Iraq resumes oil exports to world markets

David Knott
Senior Editor

Iraqi crude oil was headed for a Turkish refinery at OGJ presstime, after Iraqi and United Nations officials concluded an oil-for-aid deal that has taken almost a year to hammer out.

U.N. Resolution 986 calls for $2 billion worth of Iraqi oil to be exported for 6 months, with revenues to be used for purchase of food and medical supplies badly needed by Iraqi citizens.

The main reason the deal went ahead this time, after months of wrangling earlier led to abandonment of the resolution in a salvo of missiles, seems to be Baghdad's need to save face despite continuing economic problems.

A U.N. official in New York told OGJ that on Dec. 9 U.N. Sec. Gen. Boutros Boutros-Ghali started the process that led to implementation of the Iraq/U.N. deal Dec. 10.

The official said the first sales contract under the scheme was submitted and approved on Dec. 10. A second contract was also submitted but apparently hit procedural problems and had to be submitted again.

Iraqis starting pumping

As soon as the deal was signed, the Iraqis started pumping oil through the pipeline to Turkey.

First oil was expected to reach Turkey's Ceyhan terminal near the Mediterranean in a few days time.

Turkish Petroleum Refineries Corp. (Tupras) has chartered a number of tankers to receive the Iraqi oil. This will be carried to Tupras' Izmir refinery for processing.

The U.N. official said the organization is awaiting reports from its inspectors on first export volumes. Sales volumes are expected to reach 600,000-700,000 b/d once the deal hits full stride.

CGES view

Leo Drollas, chief economist at London's Centre for Global Energy Studies (CGES), said that when the Iraqis pushed the button to start oil pumping, nothing happened because of a power failure: "We don't know whether this was symbolic!"

Drollas said that now the first contract is signed, there is feverish activity to get other contracts approved. But CGES expects it will be January before the flow of oil from Iraq becomes regular.

As to why President Saddam Hussein finally agreed to the deal, Drollas said, "He realized that things were getting bad in Iraq again. He had sorted out the Kurds, but still the economy is ailing.

"Saddam tried to get more concessions from the U.N., but when he realized there was nothing doing, he agreed to the deal. But he has sold it to the Iraqi people, through Iraqi newspaper and television, as a prelude to full lifting of the U.N. trade embargo."

CGES maintains the deal could still be halted at any moment by either side: "There is still lots of margin for conflict. A spanner could be thrown into the works at any time."

Oil prices fall

Crude oil markets reacted as expected to news of Iraqi exports, with a fall in prices.

In trading on Dec. 9, Brent crude for January delivery fell 31 to close at $23.96/bbl. On Dec. 10, Brent January fell another 38 to $23.58/bbl.

"The initial reaction of markets was typically a fall of 50-60/bbl," said Drollas, "but this should recover soon because the underlying fundamentals are strong.

"Apparently Urals crude oil, with which Iraqi oil competes head on as they are both sour crudes, is a little light in terms of production volumes. Iraqi barrels could be absorbed by the market without much change into the first quarter.

"However, there could be an overhang by second quarter 1997, when there may be better stock cover. This will depend on the weather and non-OPEC production among other things, The outlook is very uncertain."

Drollas said the uncertainty was being reflected in late-futures markets, where oil prices had risen 35: "The market can't decide what will happen, so traders are paying a high premium to secure an option in the future."

Markets still tight

Geoff Pyne, oil market analyst at UBS Ltd., London, said the deal with the U.N. seems to be good news for the Iraqis and not much of a worry for the rest of oil industry.

Worldwide stocks are still 60 million bbl down from this time last year, said Pyne, and even with Iraqi production included, it would take 4 months to rebuild this.

Pyne said that in afternoon trading on Dec. 11 Brent crude for January delivery had recovered to $23.74/bbl on London's International Petroleum Exchange.

"A snapshot of the last few days," said Pyne, "would show that things are not so bad, and the market is tightening. But there is a long way to go before supply and demand are in balance.

"It would take a brave man to predict lower crude oil prices with stocks as low as they are. Iraqi volumes will take a month to build. The majors are wanting to lift Iraqi oil, but their contracts are tied up in a variety of bureaucratic wrangles in Baghdad."

In September, when the Iraq/U.N. agreement first looked as if it would go through, Saddam moved troops into northern Iraq to quell rebellious Kurds. He also had his ground forces fire at U.S. Air Force jets, to which President Clinton responded with a cruise missile attack on targets near Baghdad (OGJ, Sept. 16, p. 19).