Federal Oil and Gas Law Proposed by the Ministry of Oil.

Baghdad, Erbil Reach Deal on Oil Exports

Posted on 02 December 2014 . Tags: , , , , , ,

By John Lee.

Baghdad and Erbil have reached an agreement resolving the long-running dispute over oil exports and budget payments.

Finance Minister Hoshyar Zebari said that 550,000 barrels per day (bpd) of oil would be sent to the Iraqi oil ministry.

In return, the Kurds will receive their 17% share of the national budget.

The dispute had threatened the future of Prime Minister Haider al-Abadi’s new unity government, the government in Baghdad has withheld budget payments to the Kurdistan Regional Government (KRG) For more than a year, in retaliation for its efforts to export oil unilaterally through Turkey.

Under the new agreement, the KRG will export 250,000 bpd of oil from its fields around Erbil through its pipeline to Turkey, where it will be handed over to Iraq’s national State Oil Marketing Organization (SOMO).

BBC News reports that a further 300,000 bpd will also be exported from oil fields surrounding the disputed city of Kirkuk, which Kurdish Peshmerga forces have controlled since the Iraqi army withdrew in June.

According to The Guardian, the deal will also give a share of the military budget to the Kurdish peshmerga fighters; Kurdish Prime Minister Nechirvan Barzani said Abadi had guaranteed a $1 billion share.

The Special Representative of the United Nations Secretary-General for Iraq (SRSG), Mr. Nickolay Mladenov, welcomed the agreement, saying:

I look forward for the implementation of the agreement as swiftly as possible, including oil exports from the KR-I and Kirkuk, as well as the disbursement of the KRG budget from the Iraqi general budget, and the payment of Peshmergas’ salaries …

“I commend both Iraqi Prime Minister Haidar al-Abadi and KR-I Prime Minister Nechirvan Barazani for their leadership and spirit of compromise in reaching this encouraging agreement.”

(Sources: BBC News, Office of the Prime Minister, UN, The Guardian)

Brief Review of the Federal Oil and Gas Law Proposed by the Ministry of Oil. Ahmed Mousa Jiyad, Iraq/ Development Consultancy and Research, Norway.
29 August 2011
The Legal Department of the Ministry of Oil-MoO finalized on 27 July 2011 the text of its proposed Federal Oil and Gas Law- FOGL (hereinafter referred to as FOGL/MoO). According to the normal procedure the ministry passes the proposed law to the Cabinet for approval, and the latter passes the final text to the Parliament for promulgation. The parliament tables the proposed law for debate according to an established parliamentary procedure, and when finalized and approved it becomes a law and effective once it is published in the Official Gazette- Alwaqaie Aliraqia. On Sunday 28 August the Council of Ministers approved the draft law considering it the only text that represent the council view, and all other previous version are invalid. Also the council decided to send the proposed draft to the parliament version and request to table the proposed law for discussion in the parliament. At this stage it is not fully clear whether the Cabinet had approved the proposed text as is or amended it, and if amended what are these amendments. And since the Parliament is in the Eid Ramadan recess, it is expected that the matter will be taken when the House reconvene on 6 September. It is worth recalling that on 17 August the parliament began the first reading of another draft law presented by Oil and Energy Committee in the parliament (hereinafter referred to as FOGL/OEC), but was suspended and deferred to another date after walkout and objections from within the House itself. The first reading of this FOGL/OEC suppose to resume when the House reconvene on 6 September. I have in an earlier contribution addressed and assessed FOGL/OEC arriving at general conclusion that this law could have very damaging consequences on the upstream petroleum sector, on Iraq’s interests and on the political stability and development in the country. My assessment was sent to many members in the government, to all committees in the parliament, to large number of individuals and network inside Iraq and posted on many professional and business websites. Few days ago I received copy of the Ministry’s version of the law FOGL/MoO, which this intervention is all about. I assume the Cabinet had approved the draft in its substance and main principles and provisions. Part one of this review provides the main conclusions, while part two deals with the details on article-by-article base.
Part one: Main Conclusions
At the outsets and after reviewing this new draft I came with the following preliminary conclusions:
1- The new version FOGL/MoO is much better, more coherent and well balanced than FOGL/OEC from form, substantive and operational perspectives. It is also more inclusive and participatory as it grants membership in FOGC for more producing
provinces. Moreover, the Iraqi state companies, which are the core of mid and upstream petroleum sector, would be presented in FOGC.
2- FOGL/MoO has minor improvements compared with the previous drafts especially the one considered by majlis Shura al dawla- the State Consultative Council. Moreover, it has taken into account some of the developments that have taken place since 2007, especially those related to the three bid rounds.
3- Nevertheless, FOGL/MoO still has many serious flaws, ambiguities, overlapping of authorities, imbalances and lack of coherence, among many others. It is important therefore that this FOGL/MoO address some vital imbalances and important issues to insure coherence, functionality and effectiveness of the proposed legislation and attract national support for it.
- Balance between the roles of legislative and executive branches of government pertaining to mid and upstream petroleum sub-sectors. These are elaborated in details in the second part of this review, but summarized as follows:
- Balance and harmonization between the federal, regional and provincial authorities.
- Balance between representation and efficiency consideration pertaining to FOGC.
- All contracts concluded before the enactment of this law should be assessed according to the same set of criteria, done by the same body (FOGC), approved by the Council of Ministers and legalized by the federal parliament.
- The law ought to prohibit Production Sharing Contracts 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.
- 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.
4- This oil and gas law (FOGL-MoO) 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.
It is therefore very advisable to separate the two laws, as there is no logical or legal justification to address revenue sharing matters within this law in such un-substantive way.
5- Provisions pertaining to the jurisdiction of this law could be interpreted to exclude some important contracts (such as that for Basra Gas Company-BGC with Shell and Mitsubishi) from this FOGL. 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.
6- Considering the strong objections that surfaced so far against FOGL/OEC, it is advisable that the parliament suspends the first reading of this FOGL/OEC when
resuming its session on 6 Sept after the Eid holiday to avoid further disarray, acrimonious atmosphere and condemnation that this unfortunate and ill-advised draft by Oil and Energy Committee had created.
7- On its side the government may make the draft of its final version of the law available for public debate by posting it on the websites of the Council of Ministers and the Ministry of Oil.
8- Having two rather different versions of the law one was proposed by the executive branch (FOGL/MoO) while the other was allegedly proposed by sub-political groups within the legislative branch and presented by OEC (FOGL/OEC) would make the legal framework governing the petroleum upstream sub-sector more confusing and uncertain.
A condition such as this is not conducive to ensure the best interest of the Iraqi people that is enshrined in the constitution, or to furnish legal predictability and certainty that foreign development partners and IOCs are usually, or theoretically, concerned with. A resolution of this matter is of profound importance to finally agree on national functional legal framework governing the oil and gas resources of the country, and any further delay opens the door for suspicion, accusation and all forms of conspiracy theory interpretations.
9- In the mean time the parliament could enforce moratorium preventing any authority from concluding contracts pertaining to upstream petroleum as from a specific cutoff date (for example 15 September 2011) until and unless the FOGL is promulgated.
The parliament could also pass a motion requesting the Federal and Regional Governments to submit authentic copies of all already concluded contracts, for the parliament to review, debate, assess and legalese by specific laws, if proven they were conducted and are in compliance with basic principles of the Constitution.
Part Two: Articles Review
The proposed FOGL/MoO in my humble views still has many serious flaws that have to be addressed. The followings are few observations on the text of this FOGL/MoO made in chronological order of its articles. Article 1: Definitions
1- The law assumes INOC be established after the enactment of FOGL. The implication is that the House has three alternative options to consider in addressing this organic linkage between INOC law and FOGL:
I- Suspend the debate on INOC law (currently under first reading phase in the House) until FOGL is finalized, and INOC law redrafted accordingly.
II- Remove all provisions pertaining to INOC in FOGL if the former is enacted before the latter.
III- Debate the two laws in tandem and promulgate them concurrently.
2- The threshold for producing province is set at 100,000 bd (lower than that suggested by FOGC-OEC.) The implication is that the number of petroleum producing provinces
presented in the Federal Oil and Gas Council-FOGC would be higher under FOGL/MoO than under FOGC-OEC.
Article 2: Objectives
1- One of the objectives of FOGL/MoO is to reach “maximum level of production”. This objective is doubtful as it could deliver negative results on prices and depletion rates. Moreover, production should be geared to national development requirements within sustainable development perspectives. Therefore replacing the word “maximum” with “economically optimal” is more appropriate.
Article 5: FOGC Membership
1- Adding the “related” Deputy Prime Minister (currently Dr. Shahristani) to FOGC membership would strengthen the role of the federal government in this council.
2- The representatives of the “producing provinces” should have proven record of experience in petroleum industry. The representative is nominated by the related province but has to be approved by the Council of Ministers.
3- The three “experts” members should be Iraqis, to avoid any interpretation that permits foreigner to hold membership.
4- It is highly advisable that FOGC has permanent General Secretariat
5- 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. with well-qualified and experienced Iraqi staff in fields related to the nature of FOGC functions, responsibilities and role. 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.
6- Unlike FOGC-OEC, the core of the upstream and midstream petroleum sub-sectors is well represented in FOGC by INOC, SOMO and other related State companies according to this FOGL-MoO.
7- Considering the rather large number of FOGC members, 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.
Article 7: The role of the Parliament.
1- The proposed law circumvents the parliament from having a role in all matters related to upstream and midstream petroleum sub-sectors, and thus preventing the parliament from exercising its constitutional functions as the only lawful representatives of all the Iraqi people according to articles 5 and 49 of the constitution.
Moreover, the constitution entrusts and indeed obligates the federal parliament to be the guardian to “safeguard the interests of its [Iraq] people” and “ensure the safety of its., wealth [oil and gas ]”, according to Article 50. In the mean time FOGL entrusted FOGC with too much power and authority pertaining to oil and gas wealth, while all members of FOGC except the Prime Minister could be non-elected but appointed officials. Obviously, there is unacceptable imbalance in the legitimacy of functions between the parliament and FOGC, and such imbalance has to be corrected.
2- To ensure the constitutional balance between the executive and legislative branch of authority pertaining to the scope of this law this article has to be amended. The
following suggestion could be considered as addition to this article, “The Parliament discuss, approve and legislate laws pertaining to all Service Contracts resulting from licensing bids pertaining to upstream petroleum development.”
Article 9: Functions of FOGC
1- FOGC cannot decide
I- Decisions on such policies are among the functions of Council of Minister-CoM in the area of development plans. the “Petroleum industry policies” since it does not have the legal mandate and the technical capacity or institutional representation to do so for three reasons:
II- 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.
III- These vital sub-sector downstream companies are not represented in FOGC.
2- 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.
3- The draft law gives FOGC members new authority to suggest laws
Article 10: the Bureau of Independent Advisors-BIAs . 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.
1- 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.
2- This law does not specify that the advisors should be Iraqis. Thus it is vital to make such specification to avoid any possibility of employing foreign advisors in this council. (The possibility of employing foreign advisors exists under FOGL/OEC and in earlier versions of FOGL since 2007)
3- The proposed law (as discussed later) 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.
4- 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.
5- It could be more feasible to delete this article, and substitute the BIA by strengthening the technical capacities of the General Secretariat of FOGC as suggested above in article 5.
Article 11: the Role of the Ministry of Oil-MoO
1- Sub-para (12) needs redrafting to fit well with INOC functions.
Article 13: INOC
1- The term “Operator and authorized” referred to in Sub-para (first) needs careful drafting and clarifications.
2- The terms “Current production fields” and “the undeveloped fields close to it” needs to be specified and listed by names if known today. This to avoid the already known ambiguity that lead to different interpretations.
3- Fields referred to in Sub-para (second, b) needs specific data with names if known today, and without INOC needs to have future authorization from FOGC.
4- Sub-para (second, c) contradicts sub-para (second, a) and thus has to be revised. Also the condition of “competitiveness” with powerful IOCs would definitely work against INOC interests.
5- The term “reasonable profit” referred to in Sub-para (third) is vague and needs careful method to assess it or delete it as it should be one of INOC prerogatives in managing its own business operations. This has to be removed and the entire sub-para drafted properly.
6- Nothing mentioned regarding selling gas to SOMO, since Sub-para (third) refers to “crude oil” only.
7- Sub-para (third) refers to “Service Contracts” with regards to “field development”. These Service Contracts should also apply to “exploration” contracts with IOCs.
8- Generally, this Article has to be coordinated with the INOC Law to ensure harmony between the two laws. (As discussed in Article 1 above)
Article 14: the Regional Commission
1- KRG is represented in FOGC, thus there is no justification for the Regional Commission to attend also. Moreover, Regional Commission is not member in FOGC.
Article 15: Licensing
1- Sub-para (first) mentions two contracts: Exploration and Production Contract-EPC, and Development and Production Contract-DPC. The EPC should be avoided since it is too restrictive and exclude the possibility of having “exploration Contract” only. Moreover, EPC implies the phase of “Development” though it is not mentioned.
2- Sub-para (first) mentions the term “the commission” but this is not defined in Article 1. What is mentioned though is “The specialized commission”. Thus correction is needed if “the commission” means “the specialized commission”.
Article16: The Contents of the Model Contract
1- The article does not specify in a very clear language that such contracts are “Service Contracts” similar to those mentioned in Article 13.
2- Some components might indicate to the possibility of Production Sharing Contracts- PCSs such as “suitable return on investment”. Components in other articles, 41 and 43 for example, could also indicate to the possibility of PSCs.
3- It is preferable therefore to make it absolutely clear that Production Sharing Contracts in upstream development sub-sector is prohibited under this law. Such proposition is founded on Article 111 of the constitution and Article 2 (first) of this law.
Article 18:
1- There are no compelling reasons to justify this complete dependence on BIAs?
2- If a contract that is seriously deviating from the model contract then it should be rejected on that premise. Therefore, there is no reason to vote on such contract within FOGC.
Article 19:
1- Sub-para (first) is Ok but this has to be coordinated with new draft for Article 13 as suggested above.
2- Sub-para (second) needs also proper redrafting for coherence and consistency purposes.
3- The term “Iraqi specialized company” mentioned in Sub-para (third) needs, by necessity, the addition of “State” to avoid miss-interpretation for “private”.
Article 21: 1- It is not practical or correct to deal with or treat INOC in the same way the law deals with other IOCs regarding taking over the related fields at the end of the Contract’ duration
1- A clear distinction between the “Specialized Commission” and the State Contracting Party should be made since this article implies obligations for both. . This is because it is expected that INOC itself would receive all petroleum fields from the IOCs when their contracts had expired. Article 22:
2- Sub-para (eight) needs clarification regarding oil marketing.
Article 29: the Non-associated Gas Fields
1- The condition of having “gas purchase agreement” as one requirement for the field development could confine such development to export only. Flexibility is required to cover the domestic needs for gas in various uses in energy and non-energy sectors. Moreover, this condition would logically leads to “Exploration, development and production” contracts, which was discussed in Article 15 above.
Articles 30 and 31: Pipelines
1- While article 30 asserts that the federal government owns the “major pipelines”, article 31 says that, “INOC or any other specialized Iraqi Public Company established for this purpose” would own these major pipelines. Though this is minor contradiction since INOC and the other company are State companies, nevertheless and legally speaking there is and should be clear distinction between the two, and thus redrafting is needed.
Articles 33 and 34 : Field Development Plan
1- The two articles assert the need for optimal field development plan that should be formulated on assessing alternative options to maximize petroleum extraction at lowest costs, and by using advanced methods.
2- It could be useful to mention, in this law, the development activities should comply with Hydrocarbon Wealth Preservation Law nr. 84 of 1985 and all related directives and instruction.
Article 40: Petroleum Revenues This article does not fit in this law, since according to the constitution there would be a specific law for revenue sharing. This oil and gas 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. Therefore, it is better delete this article 40. Article 41:
2- The term “share” pertaining to the foreign investor in sub-para (3rd) could imply PSC.
Article 43:
1- The terms “royalty payment” and “production bonus” in sub-para (1st, a) could imply PSC.
2- The term “Financially important contracts” has to be clearly defined with minimum possibilities of exemptions.
Article 45: Dispute settlement should be related to the concluded contract NOT the interpretation of this law, since “the law is sovereign” as Article 5 of the constitution, asserts. Article 47: Legalizing already concluded contracts
1- This article creates two different systems to examine the already concluded contracts one for MoO and the other for KRG. Moreover, the BIAs exercises sovereign decisions regarding KRG contracts and this should not be accepted, especially if the majority of the advisors are foreigners.
2- The wording regarding “compliance with this law” is not identical in the sub-paragraphs.
3- All already concluded contracts should be subject to similar criteria of assessment, that is done by the same body (FOGC) and finally approved by the federal Parliament and enacted by laws.
Article 50: Jurisdiction of the this law
1- This law does not apply to “gas manufacturing”, according to this article. But the term “manufacturing” could cover many activities some of which falls within midstream and upstream petroleum sub-sectors that are covered by this law.
2- This article could be interpreted to exclude some important contracts (such as that for Basra Gas Company-BGC with Shell and Mitsubishi) from the jurisdiction of FOGL. 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.
3- Such “legal vacuum” for these important contracts (BGC as example) could compromise Iraqi interests.
4- It is advisable, therefore, to redraft this article to include important contracts (such as that for Basra Gas Company) under the Jurisdiction of this FOGL.