UPDATE 2-Iraq, Turkey discuss long term oil supply deal

Mon Oct 15, 2007 2:08pm BST

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By Simon Webb

DUBAI Oct 15 (Reuters) - Iraq is in talks for a long-term Kirkuk crude oil supply contract to Turkey, oil industry sources said, as the improved reliability of its northern export pipeline inspires more confidence in increased oil revenues.

The link to to Turkey has been exporting without interruption for two months after repeated sabotage since the U.S.-led invasion of Iraq in March 2003.

If Iraq can maintain the flow from the Kirkuk oilfields then more long-term contracts would follow, oil sources said on Monday. Oil is Iraq's principal source of the hard currency needed to rebuild its shattered economy.

Iraq issued a sales tender for up to 6 million barrels on Sunday for loading by early November. If all the cargoes sail on time, Baghdad will have sold around 18.5 million barrels of Kirkuk oil since late August -- or nearly 300,000 barrels per day (bpd) -- boosting Iraq's total exports by around 20 percent.

Iraq issues tenders to sell oil from the pipeline terminal at Turkey's Mediterranean Ceyhan port, fed by the pipeline, when it cannot guarantee the flow.

Exports through the line remains sporadic, but the volume pumped since late August has already surpassed the total in 2006 of around 9.6 million barrels.

The flow was halted on Monday after another 1.3-1.4 million barrels came through the line at the weekend, a shipping source said. There were about 6.9 million to 7 million barrels in Ceyhan storage tanks, he added.

The first company to hold fresh talks with Iraq on a term contract is Turkey's Tupras (TUPRS.IS), an Iraqi oil ministry source said on Monday.

"We are hoping to sign a contract with Tupras," he said. "We are still in discussions to finalise quantities. Exports have been more sustained."

Tupras can sign up to a term contract with less risk that other Mediterranean refiners as it can take delivery of the oil through a domestic pipeline from Ceyhan to the 113,000 bpd Kirikkale refinery.

TRICKY

Other buyers have to take on the risk of chartering a ship, potentially expensive if the flow through the line is halted and the vessel kept waiting.

Others on the list of potential term contract buyers were those that have had similar supply deals in the past, a Mediterranean oil trader said.

Iraq held Kirkuk term contracts for a brief period at the end of 2004 for about 5 million barrels a month. Aside from Tupras, the term buyers then were U.S. major Exxon Mobil, France's Total and Spanish refiners Repsol and Cepsa.

Majors Shell and BP, Italian refiners Eni, Erg and Saras and Austria's OMV have all bought crude in tenders since August.

For now, Iraq will probably want to ensure it can keep the oil flowing before it commits to more contracts, the Mediterranean trader said.

"They may still be holding off a bit to test the logistics and security before they start to commit volumes to term contracts," he said. "It's all still a bit tricky."

Sabotage attacks had kept the line mostly idle since the U.S.-led invasion of March 2003. Prior to the war, Iraq was exporting steady Kirkuk volumes of at least 700,000 barrels per day.

The northern pipeline is Iraq's secondary export route. It relies on its main terminal in the south at Basra for exports of about 1.5 million barrels per day.