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By Ahmed Mousa Jiyad. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.
Mr Jiyad is an independent development consultant, scholar and Associate with Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq’s Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: [You must be registered and logged in to see this link.]).
Introduction.
The meetings between the federal and KRG delegations held in Baghdad in the last days of October 2011 resulted in an agreement to base their discussion on the February 2007 version of the federal oil and gas law-FOGL.
Detailed, thorough and article-by-article assessments of the February 2007 draft of the law have been done and published by known Iraqi oil professionals, including this writer. The consensus among them indicates the draft suffers from many very serious flaws that ought to be addressed, revised, and redrafted. Moreover, essential and fundamental provisions are, by now, have been overtaken by events that render them outdated, irrelevant and dysfunctional.
What is needed then a very serious look into every article and the entire proposed law from substantive, format and operational aspects to insure its viability, coherence and proper functioning. It would be a grave mistake to consider the “law” as “political deal” since all had learned that most if not all political deals, in Iraq, are easily forgotten and short live!
This intervention aims to shed light on the most important issues and matters of concerns, which should be taken into considerations during the process of negotiating and finalizing a proposed draft of this law.1
Time factor effects
Many very important developments have taken place since February 2007, which makes it imperative to revise seriously various articles in the law since these provisions have been overtaken by events and thus became almost obsolete or redundant.
First: Among these developments are the bid rounds concluded by the MoO that led to concluding long term service contracts. These have generated many major consequences, which have direct implications on the proposed law.
Second: All major oilfields (except few such Kirkuk, Bai Hassan, East Baghdad among others) have been already contracted for re-development and/ or development with IOCs involvement. Consequently, there could be no need to offer any of the remaining fields for IOCs in whatever way or method. These remaining fields could be legally (by this proposed law) earmarked for INOC (to be reinstated), as suggested below.
Third: The concluded service contracts with IOCs, if implemented as envisaged, together with the production from other fields would bring Iraq’s production and export capacities to very high and unprecedented levels, even at partial success of half the contracted production targets. The implications is that there are no compelling reasons for Iraq to expand the production capacities any further at least in the next 15-20 years. The law may suggest a moratorium on any “new” development of oil fields for no less than 15 years. Moreover, the law ought to emphases the proper development of the contracted fields in the most optimum way to ensure the constitutional principle of “highest benefits to the Iraqi people”. Accordingly, the field development plans (initial and final) are of paramount importance that they should be formulated by technically competent petroleum team, approved by and constantly monitored by petroleum central authority;
Fourth: All the bid rounds were based on a service contract type and modality. The law should clearly extend support and preference to this type of contracting by making it mandatory to use this type of contracting. To prevent any misinterpretation it might be advisable to have a specific article in the law to make it unlawful and unconstitutional to conclude Production Sharing Contract- PSC in petroleum upstream sub-sector. The law ought to prohibit PSC in any phase of exploration, or development and production activities, in compliance with constitutional basic principles of collective ownership of petroleum resources and the best interests of the Iraqi people.
Fifth: The service contracts have already established significant milestones that are superior to those envisaged under February 2007 version of this law regarding, interalia, fiscal regime, conservation measures particularly those relating to gas utilization, good vs. best international business practices, dispute settlement modalities etc. Accordingly, good number of articles in this proposed law need revision on the lights of what actually have been concluded and evolved since February 2007.
Sixth: The relationship between this law and the proposed laws for the Ministry of Oil, INOC, Revenue Sharing and finally the General Commission for Observing the Allocation of Federal Revenue have to be well coordinated and considered to ensure harmony and coherence.
Seventh: The proposed law should be revised in the lights of the recent development pertaining to ExxonMobil/KRG deals and their possible impacts on eradicating the authority of the federal government over the petroleum sector. Specific provisions might be needed to prevent the repetition of such actions in the future.
Finally, by now many have publicly expressed the operational limitations of 2005 constitution, which were not fully tested when oil and gas law was drafted and proposed in February 2007. This is discussed next.
Proper and correct application of the constitutional articles.
The proposed law should attempt to have clear provision and article to address and avoid all the known ambiguities of the constitution, particularly those pertaining to oil and gas. There is absolutely no good purpose in repeating selective and biased interpretation of vague articles in the constitution aiming at weakening the role of the government on all petroleum policy issues.
The law should put an end to conflicting interpretation of these constitutional provisions as many respected and independent international legal opinions provide excellent guidance in this respect.
Petroleum policy and fields development, including contracting with IOCs to develop upstream petroleum, should be stated clearly as sovereign matters and are among the prerogatives and authority of the federal government.
Moreover, the law should make it mandatory on the federal government to prove that any field development involving IOCs delivers the highest benefit to the Iraqi people, as the constitution requires.
Effective contribution of all branches of Government
The proposed law should adhere to the constitutional principle of balancing the role and contribution of the three branches of authority: Judiciary, legislative and executive, especially with regards to upstream petroleum development contracts with IOCs.
As essential requirements the law should embrace three parallel principles to ensure checks and balances that:
Executive authority has the legal mandate to negotiate, conclude and sign the contracts;
Legislative authority (the Parliament/Council of Representatives-CoR) has the legal mandate to review, debate and promulgate laws to legalize these contracts if they are in conformity with the best interest of the Iraqi people and other principles on the constitution;
Judiciary authority has the legal authority to have the final decision in case of conflict between the two other authorities on the subject matter.
The above three essential requirements ought to be formulated through very clear, definitive and affirmative clauses in the proposed law to avoid the possibility of circumventing any of them and or limiting their due role and authority. Therefore all articles under “CHAPTER II: MANAGEMENT OF PETROLEUM RESOURCES” of the proposed law should be revised and redrafted accordingly.
4- The Federal Oil and Gas Council-FOGC.
This is the most important entity that would be created by this law. Therefore articles pertaining to its role, functions, objectives, formation and structure have to be debate and drafted carefully and clearly. It should be remembered that since no reference is made to this council in the constitution, therefore its creation is not a constitutional requirement. Moreover, the council has “non-election legitimacy” due to the possibility that only its chairman (the Prime Minister) would be elected, while other could be appointed. Finally, the council has specific professional and technical function and nature and therefore should not be considered or perceived as “political” entity.
The followings are issues of vital importance, which the proposed law should consider:
A: FOGC Membership and Structure
The representatives of the “producing provinces” should have proven record of experience in petroleum industry. The representative could be nominated by the related province but the nomination has to be approved by the Council of Ministers.
The three “experts” members should be Iraqis, to avoid any interpretation that permits foreigners to hold membership. The number of experts could increase in case the BIA is removed, as suggested below.
It is highly advisable that FOGC has permanent General Secretariat with well-qualified and experienced Iraqi staff in fields related to the nature of FOGC functions, responsibilities and role. Having permanent general secretariat is essential to ensure continuity since all members of FOGC (except the three experts) are there by virtue of their official positions not professional qualities, and thus the possibility of their turnover could be high and frequent. Moreover, it could be appropriate that either the Minister of Oil or the Head of INOC acts as the General Secretary of FOGC in addition to the membership in the council.
The core entities of the upstream and midstream petroleum sub-sectors should be well represented in FOGC. These include INOC, SOMO and other related State companies under the auspices of MoO.
Considering the rather large number of FOGC membership, their nature of representation, and the magnitude and strategic significance of the functions and role of FOGC it is important to insure balance between representation and efficiency considerations so that FOGC conduct its functions effectively.
B: Functions of FOGC
FOGC cannot decide the “Petroleum industry policies” since FOGC does not have the legal mandate, the technical capacity and institutional representation to do so for three reasons:
Decisions on such policies are among the functions of Council of Minister-CoM in the area of development plans.
The term “Petroleum industry” covers also all downstream sub-sectors, some of which such as gas industries, petrochemicals, refining industry and others are outside the scope of this law, as stipulated in Article 50.
These vital sub-sector downstream companies are not represented in FOGC.
Therefore FOGC could suggest or assist in formulating these policies but not decide them.
FOGC should not decide the “national petroleum production level” since this is the function of CoM. However, FOGC can suggest or recommend the suitable national production level and the modalities of assessing the equitable contribution of each producing contracting area.
The draft law gives FOGC members new authority to suggest laws. But FOGC members cannot have the authority to suggest laws, as this function is confined to the Parliament and the Government. Thus this right might be contested on grounds of unconstitutionality.
C: The Bureau of Independent Advisors (BIAs)
FOGC deals with matters mostly of sovereign nature that has long-term implications for the petroleum midstream and upstream sub-sectors and the Iraqi economy at large. These matters should not be left in the hands of “one year” employed advisors.
The infringement on sovereignty would be highly probable if any of the BIAs is foreign national, and this possibility does exist in the version of February 2007.
The proposed law gives too much power and authority to BIA. Thus, they would in fact be the effective decisions makers within FOGC despite their temporary and short-term employment.
The temporary term of employment in comparison with the magnitude of their function and influence would make the advisors unnecessarily susceptive to corruption that could very well undermine and compromise the Iraqi national interests.
It could be more feasible to delete any article in the law regarding BIAs, and substitute the BIA by strengthening the technical capacities of the General Secretariat of FOGC as suggested above.
D: Decisions by FOGC
The law should ensure that decision taken by FOGC should not be subject to veto by any of its members, or by minority members and should not be taken by consensus, as this practically gives veto power to any member, and renders FOGC inactive;
The approval of FOGC should not be deemed given due to elapse of time.
Decisions pertaining to contract awarding through licensing process involving IOCs should not be final but subject to the approval of both the executive (CoM) and legislative (CoR) branches of government.
The law has to clearly demarcate the line of authorities and jurisdiction of this council to avoid conflict with and overlapping over the territory of other vital entities such as CoM and MoO.
5- The role of the Ministry of Oil- MoO
The MoO plays a pivotal monitoring, regulatory and policy role. MoO is responsible for monitoring petroleum operations to ensure adherence with the laws, regulations, field’ development plans and contracting terms. In addition to its administrative and technical duties, MoO carries out verification of costs and expenditures incurred by the holders of rights to ensure correct and justified cost recoveries for the purpose of determining revenues accruing to the government. The Ministry through inspection, auditing and other appropriate actions verifies conformity with legislation, regulations, contractual terms and internationally recognized practices. Performing such diverse tasks requires specialized professional, legal, technical, accounting, planning and even diplomatic expertise.
Decentralization is important, necessary and useful, but at the same time it must first be well planned and phased/implemented properly. Second, institutional and human resource capacity development must commence as soon as possible. Third, there must always be a central organ-MoO, which coordinates with and supervises those decentralized entities to preserve and guarantee the supreme national interest.
Therefore, the law should not weaken, marginalize or undermine the role and function of the Ministry. Moreover, the timing and coordination between this law and MoO law has to be maintained to avoid predetermination or pre-empts each other.
6- Matters related to INOC
The proposed law creates, wilfully or by negligence, ambiguous, contradictory and not reassuring situations for INOC with regards to oilfield allocation, types of contract, priorities and the treatment of the company on a competitive standing.
Provisions relating to INOC should be made very clear accompanied with full list of all fields (producing, under-development and discovered but not yet developed) and known exploration blocks earmarked for INOC.
And since the most prized oil and gads fields have already been contracted with IOCs, the remaining fields (developed, underdevelopment or discovered but not developed) should, as a rule, remain within and develop through national direct efforts and, as exception, develop through service contracts.
The parliament had, in July 2011, debated a draft law for INOC but that did not lead to finalization of an acceptable version. Therefore, the timing and coordination between this law and INOC law has to be maintained to avoid predetermination or pre-empts each other.
This implies there is and could be an organic linkage between the three laws: oil and gas law, the Ministry law and INOC law.
7- Petroleum Revenues and Funds
The proposed law (article 11) obligates both the executive branch (CoM) and the legislative branch (Parliament) to enforce a “federal revenue law”, which creates and regulates “Oil Revenue Fund” and “The Future Fund”.
There are many serious problems with the said article and its provisions as summarized bellow:
From technical, procedural and constitutional way this law cannot be the legal source to promulgate another law, e.g., revenue sharing law, since the constitution is the legal source and reference for the latter law according to articles 106 and 112 of the constitution.
The parliament has not so far tabled for debate any draft for “federal revenue law” though a text of such a law have been circulating unofficially. However, the CoM has proposed in September 2011 a draft of new law for the “General Commission for Observing the Allocation of Federal Revenue”.
It appears that all these five laws are connected together, and they should be promulgated simultaneously. But this is the real problem! Each law is connected to the other four laws, thus creating a type of vicious circle.
It is therefore very advisable to remove article 11 completely from oil and gas law as there is no legal justification to address revenue sharing matters within this law in such un-substantive way.
8- Legalizing already concluded contracts
The proposed law should have clear and complete provisions to review, assess, recommend and finally legalize any of the contracts concluded before a specific cut-off date. The following is suggested for this legalization process:
A specific full-time Iraqi team comprising known Iraqi petroleum experts with proven track record should be formed to review and assess all concluded contracts within a specific time frame (for example, no more than six months).
The team should develop a unified approach consisted of objective criterion to review and assess all concluded contracts. Principles of transparency, competitiveness, openness, comparativeness, corruption-free, absence of any forms of financial irregularities, adherence to the usual contracting practices, participation of related stakeholders, are few examples that should be included in the assessment yardstick and process.
Both MoO and KRG are obliged to provide the Iraqi team with authentic copies of all signed contracts with one month from a specific date. No contract would be accepted after the month deadline, and the said contract would be considered null, void and illegal.
The review and assessment could require streamlining all these contracts to one form only. This could mean the conversion of all production sharing contracts into service contracts with terms and conditions similar to those concluded by MoO taking into considerations the comparative differences of the related fields.
The team would only recommend contracts if they were assessed to have been in compliance with and deliver the best interests/ highest benefits for the Iraqi people (as required by the Constitution). The recommended contracts would be reviewed by CoM, and when endorsed they would be send to the Parliament for consideration.
The Parliament considers the contracts case-by-case, and a law promulgated according to the due process would legalize the approved contract.
9- Balance of and harmonization between the Federal, Regional and Provincial-FRP authorities.
The proposed law should have clear demarcating lines between the three authorities to ensure their effective participation and functional cooperation in a balanced, coherent and harmonious way.
It is very essential to avoid repeating the vague provisions of the constitution that have created confusion, different and contrasting interpretation that could weaken the role and authority of the central/federal government.
Many articles in the proposed law need very serious revision to ensure real, effective and workable FRP co-management.
10- Regulating future field-development contracts
As mentioned earlier most of the highly prized oil and gas fields have been contracted with various IOCs through MoO bid rounds and KRG direct deals of PSCs. These concluded contracts together with other producing fields would bring the country’s production and export capacities to unprecedented levels.
Consequently, the proposed law should take the above into consideration, and thus all provisions regarding future contracts and licensing procedures should be revised accordingly. The followings are the main issues, which the law ought to consider:
1- Earmark all fields (producing, underdevelopment and discovered) and Exploration Blocks (current and future) for INOC;
2-INOC develops all fields through national efforts as a rule and through only Service Contracts as exception but with majority participating interest to ensure national control. It is preferable the law contains clear and specific prohibition of any contracts with IOCs other than the Service Contracts;
3- Service Contracts can only be offered through competitive, transparent and credible biding round with fully known and accessible licensing process involving all stakeholders: provincial, regional and federal related authorities;
4-If such development involves IOCs, the service contracts would be subject to the approval of the parliament and legalized by federal law;
11- Health, Safety and Environmental- HSE considerations
Clearer, broader and enforceable provisions should be included in the proposed law. The status of the related infrastructure, carelessness by the operators and any other incompetence’s and cost considerations could indicate to high probability of serious environmental disasters.
Reference to and full compliance with known international standards and best business practices should constitute the minimum standards for health and safety requirements.
12- Institutional and Human Resource Capacity Development.
The proposed law has to pay special attention to these requirements. Provisions of vital importance are need to ensure increasing “local contents”; to prevents corruption; to protect human rights; strengthening the corporate social responsibility-CSR towards the local communities on the part of the foreign investors.
13- Matters Related to Gas Conservation and Utilization
The conclusion of natural gas related contracts pursuant to the second bid round and the three gas-fields pursuant to the second bid round would make it imperative to revise the related provisions in the proposed law.
The proposed law should also take into consideration the forthcoming exploration blocks bid round.
Clarity is needed regarding the jurisdiction of this law over the recently approved deal for Basra Gas Company-BGC with Shell and Mitsubishi. The proposed law could be interpreted to exclude this and similar important contracts in the future. Yet other law(s), which such contracts may fall under (such as Private Company Law nr. 21 of 1997 as the case for BGC) has NO jurisdiction over foreign investment in midstream and upstream petroleum sub-sectors.
Finally, sufficient consideration should be given to assess the feasibility of having separate legislation for gas resources covering issues of conservation, production, utilization and any other pertaining matters.
14- The Fiscal Regime
The entire fiscal regime proposed in this law needs substantive revision since the components of the fiscal regime in the concluded service contracts are much superior and very different to those listed in articles under “CHAPTER VII: FISCAL REGIME” of the proposed law. Matters of taxation, royalty (irrelevant term under service contracts), auditing, record keeping are few examples of what has to be seriously revised.
Moreover, since service contracts are and should be awarded through transparent, well prepared and competitive bid rounds then the following conditions, which has direct financial implications, in the proposed law become irrelevant and redundant, and thus have to be removed from item “fourth” of “Article 9: Grant of Rights”:
“4-An appropriate return on investment to the investor; and
5-Reasonable incentives to the investor for ensuring solutions which are optimal to the country in the long-term related to:..”
Under competitive bid rounds it is natural and expected that competing IOCs would not submit their bids unless the business opportunity delivers an acceptable internal rate of return-IRR. Moreover, provision of the service contract themselves, which are normally known before conducting the bid round, should ensure optimal solutions to deliver best interest to Iraq during the term of the contract.
15- Sustainable national development
The law should clearly state that petroleum plans for exploration, development and production activities should be linked to the national development plans (medium and long terms). This linkage requires close coordination between the Ministry of Oil (responsible for proposing and follow-up of petroleum plans) and Ministry of Planning (responsible for proposing and follow-up of national plans). This coordination can take place within FOGC or within CoM. However, the final approval of national plans (and consequently petroleum plans) is the prerogative of the government (the executive branch) and the annual budget, covering investment and development requirements, has to be approved and legalized by law through the parliament.
The plans linkage is essential to address the capacity limitations and mitigates the negative consequences of Dutch disease and attacks of resource curse- usual phenomenon for natural resource dependent economies.
Therefore, provisions related to petroleum plans referred to in Articles 5, 6, 7 and 8 of the proposed law needs thorough revision and redrafting to regulate the above necessary linkage between petroleum plans and national sustainable plans.
Concluding remarks
The above demonstrates, in brief, why the February 2007 version of the law is not relevant any longer. However, if, for previous political commitments, that particular draft must be the negotiation’s starting point, then every page of that draft needs very serious and comprehensive redrafting.
The magnitude of the negotiation and redrafting mission requires tremendous efforts from time and professional perspectives. Legal, technical, operational and many other matters ought to be addressed thoroughly and properly. This task needs specialized and integrated team of professionals (from both sides) NOT two/three-men show and definitely NOT POLITICAL DEAL as some have suggested.
It is the duty of the government, under the constitution, to finalize a draft of the law and pass it to the Parliament for consideration, and promulgation if approved by the House. If the February 2007 draft is sent “AS IS ” to the parliament together with the positions of both governments (the federal and KRG), this would be a none-starter, and we are back to square one.
Finally, what Iraq needs is viable, coherent and functioning petroleum law that ensures the best interests/ highest benefits of the Iraqi people, the sole and lawful owners of petroleum wealth, as enshrined in the Constitution. Such viable, coherent and functioning petroleum law would also, among other thing, provide better balance for the roles of the three branches of Government/authority; inclusive and effective contributions of the federal, regional and provincial governments; and thus would create higher degree of legal predictability and legal certainty for all parties involved including the foreign development partners and IOCs who are usually concerned with.
1 Based on opinion I sent to the Iraqi Institute for Economic Reform-IIER as a contribution to the workshop organized by IIER on the Federal Oil and Gas Law, Baghdad, 17 December 2011.
[You must be registered and logged in to see this link.]
Mr Jiyad is an independent development consultant, scholar and Associate with Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq’s Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: [You must be registered and logged in to see this link.]).
Introduction.
The meetings between the federal and KRG delegations held in Baghdad in the last days of October 2011 resulted in an agreement to base their discussion on the February 2007 version of the federal oil and gas law-FOGL.
Detailed, thorough and article-by-article assessments of the February 2007 draft of the law have been done and published by known Iraqi oil professionals, including this writer. The consensus among them indicates the draft suffers from many very serious flaws that ought to be addressed, revised, and redrafted. Moreover, essential and fundamental provisions are, by now, have been overtaken by events that render them outdated, irrelevant and dysfunctional.
What is needed then a very serious look into every article and the entire proposed law from substantive, format and operational aspects to insure its viability, coherence and proper functioning. It would be a grave mistake to consider the “law” as “political deal” since all had learned that most if not all political deals, in Iraq, are easily forgotten and short live!
This intervention aims to shed light on the most important issues and matters of concerns, which should be taken into considerations during the process of negotiating and finalizing a proposed draft of this law.1
Time factor effects
Many very important developments have taken place since February 2007, which makes it imperative to revise seriously various articles in the law since these provisions have been overtaken by events and thus became almost obsolete or redundant.
First: Among these developments are the bid rounds concluded by the MoO that led to concluding long term service contracts. These have generated many major consequences, which have direct implications on the proposed law.
Second: All major oilfields (except few such Kirkuk, Bai Hassan, East Baghdad among others) have been already contracted for re-development and/ or development with IOCs involvement. Consequently, there could be no need to offer any of the remaining fields for IOCs in whatever way or method. These remaining fields could be legally (by this proposed law) earmarked for INOC (to be reinstated), as suggested below.
Third: The concluded service contracts with IOCs, if implemented as envisaged, together with the production from other fields would bring Iraq’s production and export capacities to very high and unprecedented levels, even at partial success of half the contracted production targets. The implications is that there are no compelling reasons for Iraq to expand the production capacities any further at least in the next 15-20 years. The law may suggest a moratorium on any “new” development of oil fields for no less than 15 years. Moreover, the law ought to emphases the proper development of the contracted fields in the most optimum way to ensure the constitutional principle of “highest benefits to the Iraqi people”. Accordingly, the field development plans (initial and final) are of paramount importance that they should be formulated by technically competent petroleum team, approved by and constantly monitored by petroleum central authority;
Fourth: All the bid rounds were based on a service contract type and modality. The law should clearly extend support and preference to this type of contracting by making it mandatory to use this type of contracting. To prevent any misinterpretation it might be advisable to have a specific article in the law to make it unlawful and unconstitutional to conclude Production Sharing Contract- PSC in petroleum upstream sub-sector. The law ought to prohibit PSC in any phase of exploration, or development and production activities, in compliance with constitutional basic principles of collective ownership of petroleum resources and the best interests of the Iraqi people.
Fifth: The service contracts have already established significant milestones that are superior to those envisaged under February 2007 version of this law regarding, interalia, fiscal regime, conservation measures particularly those relating to gas utilization, good vs. best international business practices, dispute settlement modalities etc. Accordingly, good number of articles in this proposed law need revision on the lights of what actually have been concluded and evolved since February 2007.
Sixth: The relationship between this law and the proposed laws for the Ministry of Oil, INOC, Revenue Sharing and finally the General Commission for Observing the Allocation of Federal Revenue have to be well coordinated and considered to ensure harmony and coherence.
Seventh: The proposed law should be revised in the lights of the recent development pertaining to ExxonMobil/KRG deals and their possible impacts on eradicating the authority of the federal government over the petroleum sector. Specific provisions might be needed to prevent the repetition of such actions in the future.
Finally, by now many have publicly expressed the operational limitations of 2005 constitution, which were not fully tested when oil and gas law was drafted and proposed in February 2007. This is discussed next.
Proper and correct application of the constitutional articles.
The proposed law should attempt to have clear provision and article to address and avoid all the known ambiguities of the constitution, particularly those pertaining to oil and gas. There is absolutely no good purpose in repeating selective and biased interpretation of vague articles in the constitution aiming at weakening the role of the government on all petroleum policy issues.
The law should put an end to conflicting interpretation of these constitutional provisions as many respected and independent international legal opinions provide excellent guidance in this respect.
Petroleum policy and fields development, including contracting with IOCs to develop upstream petroleum, should be stated clearly as sovereign matters and are among the prerogatives and authority of the federal government.
Moreover, the law should make it mandatory on the federal government to prove that any field development involving IOCs delivers the highest benefit to the Iraqi people, as the constitution requires.
Effective contribution of all branches of Government
The proposed law should adhere to the constitutional principle of balancing the role and contribution of the three branches of authority: Judiciary, legislative and executive, especially with regards to upstream petroleum development contracts with IOCs.
As essential requirements the law should embrace three parallel principles to ensure checks and balances that:
Executive authority has the legal mandate to negotiate, conclude and sign the contracts;
Legislative authority (the Parliament/Council of Representatives-CoR) has the legal mandate to review, debate and promulgate laws to legalize these contracts if they are in conformity with the best interest of the Iraqi people and other principles on the constitution;
Judiciary authority has the legal authority to have the final decision in case of conflict between the two other authorities on the subject matter.
The above three essential requirements ought to be formulated through very clear, definitive and affirmative clauses in the proposed law to avoid the possibility of circumventing any of them and or limiting their due role and authority. Therefore all articles under “CHAPTER II: MANAGEMENT OF PETROLEUM RESOURCES” of the proposed law should be revised and redrafted accordingly.
4- The Federal Oil and Gas Council-FOGC.
This is the most important entity that would be created by this law. Therefore articles pertaining to its role, functions, objectives, formation and structure have to be debate and drafted carefully and clearly. It should be remembered that since no reference is made to this council in the constitution, therefore its creation is not a constitutional requirement. Moreover, the council has “non-election legitimacy” due to the possibility that only its chairman (the Prime Minister) would be elected, while other could be appointed. Finally, the council has specific professional and technical function and nature and therefore should not be considered or perceived as “political” entity.
The followings are issues of vital importance, which the proposed law should consider:
A: FOGC Membership and Structure
The representatives of the “producing provinces” should have proven record of experience in petroleum industry. The representative could be nominated by the related province but the nomination has to be approved by the Council of Ministers.
The three “experts” members should be Iraqis, to avoid any interpretation that permits foreigners to hold membership. The number of experts could increase in case the BIA is removed, as suggested below.
It is highly advisable that FOGC has permanent General Secretariat with well-qualified and experienced Iraqi staff in fields related to the nature of FOGC functions, responsibilities and role. Having permanent general secretariat is essential to ensure continuity since all members of FOGC (except the three experts) are there by virtue of their official positions not professional qualities, and thus the possibility of their turnover could be high and frequent. Moreover, it could be appropriate that either the Minister of Oil or the Head of INOC acts as the General Secretary of FOGC in addition to the membership in the council.
The core entities of the upstream and midstream petroleum sub-sectors should be well represented in FOGC. These include INOC, SOMO and other related State companies under the auspices of MoO.
Considering the rather large number of FOGC membership, their nature of representation, and the magnitude and strategic significance of the functions and role of FOGC it is important to insure balance between representation and efficiency considerations so that FOGC conduct its functions effectively.
B: Functions of FOGC
FOGC cannot decide the “Petroleum industry policies” since FOGC does not have the legal mandate, the technical capacity and institutional representation to do so for three reasons:
Decisions on such policies are among the functions of Council of Minister-CoM in the area of development plans.
The term “Petroleum industry” covers also all downstream sub-sectors, some of which such as gas industries, petrochemicals, refining industry and others are outside the scope of this law, as stipulated in Article 50.
These vital sub-sector downstream companies are not represented in FOGC.
Therefore FOGC could suggest or assist in formulating these policies but not decide them.
FOGC should not decide the “national petroleum production level” since this is the function of CoM. However, FOGC can suggest or recommend the suitable national production level and the modalities of assessing the equitable contribution of each producing contracting area.
The draft law gives FOGC members new authority to suggest laws. But FOGC members cannot have the authority to suggest laws, as this function is confined to the Parliament and the Government. Thus this right might be contested on grounds of unconstitutionality.
C: The Bureau of Independent Advisors (BIAs)
FOGC deals with matters mostly of sovereign nature that has long-term implications for the petroleum midstream and upstream sub-sectors and the Iraqi economy at large. These matters should not be left in the hands of “one year” employed advisors.
The infringement on sovereignty would be highly probable if any of the BIAs is foreign national, and this possibility does exist in the version of February 2007.
The proposed law gives too much power and authority to BIA. Thus, they would in fact be the effective decisions makers within FOGC despite their temporary and short-term employment.
The temporary term of employment in comparison with the magnitude of their function and influence would make the advisors unnecessarily susceptive to corruption that could very well undermine and compromise the Iraqi national interests.
It could be more feasible to delete any article in the law regarding BIAs, and substitute the BIA by strengthening the technical capacities of the General Secretariat of FOGC as suggested above.
D: Decisions by FOGC
The law should ensure that decision taken by FOGC should not be subject to veto by any of its members, or by minority members and should not be taken by consensus, as this practically gives veto power to any member, and renders FOGC inactive;
The approval of FOGC should not be deemed given due to elapse of time.
Decisions pertaining to contract awarding through licensing process involving IOCs should not be final but subject to the approval of both the executive (CoM) and legislative (CoR) branches of government.
The law has to clearly demarcate the line of authorities and jurisdiction of this council to avoid conflict with and overlapping over the territory of other vital entities such as CoM and MoO.
5- The role of the Ministry of Oil- MoO
The MoO plays a pivotal monitoring, regulatory and policy role. MoO is responsible for monitoring petroleum operations to ensure adherence with the laws, regulations, field’ development plans and contracting terms. In addition to its administrative and technical duties, MoO carries out verification of costs and expenditures incurred by the holders of rights to ensure correct and justified cost recoveries for the purpose of determining revenues accruing to the government. The Ministry through inspection, auditing and other appropriate actions verifies conformity with legislation, regulations, contractual terms and internationally recognized practices. Performing such diverse tasks requires specialized professional, legal, technical, accounting, planning and even diplomatic expertise.
Decentralization is important, necessary and useful, but at the same time it must first be well planned and phased/implemented properly. Second, institutional and human resource capacity development must commence as soon as possible. Third, there must always be a central organ-MoO, which coordinates with and supervises those decentralized entities to preserve and guarantee the supreme national interest.
Therefore, the law should not weaken, marginalize or undermine the role and function of the Ministry. Moreover, the timing and coordination between this law and MoO law has to be maintained to avoid predetermination or pre-empts each other.
6- Matters related to INOC
The proposed law creates, wilfully or by negligence, ambiguous, contradictory and not reassuring situations for INOC with regards to oilfield allocation, types of contract, priorities and the treatment of the company on a competitive standing.
Provisions relating to INOC should be made very clear accompanied with full list of all fields (producing, under-development and discovered but not yet developed) and known exploration blocks earmarked for INOC.
And since the most prized oil and gads fields have already been contracted with IOCs, the remaining fields (developed, underdevelopment or discovered but not developed) should, as a rule, remain within and develop through national direct efforts and, as exception, develop through service contracts.
The parliament had, in July 2011, debated a draft law for INOC but that did not lead to finalization of an acceptable version. Therefore, the timing and coordination between this law and INOC law has to be maintained to avoid predetermination or pre-empts each other.
This implies there is and could be an organic linkage between the three laws: oil and gas law, the Ministry law and INOC law.
7- Petroleum Revenues and Funds
The proposed law (article 11) obligates both the executive branch (CoM) and the legislative branch (Parliament) to enforce a “federal revenue law”, which creates and regulates “Oil Revenue Fund” and “The Future Fund”.
There are many serious problems with the said article and its provisions as summarized bellow:
From technical, procedural and constitutional way this law cannot be the legal source to promulgate another law, e.g., revenue sharing law, since the constitution is the legal source and reference for the latter law according to articles 106 and 112 of the constitution.
The parliament has not so far tabled for debate any draft for “federal revenue law” though a text of such a law have been circulating unofficially. However, the CoM has proposed in September 2011 a draft of new law for the “General Commission for Observing the Allocation of Federal Revenue”.
It appears that all these five laws are connected together, and they should be promulgated simultaneously. But this is the real problem! Each law is connected to the other four laws, thus creating a type of vicious circle.
It is therefore very advisable to remove article 11 completely from oil and gas law as there is no legal justification to address revenue sharing matters within this law in such un-substantive way.
8- Legalizing already concluded contracts
The proposed law should have clear and complete provisions to review, assess, recommend and finally legalize any of the contracts concluded before a specific cut-off date. The following is suggested for this legalization process:
A specific full-time Iraqi team comprising known Iraqi petroleum experts with proven track record should be formed to review and assess all concluded contracts within a specific time frame (for example, no more than six months).
The team should develop a unified approach consisted of objective criterion to review and assess all concluded contracts. Principles of transparency, competitiveness, openness, comparativeness, corruption-free, absence of any forms of financial irregularities, adherence to the usual contracting practices, participation of related stakeholders, are few examples that should be included in the assessment yardstick and process.
Both MoO and KRG are obliged to provide the Iraqi team with authentic copies of all signed contracts with one month from a specific date. No contract would be accepted after the month deadline, and the said contract would be considered null, void and illegal.
The review and assessment could require streamlining all these contracts to one form only. This could mean the conversion of all production sharing contracts into service contracts with terms and conditions similar to those concluded by MoO taking into considerations the comparative differences of the related fields.
The team would only recommend contracts if they were assessed to have been in compliance with and deliver the best interests/ highest benefits for the Iraqi people (as required by the Constitution). The recommended contracts would be reviewed by CoM, and when endorsed they would be send to the Parliament for consideration.
The Parliament considers the contracts case-by-case, and a law promulgated according to the due process would legalize the approved contract.
9- Balance of and harmonization between the Federal, Regional and Provincial-FRP authorities.
The proposed law should have clear demarcating lines between the three authorities to ensure their effective participation and functional cooperation in a balanced, coherent and harmonious way.
It is very essential to avoid repeating the vague provisions of the constitution that have created confusion, different and contrasting interpretation that could weaken the role and authority of the central/federal government.
Many articles in the proposed law need very serious revision to ensure real, effective and workable FRP co-management.
10- Regulating future field-development contracts
As mentioned earlier most of the highly prized oil and gas fields have been contracted with various IOCs through MoO bid rounds and KRG direct deals of PSCs. These concluded contracts together with other producing fields would bring the country’s production and export capacities to unprecedented levels.
Consequently, the proposed law should take the above into consideration, and thus all provisions regarding future contracts and licensing procedures should be revised accordingly. The followings are the main issues, which the law ought to consider:
1- Earmark all fields (producing, underdevelopment and discovered) and Exploration Blocks (current and future) for INOC;
2-INOC develops all fields through national efforts as a rule and through only Service Contracts as exception but with majority participating interest to ensure national control. It is preferable the law contains clear and specific prohibition of any contracts with IOCs other than the Service Contracts;
3- Service Contracts can only be offered through competitive, transparent and credible biding round with fully known and accessible licensing process involving all stakeholders: provincial, regional and federal related authorities;
4-If such development involves IOCs, the service contracts would be subject to the approval of the parliament and legalized by federal law;
11- Health, Safety and Environmental- HSE considerations
Clearer, broader and enforceable provisions should be included in the proposed law. The status of the related infrastructure, carelessness by the operators and any other incompetence’s and cost considerations could indicate to high probability of serious environmental disasters.
Reference to and full compliance with known international standards and best business practices should constitute the minimum standards for health and safety requirements.
12- Institutional and Human Resource Capacity Development.
The proposed law has to pay special attention to these requirements. Provisions of vital importance are need to ensure increasing “local contents”; to prevents corruption; to protect human rights; strengthening the corporate social responsibility-CSR towards the local communities on the part of the foreign investors.
13- Matters Related to Gas Conservation and Utilization
The conclusion of natural gas related contracts pursuant to the second bid round and the three gas-fields pursuant to the second bid round would make it imperative to revise the related provisions in the proposed law.
The proposed law should also take into consideration the forthcoming exploration blocks bid round.
Clarity is needed regarding the jurisdiction of this law over the recently approved deal for Basra Gas Company-BGC with Shell and Mitsubishi. The proposed law could be interpreted to exclude this and similar important contracts in the future. Yet other law(s), which such contracts may fall under (such as Private Company Law nr. 21 of 1997 as the case for BGC) has NO jurisdiction over foreign investment in midstream and upstream petroleum sub-sectors.
Finally, sufficient consideration should be given to assess the feasibility of having separate legislation for gas resources covering issues of conservation, production, utilization and any other pertaining matters.
14- The Fiscal Regime
The entire fiscal regime proposed in this law needs substantive revision since the components of the fiscal regime in the concluded service contracts are much superior and very different to those listed in articles under “CHAPTER VII: FISCAL REGIME” of the proposed law. Matters of taxation, royalty (irrelevant term under service contracts), auditing, record keeping are few examples of what has to be seriously revised.
Moreover, since service contracts are and should be awarded through transparent, well prepared and competitive bid rounds then the following conditions, which has direct financial implications, in the proposed law become irrelevant and redundant, and thus have to be removed from item “fourth” of “Article 9: Grant of Rights”:
“4-An appropriate return on investment to the investor; and
5-Reasonable incentives to the investor for ensuring solutions which are optimal to the country in the long-term related to:..”
Under competitive bid rounds it is natural and expected that competing IOCs would not submit their bids unless the business opportunity delivers an acceptable internal rate of return-IRR. Moreover, provision of the service contract themselves, which are normally known before conducting the bid round, should ensure optimal solutions to deliver best interest to Iraq during the term of the contract.
15- Sustainable national development
The law should clearly state that petroleum plans for exploration, development and production activities should be linked to the national development plans (medium and long terms). This linkage requires close coordination between the Ministry of Oil (responsible for proposing and follow-up of petroleum plans) and Ministry of Planning (responsible for proposing and follow-up of national plans). This coordination can take place within FOGC or within CoM. However, the final approval of national plans (and consequently petroleum plans) is the prerogative of the government (the executive branch) and the annual budget, covering investment and development requirements, has to be approved and legalized by law through the parliament.
The plans linkage is essential to address the capacity limitations and mitigates the negative consequences of Dutch disease and attacks of resource curse- usual phenomenon for natural resource dependent economies.
Therefore, provisions related to petroleum plans referred to in Articles 5, 6, 7 and 8 of the proposed law needs thorough revision and redrafting to regulate the above necessary linkage between petroleum plans and national sustainable plans.
Concluding remarks
The above demonstrates, in brief, why the February 2007 version of the law is not relevant any longer. However, if, for previous political commitments, that particular draft must be the negotiation’s starting point, then every page of that draft needs very serious and comprehensive redrafting.
The magnitude of the negotiation and redrafting mission requires tremendous efforts from time and professional perspectives. Legal, technical, operational and many other matters ought to be addressed thoroughly and properly. This task needs specialized and integrated team of professionals (from both sides) NOT two/three-men show and definitely NOT POLITICAL DEAL as some have suggested.
It is the duty of the government, under the constitution, to finalize a draft of the law and pass it to the Parliament for consideration, and promulgation if approved by the House. If the February 2007 draft is sent “AS IS ” to the parliament together with the positions of both governments (the federal and KRG), this would be a none-starter, and we are back to square one.
Finally, what Iraq needs is viable, coherent and functioning petroleum law that ensures the best interests/ highest benefits of the Iraqi people, the sole and lawful owners of petroleum wealth, as enshrined in the Constitution. Such viable, coherent and functioning petroleum law would also, among other thing, provide better balance for the roles of the three branches of Government/authority; inclusive and effective contributions of the federal, regional and provincial governments; and thus would create higher degree of legal predictability and legal certainty for all parties involved including the foreign development partners and IOCs who are usually concerned with.
1 Based on opinion I sent to the Iraqi Institute for Economic Reform-IIER as a contribution to the workshop organized by IIER on the Federal Oil and Gas Law, Baghdad, 17 December 2011.
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