Iraq’s SOMO drops partners, elbows its way into oil trading

Published: Updated:
Read Mode
100% Font Size
5 min read

Iraq’s state oil marketer SOMO has scrapped two joint ventures (JVs) and reduced contracts with some European customers to push its way into trading by selling more of its crude ad hoc, trading and industry sources said.

After years of watching oil majors and independent traders benefit from large trading operations, state oil firms in North Africa and the Middle East have decided to grab back what they see as lost potential revenues.

The main solution has been to set up JVs to learn the necessary skills, following Oman, which first teamed up with global trading firm Vitol in the last decade. Oman’s JV was ultimately bought out by the government.

Over the last few years, Algeria, the United Arab Emirates, and Iraq have also gone the JV route, while Saudi Arabia has set up a fully-owned trading arm from scratch. Kuwait has held talks with foreign firms for a JV.

“This is what such JVs are always aiming at. Learn from established players and set up something on its own,” one of the sources said.

In 2017, SOMO set up one such JV with Litasco, the trading arm of Russia’s Lukoil, but quit at the end of 2018, four sources said. A similar arrangement with China’s state-run Zhenhua Oil was also axed, sources said.

Neither SOMO or Zhenhua immediately responded to a Reuters request for comment. Litasco declined to comment.

Separately, SOMO briefly sold cargoes on the Dubai Mercantile Exchange and via the S&P Global Platts window. The firm is now selling crude more aggressively itself.

“There’s about five or six of them,” a European trading source said, referring to former JV employees at SOMO. “All young, hungry and trained abroad.”

Iraqi government changes have also spearheaded the shift, according to the sources.

SOMO’s leadership was reshuffled in September 2017, under the previous Iraqi government. Alaa al-Yasiri replaced Falah al-Amri as SOMO’s chief and became Iraq’s representative on the OPEC board of governors.

In October 2018, Thamer al-Ghadhban became oil minister. He has pledged to look at ways to reform the sector and has since made personnel changes in his ministry.

One of the sources familiar with SOMO’s thinking said the firm was looking at how best to deploy the knowledge of its “seconded team” - SOMO employees who had worked in the trading JVs.

The state oil marketer believes it can carry out its physical trading operations alone for now.

“We need to re-evaluate what we gained and how to employ it in our business. We have already started with the spot tenders announced,” the source said.

After clamping down on the reselling of its crude, SOMO has been offloading its own oil in increasingly large volumes via tenders, with the aim of grabbing extra profits that previously benefited traders.

SOMO had always banned contract holders from reselling their allocated cargoes but in practice, past complaints from Baghdad went largely unheeded and a significant spot market grew.

However, at the end of last year, SOMO surprised traders by asking for port delivery documentation on each cargo in order to prove the final destination.

In 2019, some contracts with European refiners and majors were axed or significantly reduced in part due to the reselling but also in favor of the growing Asian market, traders said.

Traders involved in the Iraqi oil market said Cepsa, Total, Shell, BP, and API were among those companies whose contracts had been reduced.

After freeing up volumes from the two JVs and some customers, SOMO began tendering at the end of last year with one cargo a month. By March, the tendered volume jumped to over 6 million barrels of Basra Light, Basra Heavy and newly resumed Kirkuk.

Bolstering SOMO’s decision to take over trading is the growing scarcity of sour crude due to output cuts by some OPEC and non-OPEC producers that predominantly offer such grades.

US sanctions on Iran’s oil sector and most recently on Venezuela, a major producer of heavy, sour oil, have further exacerbated the situation.

Spot prices for medium to heavy sour oil, such as that produced by Iraq, have been on the rise.

“The market is red hot for Iraqi crudes ... so there is no need for a JV partner to share the gains,” a Singapore-based trader said.

Top Content Trending