Page 4 - DMEA Week 47 2020

DMEA COMMENTARY DMEA

Iraq sees oil pre-

payment as solution

to cash flow crisis

Iraq is seeking to use future oil sales to plug a major budget deficit

IRAQ IRAQ’S State Oil Marketing Organization 2.18mn bpd of Iraq’s exports during the first nine
(SOMO) this week proposed to its crude oil cli- months of 2020, according to Argus tracking
WHAT: ents a pre-payment option as Baghdad seeks to data, while the Heavy grade averaged just shy of
Iraq has proposed that use future oil sales to plug a major budget deficit. 800,000 bpd.
buyers pay for a year’s In documents leaked to Iraq Oil Report, In early November, SOMO said that Kurd-
supply in advance to SOMO’s director general Alaa al-Yassiri pro- istan was responsible for 446,000 bpd of Iraq’s
guarantee supplies for a posed that buyers should pay for a year’s supply total 3.482mn bpd average daily October crude
five-year period. in advance to guarantee crude supplies for a five- production. Erbil meanwhile quoted a fig-
year period. The outlet reported that Baghdad ure of 416,000 bpd, a drop of 21,000 bpd from
WHY: is seeking to raise $1.7bn through the initiative. September.
Authorities are though to Meanwhile, Bloomberg quoted the confiden- The Federal Iraqi figure shows that rather
be operating at a monthly tial letter, saying: “SOMO, on behalf of the Min- than the deeper cuts pledged by Baghdad
deficit of $3-4bn. istry of Oil [MoO], has the interest to propose between September and December, produc-
a long-term crude-supply deal in exchange for tion expanded by 242,000 bpd from Septem-
WHAT NEXT: prepayment for a fraction of the total allocated ber and remains around 38,000 bpd above its
Iraq is understood to quantity,” noting that by its calculations, the August-December quota.
be one of the OPEC move would bring in around $2bn per customer. Meanwhile, the country’s exports also
members opposed to The proposal stipulates supply of 4mn barrels per increased during the month, by more than
extending current output month, around 130,000 barrels per day (bpd). 200,000 bpd compared to the previous month.
reductions. The Iraqi authorities are thought to be oper- Total Iraqi oil exports stood at 2.968mn bpd for
ating at a monthly deficit of $3-4bn. October with revenues totalling $3.43bn, based
Last week SOMO sources were quoted by on an average price of $38.48 per barrel.
S&P Global Platts as saying that it expects to Baghdad is reported to be among several
achieve a sales volume of 1mn bpd of the new OPEC member countries opposed to extending
Basrah Medium crude grade, which will be the current 7.7mn bpd reductions of the OPEC+
launched in January 2021. group, though Oil Minister Ihsan Abdul Jabbar
The sources added that the company has has denied this and said that Iraq would back any
not yet concluded 2021 term contracts, as work decision made by its partners.
remains ongoing to determine official selling The original agreement would see produc-
prices which are likely to be sold at a discount to tion cuts being relaxed by 2mn bpd from Janu-
Basrah Light, though given the grade’s similari- ary, a move that would serve to exacerbate Iraq’s
ties to Saudi Arabia’s Arab Heavy, it may achieve already strained finances.
a similar price. With this in mind, Deputy Prime Minister
This week, SOMO announced the revision of Ali Allawi told a virtual conference this week: “I
its compensatory pricing mechanism for fluc- think … we have reached the limit of our ability
tuations in crude density. In a statement quoted and willingness to accept [an OPEC] policy of
by Reuters on November 23, the company said ‘one size fits all’. We are beginning to articulate
it would compensate Basrah Light and Bas- that position.”
rah Medium buyers by $0.4 per barrel for each He added: “We should not accept the ‘one size
degree below the grades’ associated agreed API fits all’ model that is being pursued now. I do not
gravity. Meanwhile, lifters of Basrah Heavy are particularly think that it is correct to apply this,
to receive a discount of $0.6 per barrel for every especially over a long period of time, [to] the
degree the consignment falls below the agreed OPEC cutbacks, without taking into account the
API. economic, social and demographic and political
Following the introduction of Basrah conditions.”
Medium, the new grade will have an API gravity While Iraq is not expected to depart from
of 29 degrees, with Basrah Light coming in at 33 the cartel, such statements undermine previous
degrees and Basrah Heavy 24 at degrees. announcements that Baghdad would do ‘what-
The Light grade crude accounted for around ever’ was agreed by the group as a whole. ™

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