Iraq strikes $2 billion prepayment crude oil supply deal with China's Zhenhua

Iraq on January 2 struck a multibillion-dollar oil-supply deal with a Chinese firm after Iraqi Prime Minister Mustafa al-Kadhimi approved the rare contract in the Iraqi parliament. China’s ZhenHua Oil Company finalized a deal with Iraq’s State Oil Marketing Organization (SOMO) for the monthly purchase of 4 million oil barrels worth $2 billion in a 5-year annual contract. The Iraq-China crude supply deal will bolster Iraq’s economy which is in shambles due to the coronavirus pandemic. Iraq is the latest with the prepayment settlement among the Chinese state-owned trading companies that struck similar deals with Angola, Venezuela, and Ecuador, previously to rescue the cash strapped economies. 

Head of Iraq’s oil marketing company SOMO that overseas petroleum exports, Alaa al-Yasiri, told state news agency INA that the deal made following the recent OPEC agreements will make revenues worth $4.2 billion for the Republic of Iraq. He added that the firm had received several bids from oil trading corporations, including the ZhenHua Oil Co., a subsidiary of China’s largest state-owned defense contractor that Bloomberg reported bagged the contract just last month.

SOMO signed a deal with China’s ZhenHua to supply 130,000 barrels per day of crude oil with an upfront annual payment. INA reported manager Alaa al-Yasiri as providing the supply dates flexibility to China in a specially drafted mechanism at zero interest with a premium over the price, which was approved by the Iraqi cabinet. He further cited, that the Chinese firm got the deal post a cut-throat competition with the European oil companies. 

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Iraq's GDP to shrink by 9.5 percent

OPEC’s second-largest producer, Iraq, priced the crude oil at $49 per barrel, with expectations that oil prices will improve in months ahead despite the pandemic. China’s ZhenHua Oil Co., the winning bidder bagged the contract despite interest from the major traders in the market. The cash-for-oil deal is the first for the Iraqi federal government that will boost Iraq’s budget income as Iraq's economy has been suffering from the twin shocks of the COVID-19 pandemic, according to the World Bank report. The new Fall 2020 edition of the Iraq Economic Monitor titled “Protecting Vulnerable Iraqis in the Time of a Pandemic: The Case for Urgent Stimulus and Economic Reforms” found that nearly 5.5 million more Iraqis could fall into poverty due to the potential reduction of the public wage bill, shrinking Iraq's GDP by 9.5 per cent.

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