At least 3 million barrels of Iraqi Kurdish oil are on ships heading to Asia, with trade sources naming China as a possible destination as the autonomous region expands efforts to establish independent oil sales in defiance of Baghdad.
Two sources with knowledge of the matter said Iraqi Kurdistan was in talks to potentially supply China with 4 million barrels of oil.
Reuters was unable to identify the Chinese parties involved in the talks, which the sources declined to name, and it was not clear if the cargoes currently on the water were part of the discussions.
A deal could place Beijing on a collision course with Baghdad, one of its major crude oil suppliers, which has tried to block the Kurdish sales that it says are illegal. The Kurdistan Regional Government (KRG) argues they are allowed under the Iraqi constitution.
"The Kurds are in the process of negotiations with the Chinese," said one of the sources, who asked not to be identified due to the sensitivity of the matter.
"China is buying up multiple origins of oil. So, there is not an issue from that side," the source added. "It will come down to price."
Since May, Iraqi Kurdistan has shipped over 11 million barrels of crude from the Turkish port of Ceyhan. The Kurdish sales have been shrouded in mystery, and the KRG has declined to say who is helping it arrange the deals. Trading sources said they may have to discount the oil to attract buyers in a well-supplied market.
According to a Reuters analysis of tanker tracking data, at least three Kurdish cargoes of 1 million barrels each have sailed from Ceyhan towards Asia in the past month, including one that was transferred to a supertanker near the Strait of Singapore on Monday.
Prior to the latest shipments only one 1 million barrel cargo had gone to Asia, but the KRG may be seeking a new major buyer after an attempt to sell crude into the United States this summer became embroiled in a legal tangle.
China's giant state-backed energy firms, including China National Petroleum Corporation (CNPC) and PetroChina, together work on over a fifth of the Baghdad-run oil projects. But Beijing also has stakes in Iraqi Kurdistan's oil production through Sinopec's 2009 acquisition of Addax Petroleum.
Establishing a buyer as large as China could provide reassurance to other countries and companies who would like to buy oil from the Kurds but fear the ramifications of crossing Baghdad, which has repeatedly threatened legal action.
Senior officials at CNPC and Sinopec declined to comment. A spokesman from the KRG's Ministry of Natural Resources declined to comment when asked about the talks.