Iraq upstream legal update
Source: Clyde & Co , Author: Posted by BI-ME staff
Posted: Sun October 23, 2011 8:25 pm

UAE. With proven oil reserves of approximately 115 billion barrels, Iraq's oil industry has seen considerable growth over the last two years. The Iraqi federal government (IFG) is now on its fourth licensing round, attracting key players in the international oil industry.

In parallel, the Kurdistan Regional Government (KRG) is actively engaging investors and oil companies in its own (separate) licensing process.

The opportunities in Iraq, however, are not without their challenges. The existing legal framework within which the IFG and the KRG operate is based on constitutional provisions (notably Articles 109-114 of the Iraqi Constitution 2005).

But the draftsmen of the Iraqi Constitution 2005 contemplated enabling legislation. Indeed, two competing drafts of the ''Oil & Gas Law'' have been presented to the Parliament for review.

Title
Title analysis is important for every upstream investment in Iraq. The importance of structuring and mitigation cannot be over-emphasized. This is so irrespective of whether the relevant licence is mature or freshly issued, and irrespective of whether the IFG (or one of its predecessors) or the KRG took the lead.

As such, identifying the particular legal regime in place at the moment the upstream right was issued (a legal ''snapshot'' in time) is critical. Subsequent legislative changes, as well as the principles of legal successorship, retroactivity, grandfathering, and stabilization, all come into play.

Framework for Title Analysis Post-2005
Section 4 of the Iraqi Constitution 2005 (Articles 109-114) was superimposed on legacy legislation of the Hussein era pertaining to oil and gas rights that consisted chiefly of:
Law 97 of 1967, part of which remains in force to date, reserving to Parliament the final say on contracts pertaining to oil and gas rights (meaning, as per Article 3(2), ratification by a special statute).

One debate is whether this reservation is a part still in force; and
Decree 267 of 1987, all of which remains in force to date, together with a body of other laws and decrees, regulating the Ministry of Oil's authority to negotiate and sign contracts pertaining to oil and gas rights.

One debate is whether this regulation, in conjunction with the Iraqi Constitution 2005, excludes any role by the KRG at present in negotiating and signing oil and gas licenses and exploration contracts for blocks in its region.

A chorus of voices today discusses the practical impact of this legislative framework. For this reason, as mentioned above, there remains a critical need for enabling legislation.

Enabling Legislation
A revised version of the 2007 draft ''Oil & Gas Law'' was presented by the Oil Energy And Natural Resources Parliamentary Committee (''OENRPC'') to the Parliament on 17 August 2011 (the ''Parliament's Draft Oil & Gas Law 2011'').

Subsequently, however, the Cabinet submitted a competing draft oil and gas law (the ''Cabinet's Draft Oil & Gas Law 2011'') on 25 August 2011. It is unclear which draft law (if either) will form the basis of final enabling legislation, particularly as the Cabinet's Draft Oil & Gas Law 2011 has been criticized (notably by the KRG) for its focus on centralised decision-making.

Contracts Awarded by the Iraq Federal Government (IFG)
Fourteen technical service contracts (''TSCs'') have been awarded by the IFG since the adoption of the Iraqi Constitution 2005, but none have been ratified by the Council of Representatives.

The need for parliamentary ratification has been the subject of back and forth discussions between the Ministry of Oil ("MOO"), other stakeholders and legal commentators, particularly in light of Article 3(2) of Law 97.

The pertinent text of Article 3(2) of Law 97 provides: ''any contracts and partnership arrangements entered into by the Iraq National Oil Company with third parties to develop Iraq's oil fields may be entered into if pursuant to a law''.

Ratification is a key issue that is expected to be clarified by forthcoming enabling legislation.

Contracts Awarded by the Kurdistan Regional Government (KRG)
The starting point for the KRG's authority in the oil and gas sphere is Section 4 of the Iraqi Constitution 2005, particularly Article 112.

Article 112 of the Iraqi Constitution 2005 provides that ''the federal government, with the producing governorates and regional governments, shall undertake the management of oil and gas extracted from current fields…''

The Iraqi Constitution 2005 contemplates enabling legislation intended to address issues such as (regional) authority to sign contracts pertaining to oil and gas rights. In the absence of such enabling legislation, it is unclear how the competencies granted in Article 112 of the Iraqi Constitution 2005 are to be exercised.

The OENRPC recently queried the contracts awarded by the KRG, stating that ''the contracts need to be brought into line". There are currently 40 contracts awarded by the KRG for blocks in Iraq-Kurdistan Region, the majority of which are production sharing contracts (''PSC'').

Legal commentators offer competing views on the constitutional basis of these PSCs.

Get Ready for a Contract Review
The Parliament's Draft Oil & Gas Law 2011 provides that contracts pertaining to oil and gas rights entered into prior to the new law coming into force will be subject to two levels of review (Article 46 (Second)).

One review will be by a special committee consisting of the Federal Oil Minister, the Specialised KRG Minister, and the Head of the OENRPC (the ''Review Committee'').

Another review will be subsequently undertaken by the Federal Oil And Gas Council (''FOGC''). Although Article 46 (Second) does not specify the nature and extent of the reviews, Article 40(B) of the draft ''Oil and Gas Law 2007'' suggests that the first level of review is meant ''to ensure the old contracts are in harmony with the basic objectives of the Oil and Gas Law'', whilst the review by FOGC is meant ''to ensure that such contracts produce 'maximum economic return' for the people of Iraq''.

The Cabinet's Draft Oil & Gas Law 2011 provides for a similar contract review of ''all exploration, development and production contracts'' by MOO in the first instance, and subsequently by the Bureau of Independent Advisors, which submits its recommendations to the FOGC for a final review (Article 47 (First)).

In addition to the general provision on contract review, Article 47 (Second) specifically provides that exploration and production contracts concluded with the KRG will be subject to a review by the ''Competent Body'' (defined as the Ministry of Oil, the National Oil Company or the competent KRG authority).

This KRG-specific review is meant to ''conform said contracts to the objectives and the general provisions of this law to achieve the highest economic benefit for the Iraqi people, taking into consideration the objective circumstances in which said contracts were concluded''.

Article 46 (Second) of the Parliament's Draft Oil & Gas Law 2011 and Article 47 (First) of the Cabinet's Draft Oil & Gas Law 2011 suggest that all contracts are subject to review. This proposed contract review raises concerns as to: (i) whether revisions will be imposed to the detriment of the private contractor, and (ii) whether there is any restriction on the authority of the Review Committee and the FOGC or the MOO and the Bureau of Independent Advisors, as the case may be, to impose such revisions. Our Firm has significant experience in such reviews, and foreign investors in particular may want to take legal advice in this critical area.

The universe of contracts potentially subject to review would appear to include not only the 56 or so contracts signed following the adoption of the Iraqi Constitution 2005 (being 14 TSCs under the lead of the IFG, plus a further 42 mainly PSCs under the lead of the KRG), but also potentially other contracts, and/or amendments thereto.

For the time being a prudent approach would be to deem the word ''contract'' in this context broadly, to mean contracts with a structural profit element linked to production, howsoever labelled. We would not exclude a review or challenge to contracts/rights held by the state oil companies and their subcontractors or awarded outside of the licensing rounds.

Moratorium
The 4th licensing round is scheduled to commence in March 2012. The OENRPC's recent call for a moratorium on new contracts may, if adopted, provide a breather, while enhancements to the legal regime for oil and gas are considered.

The OENRPC has requested MOO to postpone the next (fourth) licensing round and is considering proposing a bill making clear that MOO should refrain from ''organising any new licensing rounds or signing any new contracts until the necessary petroleum legislation is passed".

Bright Future
Iraq has a bright future, and this will only be enhanced as the legal framework for oil and gas investments is more fully and consistently developed.

You can access related articles on the Clyde & Co website at www.clydeco.com and www.clydeco.com/middle-east.

© 2011 Clyde & Co LLP. All rights reserved

 

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