Iraq has scrapped a $2 billion pre-paid oil supply agreement with China's state-owned Zhenhua Oil Co. and sold the crude earmarked for the deal to other customers, as Baghdad seeks to take advantage of rising prices, a top oil official told S&P Global Platts.
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Iraq's State Oil Marketing Organization earlier this year had selected Zhenhua as the winning bidder for the agreement, which included a one-year $2 billion prepayment and called for 4 million barrels of crude to be supplied each month.
Under the deal, the oil was supposed to be destination-free and Zhenhua would have been allowed to resell cargoes.
"For the time being we may say it is not applicable at this stage because of oil prices, which are high and we are in a better position and we are even generating additional profits in excess of what the Iraqi budget needs," SOMO's deputy director general Ali al-Shatari told Platts. "The oil has been allocated already. We have demand for our crude more than the availability of crude so at any time we have excess of crude, a number of customers would need to take it and to increase their contractual quantities based on it."
Iraqi oil minister Ihsan Ismaael had said Feb. 21 that SOMO had decided to "freeze" the deal, which would have been the state marketer's first such transaction.
SOMO sold its crude at an average oil price of $65.842/b in May, a 23.5% increase from its average oil price in January, according to oil ministry data.
A Beijing-based source with knowledge of the matter confirmed that Zhenhua and SOMO had terminated the deal. However, Zhenhua's previous term contracts for Iraqi crude have not been affected, the source added.
Zhenhua supplies about 18 million barrels of Iraqi crudes each year to its sister refinery Huajin Chemical, in addition to cargoes to other Chinese refineries, market sources said.
"We have a good and even perfect business relationship with our Chinese customers including Zhenhua. They understand our position," said Shatari.
Zhenhua, owned by Norinco, has been lifting Iraqi crude for its refineries since early 2009. In 2019, SOMO signed a profit-sharing agreement with Zhenhua, under which SOMO gets a percentage of the earnings from resold Iraqi crude.
SOMO also has a similar profit-sharing agreement with state-owned Sinochem.
Usually SOMO's contracts with customers are for oil sold directly to their refineries, but these profit-sharing agreements allow companies such as Zhenhua and Sinochem to sell the Iraqi crude to other customers, mainly in the Far East.
Shatari declined to disclose the percentage of profit sharing, the majority of which goes to SOMO.
SOMO is also exploring other business opportunities with a number of customers including Zhenhua, Shatari said.
"We have current business ideas, in general, to increase SOMO and Iraq's crude existence in the Chinese market and Asia in general," Shatari said. "This may include storage capacities, trading activities or facilitating trading activities in the market itself, not necessarily on FOB basis from Iraq. It could be even from there in China to sell our crude and to enter other products' business."
SOMO has been in discussions with companies in Asia, including China, to have storage for Iraqi crude there.
"There is progress in discussions, but not in taking the final decision or which one is more feasible than another," said Shatari. "But the number of companies offering this and the expansion of the way we are digging deep into the details in these discussions can be marked as progress."
In May, Iraq was the third biggest oil exporter into China, after Saudi Arabia and Russia.
India and China are Iraq's largest crude export markets.