Iraq Seals Much-Needed $2 Billion Oil Deal With China

Iraq has confirmed it has struck a deal with a Chinese company to supply it with crude oil and earn an advance payment of $2 billion.

Iraq's SOMO, the state oil marketing company, said the amount to be received will carry no interest and will represent a premium over oil prices, the Financial Times reported, citing the company's general manager.

While the company's name was not revealed, Argus reported in late December the winner was Zhenhua, a division of state-owned defense corporation Norinco. Norinco, the report noted, operates a 120,000-bpd refinery.

News of Iraq seeking a prepayment oil supply deal with buyers first emerged last November, as Baghdad struggled to keep the country functioning amid the oil price crunch and the OPEC-enforced oil production cuts. The deal was to be for a term of five years, until December 2025. Over this period, Zhenhua will get 48 million barrels of crude from SOMO annually, Argus reported.

"Prepaid oil cargoes are part of an urgent plan to boost state budget and overcome financial crisis. We have obligations towards OPEC to cut output, we have to repay foreign companies debts and also to keep our economy standing and this is why we need cash in advance for some of our oil sales," an official from the Iraq's oil ministry said at the time.

Oil revenues are vital for the Iraqi economy. According to the FT, as much as 90 percent of the state budget income comes from oil exports. The country is still struggling to get back on its feet after the war with Islamic State, too, which makes these revenues all the more vital.

For the Chinese company, the deal is good. It has locked in low oil prices just as global benchmarks are starting to go higher. For Iraq, the value of the agreement represents less than 4 percent of the expected oil revenues for this year, according to analysts.

By Irina Slav for Oilprice.com

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