Brief
Review of the Federal Oil and Gas Law Proposed by the Ministry of Oil.
Ahmed
Mousa Jiyad,
Iraq/
Development Consultancy and Research,
Norway.
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.
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. These are elaborated in details in the
second part of this review, but summarized as follows:
- Balance between the roles of legislative and executive branches of government pertaining to mid and upstream petroleum sub-sectors.
-
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.
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 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.
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.
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
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:
I- Decisions on such policies are among the functions of Council of Minister-CoM in the area of development plans.
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. 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.
Article
10: the Bureau of Independent Advisors-BIAs
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. This has to be removed and the entire sub-para
drafted properly.
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.
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. This is because it is expected that INOC itself
would receive all petroleum fields from the IOCs when their contracts had
expired.
Article
22:
1-
A clear
distinction between the “Specialized Commission” and the State Contracting
Party should be made since this article implies obligations for both.
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.