Government of Iraq secures $10 billion oil-backed loan framework agreement (Linked to Record ID#95984, 95985, and 95996)

Government of Iraq secures $10 billion oil-backed loan framework agreement On May 11, 2018, China Export & Credit Insurance Corporation (Sinosure) and the Ministry of Finance of the Republic of Iraq signed an export credit insurance cooperation framework agreement (contract ID# FA-IRAQ-001).

Under the terms of the 20-year agreement, the Ministry of Finance of the Republic of Iraq is authorized to borrow up to $10 billion (or an equivalent amount in other currencies such as RMB) via subsidiary buyer’s credit facility agreements with PRC banks and/or commercial contracts with deferred payment clauses (i.e. supplier’s credits) with Chinese companies (exporters) for projects in the ‘oil, gas, energy, infrastructure, communications, education, healthcare or electricity sectors’ that are ‘located in the areas in Iraq deemed safe by the Embassy of China and the Government of Iraq.’ All borrowings under the framework agreement, which is captured via Record ID#95982, must carry maturity lengths that do not exceed 15-years and they must be backed by an approved credit insurance policy from Sinosure.

The framework agreement also specifies that the Government of Iraq is responsible for making advance payments worth no less than 15% of the total cost of the underlying commercial contracts supported by the subsidiary buyer’s credits and supplier’s credits.

To repay and secure these borrowings, the framework agreement specified that a Crude Oil Sales Agreement would be put in place between Iraq's state-owned oil marketing company (SOMO or شركة تسويق النفط) and one or more Chinese state-owned oil importers, wherein SOMO would agree to sell no fewer than 100,000 barrels of crude oil per day to one or more Chinese state-owned oil importers.

Ultimately, SOMO agreed to sell no fewer than 100,000 barrels of crude oil per day to ZhenHua Oil Company and Sinochem (split equally between the two Chinese state-owned oil importers).

Per the terms of the framework agreement, ZhenHua Oil Company and Sinochem agreed to make payments to SOMO due under the Crude Oil Sales Agreement by depositing U.S. dollars (or another foreign currency) in a Sinosure-designated and lender-controlled bank (escrow) account (that was opened on behalf of the Ministry of Finance of the Republic of Iraq to facilitate debt service payments).

ZhenHua Oil Company and Sinochem can resell the oil, but they must transfer 65% of the resale profits to SOMO. They can retain 35% of the resale profits. If resale results in a loss, the Chinese state-owned oil importer bears 100% of that loss.

Under the terms of the framework agreement, the Ministry of Finance of the Republic of Iraq is required to maintain a minimum cash balance of $100 million in a Debt Service Reserve Account (DSRA) and pledge the DSRA in favor of Sinosure.

Apart from the DSRA, the framework agreement refers to two additional escrow accounts: an Oil Settlement Account and a Repayment Account.

All oil sale proceeds first flow to the Oil Settlement Account, which is a Central Bank of Iraq (CBI) account at the Federal Reserve Bank of New York (FRB NY). [Note: The Oil Settlement Account is also known as the Development Fund for Iraq (DFI) Account, the Oil Proceeds Receipt Account (OPRA), the Iraq 2 Account, the Oil and Gas Revenues Account (OGRA), and the DFI Successor Account.] Then, after deductions are made from the Oil Settlement Account by the United Nations Compensation Commission for compensation due to Kuwait, the remaining revenue flows to the Repayment Account (so long as there is still a $100 million minimum cash balance in the DSRA) and principal and interest payments to lenders are made from the Repayment Account.

The Government of Iraq has disclosed via EITI that that the DSRA and the Repayment Account are sources of collateral. On September 23, 2019, account agreement and oil agreement annexes to the framework agreement were finalized. Then, on September 23, 2019, the framework agreement officially went into effect.

Approximately 15 months later, in December 2020, a Financial Advisor to Iraq’s Prime Minister, Dr.

Mudhar Muhammad Salih, told the Iraqi News Agency (INA), that Iraq’s House of Representatives would need to identify the specific projects to be funded under the framework agreement and allocate funds for these projects in the Federal Budget Law. Then, on April 8, 2021, the Government of Iraq issued the 2021 Fiscal Year Federal Budget Law.

Included in the budget was a pronouncement that $1.803 billion from the $10 billion oil-backed loan framework agreement between the Ministry of Finance and Sinosure would be used to fund infrastructure projects.

Five months later, in November 2021, Salih told a local newspaper that several Chinese companies had deposited $1.8 billion in an account and the funds would be used to support these projects.

This announcement implies that the Government of Iraq ultimately decided to borrowed via commercial contracts with deferred payment clauses (i.e. supplier’s credits) with Chinese companies rather than buyer’s credit facilities with PRC banks. On June 30, 2022, Dr.

Mudhar Muhammad Salih said that ‘[t]he operations of depositing money and withdrawing from the [escrow] account are continuing for the benefit of the projects concluded within the [export credit insurance cooperation framework agreement with Sinosure].’ He also noted that ‘the [escrow] account is managed very carefully by the Central Bank of Iraq, and the financial operations are audited by the major international financial auditing companies.’ In 2022, SOMO also agreed to increase its sale of crude oil to ZhenHua Oil Company and Sinochem from 100,000 to 150,0000 barrels per day.

It did so ‘to meet the estimated annual revenue based on the Official Selling Price (OSP) applied to all buyers (without discounts or installment payments).’