devaluation may not be enough to save the sinking economy
According to people familiar with the traders, the big traders have shown great interest. The contract will be one of the largest of its kind in recent history and it will allow the winner to steer roughly to where he wants for a year. Normally, Middle Eastern crude is sold with strict regulations that prevent traders and refineries from selling the barrels to different regions.
“Iraq received $ 2 billion in interest with a premium above the price,” Al-Yasiri said. “The flexibility that Iraq has given companies is the freedom to determine the day of delivery, the export destination and the possibility of resale.”
The Organization of Petroleum Exporting Countries is meeting on Monday to determine production levels. While the group of 13 countries has reduced production prices since April, Iraq has violated its quota on several occasions and angered Saudi Arabia.
While these reductions increased the price of oil, they continued to fall by about 25% last year. Brent is trading at $ 51.80 a barrel, well below what Iraq needs to balance its budget.
– With help by Khalid Al Ansary
(Updates with details in the fourth paragraph.)