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.


‘Get prices down’ Trump tells OPEC

Updated 20 September 2018
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‘Get prices down’ Trump tells OPEC

  • Trump highlights US security role in region
  • Comments come ahead of oil producers meeting in Algeria

LONDON: US president Donald Trump urged OPEC to lower crude prices on Thursday while reminding Mideast oil exporters of US security support.
He made his remarks on Twitter ahead of a keenly awaited meeting of OPEC countries and its allies in Algiers this weekend as pressure mounts on them to prevent a spike in prices caused by the reimposition of oil sanctions on Iran.
“We protect the countries of the Middle East, they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices!” he tweeted.
“We will remember. The OPEC monopoly must get prices down now!”
Despite the threat, the group and its allies are unlikely to agree to an official increase in output, Reuters reported on Thursday, citing OPEC sources.
In June they agreed to increase production by about one million barrels per day (bpd). That decision was was spurred by a recovery in oil prices, in part caused by OPEC and its partners agreeing to lower production since 2017.
Known as OPEC+, the group of oil producers which includes Russia are due to meet on Sunday in Algiers to look at how to allocate the additional one million bpd within its quote a framework.
OPEC sources told Reuters that there was no immediate plan for any official action as such a move would require OPEC to hold what it calls an extraordinary meeting, which is not on the table.
Oil prices slipped after Trumps remarks, with Brent crude shedding 40 cents to $79 a barrel in early afternoon trade in London while US light crude was unchanged at about $71.12.
Brent had been trading at around $80 on expectations that global supplies would come under pressure from the introduction of US sanctions on Iranian crude exports on Nov. 4.
Some countries has already started to halt imports from Tehran ahead of that deadline, leading analysts to speculate about how much spare capacity there is in the Middle East to compensate for the loss of Iranian exports as well as how much of that spare capacity can be easily brought online after years of under-investment in the industry.
Analysts expect oil to trend higher and through the $80 barrier as the deadline for US sanctions approaches.
“Brent is definitely fighting the $80 line, wanting to break above,” said SEB Markets chief commodities analyst Bjarne Schieldrop, Reuters reported. “But this is likely going to break very soon.”