Iraq plans major change to oil pricing

Excess gas is burnt off at a pipeline at the Zubair oilfield in Basra, Iraq, in this August 9, 2017 photo. (REUTERS)
Updated 22 August 2017
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Iraq plans major change to oil pricing

DUBAI: Iraq has informed its customers that it plans to switch its price benchmark for Basra crude in Asia to DME Oman futures from January, dropping the average of Platts’ Oman-Dubai quotes, in a major shift in the way it prices its oil.
The proposal by state-oil marketer SOMO would mark a significant change by OPEC’s second-largest producer away from fellow members Saudi Arabia, Kuwait and Iran, which have been using price assessments from global agency S&P Global Platts as their benchmark for decades.
It throws down the gauntlet on setting prices for more than 12 million barrels per day of Middle East crude in Asia, challenging the role of the world’s top exporter Saudi Arabia.
“In an effort to realize the intrinsic value of our crude exports to Asia as to be in alignment with the recent market perception, we are contemplating a change of the current pricing formula for the Asian market,” SOMO said in a letter dated Aug. 20 and sent to its customers, according to a copy seen by Reuters on Monday.
It asked customers for opinions on the plan by Aug. 31.
SOMO and the Dubai Mercantile Exchange (DME) did not immediately respond to Reuters requests for comment.
Iraq has been reforming its oil sector — including launching crude sales through auctions on DME to achieve higher prices and setting up trading and shipping joint ventures to understand market dynamics — in what is seen as a drive to gain influence and bring in more revenue as the country seeks to rebuild its economy.
“DME has shown good practice and better transparency than Platts, they also have an auction system,” one source familiar with the matter said.
The move also appears to reflect SOMO’s aim to lead a change in crude pricing rather than following Saudi Arabia, OPEC’s biggest producer whose crude official selling prices (OSPs) set the trend for other major Middle East producers.
Iraqi crude grades are not used in any of the Middle East price benchmarks. Platts assesses its Dubai price based on deliveries of Dubai, Oman, Abu Dhabi’s Upper Zakum and Qatari Al-Shaheen crude.
“The Iraqis probably want to get in on the game of being a benchmark grade,” a Singapore-based oil trader said.
SOMO has proposed pricing crude loading in the current month using DME Oman prices from two months previously, according to SOMO’s letter to its customers.
“Such a mechanism is intended to reflect the real value of Iraqi crude oil based on the trading month in the Asia market,” SOMO said in the letter.
The change in the benchmark will affect the pricing of about 2 million barrels per day of crude that are shipped to Asia, or close to two-thirds of Iraqi crude exports from the southern port of Basra, the outlet for most of the country’s crude.
“Lately they (the Iraqis) have managed to achieve good premiums via the DME action, so there is some added value,” said an industry source at a Middle East producer.
Since April, Iraq has sold 1-2 cargoes of Basra crude per month through an auction platform on the DME as a test for future Iraqi oil sales.
Oman crude futures, launched in 2007 by the DME, are the only liquid futures contracts for Middle East crude in Asia.


Saudi Arabia scores high on prices and tax efficiency: IMD survey

Updated 56 min 7 sec ago
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Saudi Arabia scores high on prices and tax efficiency: IMD survey

  • The Kingdom ranks second in the world for pricing of goods and service
  • IMD said that most countries in the Middle East overcame political tensions in the region to experience improvements in their competitiveness

DUBAI: Competitive pricing and an efficient tax regime are two big highlights of the Saudi Arabian economy according to the annual ranking of global competitiveness by the Swiss business school IMD.
The Kingdom ranks second in the world for pricing of goods and services, and seventh for the efficiency of the government’s tax regime, according to the IMD’s World Competitiveness Ranking 2018.
But despite improvements in some areas of the economy, Saudi Arabia slipped three places in the global rankings, to 39th position out of 63 countries assessed.
IMD said that most countries in the Middle East overcame political tensions in the region to experience improvements in their competitiveness. The UAE was the top ranked, in 7th position, mainly due to strengthening of its international trade.
In a survey of executive opinion which accompanied the rankings, large proportions of respondents identified Saudi Arabia’s cost of competitiveness (53.7 percent), the dynamism of its economy (52.4 percent) and its competitive tax regime (45.1 percent) as key reasons for the attractiveness of the economy.
The Kingdom was ranked highly for its consumer price inflation policy and exchange rate management, and for its efficiency in assessing and collecting consumer and other taxes. Expenditure on education was also highly rated.
However, IMD also identified five key challenges in the current year to enhance overall competitiveness: Balancing the budget deficit and mitigating exposure to oil price fluctuations; developing legal and regulatory frameworks to support privatization and the development of strategic sectors in the Vision 2030 strategy.
It also stressed the need to develop human capital and increase workforce participation for men and women; continue the changes to the fees structure for business startups; and the need to adopt international best practice for licensing activities.
The US was the highest ranked country in the survey, now in its 30th year, overtaking Hong Kong in the top slot. Singapore, the Netherlands and Switzerland made up the rest of the top five countries.
The return of the US to the top slot was driven by its strength in economic performance and infrastructure, which were both ranked number one in the world. Nordic countries and Canada comprised the rest of the top ten, along with the UAE.
Two big risers in the 2018 rankings are Austria (18th, up seven places) and China (13th, up five places).
Professor Arturo Bris, director of the Geneva-based World Competitiveness Center, said: “This year’s results reinforce a crucial trait of the competitiveness landscape. Countries undertake different paths toward competitiveness transformation. Countries at the top of the rankings share an above average performance across all competitiveness factors, but their competitiveness mix varies. One economy, for example, may build its competitiveness strategy around a particular aspect such as its tangible and intangible infrastructure; another may approach competitiveness through their governmental efficiency.”
The bottom five economies show a slight change in their performance especially those countries that have experienced economic and political distress in the last few years. While Mongolia (62) and Venezuela (63) remained in the last positions, Ukraine (59) and Brazil (60) improved.
Brazil’s improvement is the first since 2010 due to a positive shift in real GDP and employment. Ukraine increased because of its business efficiency. Their rise pushed Croatia down two places to 61, IMD said.