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Iraq freezes oil pre-payment deal with Zhenhua amid rising crude prices: minister

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Iraq freezes oil pre-payment deal with Zhenhua amid rising crude prices: minister

Highlights

$2 billion deal was for one-year prepayment of 5-year supply

Supply was supposed to be 4 million barrels per month

The deal was the first such attempt by federal Iraq

Dubai — Iraq has put on hold an oil supply pre-payment deal with China's state-owned Zhenhua Oil Co. due to the uptick in crude prices this year, the country's oil minister told BBC News Arabic Feb. 21.

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"There was a fear that oil prices will not rise above $40/b and we were afraid of the delay in the [fiscal] budget approval. We had a number of incentives to do this announcement for the first time in Iraq," Ihsan Ismaael said in the interview.

"But with the start of this year and the economic stability resulting from the stability in the oil price, we decided to freeze this attempt, to freeze this option."

Iraq's State Oil Marketing Organization had selected Zhenhua Oil Co. as 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 pre-payment deal, which is for the 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 told S&P Global Platts Feb. 15 that OPEC's second-largest producer is unlikely to pursue similar schemes in the near future.

Kurdish standoff

Separately, Ismaael said he expects a resolution to the lingering standoff with the semi-autonomous Kurdistan region over its revenue from its oil exports.

Under the proposed 2021 fiscal budget law, Kurdistan is expected to offer the value of 250,000 b/d of its oil exports to federal Iraq based on SOMO's "competitive" crude price, the minister added.

Iraqi lawmakers are still debating the country's 2021 budget amid disagreements over the size of revenue and expenditures, Kurdish oil exports and the semi-autonomous region's share of state revenue.

Iraqi officials, including Ismaael, have in the past blamed Kurdistan non-compliance with OPEC+ cuts for the country's overall oil overproduction last year.

Iraq produced 3.807 million b/d of crude in January, including from flows from Kurdistan, SOMO said Feb. 3., below its quota of 3.857 million b/d, which is effective through March.

Production from the federal government rose 0.7% to 3.388 million b/d in January, while output from Kurdistan fell 15% to 419,000 b/d, SOMO data showed.