State-owned oil firm hopes to patch up Iraqi economy with new supply contracts

ERBIL, Kurdistan Region — Iraq’s state-owned oil marketing firm hopes to bag two billion US dollars upfront in exchange for a five-year crude supply contract with clients, according to a letter obtained by Iraq Oil Report. 

Iraq's State Oil Marketing Organization (SOMO) has sent a proposal to its potential buyers offering them a long-term supply contract in return for a year’s worth of oil revenue paid upfront, which at current prices would equal to around two billion dollars (2.3 trillion IQD).

“SOMO, on behalf of the Ministry of Oil, has the interest to propose a long-term crude-supply deal in exchange for prepayment for a fraction of the total allocated quantity,” the letter read.

The proposal comes as an attempt to fill the fiscal deficit facing the Iraqi economy due to a financial crisis exacerbated by low oil prices and the COVID-19 pandemic.

The Iraqi parliament passed the Fiscal Deficit Coverage Bill on November 12, approving government loans to funds salaries for civil servants in Iraq and the Kurdistan Region for the last two months of this year. The bill passed with a majority vote, despite a walkout by the Kurds over a clause obliging Erbil to hand over oil in exchange for its share of the budget.

Iraq has been facing difficulties dealing with ongoing financial difficulties, especially while abiding by the Organization of Petroleum Exporting Countries (OPEC) cuts. 

Under the terms of the April agreement, OPEC+, a group of 24 oil exporting countries, pledged to cut output by 9.7 million barrels per day (bpd) from May 1 until the end of June to offset a global drop in oil demand as a result of the global pandemic.

The cuts were then to be gradually eased from July, to 7.7 million barrels per day (bpd) until December.

Countries like Iraq and Russia are now having to make extra cuts after failing to abide by the agreement earlier this year.

In order to make up for the overproduction in May and June, Iraq had to cut an extra 400 thousand barrels per day, on top of the 850 thousand designated by OPEC+ for the months of July, August, and September.

The price for crude oil has recently been increasing with news of successful COVID-19 vaccine tests.