Iraq Enters $2B Oil Prepayment Deal With China

Iraq has selected a Chinese company for a multibillion-dollar oil-supply deal, as the Arab nation seeks funds to bolster an economy reeling from the Coronavirus-triggered collapse in energy prices, reported Bloomberg. 

SOMO, which oversees Iraq’s petroleum exports, picked a Chinese firm after receiving bids from several traders, the official Iraqi News Agency reported, citing an interview with the head of SOMO, Alaa Al-Yasiri. While INA didn’t name the company or specify if Prime Minister Mustafa al-Kadhimi had signed off on the deal, Bloomberg reported last month that ZhenHua Oil, a subsidiary of China’s largest state-owned defense contractor, was the winner.

“There was intense competition between two European and Chinese companies, and the Chinese company won,” INA quoted Al-Yasiri as saying.

It’s the first time Baghdad has sought a prepayment deal, in which oil is effectively used as security for a loan. It’s also the latest example of China lending to struggling oil producers via state-controlled trading companies and banks.

SOMO offered to supply roughly 130,000 barrels a day of crude for five years, according to a letter it sent traders in November. It wanted upfront payment for one year of supply, which at current prices would bring in more than $2 billion, according to Bloomberg calculations. The winner gets flexibility in choosing when to ship the crude for a year, Al-Yasiri said. This mechanism was approved by the cabinet, he said.

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