Posted on 20 December 2011.
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.
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.
Dr. Mark A. DeWeaver
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