MEES learns that Iraq's State Oil Marketing Organization (SOMO) has asked its customers to start paying a premium of 50 cents/B over the official selling price (OSP) into a designated account outside the control of the United Nations beginning 1 December and has said that any company refusing to do so will lose the volume of oil allotted to it.
The decision was communicated to Iraq's customers during the past few days and has met considerable resistance. It could lead to a halt in Iraqi oil exports beginning early December unless the matter is resolved.
It is understood that the companies have told SOMO that they cannot go along with the move for two reasons.
Firstly, because it violates UN resolutions, which stipulate that all oil revenue must be deposited in the UN escrow account, and those companies based in OECD countries would therefore face legal action from their governments.
Secondly, because the premium is costly and comes on top of the recent decision to convert Iraqi oil sales to the euro which, according to the companies, has added up to 10 cents/B for the cost of conversion and hedging to the euro as well as over 5 cents/B for opening the Letter of Credit, or a total of 15 cents/B, to the oil price.
The companies argue that the only way a fee of 50 cents/B can be accommodated is if the price formula is lowered with the approval of the UN overseers and the sanctions committee, which is highly unlikely to happen.
The majority of Iraqi crude is purchased by Russian, Chinese and trading firms (MEES, 13 November), which re-sell it immediately to end users in OECD countries. Unless the UN rejects the Iraqi move publicly, secondary lifters are unlikely to stop purchasing Iraqi oil for legal reasons.
However, if the direct buyers pay the 50 cents/B premium, they would then charge secondary buyers a premium of 70-90 cents/B over the OSP, which could price Iraqi oil out of the market.
In that event the only way the end users could be induced to buy Iraqi oil is if SOMO lowers the OSP and the UN approves the measure.
© 2000 Mena Report (www.menareport.com)