Commodities giant seeks to increase stake in Iraq Kurdish oil game

Glencore is seeking to raise $550 million from investors via a debt issue guaranteed by oil from the Iraqi Kurdistan Regional Government (KRG) in an attempt to secure a big slice of the high-risk, high-reward market in a region at war with Daesh.

Kurdish oil has been targeted by European traders over the past two years, during an industry downturn, since Erbil began selling oil independently from Baghdad. It has been relatively cheap due to the potential for supply disruptions and threats from Iraq’s central government to sue anyone touching the crude.

The government of the autonomous Kurdish region in Erbil has borrowed around $2 billion from Glencore’s rivals such as Vitol, Petraco and Trafigura to be repaid in oil. The companies have all borrowed money from banks and lent it to Erbil at their own risk.

Glencore, whose commodity trading division has been under pressure to perform as mining profits have declined, was the last merchant to enter the game earlier this year by lending $300 million to Erbil.

The loan is being repaid by way of one mid-sized oil cargo a month, worth around $25 million.

Reuters cited a report that suggested that Glencore expects to enter into a new 5-year agreement with the KRG to buy its crude, with deliveries rising from one cargo in January, to two in February-March, four in April and six from May onwards.

Six cargoes a month would represent a quarter of overall exports from the KRG and would be worth over $1.7 billion a year at today’s price of around $40 per barrel for Kurdish oil, and more than $8 billion over the course of five years.

Kurdish oil sales, diminishing Iraqi sovereignty

While Glencore and rivals have loaned money to Erbil, Reuters has reported that these companies have never publicly acknowledged such deals for fears of confronting the Iraqi central government, which says the Kurds have failed to respect deals to transfer agreed volumes of oil to Baghdad.

The fact that the KRG has been able to make deals with large, international commodity traders indicates that Baghdad’s sovereignty has been significantly curtailed by semi-official actors operating within Iraq’s fractious economic, financial and political system.

KRG exports its oil via the Turkish Mediterranean port of Ceyhan. Flows have been running at over 600,000 barrels per day since September after being occasionally disrupted in 2015 and at the start of this year due to militant attacks in Turkey and the Iraqi Kurdish autonomous region.

Illegal KRG oil sales have courted controversy not only for circumventing Baghdad’s control over federal oil exports and the national budget, but also because Iraqi oil sold by Kurds has been shipped from Turkey to Israel.