Introduction

Recent political events in Iraq have focused the attention of Iraqis and international investors alike. Although Iraq opened its upstream industry to international investment, it has done so without the benefit of a federal oil and gas law. This important omission has weighed heavily on everyday Iraqis, concerned with the direction of this critical industry; politicians and constitutional scholars, concerned with legality and protecting and distributing national wealth; and the international petroleum industry, concerned with the sanctity of their investments. With the competing and conflicting proposals for the federal oil and gas law, the certainty and clarity that these stakeholders hoped for remains elusive.

The competing proposals for the federal oil and gas law originate from the political compromises that led to the conclusion of the Iraqi Constitution in 2005 and the formation of the coalition Federal Government in 2010. Often certainty was the necessary and willing victim of much-needed consensus building.

Competing Proposals

The first proposed oil and gas law (the “Legislature’s Proposed Law”) was proposed by the House of Representatives (the parliament or legislative branch) on 17 August 2011 and was championed by Adnan Al Janabi of the Al Iraqiya Party. Mr. Al Janabi also chairs the Oil and Energy Committee, a committee formed to share political power when the Al Iraqiya Party’s candidate for prime minister, Ayad Allawi, withdrew his bid for such a role despite winning more seats in Parliament than any other party.

When the Legislature’s Proposed Law was read in the parliament, many members who support Prime Minister Nouri al-Maliki walked out, creating a quorum issue. A number of reasons for this have been cited, but politics were likely the main driver.

The second proposed oil and gas law (the “Executive’s Proposed Law”) was proposed by the Council of Ministers (the cabinet or executive branch) based on the recommendations of the Ministry of Oil on 28 August 2011. It is supported by Prime Minister Nouri al-Maliki, Deputy Prime Minister for Energy (a new post in 2010) Hussein al-Shahristani, Minister of Oil Abdul Karim al-Luaibi and others.

The Kurdistan Regional Government and Kurdish parliamentarians have criticized the Executive’s Proposed Law for a number of specific reasons, but the primary motivation is the potential impact on the economic interests of the Kurdistan Region.

Each proposed law represents a change from the draft oil and gas law that had been largely agreed upon by the Federal Government and the Kurdistan Regional Government in February 2007. Each faction claims their proposed law is paramount and the other is invalid and should be withdrawn.

Interestingly, in July 2010, at the request of Prime Minister al-Maliki, the Iraq High Court handed down a decision that, pursuant to Article 20 of the Constitution, only the Council of Ministers could “draft” a law and that the Parliament’s authority was restricted to “proposing” laws (as a precursor to the executive “drafting” a law).

Legislature’s Proposed Law

A draft of the Legislature’s Proposed Law (in Arabic only) has been circulated. Although it is not certain that this version of the oil and gas law will be enacted, in this or any amended form, we believe an analysis of the key terms of this draft will provide useful insight into one side of the debate. As the Executive’s Proposed Law and further iterations of both proposed laws become available we plan to provide further updates.

Industry Reorganization

The Legislature’s Proposed Law contemplates a substantial reorganization of the state organs in the oil and gas industry, with a fairly substantial loss of power by the Ministry of Oil, the Council of Ministers and the Parliament itself. Some have criticized this reorganization as being unconstitutional.

Currently the state organs include the Council of Ministers (executive), the Ministry of Oil (policy maker, regulator and de facto national oil company), the Deputy Prime Minister for Energy (executive), the Oil and Energy Committee (advisory) and the Parliament. The proposed system would create several new entities: the Iraq National Oil Company (which would take the national oil company role away from the Ministry of Oil), the Federal Oil and Gas Council, or FOGC (which would take powers away from the Ministry of Oil, the Council of Ministers and the Parliament), the Bureau of Independent Advisors, or BIA (which would advise the FOGC), and a review committee consisting of the Minister of Oil, the Minister of Oil of the Kurdistan Region and the Chairman of the Oil and Energy Committee.

It is difficult to see how the addition of these new state organs will help to streamline decision making or clarify where authority lies.

Approval of Contracts

Under the Legislature’s Proposed Law, the FOGC will have wide-ranging authority, including the power to review and approve all new petroleum contracts in the Federal Region and the Kurdistan Region, and making key decisions on the issuance of oil and gas contracts under bid rounds and otherwise, including preparing model contracts. It is not surprising that the Ministry of Oil takes issue with this proposed erosion of its authority and powers.

Article 18 also specifies that the BIA will review all new petroleum contracts in the Federal Region and the Kurdistan Region in light of the FOGC approved model form, note key differences and make recommendations with respect to the approval or amendment of those contracts to the FOGC. There has been criticism that the proposed law does not require that the members of the BIA be Iraqi nationals, and there appears to be great concern over foreign influence in the process.

Existing petroleum contracts in the Federal Region and the Kurdistan Region are to be reviewed and, if accepted, approved by a committee composed of the Minister of Oil, the Minister of Oil of the Kurdistan Region and the Chairman of the Oil and Energy Committee. Given the historic disagreements among these personalities, this may be a challenging mandate. If these three representatives fail to reach consensus on a petroleum contract, then the contract will be referred to the leaders of the three major political parties - also a challenging mandate. This could be a recipe for continuing deadlock and uncertainty.

Kurdistan Region

Article 14 of the Legislature’s Proposed Law may have been designed to garner political support from the Kurdistan Regional Government and the Kurdish parliamentarians. Under this Article special regional authorities are empowered to hold bid rounds. The FOGC is to be represented at these bids rounds through a single member of the BIA. Again there is concern that the members of the BIA are not required to be Iraqi nationals.

The Legislature’s Proposed Law also seems to contemplate that a production sharing contract is a legitimate form of petroleum contract. This goes further than recent indications that the Federal Government was easing its position on the outright illegality of production sharing contracts (as opposed to the illegality of the production sharing contracts already issued by the Kurdistan Regional Government) based on the distinction between an exploration block (as is found in the Kurdistan Region) and a development block (as was the predominant subject of the Federal bid rounds).

Conclusion

While many had hoped the submission of a draft oil and gas law would be the first step in creating certainty over the Iraqi petroleum industry, few would have predicted the current circumstances. The competing draft laws have done little to stabilize the political and legal situation and it appears, now perhaps more than ever, that a grand political compromise will be required to solve the host of issues that face Iraq’s petroleum industry. Stakeholders can only hope that such a compromise will offer more clarity and certainty than past efforts - if it does not, history may be doomed to repeat itself and there may be further debates over the ambiguities that compromise could require.

Epilogue

The competing drafts of the oil and gas law seem to have done little to dampen investors’ enthusiasm for the upcoming fourth Iraqi bid round.