Iraq is struggling to find buyers for all its 2013 oil output on term contracts, industry sources said, as foreign refiners complain of high prices and variable quality from the world's fastest growing crude exporter, Reuters reports.
Tough contract negotiations between Iraq's State Oil Marketing Organization (SOMO) and buyers in Asia, Europe and the United States are underlining how well the global market is supplied, despite diving exports from neighbouring Iran.
"Iraq was hoping to sell larger volumes but I don't think they've succeeded yet," said an industry source with a buyer of Iraqi crude, who declined to be identified because the talks are commercially sensitive.
"A lot of the big oil companies asked for less, if anything. I think the Iraqis have to get a grip on the quality and get a grip on the prices to reflect that."
Using foreign expertise and investment, Iraq is rapidly expanding its oil exporting capacity after the sanctions against former dictator Saddam Hussein and the 2003 U.S.-led invasion which overthrew him.
New production is starting up in the south and the semi-autonomous Kurdistan region has agreed to keep volumes of its output flowing into Iraq's northern pipeline.
But the variable quality of Iraqi oil, official prices that buyers believe are too high and the availability of cheaper spot supplies are all deterring some refiners from agreeing to increase their 2013 term contract supplies, sources say.
Chevron is among those that want to reduce their term purchases from Iraq next year, said trade sources and a senior Iraqi oil official. Chevron could not be reached for immediate comment. BP is also looking to take less under contract, industry sources said.
"I think they are struggling to get all the volume termed up," said a source with a second Iraqi crude buyer based in Europe. "The prices are too high and the market is oversupplied, even though Iran is out."
Iran's exports have plunged by more than 50 percent or over 1 million barrels per day (bpd) due to international sanctions aimed at halting its nuclear programme. Western nations fear Iran wants to develop nuclear weapons, a charge Tehran denies.
A sharp rise in crude exports from Saudi Arabia and patchy demand due to the weak state of the global economy have combined to weaken Iraq's negotiating hand.
Iraq's crude output has passed 3 million bpd for the first time in three decades as the world's biggest oil companies invest billions of dollars to develop its oilfields.
Exports from the southern ports are set to hit their highest level ever at 2.531 million bpd in November and new fields such as West Qurna-2 will start production next year.
CHEAPER OPTIONS
Contract talks over 2013 term volumes for Iraq's Basra Light and Kirkuk crude grades are not expected to be completed until later in November. One complication is the fact that many oil companies already get crude from stakes in Iraqi fields they are developing, which they can keep or sell on.
"A lot of people are reluctant to buy term supply given that there is a lot of spot availability at lower prices," a trader based in Asia with a Western oil firm said.
An Iraqi oil official said companies such as BP and China National Petroleum Corp which are being paid in crude for their development contracts are entitled to re-sell the oil provided they "officially inform" SOMO.
CNPC is offering barrels at up to an 80-cent discount to Iraq's official prices, said market sources. "We are not happy about this," said the Iraqi official. CNPC could not immediately be reached for comment.
Official Iraqi prices are linked to market benchmarks which vary, but for Basra Light sold to Europe it is currently around $106 a barrel.
Oil refiners typically enter annual contracts with SOMO to buy the crude at its official selling price (OSP), set by Iraq every month. Trading companies usually get their term contract supplies from producers with equity stakes in the oilfields, often paying a small premium to the OSP.
However, since Basra Light has traded below the OSP for most of this year, buyers could have saved 10-30 cents a barrel by going on to the spot market. This equates to $100,000-$300,000 for a minimum volume of 1 million barrels.
Despite increasing supply, Basra Light has become more expensive for Asian buyers than a rival crude from Saudi Arabia, Arab Medium. The Iraqi crude used to track the official price changes of the Saudi oil closely.
One trader in northeast Asia noted that tankers had a longer voyage from Iraq's main oil terminal than from Saudi Arabia's Ras Tanura. "Given its large cargo size and that the Basra terminal is further than the Ras Tanura port, Basra's OSP should be below Arab Medium," the trader said.
QUALITY VARIES
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.
Changes in the crude's sulphur content and API gravity - a measure of its weight - affect its value and can cause processing problems for refineries configured for a certain gravity and sulphur level.
Heavier crudes usually yield a lower proportion of higher value petroleum products while higher sulphur oil needs more processing to meet environmental regulations.
"The quality has been variable on both Kirkuk and Basra," another trading source said. "Really high APIs one day and then lower than normal. It's not consistent and they are not blending enough."
Iraq has told buyers it aims to smooth out the quality differences in 2013. "We have received some remarks about the quality and we are working to solve these problems," the senior Iraqi oil official said. "It is a challenge that we will tackle."
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