London: Iraq is sharpening a push to sell its swelling crude output and sit at oil's top table with Saudi Arabia, sweetening terms for contract buyers next year, its customers say.
Iraqi oil minister Abdul-Kareem Luaibi held court to oil executives in Vienna's Hotel Imperial last week on the sidelines of an Organisation of Petroleum Exporting Countries (Opec) meeting. Some buyers have said they were concerned by higher prices and variable quality.
"The Iraqis have become more active and serious in their marketing effort," said a Western oil executive from a firm that buys from Baghdad.
"They're willing to be very competitive on pricing and want to solve existing problems."
The world's fastest growing oil exporter is working to expand market share and is emerging as a rival to Saudi Arabia in the Opec, as Iran's output is reduced by Western sanctions.
Baghdad is targeting crude exports of 2.9 million barrels per day (bpd) next year, up from 2.62 million bpd in November, as investment by foreign oil companies pushes production towards its highest level ever.
Some clients have complained of high official selling prices (OSPs) and variable quality of the Basra Light and Kirkuk grades, raising the prospect Baghdad could struggle to shift all the crude in 2013 term contracts.
Initially, BP and Total wanted to reduce their 2013 volumes of Basra. However, both are expected to take similar volumes to 2012, about 135,000 bpd each, trade sources said. BP will also receive unspecified volumes as repayment for its investment in Iraq's upstream industry.
Quality of Basra
"The Iraqis say they will stabilise the quality of Basra and understand they will need to be competitive on price," a second Western executive said. "They have to somehow place their additional production."
The quality of Iraq's Basra and Kirkuk crudes has been variable due to the erratic flow of Kurdistan oil into the Kirkuk stream and the start-up of new fields in the south. These concerns persist, deterring some buyers.
"I don't think Iraq has termed up all," a third executive said. "They know the prices are out of line mostly because the quality has been too variable for both Kirkuk and Basra. Until they resolve it, I don't think many will up their volume."
Some companies have trimmed Kirkuk volumes for 2013. ENI and Total each plan to take 10,000 bpd less of Kirkuk in 2013, industry sources said. Less Basra will be heading to the United States, where Chevron has cut its volumes, a source added.
"The issue is simply price. The OSP is too high, made worse by the variations in quality and unreliability in Basra deliveries," said a fourth executive. "Given there is some slack in the market, no one will pay over the odds." Iraqi oil official declined to comment for this story, and BP, Total, Eni and Chevron declined to comment on their plans to buy Iraq oil.
More to China
Just two years into the oil expansion drive, which had been held back by decades of wars and sanctions, Iraq has vaulted past Iran to become Opec's second-largest producer behind Saudi Arabia. That growth has not been lost on Riyadh, and a reinvigorated Iraq has led to a new rivalry at the top of Opec, according to officials at last week's meeting of the producer group.
"This was bound to happen. Iraq has to sell more crude and get a bigger market share," a Western oil company source said. "And they want to understand how to do it in a practical way."
Opportunities for Iraq and Saudi Arabia to sell more into Asia — particularly China — were created after Iran's exports plunged by more than 50 per cent, or over 1 million bpd, due to international sanctions aimed at halting its nuclear programme.
Chinese state refiner Sinopec will nearly double the amount of term crude it buys from Iraq next year to 270,000 bpd as it looks to replace oil from Iran, sources said.
But cuts by other refiners mean China's total volume under one-year contracts with Iraq will rise by just 8.2 per cent to 568,000 bpd next year. That still leaves Iraq some distance behind Saudi Arabia in terms of market share.
There are signs Baghdad may become more aggressive on pricing to the Far East.
— perhaps a concrete step it is delivering on officials' pledges over pricing. Despite an increasing supply, Basra Light has been more expensive for Asian buyers than a rival crude from Saudi Arabia, Arab Medium, prompting buyers to grumble.
For January, however, Iraq chose to leave its Basra Light price to Asia unchanged, while Saudi Arabia increased the prices of its Arab Light, Medium and Heavy crude to customers in the East.
Concern about pricing is likely to linger nevertheless. "It's one thing to get the top people to say they want to fix it, but quite another to get the people who actually set the OSPs to fix it," an industry source said. "It looks like it won't happen overnight."