Thanks for sitting down with MEES.
We appreciate it.
Q: You’ve been Somo Director General for a year and half now. How would you describe your strategy for the company?
A: Once taking over the office, I immediately turned to the medium- and long-term plans, and the mechanisms that will make them possible. Regarding the crude market, the main intention is to get a better netback for each barrel of crude we export. This is the main concern on the marketing side.
In order to increase the yield, we have two specific plans. First, we have stopped cargo resales to third parties, so it will not be sold between traders. Second, we want to sell volumes – albeit marginal volumes, only two or three cargoes a month – on the spot market. This will translate into a better return as most of the buyers will give a premium on the OSP we have set for the term contracts.
The third factor that will have an important impact on Somo is our ongoing staff training. We are trying to increase their capacities to be in touch with international markets and the mechanisms behind markets – both logistically and financially.
Q: Does Somo plan to increase spot cargo sales any time soon?
A: Yes. It all depends on the response from the market and the availability of extra cargoes. The increases will happen next year as we have already allocated the volumes to be sold for this year. We will determine the exact volumes in November after collecting reports from the relevant divisions within the companies regarding the volumes that will be offered on the spot market.
Q: Yet you have stopped selling cargoes on the DME [Dubai Mercantile Exchange] and in the Platts ‘window’. What was the logic behind this?
A: Our experience was that we had auctioned some cargoes on the DME, then some in the Platts window. After these two experiences, we came to the conclusion that there is interest from buyers in bidding directly to us for any spot cargoes that we tender.
Q: You mentioned that cracking down on buyers reselling Iraqi crude is a key strategy for Somo. What prompted this change and why?
A: The approach of the previous administration was based on a trust with our clients that they don’t trade our crude. Now we have a different approach. New administration, new approach. We came to the conclusion that some of our clients took the liberty to stray far from our trust and did trade our crude. We put a stop to it.
Q: Is Somo considering new ways to set its OSPs?
A: Regarding the OSP, we haven’t really changed the mechanism of setting this. Our people who recommend and set the OSPs have always followed the market trends through studies, observations, and consultations with clients. We receive recommendations each month, including through video conferences with some major companies and refineries, because we have to balance between the refineries we have contracts with, and the major [producing] companies.
We take time to set an appropriate OSP and take into account recent developments in the markets for the month just past and the first few days of the current month. As you know, the market for the last few days has looked different to that for the three previous weeks – so all these factors matter.
Q: Speaking of recent developments, what is your outlook on the Brent-Dubai spread?
A: The differential between Brent and Dubai had been narrowing until the last three or four weeks. And of course this narrowing differential meant more lighter crude volumes were being transported to Asia. Now if you look at the situation, the differential has expanded. It has grown from 45¢/B to $3.30/B. Meaning that a strength has returned to Dubai and sour crude is now in high demand due to the shortages from Venezuela and Iran.
Q: What was the logic behind cancelling the crude marketing JVs with [Lukoil’s trading arm] Litasco and [Chinese state firm] Zhenhua?
A: We didn’t really cancel the JVs, we just decided from our negotiations with the counterparties that these JVs will be for a specific period, and that period will be one year – which has already lapsed.
We have appraised what our secondees gained from this experience with the counterparties and based on this appraisal we decided the JVs were no longer serving their purpose. We may reconsider as we intend to have a strong partner in each market – Asia, the US and Europe.
Q: So you’re planning additional JVs in the future?
A: Yes. It’s possible. We’ve had talks with BP, with Shell, with Exxon, with Chevron. Until now we haven’t really taken the subject seriously with the others, but we have had talks.
We will wait and see how the situation develops after we open offices in those markets. And we will start with an office in Singapore. We were studying, and now we have an offer to open an office and our experts are working to make it happen.
Q: By when?
A: Next year, hopefully.
Q: How are plans to set up a hedging program with Iraqi banks progressing?
A: It’s not a simple matter and it’s not left for Somo to decide. It’s a wide subject. We have made our study and given it to the concerned authorities including the Ministry of Finance. The Trade Bank of Iraq is also involved and they supported us in our study by providing us with the material we required. The decision is now left with the Council of Ministers and there has not been one yet. And there is no request from the Ministry of Finance to adopt it.
Q: Moving on to your operations, what is Iraq’s current crude export capacity from Basra, and when does Somo expect this figure to rise?
A: Our current export capacity is 3.7mn b/d, and in a way, we have exceeded this rate and have sufficient installed capacity to see this increased further.
Q: And what is the installed capacity?
A: Actually, our export capacity is comparable to the production rate [4.7mn b/d] and we have the conviction that we will increase this between 2024 and 2029 to reach 6.5mn b/d.
Q: And in terms of short-term increases, what can Iraq expect? This is especially critical since southern exports were just below the 3.7mn b/d capacity figure in December?
A: Regarding this, we of course have short, medium and long-term studies to increase export capacity. Now, we have all the logistics being studied for extra pipelines so the extra SPM [SPM4] can start operating. We also have a long-term study to construct a floating island to increase the capacity of exports.
Q: Storage capacity is also critical. How are plans to add storage progressing?
A: Our storage capacity now marginally exceeds 10mn barrels. And, of course, this is insufficient. We need to expand this storage capacity in order to make it compatible with production and ensure that the logistics work. Somo has already spoken with Basra Oil Company to consider these factors and speed up capacity increases since they are responsible for this subject. And of course, adding storage capacity will also give Somo the flexibility to segregate different crude grades.
One subject we’ve studied with interest is storing Iraqi crude overseas – especially in the Far East.
Q: Does SOMO have a timeline for overseas storage, or more specifics on locations?
A: We are still trying to determine if this particular alternative is really suited for Somo’s logistics. If we determine it is, we will go ahead. This process started last year. As for the countries, we are considering South Korea and Japan.
Q: How does Somo plan to deal with output increases of heavier oil – especially from Halfaya in Maysan – in terms of maintaining segregation between heavy and light grades?
A: Of course we currently have two [southern] grades, and the specification of each depends on the system in which it’s stored. We might launch a third grade [Basra Medium] to solve this problem [maintaining crude grades to contracted specifications] but this all depends on the system that is developed in the future.
Q: In the best-case scenario, when could Basra Medium be launched?
A: It depends on three factors. First is the production rate of lighter crude. Second is the storage capacity and our ability to segregate grades. Third is the midstream system. Approximately two or three years is the most likely timeframe.
Q: In oil marketing terms, how important is it for Iraq to develop ‘strategic’ export routes such as the Basra-Aqaba plan or the north-south Strategic Pipeline?
A: The project now from Basra to Aqaba is a highly strategic project, and of course it is not only this project that Somo is considering. There was the pipeline to Syria for instance, the pipeline to Saudi Arabia, but the strategic project now at hand is Basra to Aqaba.
This will give flexibility and expand the vision of Somo in terms of marketing – especially when it comes to reaching Mediterranean markets.
The Iraqi-Turkish pipeline, is very damaged but used to be a strategic pipeline through which we moved cargoes from Basra to the north. It enabled Iraq to send volumes to the north to be blended and burned in refineries and vice versa.
Q: Is there any chance that current volumes from Kirkuk to Ceyhan via the KRG’s pipeline could increase?
A: Currently we are exporting between 85-90,000 b/d, because this is the available volume from Kirkuk. If production increases, and we receive a message from North Oil Company that they are capable of surpassing this figure, then we definitely have the capability to pump this crude to Ceyhan and export from there.
North Oil actually have the capability to surpass these volumes, but because of our Opec production commitment, are not in a position to do so.
Q: So the 80-100,000 b/d figure given when the deal was announced was more in terms of a guideline based on Opec commitments?
A: Yes. They could produce 120,000 b/d.
Q: What portion of the Kirkuk crude is lifted in Ceyhan and what portion is sent to be refined in Turkey?
A: The priority is given to the Turkish side and what is left we export. Two-thirds to the refinery and about one-third is exported from Ceyhan.
Q: Output at the Qayara field is currently around 30,000 b/d and operator Sonangol says it could increase to 60,000 b/d and beyond in the near future if the demand is there. But local refineries aren’t taking the volumes and Somo is only tendering for 25,000 b/d. So how does Somo see the field’s development going forward?
A: Qayara crude is very heavy, and most of the local refineries aren’t interested in running such a crude. We have succeeded in exporting around 25,000 b/d, and some of the crudes have reached Indian refineries. So we have really succeeded in reaching the quantity needed for some for some of the companies to lift it. Considering the difficult logistics of exporting such crude, it has been a success.
Q: And is Somo selling it from Basra?
A: We sell it ex-field. A transporter will take it from the field to Basra and then has the burden of finding a buyer. Somo still follows the process and observes who the end user will be according to the records.
Q: Have any volumes gone to Turkey?
A: From an economic point of view we are not really interested in expanding the export of such crude. Even these marginal volumes could factor into impacting our Opec commitment. But nevertheless, we are trying to increase production of light crudes in the south rather than concentrating on developing Qayara as an export crude.
We are actually looking at a new approach for exporting this grade. We are considering blending it in order to make it more interesting for lifters. We aim to improve the specifications and have different scenarios to make this possible, but we are still studying them. So this may be a new grade.
Q: With IMO regulations on high sulfur fuel oil [for shipping] coming into effect from January, do you expect demand for Iraqi volumes to fall?
A: You know very well that there are contradictory approaches when analyzing the market and we don’t know exactly what sort of direction the market will take. Definitely there will be a solution for our fuel oil to be marketed, and we hope we will succeed in this.
We know what sorts of requests we are going to get from our clients in November and the volumes they intend to lift for 2020. We know.
Q: Lastly, Saudi Arabia and other Gulf producers are increasingly turning to petchems and refining to climb up the value chain. Iraq has long planned an export refinery at Basra and is looking to develop petchems complexes. Is Somo keen to expand away from solely marketing crude?
A: Somo definitely is interested in optimizing returns from the barrel by pursuing products exports. We now have the Karbala refinery project which is really progressing and there is also the Fao refinery which is under study and will materialize in the future.
There is also Nebras for petchems, which is a major project involving Shell, the Ministry of Oil, and possibly Sabic – along with a marginal share for the Ministry of Industry as well.
The Oil Minister has also told us to study the possibility of overseas refining and how we can invest overseas.
Interview conducted by Waylon Fairbanks in Baghdad on 16 April.