SOMO awaiting government, ministerial approval
Zhenhua to prepay one year of oil supply
Prepayment deals unlikely to be repeated
Dubai — Iraq’s $2 billion oil prepayment deal with China’s state-owned Zhenhua Oil Co. is on hold pending government approvals, the deputy director general of State Oil Marketing Organization told S&P Global Platts.
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SOMO selected Zhenhua Oil Co. as one winner in a five-year oil supply deal that includes one-year prepayment of $2 billion. Under the deal, the oil is destination free and Zhenhua is allowed to resell cargoes.
The deal, which is for supply of 4 million barrels per month, is the first such agreement to be introduced by federal Iraq’s oil marketer. Northern Iraq’s semi-autonomous Kurdistan region often has such deals with its traders. SOMO Deputy Director General Ali al-Shatari added that OPEC’s second-largest producer would be unlikely to pursue similar schemes in the near future.
The conclusion of the deal “depends on the higher authorities’ meetings and how they are going forward with it, and of course it is always the decision of the cabinet,” Shatari said in an interview this week. “Of course, we are keeping the contact with the winner Zhenhua Oil Co. in order to understand their position regarding this delay in getting the approvals. So until now everything is on hold.”
Besides the cabinet and oil ministry approvals, the ministry of finance also needs to give Zhenhua a guarantee letter, Shatari added.
Zhenhua, owned by Norinco, couldn’t immediately be reached for comment on the matter.
Cash-strapped Iraq is looking for extra revenue streams as it struggles with paying bills due to the pandemic and low oil prices. The country relies on oil revenue for around 90% of its income.
The Zhenhua prepayment deal is likely to be a one-off supply agreement and will not be repeated in the near future, Shatari said.
“It cannot be a trend, by the way, unless it is happening in different periods because our target is not to allocate more than, for the time being, around 5% of our monthly exports for that purpose, so that Iraq will be more than 100% sure it can meet its obligations under such deals,” he said.
SOMO, which markets only federal Iraqi crude, expects to export around 2.9 million b/d in February, with 2.8 million b/d going through the southern terminals that handle Basrah crudes.
The agreement didn’t specify the type of oil to be lifted and just mentioned Basrah crude. Iraq sells three grades of Basrah crude: Basrah Light, Basrah Heavy, and Basrah Medium, which was introduced in January.
The type of Basrah crude “should be specified after informing the winner about the approval and then the winner should select the type of crude or even the split of types of crude the winner wants to lift over the year period when we do the prepayment in crude oil,” Shatari said.
It is not the first time SOMO has dealt with Zhenhua, which has been lifting Iraqi crude for its refineries since early 2009, Shatari said. In 2019, SOMO signed a profit-sharing agreement with Zhenhua, under which SOMO gets a percentage of resold Iraqi crude.
“Usually our contracts with our customers are crude that should go to their refineries not to be resold,” Shatari said. “For the profit-sharing contracts or agreements, we allow the resale but we share certain percentage of the profits made by every single cargo.”
He declined to disclose the percentage of shared profit.
Zhenhua has also trained SOMO traders, with the marketing body seconding traders to China in order for them to learn about the trading business, Shatari said.
“We sent them to work side by side with Zhenhua’s traders, finance and legal people,” he said. “So we got some experience and we are using their experience that’s how we initiate the sell on spot basis as well.”