Debate Continues on Legality of Kurdistan’s Petroleum Contracts

By Thomas W. Donovan, Managing Partner at Iraq Law Alliance, PLLC.

Introduction

Several recent events have prompted a return to the lingering debate over the legality of the production sharing contracts entered into by and between the semi-autonomous Kurdistan Regional Government (KRG) and around 35 private international companies over the past few years. The KRG, through its own Ministry of Natural Resources, is adamant that the signing and negotiation of contracts for any ‘new’ petroleum developments (ie, those taking place under the 2005 Iraqi Constitution) remains its sole responsibility, and not that of the federal Iraqi government.

The current federal government in Baghdad, under the new minister of oil, Abdul Karim Al Luabi, has signalled a significant departure from previous policy, which was insistent that all petroleum policy be derived and managed by the federal Iraqi Ministry of Oil. Since assuming power in the new Iraqi government on December 21 2010, Al Luabi has made public statements confirming the legality of the production sharing contracts under Iraqi law, allowed Kurdish petroleum to be exported through Iraqi national pipelines and remitted payment to international oil companies operating in Kurdish fields under the contracts.

Many commentators have argued that Al Luabi’s recent acts are conciliatory in nature and a realisation of the authorities that numerous international oil companies are already operating in Kurdistan despite Baghdad’s attempts to derail the process. Other commentators assert that provoking the Kurdish bloc with a significant legal dispute will lead to further domestic political instability and increased calls for independence by the KRG.

Notwithstanding these considerations, the debate over the legality of the Kurdish production sharing contracts is grounded in an analysis of the division between federal and regional authorities in Iraq. The division is apparent in the notions underlying both the 2005 Iraqi Constitution and Iraqi law as applicable in the Kurdistan region. Previous pronouncements by the Ministry of Oil in Baghdad to the effect that the majority of the contracts were illegal or unconstitutional under Iraqi law appear difficult to support under close scrutiny. Instead, there appears at least a modicum of justification to the position that the future development and application of petroleum policy in Kurdistan remains under the sole jurisdiction of the KRG.

‘Present field’ v ‘future field’ distinction

The constitution allocates any power that is not reserved exclusively for the federal government to the regional or governorate governments and gives priority to regional or governorate laws where there are disputes over power-sharing.(1) Federalist notions were enshrined to the effect that no law may be enacted that contradicts the Iraqi Constitution or a part of any regional constitution, or any other legal text that contradicts the Iraqi Constitution.

One Response to Debate Continues on Legality of Kurdistan’s Petroleum Contracts

  1. Ahmed Mousa Jiyad June 11, 2011 at 11:17 am #

    Inaccurate and partial interpretation of the Constitution.

    Analytically, the constitution has, regarding oil and gas resources, three categories of principles: “Core”, “management” and “promotional” principles. The core principles, by definition, are those that have to be uphold, respected and adhered to at all time by all branches of government, decision makers and people as long as the constitution remains valid. There two core principles are: the “ownership” principle and the “highest/best benefit to the Iraqi people” principle. The ownership and best interest principles are intertwined and mutually inclusive.

    Ownership principle is enshrined in Article111, which states “Oil and gas are owned by all the people of Iraq in all the regions and governorates.” In addition to being very clear, this article has to be linked with Article 5, which asserts, “people are the source of authority and legitimacy”. The implications of these two constitutional articles are:
    I- Indivisibility of ownership of oil and gas. This means no group of Iraqis in any region or governorate has the right to act on behalf of all the rightful owners of these resources, or claim exclusivity of ownership of localized resources;
    II- The only entity that has the legal and constitutional mandate to act on behalf of the people of Iraq is their representatives in the federal parliament. Thus the parliament is the lawful representative of the rightful owners.
    III- The term “all the people of Iraq” is and should be interpreted in an inter-generations aspect incorporating both current and future Iraqis. Hence, ownership is and becomes essential component of sustainable development, which in essence is inter-generations’ welfare issue in the management of natural resources.

    The “highest interests/ benefits ” principle is expressed in Article 112 (Second). Considering the depleting nature of hydrocarbons, their critical role in the economy and the interest of current and future generations of Iraqis, the “highest interests” of all Iraqi people can only be guaranteed and protected through sound, efficient and cost effective sustainable development by transforming those depleting resources into productive physical and human assets. Obviously the “highest interests” is, and should be understood as a multi-dimensional optimization responsibility on three levels: macro (federal) level; oil sector level; and micro (field/project) level. These three optimizations are mutually inclusive, enforcing and inseparable.
    The macro/ federal level aims at achieving progressive levels of sustainable development in both physical and human assets taking seriously into considerations the limitations and consequences of the “Absorptive Capacity”, the “Dutch Disease” and “Resource Curse” discourses that are usually associated with the economic rent of oil. Basic question in this regard is about national petroleum policy and its link to national development.
    The national petroleum policy is integral and fundamental component of any “sovereign economic and trade policy” referred to in Article 110, as one of the exclusive powers of the federal government.

    The essential issue at the heart of the “highest interests/benefit” is that the executive branch of government, represented by the Council of Ministers-CoM has to make before the federal parliament a clear and unequivocal submission on how and why what it proposes represents the best and highest interests for the Iraqi people. Obviously this macro/federal optimization as a sustainable development issue is beyond a sectoral ministry such as MoO or regional governments such as KRG or provincial authority such as local vcouncils.
    Furthermore and on the other hand the sector and micro optimizations fall under a second category of constitutional principle, namely the FRP- Federal, Regional and Provincial- FRP co-management, as stipulated in Article 112, and the third category of “promotional principles” to encourage private investment as refereed to, among others, in Articles 25 and 26.
    The co-management of petroleum fields and private investment (both Iraqi and foreign) have to uphold and preserves the best interests of the Iraqi people and should at all time respect the collective ownership of petroleum resources by all Iraqi people. This is why the “ownership” and “best interests” are supreme and remain the core principles in the constitution that all governments and authorities have to adhere to.

    The article reduces a complex problem of petroleum policy into definitional matter and personal attitude; limits the analyses to few articles of the constitution and thus ignoring the implications of other articles, the most fundamental among which are the core principles of “the best interest for the Iraqi people” and the “collective ownership of oil and gas wealth” which are enshrined in the constitution and confirmed by all international documents Iraq had concluded. The article does not differentiate between “ownership”, “co-management” and “promotional” principles, their implications and modus operandi requirements, which are devised by the constitution regarding oil and gas wealth of the country. Moreover, it seems to ignore the validity and legal powers of old laws that remain enforceable under the constitution. Finally, it pays no attention to the totality of adherence to the entire constitution not to selectivity of few articles or paragraphs.

    The article sound selective in his approach because it puts the emphases on “present fields”, and even worse by apparently accepting the KRG idea of “commerciality”, though not defined, as the demarcating device between the authorities of federal vs. regional governments.
    Obviously such understanding ignores the basics of upstream petroleum industry and its main phases of exploration, development and production. By implicit or explicit endorsement of KRG’ “commerciality” condition, he actually de-legalise all service contracts concluded under second and third bid rounds on a rather shaky premises.
    Moreover, his selectivity undermines, again by intention or omission, the necessary requirements of exercising the exclusive powers of the federal government. When referring to Article 110, he tells us, “list does not include petroleum activities”. This approach of “search for words: petroleum activities” is very disappointing and sheds too much doubt on the quality of his analyses and weaken an already simple argument.
    It is true the words “petroleum activities” are not mentioned, verbatim, in Article 110. BUT he did not tell us what that same article has in substance to do with petroleum policy, which comprises all types of petroleum activities.
    Article 110 clearly state that the federal government shall have exclusive authorities in the following matters: “negotiating, signing, and ratifying international treaties and agreements”; “formulating foreign sovereign economic and trade policy”); “Formulating fiscal,.., policy; drawing up the national budget of the State; formulating monetary policy”
    Obviously, any agreement within OPEC regarding quota, prices, etc has direct implications on Iraqi oil. Moreover, formulating economic, trade, fiscal, monetary polices, annual budget (for current and investment expenditures) is and should be based on petroleum upstream activities since petroleum is the main export item and the main source of foreign exchange and revenues. These are examples reflecting one of structural characteristics of the Iraqi economy that is know, even to a layman, since oil was discovered in the country.

    Finally, many of the fields, which KRG contracted under PSCs could be considered under “present fields” if oil industry criterion, other than “commerciality”, are used such as discovery, delineation, commencement of explorational and/or developmental drilling, etc. Thus unilateral self-serving interpretation by KRG should not be enough for an independent legal opinion. But Mr. Donovan conclude, “the legitimacy in asserting control over undiscovered fields located within the Kurdistan Region appears to lie with the KRG, rather than the federal government.” His own conclusion should mean that [discovered] fields must be categorised as “present” fields regardless of the commerciality conditions.
    In this case many of the contracted fields by KRG are actually discovered many years or decades even before the formation of KRG itself. For examples only, the first well was drilled in 1981/2 in Block 6, which is located within Nainawa Governorate (not part of KR!). This block together with blocks 7 and 8 were contracted to the American company, Hunt Oil. Also three wells were drilled in Taq Taq oilfield during late seventies and enough geological information were available about this “field”, which was included in Annex 3 of the Oil and Gas Law of February 2007, but Mr. Ashti Hawrami moved it to Annex 4, and offered it to Addax-Genel as “exploration block!”, as he actually did with other gas fields, Khormor and Chamchamal. Also 15 wells were drilled in Khurmala, one of three domes in Kirkuk oilfields, during the seventies to nineties of last century. On a personal note, I spent two months in 1978 with drilling crew in one of Khurmala wells, which KRG now control under their same understanding of “present fields.” A well-respected Iraqi oil veteran, Mr. Fouad AlAmeer provides ample and seriously researched information and data on fields and blocks offered by KRG.

    The article looks biased in its interpretation as taking or accepting what KRG says without referring to the many published studies (though mostly in Arabic) contesting and refuting such claims by KRG. Accordingly, the author arrives at imbalance conclusions similar to those arrived before by the KRG-hired international consultants. Incidentally, in an earlier posting (2 Feb 2011) on this IBN, Mr. Donovan expressed hope that the petroleum law “will not be debated” by the federal parliament, a position formally declared by Mr. Ashti Hawrami of KRG few weeks earlier that date during CWC London conference of November 2010!!.

    Mr. Donovan also adopts same attitude of KRG by “personalising” federal government petroleum policy on who is the minister of oil (Shahristani vs. Luabi), an allegation that is usually repeated by KRG politicians, the oil companies having interests in KR and their advocates.
    Through my daily follow-up of Iraqi and foreign sources, I did not find solid and convincing evidence to support Mr. Donovan claim, “The current federal government in Baghdad, under the new minister of oil, Abdul Karim Al Luabi, has signalled a significant departure from previous policy, which was insistent that all petroleum policy be derived and managed by the federal Iraqi Ministry of Oil” and “Al Luabi has made public statements confirming the legality of the production sharing contracts under Iraqi law.” In fact there are strong statements by the Ministry which categorically refuting Mr. Donovan unsubstantiated claim. Moreover, credible available evidence suggest that PSCs concluded under former regime had to be converted to service contracts before they would be given any considerations by the federal ministry of oil. Additionally, there is strong understanding among Iraqi oil professionals and legislators that PSCs are, by their very nature, contravene the current constitution on the premise of collective ownership of petroleum wealth, thus renders them unconstitutional form of contracts.

    Finally, I share many Iraqis who believe that the Constitution has many flaws and ambiguities that could be interpreted differently; it was a product of political horse-trading that was influenced by “foreign experts and advisors” involvement, and direct interventions by the US administration at that stage of its drafting. Nevertheless, as long as it is valid, all levels of authority at federal, regional and provincial have to adhere to this supreme law of the country.
    I strongly believe that both Federal and KR Governments are at default, and all their concluded oil contracts are unconstitutional unless and until they are approved by the federal parliament, proved to be for the best interests of Iraq and enacted by law according to the usual process.
    Having said that, there is nothing to suggest that the MoO and KRG has adhered to the two core principles of ownership, by deliberately circumventing the parliament, and best interest, by not presenting the proof of optimality. Finally, the FRP co-management is lacking.
    Thus, all such contracts face very serious legal risk and uncertainty. Moreover, KRG’ PSCs are the most vulnerable in this regards. Information available does not indicate that KRG had provided full, complete and accurate information that satisfies good governance and transparency standards and requirements regarding all its concluded PSCs. In addition to the above, they contravene the two core constitutional principles- best interests of the Iraqi people and the collective ownership of all oil and gas wealth (not only revenues) of the country.

    Ahmed Mousa Jiyad,
    Iraq /Development Consultancy and Research (I/DC&R)
    Norway.
    11 June 2011
    [This comment has been edited by Iraq Business News]