* Iraq to supply 40 percent of new refinery's crude
* Edges out competition with sweeter terms
* Sinochem Corp to become one of Iraq's top oil buyers
By Judy Hua and Chen Aizhu
BEIJING, Nov 4 Sinochem Corp will become one of
Baghdad's top oil buyers next year when the Chinese state
company starts its first wholly-owned refinery, the latest
example of Iraq beating Middle Eastern rivals in the competition
for new markets in Asia.
Iraq's output has increased rapidly after years of unrest
and China is the most important battleground for exporters
looking for new markets. China overtook the U.S. as the world's
largest net oil importer in September and has driven global fuel
demand growth for a decade.
Iraq said China is seeking to increase purchases of its
crude by more than two-thirds next year. To boost sales it has
offered sweeter payment terms to buyers than
Sinochem plans to use Iraqi crude for 40 percent of the
capacity of the new refinery, replacing a preliminary agreement
to use more expensive oil from Kuwait, Chinese traders said.
"Kuwaiti crude is pricier than Iraqi oil and it is
non-tradable, making it less competitive," said a trading source
with knowledge of the deal. Sinochem would still likely buy some
crude from Kuwait, he added.
Sinochem's 240,000-barrels-per-day Quanzhou plant on China's
southeast coast is expected to process about 100,000 bpd of
Iraqi crude after completing test runs due to start in December,
the trading sources said.
Sinochem may still need to honour, at least partially, a
non-binding agreement inked in 2007 with OPEC-member Kuwait to
buy 240,000 bpd Kuwaiti oil for the Quanzhou plant.
"(Sinochem) can't burn the bridge behind it," said the
source, estimating the volume from Kuwait could be only two
million barrels per quarter, or about 22,000 bpd, less than a
tenth of the preliminary deal.
Sinochem's informal tie-up with Kuwait helped it obtain
state approval for its refinery since Beijing requires large new
refineries to secure oil supply first.
But Sinochem had never formalised the supply deal with
Kuwait, traders said, partly because the OPEC member does not
appear to have any immediate plan to boost its oil output beyond
the current 3.2 million bpd.
A Sinochem trading executive said that while Kuwaiti oil is
what the refinery was designed for, economics would be the most
important criteria when deciding which crude to use.
For test runs, the Quanzhou plant will process sweet crude
from West Africa - including 3 million barrels of Angolan
Cabinda crude - before switching to lower quality sour grades
after entering normal operations, traders said.
Sinochem, one of Baghdad's long-standing Chinese customers,
is already lifting under it 2013 contract some 200,000 bpd of
Iraq's flagship crude Basra Light.
Most of Sinochem's contracted barrels now go to Chinese
refineries owned by top Asian refiner Sinopec Corp
Sinochem's Quanzhou plant was also likely to buy crude from
other Middle East exporters such as Saudi Arabia, traders said.
Sanctions-hit Iran was also on the potential suppliers'
list, said the Sinochem executive, if and when sanctions ease.
"We are closely following the progress of the Iranian nuclear
talks. We shall be prepared to take Iranian oil once the
sanctions are lifted," he said.
IRAQI PLAY FOR MARKET SHARE
By offering deeper discounts in pricing and extending credit
payment durations, Baghdad is also luring other key Chinese
buyers including state refiner Sinopec Corp
and smaller state traders Zhenhua Oil and state-run China
National Offshore Oil Corp (CNOOC).
CNOOC lifts oil from Iraq's Maysan oilfield, which its
listed arm CNOOC Ltd is involved in developing.
Sinopec will raise its Iraq term purchases next year after
nearly doubling this year's volume to around 270,000 bpd,
"The volume will grow, and by not a small rate," said a
trading official who was familiar with Sinopec's crude purchases
but declined to give a more specific estimate.
Smaller trader Zhenhua Oil is likely to more than double its
Iraqi term crude in 2014 from this year's 22,000 bpd, said
another source with knowledge of China's oil trades.
Iraq expects China to seek 70 percent more crude - or a
total of 850,000 bpd - in 2014 versus current contract levels,
its deputy prime minister for energy Hussain al-Shahristani said
earlier this month.
Total exports are now running about 2.5 million bpd, but in
the first quarter of 2014 Iraq expects its export capacity to
rise to 4 million bpd, al-Shahristani also said.
Iraq expects its oil output to hit 3.5 million bpd by the
end of the year, as it counters infrastructure and security
issues that have this year hampered its efforts to maintain
steady output and exports.
(Editing by Tom Hogue and Simon Webb)