27 Oct 2000

Iraq may halt 5.0 pct world oil exports in euro row

By Peg Mackey

DUBAI, Oct 26 (Reuters) - Iraq is likely to suspend oil sales worth five percent of world crude exports from November 1 if Washington objects to a plan by Baghdad that it be paid in euros rather than in dollars, an Iraqi source said on Thursday.

"Iraq is unlikely to implement oil contracts if the United States objects to euro payments for Iraqi oil and Baghdad insists payment be made in euros," the source told Reuters.

"I see a problem," he added. "This is a political issue and not a technical matter."

He indicated any suspension would be from November 1.

Iraq was the sixth biggest oil supplier to the United States in August, providing 749,000 barrels per day (bpd), U.S. government figures show. Its U.N.-monitored sales account for five percent of world oil exports of about 45 million bpd.

Benchmark Brent crude oil in London jumped 50 cents on the news and was trading at $31.95 at 1200 GMT.

The world's largest oil exporter, Saudi Arabia, as well as other producers would increase their exports in the event of any Iraqi shortfall, an OPEC delegate said.

Saudi Arabia has said it can increase its current output of 8.5 million bpd by two million bpd and that it could take up to 90 days to attain maximum production levels.

The West's energy watchdog, the International Energy Agency, has said it would consider releasing emergency stocks in the event of a supply shock such as an Iraqi export halt.

The United Nations sanctions committee will meet on October 30 to discuss a proposal from Iraqi oil marketer SOMO that from November 1 all letters of credit for crude oil payment must be opened in euros rather than dollars.

The committee, which is to receive a written U.N. staff report on the issue by Thursday, is split on whether it should allow a switch to euros or even whether it has any right to weigh in on the matter, diplomats in New York have said.

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The Middle East Economic Survey (MEES) reported on Thursday that a serious possibility existed that Iraqi oil sales could be suspended next week due to delays at the United Nations over whether to approve Baghdad's euro proposal.

MEES said one indication of how Baghdad would react would be whether state oil marketer SOMO is given permission by Iraq to submit its November price formulae in the next 24 hours.

If it does -- it can be taken to mean that a compromise is possible and it intends to go ahead with its export schedule, the newsletter said.

Lifters of Iraqi barrels have told Reuters that they have no objection in principle but they are worried about becoming bogged down in a procedural wrangle.

Baghdad has been exporting about 2.3 million barrels per day (bpd) of oil in the current eighth phase of a U.N. humanitarian oil-for-food exchange.

The eighth phase of the exchange ends on December 5. Iraq's oil exports at current prices fetch around $60 million a day.

Oil-for-food revenues are currently deposited in a dollar U.N. escrow account at Banque Nationale de Paris (BNP) in New York. That account, after nearly four years of the programme, now stands at around $10 billion, said industry sources.

But BNP cannot issue a new, standard euro format for letters of credit until instructed to do so by the United Nations, customers said.

Oil firms lifting Iraqi barrels in early November must now get the necessary U.N. mandated paper work in place.

Some industry sources have said Washington, dead set against euro payment, was proving the main stumbling block at the U.N.

But Baghdad was also playing politics as well, they added.

The Iraqi government decided last month to halt trading with the dollar and replace it with the euro or any other currency.

Baghdad has said the move was to confront the "daily American-Zionist aggression," an apparent reference to U.S. support for sanctions.

The U.N. oil-for-food deal lets Iraq sell oil over a six month period on a renewal basis to buy food, medicine and other humanitarian goods for the Iraqi people reeling under stringent U.N. sanctions imposed for Baghdad's 1990 invasion of Kuwait.

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-- Martin Thompson (mthom1927@aol.com), October 26, 2000