Page 6 - MEOG Annual Review 2021

MEOG FEBRUARY MEOG

Iraq suspends SOMO prepayment

deal as market mood changes

Iraq’s oil ministry halted the prepayment deal to sell crude at a price that would have
undervalued the country’s most valuable commodity following the rapid rebound in oil prices.

IRAQ IRAQI Oil Minister Ihsan Abdul Jabbar this solution for some time. However, given the lack
week announced that Baghdad has frozen a of warning and short deadline, the move bears
prepayment deal with China’s Zhenhua Oil Co. the hallmarks of a knee-jerk reaction to fill Bagh-
WHAT: for 4mn barrels per month of crude, citing the dad’s $3-4bn monthly operating deficit.
SOMO’s December recent oil price rally to above $60. The award followed a brief bidding period
prepayment deal with Speaking to BBC News Arabia, Jabbar, also which was extended from four days to 11 to
Zhenhua has been put on referred to as Ihsan Ismaael, said: “There was a give potential participants more time to prepare
hold amid the ongoing fear that oil prices will not rise above $40 per bar- paperwork and fulfil banking requirements.
oil rally. rel and we were afraid of the delay in the [fiscal] However, the short window and large upfront
budget approval. We had a number of incentives cost meant those able to take part were effectively
WHY: to do this announcement for the first time in limited to state-backed Chinese companies and
Iraq had launched the Iraq.” international oil firms.
initiative to guarantee However, he added: “with the start of this year Meanwhile, Argus Media quoted an
income with fears of oil and the economic stability resulting from the sta- informed banking source as saying that compa-
prices being stuck below bility in the oil price, we decided to freeze this nies already engaged in oilfield development in
$40 per barrel, but has attempt, to freeze this option.” Iraq were best positioned to win the tender given
since had a change of In December, Zhenhua was awarded a five- that they would have already carried out relevant
heart. year term crude supply tender from Iraq’s state due diligence.
oil marketer SOMO under an arrangement that The move came as a surprise given that it
WHAT NEXT: included a $2bn pre-payment for the first year’s was a novel approach for Baghdad. With mar-
With oil prices having crude volume. The agreement guaranteed Zhen- ket sentiment appearing to have completed a
risen so quickly, hua the supply of 48mn barrels of crude per year near full turnaround over the past few weeks,
Baghdad is seeking to from January 2021 to December 2025. the experiment appears to be over, with SOMO
resist the temptation to The contract had been pending approval by deputy director-general Ali al-Shatari telling
produce more than its the Iraq Cabinet and Finance Ministry, following S&P Global Platts that the country is unlikely
OPEC+ quota and the which Zhenhua was to be given 30 days to pay pursue such initiatives again soon.
compensatory cut level the $2bn pre-payment for loadings between July He added that even if it was to be revisited,
it promised to remain 1, 2021 and June 30, 2022. prepayment deals would not become a ‘trend’
within. SOMO is understood to have been consid- because SOMO’s “target is not to allocate more
ering implementing an oil sales pre-payment than, for the time being, around 5% of our

P6 www. NEWSBASE .com Annual Review •2021