WATCHING THE WORLD SELLING IRAQI CRUDE

With Roger Vielvoye from London Potential customers for Iraqi crude oil are starting to get a clear idea of how the United Nations will permit the first release of oil supplies onto the market. What buyers do not know are the likely volumes that will be available once the embargo is lifted and crude starts flowing for export through the pipeline from Iraq's northern oilfields into Turkey and the export terminal on the Mediterranean at Ceyhan.

Sept. 16, 1991

3 min read

Potential customers for Iraqi crude oil are starting to get a clear idea of how the United Nations will permit the first release of oil supplies onto the market.

What buyers do not know are the likely volumes that will be available once the embargo is lifted and crude starts flowing for export through the pipeline from Iraq's northern oilfields into Turkey and the export terminal on the Mediterranean at Ceyhan.

AN EARLY OPTION

At first the U.N. talked about raising $1.6 billion from Iraqi oil sales during 6 months to fund purchases of food, medicine, and equipment to restore Iraq's agriculture, water supply, and sanitation. At an average price of about $17/bbl, exports of 515,000 b/d would have been needed to achieve that total.

But before any funds can be handed out for humanitarian purposes, oil sales would have to provide a $480 million contribution to the war reparations fund.

On top of this, crude exports must also fund the cost of nuclear inspection teams, monitoring and managing oil contracts, as well as the cost of direct procurement of food by the U.N. and monitoring and distribution of humanitarian purchases in Iraq.

Meeting those costs will take total deductions from sales to $666.3 million, leaving only $933.7 million for humanitarian purchases.

The latest report by U.N. Sec. Gen. Javier Perez de Cuellar shows that figure is about $800 million less than the sum Iraq needs to spend for humanitarian imports.

To ensure that the additional funds are available, oil exports will have to rise to about 800,000 b/d for 6 months. And at the moment there are no signs the U.S. and some of its allies in the Persian Gulf war are ready to allow the added 300,000 b/d of Iraqi oil exports.

More progress has been made on preparations for administering the resumption of oil exports. The secretary general's latest report to the Security Council recognizes that oil markets move at a much faster pace than the U.N. bureaucracy. With this firmly in mind, Perez recommends that Iraq's state oil marketing authority, SOMO, should sell the oil which will be available only fob Ceyhan to facilitate monitoring.

The idea of creating a special U.N. body to handle sales or using a third party such as a trader or broker are rejected as impractical. Because Iraq knows the likely outlets for Kirkuk crude, Perez contends that exports could start almost immediately upon final U.N. approval. Using SOMO has the added advantage of ensuring that the best possible terms are negotiated with customers.

WHAT'S REQUIRED

Once a deal has been clinched, the contract must be approved by the U.N. sanctions committee within 24 hours. Ultimately, Perez says, a no-objection procedure could be introduced.

A letter of credit must be opened for each contract, issued by a reputable international bank in a standard form. All proceeds from the sale will be paid by the purchaser into a U.N. escrow account.

And by putting the money directly into a escrow account that enjoys all the privileges and immunities of the U.N., the purchaser will be free from pursuit by any third party with claims against Iraq arising from the August 1990 seizure of Kuwait.