General Interest Limited sale of Iraqi crude oil still at issue

Feb. 26, 1996
There has been no decision on limited sales of Iraqi oil to pay for humanitarian supplies in the wake of 2 weeks of talks between Iraqi officials and United Nations negotiators. The two sides began talks Feb. 6 at U.N. headquarters in New York. At issue is potential sale of $2 billion worth of Iraq's oil to purchase food and medical supplies for Iraqi people. A U.K. Foreign Office official said the first round of talks ended Feb. 19 as originally intended, and no conclusions appeared to

There has been no decision on limited sales of Iraqi oil to pay for humanitarian supplies in the wake of 2 weeks of talks between Iraqi officials and United Nations negotiators.

The two sides began talks Feb. 6 at U.N. headquarters in New York. At issue is potential sale of $2 billion worth of Iraq's oil to purchase food and medical supplies for Iraqi people.

A U.K. Foreign Office official said the first round of talks ended Feb. 19 as originally intended, and no conclusions appeared to have been reached.

"The U.N. Secretariat will report today or tomorrow," said the official Feb. 20, "but we are not aware that anything particularly exciting has happened."

Press reports said neither side claimed to have reached an agreement after the talks ended. Discussions covered plans for Iraqi oil production and sales, the effect of limited Iraqi production on oil markets, payment details, opening an escrow account for cash raised from oil sales, and purchase and distribution of food and medical supplies.

The Foreign Office official said, "The next step is for the U.N. Secretariat and the Iraqis to decide if a second round of talks is worthwhile. But it is impossible to predict what will happen. You would have to gauge the intentions of the Iraqis, and this is always difficult."

Saddam's dilemma

London's Centre for Global Energy Studies (CGES) reckons the situation in Iraq has become so desperate that President Saddam Hussein needs to find a way of exporting oil to ensure his survival.

CGES said, "If he can find a way of selling oil without compromising his authority in Iraq he will do it. Although nothing is ever certain as far as Saddam Hussein is concerned, it does seem that the return of some Iraqi oil is probably inevitable and will happen in 1996."

CGES maintains that having raised the hopes of the Iraqi people, it will be difficult for Saddam to back down. The black market exchange rate for the Iraqi dinar has picked up, and people have started to sell hoarded goods because they have some confidence in the future.

CGES said, "As long as the prospect for oil sales continues, the immediate pressure on the regime is removed, creating time for negotiations. But the situation will deteriorate rapidly if the door is closed again. Although Saddam may well take his time to finally agree, the talks look destined to succeed."

OPEC scene

Meanwhile, CGES reports that Organization of Petroleum Exporting Countries members are staking out their positions ahead of an emergency meeting promised if Iraq returns to full oil exports.

CGES said, "Tehran has called for Riyadh to bear the burden as a major beneficiary of Iraq's enforced absence from the market, while the U.A.E. has joined Saudi Arabia in calling for strict quota observance as the obvious way to accommodate Iraqi oil.

"Given the levels of overproduction currently enjoyed by some member countries, there will have to be a major price crisis before the members will withdraw from their entrenched positions" (OGJ, Feb. 19, Newsletter).

If Iraq and the U.N. agree on implementation of Resolution 986, CGES said, Iraq could begin exporting oil at a rate of 800,000 b/d. This figure includes sales to cover payment for production system repairs and exports.

CGES warned that once an agreement is announced, oil prices will fall heavily but will recover to settle at a level dictated by market fundamentals.

Failure of OPEC to make room for Iraqi production could lead to disastrously low oil prices in the second half of 1996.

If Iraq accepts U.N. conditions swiftly, CGES reckons Iraqi oil exports could begin as early as the second quarter.

Then, if OPEC made room for Iraqi exports, CGES predicts the price for OPEC basket crude oil will average $17/bbl in the first quarter, $17.20/bbl in the second, $15.30/bbl in the third, and $15.30 in the fourth.

If OPEC members continue at present production rates, which resulted in an average total output of 26 million b/d in January, CGES predicts OPEC basket crude will fetch $17/bbl in the first quarter, $16.90/bbl in the second, $13.60/bbl in the third, and $11.10/bbl in the fourth.

GCES declared, "No OPEC member country is in a position to live with such low oil prices, and action undoubtedly will be taken at some point to bolster severely weakened prices."

Yet CGES said OPEC's reaction time will be slow because members usually need the spur of sharp drops in oil prices to spur them into action-even when an impending price drop has been obvious.

Potential buyers

More than 40 oil companies have submitted applications to the U.N. to buy Iraqi oil when sanctions are lifted, Middle East Economic Survey (MEES) reported.

MEES said the list of potential buyers includes units of Petroleo Brasileiro SA, Finlands Neste Oy, Petrofina SA, Elf Aquitaine SA, Total SA, Agip SpA, Exxon Corp., British Petroleum Co. plc, Shell International Petroleum Co. Ltd., and Mobil Oil Corp.

The applications reportedly were made to the U.N. Sanctions Committee during the past 3 years in accordance with Security Council Resolution 661 of 1990.

MEES also said talks between Iraq and the U.N. over limited sales of Iraqi oil to fund purchase of food and medical supplies changed course half way through.

MEES said Abd Al-Amir Al-Anbari, head of the Iraqi delegation, originally was given a mandate to discuss only those aspects of the deal relating to distribution of humanitarian supplies, then to return to Baghdad for consultations before starting a second round of talks.

This approach was said to be poorly received in New York, leading to exchanges between Al-Anbari and Baghdad, after which the Iraqi team was authorized to discuss all aspects of the deal and reach an understanding.

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