Iraq’a oil and gas law

CGES | APRIL 2007 | SOURCE: Global Oil Insight

After the swift collapse of Saddam Hussein’s regime in Iraq in April 2003, the world looked forward to a new era of peace and prosperity for Iraq and a rapid expansion of its oil production.

In light of the prevailing geopolitical realities and facing diminishing oil and gas prospects outside OPEC, the world’s appetite for Iraqi oil has grown considerably, spurred on by the international oil companies’ knowledge that therein lies the world’s second largest proven reserves of oil, comparable to Iran’s.

Initially, oil analysts produced rosy scenarios of Iraq’s rapidly expanding oil production.

They envisaged a swift rehabilitation of Iraq’s battered infrastructure in just a year from the regime’s collapse and in only two years a re-attainment of Iraq’s production capacity of 3.5 mbpd from the days before the 1990 Gulf War.

Within six or seven years, Iraq’s output capacity was expected to rise to 6 mbpd — or even reach as high as 8 mbpd.

Now, four years after Saddam’s fall, none of the above scenarios has materialised. The reality is very different, for even the 2.8-mbpd of capacity that existed prior to the 2003 invasion, which was supposed to have been re-instated by April 2004 according to a US-financed plan, has not been reached and today Iraq’s oil production hovers around 2 mbpd.

Several factors have brought about this depressing state of affairs, principal among them being the unabated frenzy of insurgency and sabotage that has fostered a pervasive lawlessness in the country and prevented the restitution of Iraq’s ravaged oil industry. Iraq cannot even export oil from its still-prolific Kirkuk field via the Turkish port of Ceyhan as a result of incessant attacks on the Iraq-Turkey pipeline.

Iraq’s new Oil and Gas Law

As is to be expected, the oil multinationals are not prepared to enter Iraq and undertake activities of whatever kind without the safeguards of a fully functional constitution, a legitimate government, a workable oil and gas law in place and an acceptable level of internal security that ensures the safety of both personnel and property.

Iraq now has a constitution and an elected government, and a new Oil and Gas Law has been approved by the Council of Ministers and passed to the Council of Representatives (the Iraqi parliament) to be debated and ultimately ratified. Whether or not Iraq will ever become safe enough to encourage foreign companies to invest in the country is a moot point at the moment.

What we can do instead is to examine whether the groundwork is good enough, which means taking a measured look at the new law proposed for Iraq’s oil and gas industry.

Three Iraqi experts and a consulting agency (Bearing Point), appointed by the US government, drafted the law. On completion, the Bush Administration, the major international oil companies and the International Monetary Fund reviewed the draft law. It contains a preamble and eight chapters, comprising 43 articles.

The main features are as follows. Chapter 1 spells out a number of fundamental provisions.  Chapter 2 specifies the competencies of various authorities, namely the Council of Representatives, the Council of Ministers, the Federal Oil and Gas Council (FOGC), the Ministry of Oil, the Iraqi National Oil Company (INOC) and the provincial authorities.

The significant feature of this chapter is the creation of two new authorities — the FOGC and the INOC.

The members of the FOGC include, among others, the federal ministers of oil, finance and planning, the head of the Iraqi central bank, a regional government minister (referring to the Kurdish region) and a representative of each producing province not yet included in a region.

The FOGC is headed by the prime minister and its main functions, inter alia, concern the instigation of federal oil and gas policies and the granting of exploration and development contracts.

This chapter also re-creates the INOC after it was abolished by Saddam’s regime in 1987. Among the INOC’s main responsibilities are managing and operating the currently producing oilfields mentioned in Annex 1 (comprising 27 fields, among them East Baghdad, Kirkuk, Majnoon, Rumaila, West Qurnah and Zubair). INOC’s other responsibilities also include the development, management and operation of the fields already discovered but not yet developed, as mentioned in Annex 2, which includes 25 fields.

Included in this chapter is the creation of a Regional Authority (pertaining, at present, to the Kurdish region only). Among the competencies of this authority is the granting of exploration licences and the development of those fields that have been discovered already but have not yet been developed.

These fields are mentioned in Annex 3: there are 26 fields in total, including among them the Ahdab, Akkas, Chemchemal, Gharraf, Kifl, Naseriyah, Rafidain, Samawah and Taqtaq oilfields.

Chapter 3 discusses exploration and development and describes in detail a specific contract that it calls the “Exploration & Development Contract” It also enumerates the obligations of the holders of exploration and production licences and discusses access to the main pipelines, field unitisation, conservation and ownership of data.

There is also mention of “Restrictions on Production Levels”, which may be triggered at some stage by national policy considerations. This particular restriction was introduced so that oil producers in Iraq would comply with OPEC’s production quota system.

Iraq is not at the moment an active participant in this output restraining system, but as Iraq’s oil production increases it will be asked at some stage to rejoin the quota mechanism and constrain its output accordingly.

Chapters 4 to 8 discuss transportation issues, the use of natural gas, regulatory matters, the fiscal regime and miscellaneous provisions.

The law draws fire

The new law was criticised and attacked by several interested parties, including some in the British media. The prevailing view, even before the law was published, was that it would legitimise the production sharing agreement (PSA) as the key contractual tool between the Iraqi government and the international oil companies.

In this regard, a report was published about 18 months ago by Platform (a UK-based organisation working on environmental issues and social justice) in conjunction with a number of US and UK organisations.

The report, entitled “Crude Designs: The rip-off of Iraq’s oil wealth”, argued that the oil policy, designed for Iraq by the US, allocates the majority of Iraq’s oilfields that are slated for development to the multinational oil companies.

It went on to state that in spite of Iraqi public opinion, which is strongly opposed to handing control of Iraqi oil wealth to foreign companies, the US and British governments, in collaboration with a group of powerful Iraqi politicians, are pushing for this US-designed oil policy, whose embodiment is the proposed Iraqi oil and gas law.

Although the traditional PSA is of less benefit to the host country in comparison with, say, service or buy back contracts, the report wildly exaggerates its negative aspects. For example, at a price of $40 per barrel, the report alleges that Iraq stands to lose between $74 billion and $194 billion over the lifetime of the proposed contracts.

Platform even took the trouble of going to Basra to give a presentation to the local Federation of Oil Unions, which seems to have completely discredited the PSA in the eyes of the Federation. Consequently, and as a result of public opinion that had turned hostile to PSAs, the law was re-drafted without any explicit reference to PSAs. Instead, an Exploration & Development Contract was adopted, which may yet prove to be a PSA in disguise.

Several writers and groups have also heaped criticism on Iraq’s Oil and Gas Law, among them a group of Iraqi oil experts consisting of former oil ministers, former high-ranking oil officials and veterans of the Iraqi oil industry. They met last February in Amman, Jordan, and after their deliberations they sent an open letter to the Iraqi parliament stating, among other things, that ... 

There is an unseemly rush to promulgate the new law without allowing the participation of concerned parties, such as Iraqi oil experts and various institutions of Iraq’s civil society; it would be better to wait until the Iraqi constitution is amended.

This group of experts supports restructuring the Iraqi ministry of oil and re-establishing the INOC.

There is clearly a flaw in the structure of the FOGC, since the law mandates the FOGC’s chosen members to represent the composition of the Iraqi people, which is a thinly veiled reference to Iraq’s sectarian and ethnic composition.

Downstream activities, such as refining and distribution, are excluded from the functions of the INOC, whereas such activities should be included. We infer from this law that the main reason behind it is to raise Iraq’s production capacity through foreign investment and, in this regard, we recommend that the capacity should first be raised by rehabilitating the currently producing oilfields through INOC, and then by developing the already discovered giant fields by means of service and management contracts with reputable companies, while avoiding long-term contracts at the present time.

Long-term contracts with the international oil companies concerning exploration, development and production should be avoided until the security situation improves, in order to ensure that the companies are able to execute the contracts, and that such contracts are to be presented to your council (parliament) for ratification.

The Iraqi constitution is the problem

What has really weakened the position of the federal government regarding the rational exploitation of Iraq’s oil wealth is the flawed nature of the Iraqi constitution. Among the many shortcomings of this constitution, it decreed in one of the oil and gas articles that “the federal government with the producing governorates and regional governments shall undertake the management of oil and gas extracted from current fields...” which means that the federal government has no jurisdiction over Iraq’s undiscovered reserves.

These reserves, according to a joint CGES-Petrolog study, are about twice the size of Iraq’s current proven reserves. In another article, the constitution mandates that:

“all powers not stipulated in the exclusive authorities of the federal government shall be the powers of the regions and governorates that are not organised in a region. The priority goes to the regional law in case of conflict between other powers shared between the federal government and regional governments”.

According to this constitution, oil and gas are not under the jurisdiction or exclusive authority of the federal government, since they fall within the remit of the regions and governorates. That is why 65 exploration blocks, under Annex 4 of the proposed oil and gas law, are within the sole jurisdiction of the Kurdish region and the remaining oil-producing governorates to the exclusion of the federal government.

The superior standing, under the Iraqi constitution, of regional governments in conflicts with the federal authorities, is highly unusual. In the United States, for example, the Federal Government has sole jurisdiction over all federal lands and the minerals beneath, and all lands are considered federal as long as these lands are not owned privately by persons or legal entities.

Another example is the United Kingdom, where the British Parliament controls all oil and gas resources in the UK sector of the North Sea on behalf of all the British people; had the Iraqi constitution applied, Scotland — as a constituent part of the UK — would be in control of these resources.

The flawed nature of the afore-mentioned oil and gas articles was not really the fault of the parliamentary oil committee that drafted them, as was later claimed by some members of that committee. Rather, it was a case of changes to the original draft being allowed to creep in, having been introduced behind closed doors by certain political factions just before the constitution was presented to the electorate to be approved in a referendum.

This angered the Sunnis and important Shiite blocks, which led ultimately to an agreement that the constitution should be amended.

The Iraqi parliament and government should not be pressurised into ratifying the oil and gas law when the constitution itself needs to be amended and the law modified according to international mineral resource practice.

Next article: Ratifying Iraq’s new oil and gas law

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