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Iraq: Long-Term Oil Contracts Given to Major Corps

by Bruce StanleyAssociated Press
July 24th, 2003

LONDON -- Two major oil companies have each agreed to buy 10 million barrels of Iraqi oil under the first long-term contracts to be offered by Iraq since the end of the war.

BP PLC and Royal Dutch/Shell Group of Cos. each expects to ship 2 million barrels of Basra Light crude per month, starting in August and ending in December, the companies announced. They will load the oil on tankers at Iraq's Persian Gulf export terminal of Mina al-Bakr.

Oil production in southern Iraq has increased substantially in recent weeks thanks to improved security at oil fields, pipelines and other facilities there.

The so-called term contracts for selling fixed quantities of oil over a longer period is a significant step forward for Iraq and its postwar reconstruction. The offers indicate the Oil Ministry is confident that looting and sabotage at Iraqi oil facilities will not prevent it from honoring export contracts lasting five months.

Earlier this month, the two companies made purchases at an auction held by Iraq's State Oil Marketing Organization, the state-run monopoly that controls Iraqi crude exports.

The marketing organization, known as SOMO, is overseen by Iraq's Oil Ministry. But since Iraq does not have a sovereign government, leadership appointments to the ministry have been made by the United States since the end of the Iraq war.

SOMO also agreed this week to sell 6 million barrels under shorter spot contracts to ChevronTexaco, Petrobras of Brazil and Switzerland's Vitol. These three companies have agreed to ship 2 million barrels each by the end of July, the Iraqi official said.

Iraq has the world's second-largest proven oil reserves, and term contracts will generate steady income for the first time since the U.S.-led invasion.

"We are receiving offers from many companies, and we are going to evaluate them one by one," a senior Oil Ministry official said, reached by telephone in Baghdad. SOMO plans to sell Iraq's oil to refiners and other end users, ending Saddam Hussein's practice of selling at a cheaper price to middlemen.

Shell received a written offer from SOMO yesterday for 10 million barrels under a term contract.

"We intend to take up that offer," Shell spokesman Simon Buerk said.

BP said it has agreed to a similar contract. Neither Shell nor BP has decided yet where it will ship its new oil.

The Oil Ministry official said looting and sabotage continue to block exports from fields around the city of Kirkuk in northern Iraq. The official, speaking on condition of anonymity, said output in the south has risen sharply, but could not specify the amount.

The deaths of Saddam's two eldest sons, Oday and Qusai, in a firefight in the northern Iraqi city of Mosul could give a boost to the oil sector, officials said. The sons may have had a hand in directing attacks on the main pipeline from Kirkuk to Turkey.

The official said their deaths could have a "positive impact" on the security of oil operations.

If the Kirkuk-Turkey pipeline reopens, crude from Kirkuk could reach the market and trigger a fall in oil prices of up to $3 a barrel, said oil analyst Mike Lynch of Boston-based Strategic Energy & Economic Research.

In another development, Iraq's Governing Council is reviewing candidates for the expected appointment of a new oil minister, the Iraqi official said. The Oil Ministry is led now by an interim chief executive, Thamer al-Ghadhban.

The Governing Council also plans to name an Iraqi representative to OPEC, the official said. Although Iraq is a founding member of the Organization of the Petroleum Exporting Countries, it hasn't participated in the cartel's quota system for crude since the 1991 Gulf war.



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