Iraq’s SOMO close to JV with China’s Zhenhua to boost crude sales

Flames rise from the burning of excess hydrocarbons at the Hammar Mushrif new Degassing Station Facilities site inside the Zubair oil and gas field, north of the southern Iraqi province of Basra on May 9, 2018. (AFP)
Updated 27 August 2018
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Iraq’s SOMO close to JV with China’s Zhenhua to boost crude sales

  • The move will bolster Iraq’s position in Asia, the world’s biggest and fastest-growing oil-consuming region
  • China is under the pressure to cut oil purchases from Iran, OPEC’s third-largest producer

BEIJING/DUBAI: Iraq’s state oil marketer SOMO is close to a deal with China’s state-run Zhenhua Oil to boost the OPEC member’s crude oil sales to the world’s top oil importer, four sources with knowledge of the matter said.
Iraq is the second-largest producer in the Organization of the Petroleum Exporting Countries (OPEC). The move will bolster Iraq’s position in Asia, the world’s biggest and fastest-growing oil-consuming region, which already takes 60 percent its oil exports at some 3.8 million barrels a day (bpd).
“Zhenhua helped Iraq to penetrate the Chinese market and make more revenues for Iraq,” said a senior source familiar with the discussions on the deal, adding that a 50/50 proposed joint venture could be finalized in October or November.
Another source said the deal was pending regulatory approvals, giving no further details.
It is not clear where the JV would be located, but two of the sources familiar with the negotiations said the port city of Tianjin, near Beijing, was under discussion. Singapore is also among the options, they said.
All four sources declined to be named as they were not authorized to discuss commercial matters with media.
Zhenhua declined to comment. SOMO did not immediately respond to an email request for comment.

Under Pressure

China is under the pressure to cut oil purchases from Iran, OPEC’s third-largest producer, as the United States re-imposes sanctions on Tehran and threatens to choke off the Islamic republic’s oil exports to zero.
Amid the trade dispute between Washington and Beijing it is also unclear whether Chinese importers will be able to continue to import US crude.
The SOMO-Zhenhua deal would give China another crude supply option as the Iran and US oil flows are threatened.
Zhenhua’s relationship with SOMO goes back to former Iraqi President Saddam Hussein’s days, when China-based parent company defense conglomerate Norinco, was among the first Chinese entities active in Iraq’s oil and gas exploration.
Last year, Zhenhua won a term contract to supply diesel fuel to SOMO for the first time, and it also recently entered a deal to develop Iraq’s East Baghdad oilfield.
Zhenhua has been marketing Iraq’s main crude grade, Basra Light, for SOMO since the start of 2018 and has also sold some to Taiwan, said a separate Singapore-based trading source.
Zhenhua, the smallest of China’s state-run oil and gas majors, has over the past three years expanded its foothold in oil sales to independent Chinese refiners, which were only allowed to start importing crude from 2015 and now make up some 20 percent of China’s total crude imports.
Zhenhua’s crude sales to such independents, sometimes known as “teapots,” hit a record 6.5 million tons last year, or 131,000 bpd, equivalent to about 7 percent of overall teapot purchases, according to industry estimates.
China’s state oil majors Sinopec, CNOOC and PetroChina are regular Iraqi oil customers under term supply deals with SOMO or oilfield service contracts.


Gulf tanker incidents to raise shippers’ costs, cut traffic

Updated 1 min 14 sec ago
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Gulf tanker incidents to raise shippers’ costs, cut traffic

WASHINGTON: Recent seizures and attacks aimed at oil tankers in the Strait of Hormuz will raise insurance rates for shipping companies and, if unchecked, reduce tanker traffic in the vital waterway, according to energy experts.
Britain’s foreign secretary said that Iranian authorities on Friday seized two ships, one flying under the British flag, the other registered in Liberia. The events occurred in a passageway that carries one-fifth of the world’s crude exports.
“If this kind of problem continues, you might see people start to shy away from the (Persian) Gulf or try to reflag — not be a British tanker,” said energy economist Michael Lynch.
The near-term impact will fall most heavily on the shipping industry in the form of higher insurance rates, said Lynch, who is the president of Strategic Energy & Economic Research Inc.
Richard Nephew, a Columbia University researcher who wrote a book on sanctions, also believes the tanker seizures could create “a real risk premium” for companies that operate in the Gulf and insurers that underwrite them.
“Certainly we’ve seen concern with this in the past on sanctions grounds, and I would imagine security groups would be a far more complicating element,” Nephew said.
On Friday, Iran’s Revolutionary Guard said it took the British tanker Stena Impero to an Iranian port because it allegedly violated international shipping regulations. An Iranian news agency said the Liberian-flagged Mesdar was briefly detained and then released after being told to comply with environmental rules.
The seizures marked a sharp escalation of tension in the region that began rising when the Trump administration withdrew from a 2015 nuclear deal with Iran and imposed severe restrictions on Iranian oil exports and other sanctions.

FASTFACT

The British navy seized Iran’s Grace 1 tanker in Gibraltar on July 4 on suspicion of smuggling oil to Syria in breach of EU sanctions.

Many of the 2,000 companies operating ships in the region have ordered their vessels to transit the Strait of Hormuz only during the daylight hours and at high speed. But only a handful of the companies have halted bookings.
The tensions in the Gulf also pushed oil prices slightly higher. Brent crude, the international standard, rose 0.9 percent to $62.47 a barrel on Friday, while benchmark US crude gained 0.6 percent to settle at $55.63.
There’s a long history of shippers enduring threats in the region.
“There have always been little problems around the Gulf where people will say, ‘You’re in our territorial waters,’ but usually that doesn’t go so far as the seizure of tankers,” Lynch said.