Iraq confirms $2bn oil prepayment agreement with Chinese firm

The Chinese firm will pay for a full year's worth of crude prior to loading shipments

A worker checks the valve of an oil pipe at Nahr Bin Umar oil field, north of Basra, Iraq December 21, 2015. Iraq has signed deals worth $1.4 billion to ship about 160,000 barrels per day of crude to two Indian refiners in 2016, sources said, upping the ante in a race among exporters to cement their market share in Asia - the world's top oil consuming region.  Picture taken December 21, 2015. REUTERS/Essam Al-Sudani
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Iraq signed a $2 billion agreement on Sunday with a Chinese buyer who will pay in advance for crude exports.

The deal comes as the cash-strapped oil producer is looking for ways to raise funds.

Alaa Al Yasiri, general manager of the State Organisation for Marketing of Oil, said a mechanism that does not adversely affect Iraq had been set up, providing greater flexibility over the marketing of its crude.

"Several offers have been made by the companies and there was intense competition between two European and Chinese companies, and the Chinese company won," Mr Al Yasiri told the Iraqi News Agency.

He did not disclose the name of the company but said Iraq will receive "$2bn at zero interest" through the sale. Media reports last month said the country had entered a supply agreement with ZhenHua Oil, a subsidiary of China's largest state-owned defence contractor.

Under the agreement, the Chinese firm will pay for a full year's worth of crude before loading shipments. Usually, payments are made 30 days after crude exports are loaded.

"The flexibility that Iraq has granted to companies is the freedom to determine the day of loading the shipments, the export destination, the possibility of resale and a set of marketing benefits in return," Mr Al Yasiri said.

Iraq is navigating a debilitating economic crisis compounded by falling oil prices in 2020 caused by the Covid-19 pandemic, as well as an ongoing health crisis.

Baghdad last month devalued its currency by around 23 per cent against the US dollar, the first adjustment in the currency peg since 2015.

Under the country’s provisional budget, an allocation of 150 trillion dinars ($103bn) was earmarked for spending, against expected revenue of 92tn dinars, leaving the government with a gaping deficit.

Opec’s second-largest producer depends on oil revenue to meet 90 per cent of government expenditure, including $5bn spent on monthly salaries for public servants.

Iraq's sovereign debt is rated as B- by Fitch Ratings, six notches below investment grade. The country has almost exhausted its borrowing options and is looking for prepayment for oil exports as an immediate and cost-effective way to help plug its budget deficit.

Monetary support from the Central Bank of Iraq increased to 28.5tn dinars by the end of August, from 14.1tn dinars at the end of May, Fitch said in a note in December.

Borrowing has plateaued because the government requires parliament’s approval to sanction more spending.

The Iraqi government is also considering wide-ranging reforms, which include halving its wage bill. Currently, about a quarter of government spending goes to paying civil servants.

The prepayment contract with the Chinese firm is a "positive" move, said Ahmed Tabaqchali, chief investment officer at the AFC Iraq Fund and a fellow at the Kurdistan-based Institute of Regional and International Studies.

"The concept of using the futures market or along those lines to hedge your production, I think that's certainly a positive thing and Iraq should look at it, not exclusively but definitely, given the fact that our issue, most of the time, is variable revenues that meet rigid and sharply increasing expenditure," he said.

Baghdad will continue targeting Asian markets, as it considers sales to the region generally deemed to be the most profitable, Mr Al Yasiri said. Opec's second-largest producer sells nearly 70 per cent of its crude to Asia, including India, China and South Korea.

The country's agreement with Opec+, which is cutting back crude production of around 7.2 million barrels per day, has had a positive impact on Iraq, Mr Al Yasiri said, as the country has been able to earn higher revenues from the sale of a lower volumes of crude at higher prices.