Iraq to swap HSFO, crude for Iranian gas

The crude-for-gas swap deal that Iraq and Iran agreed earlier this week will involve a quantity of high sulphur fuel oil (HSFO), a source with knowledge of the matter has told Argus.

Iraq will provide Iran with 2mn t of HSFO and 30,000 b/d of crude, starting in August for six months, the source said, in return for Iranian gas. That amount of HSFO is equivalent to around 71,000 b/d, which roughly equals the bulk of Iraq's surplus HSFO output.

The crude will come from the recently restarted Qayyarah oil field and "the quantities could incrementally increase," the source said. Exports resumed from the field, mostly by truck, at around 34,000 b/d in June, the oil ministry said earlier this month.

The deal is designed to allow Iran to get paid for the gas it delivers to Iraq, after it has encountered difficulties doing so because of US sanctions. Iraq owes Iran €11bn ($12.12bn), and Tehran's inability to access what it is owed led it to reduce gas supplies to Iraq by more than 50pc as of 1 July, Iraq's prime minister Mohammed Shia al-Sudani said on 11 July when he announced the swap deal. Tehran's reduction created an electricity supply crisis in Iraq at a time when temperatures were above 50°C.

Al-Sudani said the swap agreement secured the resumption of gas supply at 10mn m³/d, which will increase to previous levels. Iran has pumped around 21mn m³/d to Iraq during the winter season, and up to 50mn-55mn m³/d during the summer season.

Iran gets bypass

The swap deal allows Tehran to avoid seeing its revenues parked in Iraq's central bank, creating a mechanism to bypass sanctions. It also fits a strategy of diluting US influence in the region, particularly in neighboring Iraq. Washington has been pushing Baghdad for years to wean itself off imports of Iranian gas and recently hailed the signing of TotalEnergies' energy investment deal, in rare praise for a foreign-led oil and gas project.

But Iran is itself a major producer and exporter of HSFO, and the reason for including the product in the deal is unclear. Iraqi fuel oil is mostly straight-run fuel oil (SRFO), which is highly sought by refiners in Asia-Pacific, India and the US for processing through secondary units for more high-value products.

Iran has been implementing a number of expansion projects at its refineries aimed to cut fuel oil production, and market sources had told Argus that Iraq will reduce exports of SRFO to cope with power-generation demand during the summer months.

The inclusion of a third party to load the Iraqi crude and HSFO seems to be a likely scenario, the sources noted.

"Iran will decide which company will load the quantities. After all, it is Iran's money," the source said, without offering any information on how the transactions could be conducted.

By Bachar Halabi, Elshan Aliyev and Nader Itayim