Iraq has chosen a Chinese company for a multi-billion dollar oil supply deal, while the Arab nation is seeking funding to support a spin-off economy due to the collapse in energy prices caused by Coronavirus.
SOMO, which oversees Iraq’s oil exports, has chosen a Chinese company after receiving offers from several traders, the Iraqi official news agency reported, citing an interview with SOMO chief Alaa Al-Yasiri. While INA did not name the company and did not specify whether Prime Minister Mustafa al-Kadhimi signed the agreement, Bloomberg reported last month that ZhenHua Oil Co., a subsidiary of China’s largest state defense contractor, has was the winner.
Read more: China is to save Iraq with a multi-billion dollar oil deal
“There was intense competition between two European and Chinese companies, and the Chinese company won,” INA was quoted as saying by Al-Yasiri.
This is the first time Baghdad is looking for a prepayment agreement, in which oil is actually used as collateral for a loan. It is also the latest example of Chinese lending to oil producers struggling through commercial companies and state-controlled banks.
SOMO has offered to supply about 130,000 barrels a day of crude for five years, according to a letter sent to traders in November. He wanted to pay in advance for a year of supply, which at current prices would bring more than $ 2 billion, according to Bloomberg calculations. The winner gets flexibility in choosing when to deliver the crude for a year, Al-Yasiri said. The mechanism was 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 falling prices since March, Iraq is in one of its weakest positions. OPEC’s largest producer after Saudi Arabia, its economy was forecast by the International Monetary Fund to contract by 11% last year. 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 dwindled.
Iraq’s troubles make it harder for the government to raise money more conventionally through the bond market. The country’s dollar averages 8.2%, one of the highest levels for any sovereign.
Read more: The devaluation of Iraq may not be enough to save the declining economy
The oil supply agreement has 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 will allow the winner to deliver raw anywhere he wants for a year. Crude oil in the Middle East is normally sold under strict clauses that prevent traders and refineries from reselling the barrels in different regions.
“Iraq has earned $ 2 billion at zero interest, with a premium over the price,” Al-Yasiri said. “The flexibility that Iraq has given to companies is the freedom to determine the day of loading of deliveries, the destination of export, 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 nations cut production in April to raise prices, Iraq has repeatedly violated its quota, angering Saudi Arabia.
While these cuts raised the price of oil, it 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 assistance of Khalid Al Ansary
(Updates with offer details in the fourth paragraph.)