Iraq has agreed a multibillion-dollar oil-supply deal with China

Iraq, Chinese firm in $2 billion oil prepayment deal

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Baghdad: Iraq has agreed a multibillion-dollar oil-supply deal with a Chinese company, according to the Arab nation’s official news agency.

SOMO, which oversees Iraq’s petroleum exports, picked a Chinese firm after receiving bids from several traders, INA reported, citing an interview with SOMO General Manager Alaa Al-Yasiri. While INA didn’t name the company or specify if Prime Minister Mustafa al-Kadhimi had signed off on the deal, Bloomberg reported last month that ZhenHua Oil Co., a subsidiary of China’s largest state-owned defense contractor, was the winner.

SOMO offered to supply roughly 130,000 barrels a day of crude for five years, according to a letter it sent traders in November. It sought upfront payment for one year of supply, which at current prices would bring in more than $2 billion, according to Bloomberg calculations. The winner gets flexibility in choosing when to ship the crude for a year, Al-Yasiri said. This mechanism was approved by the cabinet, he said.

“Iraq got $2 billion at zero interest with a premium over the price,” INA quoted Al-Yasiri as saying. “There was intense competition between two European and Chinese companies, and the Chinese company won.”

A spokesperson for the prime minister didn’t immediately respond to a request for comment.

The pre-payment deal, a first for Baghdad, is the latest example of China lending to struggling oil producers via state-controlled trading companies and banks.

While all major oil exporters have taken a hit from the coronavirus-triggered plunge in prices since March, Iraq is in one of the weakest positions. OPEC’s biggest producer after Saudi Arabia, its economy was forecast 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 U.S.-led invasion in 2003 – as its foreign-exchange reserves shrunk.

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 it allows the winner to ship crude to wherever it wishes for a year. Normally, Middle Eastern crude is sold with strict clauses preventing traders and refiners from re-selling the barrels to different regions.

“The flexibility that Iraq has granted to companies is the freedom to determine the day of loading the shipments, the export destination, the possibility of resale and a set of marketing benefits in return,” Al-Yasiri said.

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