Iraq has selected a Chinese company for a multi-million dollar oil supply deal as the Arab nation seeks funds to bolster an economy stemming from the collapse in energy prices caused by the Coronavirus.
SOMO, which oversees Iraq’s oil exports, 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. Although the INA did not name the company or specify whether Prime Minister Mustafa al-Kadhimi had signed the agreement, Bloomberg reported last month that ZhenHua Oil Co., a subsidiary of the largest defense contractor state of China, was the winner.
Read more: China will decide to rescue Iraq with a multimillion-dollar oil deal
“There was intense competition between two European and Chinese companies, and the Chinese company won,” INA said, according to Al-Yasiri.
It is the first time Baghdad has sought a prepayment agreement, in which oil is effectively used as collateral for a loan. It is also the latest example of China’s lending to troubled oil producers through state-controlled commercial companies and banks.
SOMO offered to supply approximately 130,000 barrels a day of crude oil for five years, according to a letter it sent to traders in November. He wanted an initial payment for a one-year supply, which at current prices would bring in more than $ 2 billion, according to Bloomberg calculations. The winner gets flexibility in choosing when to send crude for a year, Al-Yasiri said. 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 a blow from falling prices since March, Iraq is in one of the weakest positions. OPEC’s main producer after Saudi Arabia, the International Monetary Fund predicted that its economy would contract 11% last year. The government weakened the luncheon by nearly 20% against the dollar in December, the first devaluation since the U.S.-led invasion in 2003, as its foreign exchange reserves shrank.
Iraq’s problems make it harder for the government to raise money more conventionally through the bond market. The country’s dollar yields an average of 8.2%, one of the highest levels of any sovereign.
Read more: The devaluation of Iraq may not be enough to save the collapsing economy
The oil supply deal attracted great interest among major traders, according to people who knew the subject. The contract will be one of the largest of its kind in recent history and allows the winner to send crude to wherever they want for a year. Typically, crude oil from the Middle East is sold under strict clauses that prevent traders and refiners from reselling barrels in different regions.
“Iraq earned $ 2 billion at zero interest with a premium on the price,” Al-Yasiri said. “The flexibility that Iraq has granted to companies is the freedom to determine the day of loading of shipments, the destination of export and the possibility of resale.”
The Organization of the Petroleum Exporting Countries is due to meet on Monday to assess production levels. Although the group of 13 countries has reduced production since April to raise prices, Iraq has failed to meet its quota on several occasions, angering Saudi Arabia.
Although these cuts have raised the price of oil, last year it still fell by about 25%. 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.)