What started as another spat between Iraq and the Security Council in late November (MEES, 27 November 2000) has developed into a fully-fledged confrontation between the two which has led to the disruption of Iraqi oil exports.
Although the crisis has had little political effect, it could, if not resolved in the next two weeks, have a significant impact on OPEC’s deliberations during the extraordinary meeting to be held in Vienna on 17 January.
Baghdad’s demand that its customers pay a fixed surcharge of 50 cents/B, later reduced to 40 cents/B, into a designated account independent of the UN was an overt political attempt to force major international oil firms to challenge the sanctions regime. Iraq threatened to halt deliveries to its customers if they refused to cooperate.
The attempt failed from the start, causing the interruption of Iraqi oil exports, because the international oil companies refused to oblige, for political and commercial reasons; the sanctions committee acted promptly and forcefully by refusing non-market related price formulas; and the US, the IEA and Saudi Arabia issued forceful statements assuring the markets that they would take action if there were any shortfall of supplies (MEES, 4 & 11 December 2000).
Accordingly, Iraq’s calculation that companies would be obliged to lift Iraqi crude as prices rose sharply with the interruption of supplies at the beginning of winter turned out to be wrong. In fact, prices declined by almost $10/B at one point.
Iraqi oil exports under the UN oil-for-food program plummeted to an average 1.2mn b/d in December from 2.1mn b/d in November.
Iraqi production for December averaged 1.80mn b/d (1.2mn b/d under the oil-for-food program, plus 600,000 b/d for domestic consumption and cross-border trade with Jordan, Turkey, Syria and the Gulf).
Average Iraqi oil production in 2000 is estimated at 2.57mn b/d, compared to 2.54mn b/d in 1999 and 2.11mn b/d in 1998 (see Table below).
Iraqi Crude Oil Production
(Mn B/D)
2000 Average
Dec Nov Oct Sep Aug Jul Jun May Apr Mar Feb Jan 2000 1999 1998
1.80 2.70 2.96 2.81 3.00 2.44 2.54 3.03 2.63 2.16 2.59 2.18 2.57 2.54 2.11
While Iraq has succeeded in recent months in extracting several concessions from the Security Council, most of these fell within the parameters of the sanctions resolutions.
This time around, however, Iraq’s demand is a direct challenge to the essence of the sanctions regime – control of the oil funds – and none of SOMO’s customers, including various Russian companies, are prepared to pay the fixed surcharge in defiance of the UN.
One long-time buyer of Iraqi crude told MEES: “Unless SOMO comes clean and public on this issue, there won’t be any major lifting. We will be accused even if we don’t pay.
Who will believe us?” There were no Iraqi exports during the first four days of January, although a tanker started lifting Basrah Light from Mina al-Bakr on 5 January.
There is still a backlog of around 70mn barrels of crude undelivered from the 8th phase of the oil-for-food program, while only a handful of contracts have been signed by small and little known companies for the 9th phase (which began on 6 December and ends on 3 June 2001).
Reuters reported on 4 January that the following contracts had been signed so far: Belmetalenergo (Belarus), 6mn barrels of Basrah Light; Italtech (Italy), 4mn barrels of Basrah Light and 4mn barrels of Kirkuk; Montega (S. Africa), 2mn barrels of Basrah Light; Fenar (Lichtenstein), 4mn barrels of Basrah Light and 2mn barrels of Kirkuk; and Quantum Holdings (Malaysia), 2mn barrels of Basrah Light and 2mn barrels of Kirkuk. The sanctions committee has already approved SOMO’s January price formulas for crudes destined to the US and the Far East (MEES, 25 Dec 2000/1 Jan 2001), and is expected to do the same for the European prices on 5 January.
The confrontation has direct implications for the extraordinary OPEC conference in Vienna.
Among the questions it raises are whether Iraq will continue to insist on the surcharges by 17 January and whether SOMO will be able to sign any significant number of contracts by then.
If the surcharges continue and customers hold off, OPEC can expect very little oil from Iraq in the foreseeable future – and no one in OPEC knows when or how the confrontation might end.
Iraq has over $5bn of uncommitted funds in the UN escrow account, which means that it can hold out for a long time without exports.
On the other hand, the disruption of oil exports hits at the heart of the Iraqis’ diplomatic campaign to win supporters through oil and commercial contracts.
In related Iraqi developments:
No date has yet been set for a meeting in New York between UN Secretary-General Kofi Annan and a senior Iraqi delegation headed by Foreign Minister Muhammad Sa'id al-Sahaf to discuss the impasse over implementing resolution 1254.
Iraq’s attitude to the forthcoming talks was outlined by the daily al-Iraq on 29 December as follows: “Iraq is not opposed to a constructive and fair dialogue with the UN and its Secretary-General as long as that involves no preconditions and takes into account Iraqi principles relating to four fundamental issues.
The first is that the basis and aim of the dialogue in all its aspects is the immediate and total lifting of the unjust embargo imposed on Iraq.
Second, it must recognize the great efforts exerted by Iraq to conform to all Security Council resolutions and in fulfilling all the commitments necessary for the lifting of the embargo, a fact that makes the removal of the resolutions necessary because their objectives no longer exist.
Thirdly, Iraq must enjoy all its natural rights to dispose of its resources and to establish economic, political, social, cultural and other relations without conditions or limitations. Fourthly, no party, no matter what its size or status, from near or far, may interfere in Iraq’s internal and national affairs.”
Iraq has sent a second letter to the UN Secretary-General protesting the fact that it has not received a response to its earlier request to allocate €1bn from the oil-for-food program to the Palestinian people.
Iraq has already sent €5mn to the West bank and Gaza to provide $10,000 to each of the families of the victims of the al-Aqsa intifada.
President Saddam Husain on 31 December reviewed the biggest military parade in Baghdad since the 1991 Gulf War. The al-Aqsa Call parade displayed short-range surface-to-surface missiles, anti-aircraft guns, artillery, over 1,000 modern Russian tanks and infantry units.
Norway has been named the head of the sanctions committee, replacing the Netherlands.
(mees)
© 2001 Mena Report (www.menareport.com)
