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China to bail out Iraq in multibillion dollar oil deal

Oil tanksers seen at the Al-Basra Oil Terminal in Iraq [Samuel W. Shavers/Wikipedia]
Oil tankers seen at the Al-Basra Oil Terminal in Iraq, 16 May 2017 [Samuel W. Shavers/Wikipedia]

Iraq is currently deciding whether to go ahead with a multibillion dollar oil deal with China which will bail the country out as part of the effort to solve Baghdad's worsening economic crisis. The deal comes after SOMO, Iraq's state agency in charge of oil exports, welcomed bids from various oil traders and companies in a letter issued last month.

That resulted in "several offers" being made by various companies. These were then evaluated by Prime Minister Mustafa Al-Kadhimi, reported Bloomberg, which quoted cabinet spokesman Hassan Nadhim.

In the Iraqi government's bid conditions, SOMO said that the successful company would purchase four million barrels of oil per month, or around 130,000 per day, with the first year's supply being paid for up front. The deal is meant to last for five years.

In return for supplying oil to the winning bidder, Iraq will receive $2 billion for a fraction of the promised quantity of oil, with the balance paid later. The barrels of oil are effectively security for a loan.

READ: Iraq eyes construction deals with China in return for oil sales

The winning bidder turned out to be ZhenHua Oil Co., a major state-owned company in China with ties to the Chinese military. It is the latest example of China's international lending strategy, in which state-controlled banks and trading organisations lend money to oil-rich countries struggling to keep afloat financially, such as Venezuela, Ecuador, Angola and now potentially Iraq.

If Prime Minister Al-Kadhimi signs the deal, then it would not be the first time that the company has dealt with Iraq. ZhenHua Oil, which trades around 1.3 million barrels per day of oil and other products, began a joint-venture with SOMO back in 2018 in order to help market Iraqi oil in China to increase exports. That venture was later scrapped.

Iraq's economy and oil industry suffered greatly from the oil price crash earlier this year, after Russia and Saudi Arabia triggered an oil price war in March over a dispute over oil production.

In September, Iraq's crude oil exports fell by six per cent and last week its oil minister acknowledged that the industry is in a critical condition due to the coronavirus pandemic.

READ: What impact will the oil price crash have on the Arab world?

Asia & AmericasChinaIraqMiddle EastNews
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