China prepares to sign a multi-billion dollar oil deal with Iraq

China’s state-run Zhenhua Oil is set to sign a multibillion-dollar contract with the Iraqi government for long-term oil supply.

Iraq’s state oil marketer SOMO will receive an upfront payment for a year of supply from the Chinese company. The deal will run for five years.

Iraq will export 4 million barrels a month, or about 130,000 per day, under the deal.

According to Bloomberg, Zhenhua Oil will pay more than $2 billion to Iraq in advance. 

Last month, the cash-strapped Middle Eastern country called for a tender as part of a long-term crude oil supply deal, which includes an upfront payment. It also attracted major oil traders’ interests.

Baghdad’s deep financial crisis is rooted in corruption, mismanagement, unreliable crude exports, and the expenses spent on the war against Daesh. Reversing the economic crisis has become a daunting challenge for the country’s Prime Minister, Mustafa al Kadhimi. 

Iraq is largely dependent on oil exports, which accounts for more than 60 percent of its economy. But shaken by the protests, and badly hit by the coronavirus pandemic, Iraq’s economy has experienced a sharp decline along with its decreasing oil sales. Its oil revenue sank alongside crashing global oil prices. 

Amid the economic crisis, Iraq has seen mass protests and the country’s armed forces have responded to demonstrations by using brute force, leaving hundreds of protesters killed. 

Prepayment deals

Cash-strapped oil-rich countries sometimes make upfront payments which include deals to solve their money shortages. However, Iraq has never signed such a deal. 

In the past, the semi-autonomous Iraq Kurdistan Regional Government did sign some with nations like Chad and the Republic of Congo.

The current deal between China and Iraq will be the largest pre-payment pact of recent times.

Together with the volume of the agreement, the deal allows the buyer to transfer oil to wherever it wants in the first year. Normally, Middle Eastern oil suppliers limit the re-selling of the oil by traders of refiners to different regions.

The agreement shows the latest example of how China is using its state-controlled companies to lend money to economically struggling oil producer countries like Venezuela, Angola and Ecuador, in exchange for oil barrels rather than money.

Zhenhua Oil, which was founded in 2003, has played an important role in China’s “going global” policy for energy. It has been operating in the UAE, Kazakhstan, Myanmar, Kuwait and Brazil.