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Japan secures more Iraqi oil after approval of Itochu’s West Qurna 1 deal

Itochu has stepped into Iraq’s upstream business by winning approval to buy out Shell’s stake in the giant West Qurna 1 oil field, a deal that could not only boost flows of Basrah crude oil to Japan, but could also help the Japanese company to push sales of the grades to other markets in the Asia Pacific region.

Itochu said Friday that it had secured all necessary approvals from Iraq, including from state-owned Basra Oil Company, to acquire Shell’s 19.6% stake in the field in the next few days.

Shell said the deal with Itochu covers the sale of its local unit, Shell Iraq BV, for $406 million.

Itochu and Shell agreed the deal earlier this year and were waiting for the final approval from Baghdad, S&P Global Platts reported in January.

Located in southern Iraq 50 km northwest of Basra, the ExxonMobil-operated West Qurna 1 field produces more than 400,000 b/d.

Shell began marketing its interest in the West Qurna 1 field last year when it also announced its planned exit from the country’s Majnoon oil development.

The major is set to hand over operations of Majnoon to state-run Basra Oil Company by the end of June, making it the first major oil company operating an oil field under the technical service contract model to exit Iraq.

Foreign operators in Iraq have been under increasing pressure in recent years to boost output from oil projects under the terms of their service contracts despite payment delays, security threats and infrastructure challenges.

“Iraq is an important country for the Shell Group, and exiting West Qurna 1 allows us to focus our resources on other assets in our Iraq portfolio,” Shell’s Upstream Director Andy Brown said in a statement.

Iraq cut the production target for West Qurna 1 in 2013 to 1.6 million-1.8 million b/d, from an original target of 2.3 million b/d set in 2009.

Shell remains an investor in the planned Nebras petrochemicals plant in Basra, as well as joint-venture partner, with a 44% stake, in the Basra Gas Company, which captures and utilizes associated gas from three large oil fields in Basra.

MARKET REACTION

Iraq’s decision to approve Itochu’s acquisition of the West Qurna 1 stake could help ensure ample Basrah crude sales to Asia, satisfying Baghdad’s growing ambition to gain market share in East Asia, market participants said.

Itochu’s debut entry into the Iraqi upstream business could also mean that Asian buyers would gain more access to spot Basrah crude supply as the Japanese trader is likely to offer most, if not all, of its equity Basrah crude barrels to end-users in East Asia, Asian sour crude traders said.

An Itochu spokesman told Platts on Friday that it was not immediately clear when it will be able to start lifting its equity volume of Basrah Light and Basrah Heavy crude from the field.

Itochu has a strong presence in the Asia Pacific sweet crude market, supplying numerous end-users across the region with its term and equity crude oil from various fields located in Far East Russia, Oceania and Southeast Asia.

Last year, Itochu had signed a term contract to lift around 200,000-300,000 barrels of Indonesian Senipah condensate each month. The trader was regularly seen offering and selling its term ultra-light crude barrels to regional refiners and petrochemical companies.

Itochu had also previously secured monthly term supply of light sweet Australian Barrow Island crude from Chevron for 2017.

The trading firm is also a regular player in the Far East Russian crude complex, offering around 700,000 barrels of light sweet Sokol crude each trading cycle.

Market sources said Iraq’s decision to approve the deal between Shell and Itochu was no surprise as the big OPEC producer frequently highlighted the importance of the Asian market and Itochu’s presence in the country’s upstream sector would help broaden Basrah crude’s customer base in the Far East.

JOGMEC’S EQUITY FINANCE

Itochu, which has also agreed with Japan Oil, Gas and Metals National Corporation to get equity finance from the state-owned organization for acquiring the West Qurna 1 stake, will have to bring back certain equity crude lifting volumes to Japan, said the Itochu spokesman, declining to elaborate.

Under the equity finance deal, Jogmec said it will provide 40% equity to Itochu’s wholly owned subsidiary CIECO West Qurna, with the balance to be held by Itochu, although it wasn’t immediately clear when it will take place yet as it is still subject to Iraqi government approval.

Jogmec said Itochu’s participation into the development of the giant West Qurna 1 field will not only contribute stable oil supply to Japan but will also help diversify supply sources in the Middle East.

Iraq was the seventh-largest crude supplier to Japan in 2017, when it imported an average of 55,888 b/d, which accounted for about 2% of Japan’s total imports of 3.23 million b/d. Japan’s Iraqi crude imports averaged at 130,250 b/d in January, which accounted for 4% of the total imports of 3.42 million b/d in the month.
Source: Platts

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