<article><p class="lead">Iraqi state-owned marketing firm Somo has awarded a five-year term crude supply tender that includes a $2bn prepayment period to China's Zhenhua, according to six market participants.</p><p>Zhenhua will receive <a href="https://direct.argusmedia.com/newsandanalysis/article/2162509">48mn bl of Basrah crude per year</a> over the January 2021-December 2025 period. Somo had asked bidders to prepay for supply loading over the 1 July 2021 – 30 June 2022 period within 30 days of signing the contract, offering this crude as resellable and free-destination. Somo typically bans resales under its term contracts.</p><p>Tender participants were required to submit by 4 December their best bids at a differential to Somo's as-yet-unpublished official formula prices for the prepaid period. The winner will pay for the remaining four-year period at the official price, and will be able to nominate their preferred Basrah crude grades. Somo will split Basrah crude two streams into three in January, and introduced an API-linked quality compensation scheme <a href="https://direct.argusmedia.com/newsandanalysis/article/2162547">on 23 November</a> for the overhauled Basrah Light, Basrah Medium and Basrah Heavy.</p><p>An Iraqi source said that the tender process required the winner to be approved by the country's cabinet, possibly including finance minister Ali Allawi. It is unclear if this has taken place.</p><p>Some market participants have connected Somo's recent <a href="https://direct.argusmedia.com/newsandanalysis/article/2166266">trimming of term Basrah volumes</a> to at least four European buyers with the need to generate available supply for the tender. Market participants said that Somo may have cut term volumes to customers in Asia-Pacific, but details are unclear.</p><p>Zhenhua is a branch of Chinese state-owned oil and arms group Norinco, which has the 120,000 b/d Huajin refinery subsidiary. Norinco is already present as an equity producer in Iraq, with stakes in part of the 10,000 b/d East Baghdad and the 130,000 b/d Ahdab fields. </p><p>Trade sources had anticipated a small number of entrants into the tender because of the substantial pre-payment sum. Participants were initially only given one week, to 27 November, to secure the relevant financing, but Somo adjusted this deadline to 4 December. It nevertheless still limited the prospective winners to Chinese companies and oil majors, which are more likely to have the necessary liquidity. An Iraqi equity producer is best positioned to win the tender because having a presence in the country means it would have already run part of the due diligence required in order to broker the financing, a banking source said.</p><p>Cash-strapped Iraq has been hard pressed to secure income because of ongoing Opec+ production restraint efforts that limit the amount of crude it has for sale. The World Bank has said that Iraq's economic outlook largely depends on global oil markets. It expects the country's oil gross domestic product (GDP) to contract by 12pc this year, and an for overall contraction of 9.5pc, which would by Iraq's worst annual performance since 2003.</p><p class="bylines">By Ruxandra Iordache</p></article>
