INOC Law: Shaky Premises And Doubtful Prospect
By Ahmed Mousa Jiyad
Mr
Jiyad is an independent development consultant, scholar and Associate with the
Centre for Global Energy Studies (CGES), London. He was formerly a senior
economist with the Iraq National Oil Company and Iraq’s Ministry of Oil, Chief
Expert for the Council of Ministers, Director at the Ministry of Trade, and
International Specialist with UN organizations in Uganda, Sudan and Jordan. He
is now based in Norway and has own development consultancy and research bureau
(Email: mou-jiya@online.no).
Background
The Speaker of the
Iraqi Parliament, Usama al-Nujaifi, said in a press conference in Baghdad on 16
March that the Iraq National Oil Company (INOC) law was due for first reading in
the parliament. That reading took place and was televised on 31 March to
commence the administrative process, but more substantive debate is expected
before and during the second reading of the draft law before the final version
of the proposed law would be tabled for the House vote according to the by-laws
and constitutional requirements.1
The recent focus on
the INOC law, and the so-called hydrocarbon “package of four laws” –
comprising the Federal Oil and Gas Law (FOGL), the Ministry of Oil Law (MOOL),
the Revenue Sharing Law (RSL) and the INOC law – seems to be linked to the
political horse-trading and the “agreement” that led to the formation of the
current government. 2
The purpose of this paper is to make a contribution to the ongoing
debate on the INOC law, shed more light on this law, identifying its main flaws
and weaknesses and highlight the new approach and modus operandi sought
by the parliamentary committee in dealing with this law and other related
‘packaged’ laws.
Priorities
And Approach
In an interview given to Iraq
Oil Report
and on other occasions the current Chairman of the Oil, Gas and Natural
Resources Committee (OGNRC) of the federal parliament, Adnan al-Janabi, provided
his vision and approach in dealing with laws that fall under the mandate,
responsibility and prerogatives of OGNRC. To be specific, and with particular
reference to INOC, Mr Janabi 3 aims to:
·
Adhere to “what’s
constitutionally right and in the national interest.”
·
Look into all pending
legislation (the package deal) to “reactivate in parallel.”
·
Prepare for consultations
with “all key parties and experts within the government institutions and
outside.”
·
Make the INOC law “his
first priority”.
Giving priority to the INOC law could explain the recent tabling of the
said law for first reading in the parliament. There are, though, implications.
First, when the draft of this law is finalized (and not necessarily enacted, as
it will be tied to the parallel reactivation within the package deal) the
detailed provisions regarding INOC in FOGL become redundant and thus have to be
either removed or radically reduced. Second, since the current draft of the INOC
law is not identical, in form and substance, with the related provisions in FOGL,
the current INOC draft has to be harmonized to take into consideration the
relevant provisions in FOGL. Finally, there is high possibility that the
Kurdistan Regional Government (KRG) would oppose this prioritization as KRG
stood against (a strong) INOC, on the pretext of centralization. Also, INOC is
not among KRG’s “negotiations conditions” that preceded the formation of
the current government. 4
Participatory
Approach And Consultations
The proposed consultation beyond the circles of the parliament is a
significant step in the participatory development. But to make such endeavour
effective, real and meaningful, such consultations have to be inclusive,
representative and transparent. To be so, two levels of participation are
important and should be carefully considered and executed.
The first level is OGNRC participation. Currently, OGNRC has 16 members
and all except one, Bayazid Hassan
'Abd Allah Muhammad, are new to the role. Mr Muhammad was a member in the previous committee, and thus one can assume he is
well informed on petroleum matters, while Mr Janabi is a well known oil
professional. I assume, as confirmed by inside sources, that other members of
OGNRC need a good deal of capacity development in their field of mandate to be
able to address the legal, economic, technical and developmental complexities of
petroleum sector. In conducting consultations with external (outside OGNRC)
sources, it is not viable or advisable to involve all members of OGNRC.
Equally so it is politically improper and dangerous to confine the consultation
to one person only – the chairman of OGNRC.
Hence the options of one or all should be avoided, as the first is incorrect and
the second is dysfunctional. My proposal is to limit the participation from
OGNRC to three members only: the chairman, the deputy and the secretary of the
committee. This should not cause any problem as the three are already selected
and do represent the three major political blocks (Iraqiya,
State of Law, and Kurdish Coalition, respectively). The three
representatives should report to OGNRC promptly and fully on their
consultations.
The second level concerns the external parties to the consultation. The
external consultations could be difficult, time consuming, susceptive to
pressures from interest groups (business or political), and financially costly.
Hence there could be real possibilities that such difficulties derail the debate
and divert it towards self-serving orientations. Nevertheless, such consultation
is necessary, beneficial and fundamental. I would suggest for OGNRC
representatives to hold external consultations with three parties representing
the state-business-society (SBS) triangle. The SBS formula could enrich and
organize the proposed consultations provided they are conducted with carefully
identified and selected representations.
The ‘state’ representation is usually from the petroleum
professionals currently employed by the related governmental apparatus who have
direct involvement in oil sector: the ministry of oil, regional oil companies,
and oil and energy committee in the council of ministers. This consultation
could secure functional channel of communication between the executive and
legislative branches of state authorities to smooth differences and insure
harmonious and coherent coordination between the parliament and the government
on the related legislations.
The ‘business’ representation should come from the known Iraqi
private companies currently involved in oil sector development. Recent
information indicates there are some 50 such companies, which could enrich the
debate. Effort should be made to avoid the domination of powerful business
interests in such debate as this could lead to weaken national entities under
the pretexts of competition, market principles and assumed efficiency. The
current drafts of FOGL and the INOC law are full with provisions that have and
could lead to uncontrolled liberalization and privatization of the upstream
petroleum sector.
Finally, the ‘society’ representation could be confined to petroleum
experts outside the sector such as retired technocrats, scholars and consultants
residing inside or outside the country. For practical and financial
considerations, the consultations with expertise outside the country could be
done by using information and communications technology or on and ad hoc
basis through conferences or roundtable discussions etc. However, availability
of financing for direct consultations with external expertise could be a
prohibiting factor. An important factor for societal involvement is
accessibility to information and the possibility to make a contribution. For
this purpose and to avoid misunderstanding, for time saving and to have a
unified debating platform it is highly desirable to post the draft of the INOC
law on the parliament website. In addition to the consultations mentioned above,
the informed public should be invited to make their comments on the draft of the
law during a specific period of time and provide web-space to post such
comments.
The proposed consultations and the way they would be done, as explained
above could deliver good results and help in developing functional legislations
that could set the right and feasible path for solid development of the
petroleum sector and a well established INOC.
Proposed
INOC Law
INOC is a state company and should remains so. As a basic
premise the company should be supported by the state financially,
institutionally and legally. In the meantime it must have a good degree of
independence in conducting its business and operations, and this should be
maintained by legal instruments including its laws and by-laws. INOC should have
and adhere to strict good governance with uncompromised standards of
transparency, accountability and efficiency.
The current draft
of the INOC law has 30 Articles, divided over eight sections and a preamble. It
is somewhat slightly different from the
earlier two drafts of the law, which have been circulated since 2007, and I have
addressed this law on many previous occasions,5 thus
there is no need to repeat most of the assessment of the law. However, basic
issues deserve highlighting in the remaining space of this article.
INOC
As A Public, Not Holding Company
The current draft
refers to INOC as a “public company”, reinstating what was mentioned in the
2007 draft but different from the term “holding company”, which was used in
the INOC law that was approved by the Council of Ministers on 28 July 2009 and
sent to the Parliament and, thus supposed to be the one that has gone through
the first reading on 31 March 2011. But the currently circulated draft for FOGL
uses also the term “holding company”, causing further confusion on which
version of the INOC law is actually under debate by the parliament.
In my previous
assessments of INOC law referred to above I addressed and opposed using the term
“holding company” for INOC. Furthermore, it is vital that this term is not
used in FOGL, otherwise there will be serious legal contradiction between the
INOC law and FOGL.
The new draft, as
in the previous one, maintains that provisions of public company law (PCL – in
this case PCL No 22 of 1997) apply to INOC except what contravenes this proposed
law. But disparities between the two laws are so many, so substantive and so
effective that it makes no sense nor serves any good purpose to have INOC
governed by the PCL. This adds even more ambiguities and creates further legal
complexities that could affect the functions of INOC and its legality.
What is mystifying
is that, while PCL provides the possibility of excluding any “extractive
company” in upstream petroleum from the provisions of PCL (Article 41), the
proposed law puts INOC under the umbrella of the PCL unnecessarily. This, once
again, testifies that quick fixes and hasty proposals seem to dominate
policymaking, an attitude that could only result in more confusion and further
procrastination.
INOC’s
Areas of Operation
INOC, according to
the proposed law, would be mandated to manage, develop and operate “current
producing fields” and “the discovered not developed fields”. However, two
matters would effectively impact such mandate. First, the law does not specify
by name these “current producing fields” and “the discovered not developed
fields”, thus open the possibility for different interpretation, as Article
112 of the constitution does. There should be no difficulty in specifically
naming these fields, as the Ministry of Oil had, in October 2010, provided
detailed information on 66 oil fields and surely the ministry has equally
sufficient data on gas fields, which permits identifying the field (developed or
not yet) that would be earmarked for INOC. Also in this respect, though the
draft of FOGL clearly assigns fields mentioned in Annexes 1 and 2 for INOC, the
two annexes are not provided in the said draft, and thus one cannot know for
sure which fields are listed in the two annexes, especially these annexes were
compiled in 2007 and much tampering have been done with them. Second, the fields
(developed or not) would be assigned to INOC by a proposed Federal Oil and Gas
Council (FOGC). The implication is that INOC has no real but only symbolic
mandate, since it is FOGC which would effectively be the decision maker on which
fields are to be assigned to INOC. 6
In addition to the
above “mandate” INOC would be allowed to conduct exploration, development
and production in “areas outside its areas of operation, in accordance with
FOGL”. However, the current draft of FOGL mentions “competitive bases”
among all ‘licence holders’ inclusive of the INOC as condition for having
business in areas outside INOC’s areas of operation.
There is an
apparent bias against INOC involvement in petroleum operations in these areas
for a number of reasons. To begin with and for strategic as well as sound
policy, it is wrong and harmful to treat the INOC on an equal footing with those
known IOCs. The pendulum definitely tilts against the INOC due to the large
qualitative edge that works in theory and practice for the benefit of IOCs at
the expense of the INOC. On the contrary, the INOC should receive preferential
treatment, particularly as it faces international companies with a huge
potential compared with its modest one, which has suffered from the disastrous
consequences of more than a quarter century of war, sanctions, occupation and
the absence of normality and security. INOC is not yet reinstated, yet it is
expected to compete with well established, more powerful and better organized
IOCs. This is surely a non-starter for INOC.
Second, which other
OPEC member treats its national oil company in the manner this FOGL is
advocating for INOC? I doubt very much that any national oil company in a
developing, transitional or developed country has been subjected to such a
crippling precondition.
Third, even the
very developed countries, such as Norway, 7 grant their oil companies’ favourable treatment until
they stand fast on solid ground. Why then does FOGL deny the INOC this widely
recognized practice?
Fourth, as shall be
discussed below, while FOGL emphasises competitiveness, the INOC law suggests
“administrative” profit margins, operating costs decided externally (by FOGC,
Ministry of Finance or another entity), and all its decisions are to be approved
externally as well. Obviously this indicates an intention to prevent
incompatibility between financial constraints, through administrative capital
and profits, and the requirements of international competitive norms. The
outcome would work against INOC for the benefits of IOCs, leading to further
weakening of INOC and national efforts in upstream petroleum.
To sum up, there
appears to be too many ambiguities regarding the mandate of INOC, its area of
operation and what it is entitled to do outside these areas. By intention or
omission, the outcome of such flaws in the law would weaken INOC, an outcome
that would eventually serve the liberalization and privatization of the upstream
sector.
To overcome all
unfavourable provisions in the INOC law and FOGL and their possible disastrous
consequences, I suggest an alternative comprising the following main principles:
·
Since INOC is fully a
state entity, each and every petroleum field (regardless of their exploration,
development and production status) should be, by virtue of INOC law, earmarked
for INOC. Provisions regarding petroleum fields located in Kurdistan region
would be negotiated between the federal government and KRG.
·
INOC should be mandated to
develop these fields in cooperation with qualified Iraqi and foreign oil
companies subject to: providing detailed economic and technical feasibility
studies; approval by higher authorities as required by the law such as the
Councils of Ministers (COM) and/or FOGC; such cooperation not taking the form of
concession and/or production sharing contracts/agreements; and, when cooperation
involves a foreign oil company, the related contract has to be approved by the
federal parliament and enacted by law according to the constitutional process.
Capital
Requirements And Financial Entitlements
Chapters 3 and 7 of
the proposed INOC law cover the “Capital” and “Entitlements and
Obligations” of INOC, respectively. As a fully owned state company, the
capital of INOC and its operating costs – capex and opex – would be covered
by the state. INOC will have ID400bn, increasing subject to the approval of COM
after an economic feasibility study justifying such an increase. The company can
borrow from internal and external sources to finance its investment
requirements. Also it can issue bonds, which are exempted with their accrued
interests from taxes.
A few observations
are due on capital requirement and financial entitlement. As a state entity,
INOC cannot borrow externally without the approval of the parliament, hence the
approval of such borrowing by COM is neither sufficient nor constitutional. The
law is silent on whether foreign individuals and or entities can buy the bonds.
There are no clear economic justifications for issued bonds and their interests
being tax-free. INOC begins paying back its capital to the state five years
after achieving “net profits” (NP), at specific percentages of annual net
profits starting from 50% and rising to 100% of NP when INOC has accumulated a
value of the “reserves account” of four times its capital.
Provisions
governing these matters are not free from ambiguities and inconsistencies.
However, the most unspecified concept is the “profit rate”, which the whole
fiscal regime of INOC practically relies upon. According to Articles 16 and 17,
INOC is entitled for each barrel of oil and gas in terms of barrels of oil
equivalent delivered at any specific delivery point remuneration equals to that
barrel’s “operating cost and profit percentage”. The barrel’s
“operating cost” is to be negotiated between INOC and the Ministry of
Finance, and if they fail the FOGC will have the final word. The “profit
rate/percentage” would also be decided by FOGC “in accordance with INOC’s
annual investment plan, provided that the remuneration is not less than the
operation costs.”
The above indicates
that INOC financial entitlements are basically administered by FOGC. The
questions now are: how competent and qualified this ad hoc body, FOGC, would be in determining INOC revenues; what are
the main parameters it uses to reach a rewarding profit margin and accurate
operating costs; and could this become a disincentive for INOC or even a
powerful leash to hold it from playing an active role in upstream petroleum
development? After all, FOGC is an entity that will be created pursuant to FOGL
and is thus an unknown entity now! 8
Finally, by
focusing on operating costs that are, by definition, geared to production of oil
and gas, INOC would have less incentive for exploration activities that could
augment the national reserves to replenish production.
Management,
Governance And Oversight
The proposed law
provides that INOC would be attached to the COM but have its own management
board; however, all decisions by this board have to be approved by FOGC. At the
outset the attachment of INOC to COM while its decisions are the prerogatives of
FOGC would surely create conflict, confusion or a multiplication of authority
over INOC. When INOC is institutionally attached to COM, why then has FOGC the
oversight and approving authority over decisions taken by INOC management board?
These are serious matters that have to be cleared, resolved and drafted properly
and effectively in the proposed law.
Also, the
attachment raises the question of whether COM will supervise INOC’s operations
directly, or via an entity within the COM organizational structure, or the
Deputy Prime Minister for Energy (currently Husain al-Shahristani). Moreover, as
COM is a very politically-driven council this could lead to INOC becoming more
politicized and affected by the devastating Muhasasa (party quota system)
of Iraqi politics. Thus the current law would lead to either conflict or
confusion or multiplication or overlapping of authorities over INOC, and this
could very well generate serious managerial difficulties with detrimental
consequences.
Even if the above
confusion of COM and FOGC control over INOC is resolved, there are no compelling
reasons justifying full oversight of FOGC over all decisions taken by INOC
board, as suggested by the proposed law. Such strict oversight by an ad hoc
body, which has less sector-specific professional competence than INOC itself,
is unnecessary, unjustifiable and unproductive. Therefore, FOGC approvals should
be confined to strategic and important decisions that can be specified in the
by-laws of INOC.
The composition of
the INOC management board is an important matter, especially under the
above-mentioned strict oversight by FOGC and COM. Members of INOC board should
essentially represent oil companies under the umbrella of INOC such as South Oil
Company (SOC), North Oil Company (NOC), Misan Oil Company (MOC) and any other
oil/gas producing entities. In addition to these there should be one ministerial
representative from each of the ministries of oil and of finance. The first is
to insure sector-specific harmonization and coordination, while the second is to
insure financial coordination since the Ministry of Finance has a vital role in
affecting the fiscal regime, as discussed above.
The proposed INOC
law suggests representatives of the Central Bank of Iraq (CBI) and the Ministry
of Planning as members of the INOC board. I actually do not see compelling
reasons for these representations. CBI, according to its current law, is an
independent entity, and thus its role is very different from what it used to be
prior to 2003. Hence, its representation could either contravene its own law or
would not be effective. Also, the representation of the planning ministry is
redundant on this operational level since the ministry would be represented in
FOGC, which oversees INOC.
The chairman of
INOC, who would also be the head of its management aboard, would have
ministerial status, with executive powers and authorities. However, the law does
not specify the modalities of nominating and approving the chairman’s
appointment.
A suggestion was
made to give the chairman ceremonial duties while the real day-to-day
authorities should be given to the Executive Director. I do not see too much
benefit in such suggestions for the following reasons: INOC is fully a state
entity and thus it is structurally different from corporations, which usually
have a chairman and chief executive/director for reasons of governance and
efficiency of operations. Second, if the chairman has ceremonial duties s/he
should not have a ministerial status while the one who has the authority and
responsibility has lower status.
In light of the
above, provisions of the law pertaining to INOC’s attachments, its management
board and the supervisory role higher authorities are full of flaws requiring
very serious revisions and thoughtful consideration.
Concluding
Remarks
Most Iraqi oil
professionals inside and outside the country have called repeatedly for INOC to
be reconstituted, although their views can differ depending on the changing
circumstances. It is my view that re-establishing INOC is essential and deserves
full support. However, all due attention must be given to ensure the company is
re-established on a sound basis so that it can play an effective role in
developing the nation’s petroleum resources.
Unfortunately, and
despite many published constructive views, the currently proposed law would
effectively create a very weak INOC since its profit rates, its operating cost,
and all its decisions including those related to petroleum fields assigned to it
are decided externally. Such conditions would surely compromise the efficiency,
effectiveness and performance of INOC.
In the meantime,
and in addition to having been recently reinstated, the FOGL requires INOC to
compete with IOCs for petroleum fields outside its areas of operation. This in
all practicality is a camouflaged call for privatization of upstream petroleum.
Was this the main intention of the INOC law and FOGL? Only time will tell!
Notes
1.
However, at the time of writing this article, 9 May 2011, the draft of
the proposed INOC law is still on the list of “project laws” with serial
number 56, which implies the law has not been tabled for first reading.
Moreover, the INOC law is not listed on the laws that are under first reading
phase.
2.
For more information see, A
M Jiyad, ‘Iraqi Federal Oil and Gas Law Revisited’, Energy &
Geopolitical Risk, Vol 2, No1, January 2011.
3.
http://www.iraqoilreport.com/politics/oil-policy/qa-adnan-janabi-5591/?utm_source=rss
(accessed 13 April 2011).
4.
The ‘Negotiation Conditions of Kurdistan Region…’, Irbil, 21 August
2010, focused on two laws only: FOGL (draft dated 15 February 2007 and its
amendments dated 23 April 2008); and Federal Financial Revenues Law – known as
the Revenue Sharing Law (RSL – draft version dated 20 June 2007 and its
amendments dated 23 June 2008).
5.
See A M Jiyad articles and
presentations as follows: ‘Remarks on the Proposed INOC Law’, presented to
the MENA 2009 Oil and Gas Conference, Imperial College, University of London,
28-29 September 2009 (http://www.targetexploration.com/MENA09.pdf) and MEES,
5 October 2009; ‘Technical Assessment of the INOC Law’, Iraq
Oil Report (http://www.iraqoilreport.com/the-biz/technical-assessment-of-the-inoc-law-2121/);
‘The New Draft Law Takes Us Back to Square One’, Energy Intelligence (http://www.energyintel.com/n/portal/iraqs-second-oil-gas-bid-round.aspx).
6.
I am aware that very liberal and private interests are advocating that
INOC should not have a clear mandate for “the discovered not developed
fields.” Rather, they suggest, INOC should compete with others for these
fields in competitive biding rounds.
7.
In fact the Norwegian government adopted a strict strategy of
‘Norwegianization’ that worked well in favor of domestic nationals and firms
relative to foreigners, without compromising economic efficiency considerations.
For further information see UNCTAD, World investment Report 2007, page 170.
8.
For further analysis of FOGC see A M Jiyad, ‘Federal
Oil and Gas Council: Basic Issues for Consideration’, Iraq
Energy Institute, UK, 2009 (http://www.iraqenergy.org/).