Almost everything in life is a matter of perspective, including developments in the oil and gas industry. For people who would start to study global oil flows today, it would come as something completely natural that Iraq largely depends on Asia to take in its plentiful oil exports. Be it Basrah Light or Heavy, Asia’s share in Iraqi exports (excl. Kirkuk) averaged 80% in 2020, quite a steady progression from 60% in 2017, 65% in 2018 and 71% in 2019. For those who have dealt with Iraqi streams in the past, the occurrence of Basrah Light in Europe was just as natural as that of North Sea grades or Urals – now it is a mere fraction of what it was. The OPEC+ market landscape has altered the erstwhile bidirectionality of Iraqi exports, to the extent that despite Iraq’s hefty production cuts in H2 2020 exports to Asia have barely moved.
Graph 1. Iraq’s Crude Exports to Asia in 2017-2021 (million barrels per day).
Looking back into the Europe-bound trade movements of 2015-2016, one can notice that Iraq’s flagship grade Basrah Light was a staple diet across the Old Continent. The port of Rotterdam would regularly receive 2-3 VLCCs, Mediterranean refineres in Greece, Italy, Spain and elsewhere would take in the occasional Suezmax of Basrah Light. The introduction of Basrah Heavy in the summer of 2015 has triggered the occasional purchase to Greece, Italy and Spain; add to this the stop-and-go nature of Kirkuk exports (either with Kurdish crude or without) towards the Mediterranean and beyond and one gets a fairly solid outlet market for the Iraqi state oil company SOMO. Throughout 2016-2018 the combination of the above-mentioned factors has hiked the average European monthly intake of Iraqi crudes to 25-30 MMbbls (0.8-0.9mbpd).
Looking back into the Europe-bound trade movements of 2015-2016, one can notice that Iraq’s flagship grade Basrah Light was a staple diet across the Old Continent. The port of Rotterdam would regularly receive 2-3 VLCCs, Mediterranean refineres in Greece, Italy, Spain and elsewhere would take in the occasional Suezmax of Basrah Light. The introduction of Basrah Heavy in the summer of 2015 has triggered the occasional purchase to Greece, Italy and Spain; add to this the stop-and-go nature of Kirkuk exports (either with Kurdish crude or without) towards the Mediterranean and beyond and one gets a fairly solid outlet market for the Iraqi state oil company SOMO. Throughout 2016-2018 the combination of the above-mentioned factors has hiked the average European monthly intake of Iraqi crudes to 25-30 MMbbls (0.8-0.9mbpd).
Graph 2. Share of Asia in Total Iraqi Exports in 2017-2021 (%).
Today Europe’s share is half of what it was 3-4 years ago in absolute terms. Asia’s share, however, has risen in both absolute and relative terms. We have already touched upon the relative numbers, but the absolute volumes are just as indicative – Asia’s rise in importance for Iraq happened against the background of average annual exports dropping from 3.43mbpd in 2018 to 2.94mbpd in 2020. Iraqi exports to Asia (including Kirkuk) have averaged 2.3mbpd last year – of this, China and India alone account for almost 2mpbd, with 1.05mbpd and 0.9mbpd respectively.
The splitting of the Basrah Light crude stream into two new ones – Basrah Medium taking over the old Basrah Light in terms of quality and the new 34° API Basrah Light finally living up to its officially declared density – has actually nudged Baghdad towards an even tighter linkage with Asia. The thing is that Basrah Medium, i.e. the “old” Light at roughly 29° API, has heretofore seen only 3 cargoes delivered to Europe in 2021.
Little does foreshadow any sudden reversal of Iraq’s Asian pivot. If anything, it might increase even more – SOMO’s granting of its giant 5-year prepayment deal to China’s state-owned Zhenhua Oil worth $2 billion was delayed by the Iraqi side but remains in power, subject to settling all details. The choice of Zhenhua is not surprising, the Chinese firm has had a contractual relationship for SOMO for more than a decade and operated a JV that traded Iraqi volumes, now broken up as the Iraqi state oil marketer decided to take Basrah sales into its own hands. Under the prepayment deal, Zhenhua would receive 4 MMbls a month from SOMO (the monthly split of grades to be offered is not determined as of yet) and even though these barrels are destination-free (as opposed to SOMO’s regular dealings) a significant portion will end up in Chinese refineries, as they generally do.
Interestingly, Iraqi authorities have fully embraced the change and are reported to seek storage deals in China and Pakistan to provide more flexibility to their supplies, following in the footsteps of Saudi Aramco that has similar deals in Japan and South Korea. The likelihood of this happening anytime soon remains rather bleak, Iraq would need at least several years of high prices and no wars.
Graph 3. Share of India and China in Asia’s Demand for Iraqi Crude 2017-2021 (%).
Based on the geography of terminals that load Iraqi crude, there should be one notable exception to the general pivot towards Asia – the flow of Kirkuk grade, loading in the Turkish port of Ceyhan. The low freight costs arising from the proximity of Ceyhan to Med refiners, most of whom are well-configured to handle its quality and rather high sulphur content, would logically indicate that most of Kirkuk exports would end up in Europe. This was the case for most of the 2010s, the average share of Europe in total Kirkuk exports always oscillated around the 60% mark. In periods of crude shortage, such as the dispute-heavy year of 2019, Europe’s share shot up to almost 70%, its highest within the decade, however from 2020 onwards the Old Continent’s share has dropped below the historical average (56% in 2020) and continues to stay there in Q1 2021.
Graph 4. Kirkuk Exports in 2017-2021 vs Percentage Share of Kirkuk Exports Going to Europe (million barrels per day, %).
Being cognizant of the trends taking place in front of our very eyes is a prerequisite to shaping one’s crude marketing strategy in an optimal manner and Iraqi oil authorities understand this very well. Iraq is getting increasingly dependent on Asian buyers, especially China and India, with all the potential pitfalls and challenges this might entail. It is one thing to ride the waves of robust economic growth, at the same time a realistic contingency plan is required should the future bring a sudden halt to Asian demand. Just to take one example, Iranian Light is quality-wise similar to Basrah Light; should Teheran be allowed to return to global crude markets and conduct an aggressive pricing policy, the Iraqi SOMO might feel the increased pressure.