Iraq is seeking an upfront payment of about $2 billion in exchange for a long-term crude-supply contract, the latest sign of Baghdad’s growing desperation for cash as its economy unravels.
The country is grappling with a crisis brought to a head by low oil prices and OPEC+ output cuts. As state coffers dwindle and school teachers go unpaid, the country risks a repeat of upheaval last year that brought down the government and saw hundreds of protesters killed.
In a letter to oil companies seen by Bloomberg News, the Iraqi government sought to mitigate its dire financial position by proposing a five-year supply contract delivering 4 million barrels a month, or about 130,000 barrels a day. The buyer would pay upfront for one year of supply, which at current prices would bring in just above $2 billion, according to Bloomberg calculations.
The letter from SOMO, the Iraqi state-owned agency in charge of petroleum exports, was first reported by the Iraq Oil Report.
“SOMO, on behalf of the Ministry of Oil, has the interest to propose a long-term crude-supply deal in exchange for prepayment for a fraction of the total allocated quantity,” according to the letter, which was marked strictly confidential. It asked potential buyers to respond by Nov. 27.
According to Bloomberg, cash-strapped oil producers have often relied on pre-payments deals to raise money, but Baghdad hasn’t done so until now.
SOMO has revised the price mechanism used to compensate buyers for fluctuations in the density of its crude exports, starting with shipments in 2021, according to a Nov. 23 notice to clients reviewed by Reuters.
The announcement follows SOMO's plan to launch a third crude oil export grade called Basra Medium in January, by splitting the existing Basra Light production into two grades.
The new Basra Light export grade will have an American Petroleum Institute (API) gravity of 33 degrees after the split while Basra Medium's gravity will be 29 degrees. The existing Basra Heavy crude, which SOMO started marketing in 2015, has an API gravity of 24 degrees.
SOMO will compensate Basra Light and Basra Medium lifters by 40 cents per barrel for each full degree below the grades' API gravity. Basra Heavy lifters will receive 60 cents per barrel for every degree the cargo is below its specific API gravity, the notice said.
API gravity is an indicator of an oil's density. Lower gravity oil tends to produce more fuel oil after refining while higher gravity crudes tend to produce more higher-value products such as gasoline and diesel fuel when refined.
Iraq exported about 2.77 million barrels per day of Basra crude in October and it is the second-largest producer in the Organization of the Petroleum Exporting Countries.
