Oil & Gas

23 Feb 2021

Iraq Freezes Crude Prepayment Deal with China’s Zhenhua

23 Feb 2021  by Adal Mirza & Sarah Raffoul   

Iraq has frozen a five-year crude prepayment deal with Chinese state-owned trading firm Zhenhua because of rising oil prices, oil minister Ihsan Abdul Jabbar Ismail said.

The deal, which was aimed at boosting Baghdad's finances, was suspended just two months after the preliminary agreement was reached. Fearing oil prices would not rise above $40/bl, Iraq provisionally awarded the contract to load Basrah crude in December, including a $2bn upfront payment.

But the deal was not activated because of rising oil prices.

"We decided to freeze this option and we did not activate it," Ismail said in an interview with BBC TV yesterday.

The minister did not elaborate or confirm whether Iraq was freezing the deal in its entirety, or only certain elements of the arrangement.

Under the deal, Zhenhua would have received 130,000 b/d of Basrah crude from Iraqi state-owned oil marketing firm Somo from 2021 to 2025.

Somo had asked bidders to be prepared to pay for 12 months of crude — loading over July 2021-June 2022 — within 30 days of signing the contract. Somo broke the normal resale and destination restriction rules that it normally applies to term contracts in an attempt to make the deal more attractive.

Oil export revenues account for more than 90pc of Iraq's financial base. Baghdad has been facing severe budgetary problems because of the fall in oil prices in 2020, as well as the Opec+ production cut agreement. Some of the pressure has eased since prices rose to around $60/bl.

Iraq's real GDP is expected to shrink by 11pc in 2020, reflecting the contraction in oil output and interruption of non-oil economic activity caused by Covid-19 restrictions, the IMF said in December. "The sharp decline in oil revenue is expected to widen the fiscal and external current account deficit to 20 and 16pc of GDP respectively," the IMF said.

Iraq's production is around 600,000 b/d lower than in 2019. The country produced 3.807mn b/d in January, down from 3.857mn b/d in December, Somo said.

Iraq's production ceiling under the latest Opec+ agreement is 3.857mn b/d in January-March, but it must also compensate by the end of March for producing above quota for much of the second half of last year.

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