An extract from The Oil and Gas Law Review - 7th edition

Licensing

To date, the KRG has signed more than 50 PSCs with IOCs. Not only did the region until very recently offer security and stability (and remarkably continues to, post ISIS and the subsequent economic crisis), the terms and conditions of the PSCs are more favourable to private investors than the technical services contracts (TSCs) and development and production services contracts (DPSCs) signed by the Federal Iraqi Ministry of Oil.

The MNR has the discretion over whether to invite applicants for licensing or to award licences based on direct negotiation. In all cases, an applicant or invitee must demonstrate technical and financial capability. It also needs to have a record of compliance with the principles of good corporate citizenship, and a commitment to the Ten Principles of the United Nations Global Compact.

Key features of the PSC are to be negotiated with the MNR based on the Model PSC published by the KRG, which includes that:

  1. a signature bonus and a capacity-building bonus are payable by the contractor once the PSC becomes effective;
  2. the KRG has the right to participate in the PSC through one of its public companies with a stake of up to 25 per cent after commercial discovery. The contracting partner is usually a consortium consisting of an IOC and a carried Kurdish national company with an undivided interest of between 20 and 25 per cent in the PSC. The Kurdish public company may, at its discretion, assign part or all of its government interest to a third party;
  3. the term of the PSC varies in accordance with advancement. The exploration period lasts for five years (comprising an initial sub-period of three years and a second sub-period of two years) and may be extended for a further two years. Upon commercial discovery, the development period extends to 20 years with two possible extension periods of five years each;
  4. preference is to be given by the IOC to local employment, subcontractors and materials;
  5. capacity building of local employment including training, funding, education and secondment of government employees is required. All reasonable training costs for Iraqi personnel are recoverable petroleum costs;
  6. during the exploration period, an annual surface rent of US$10 per square kilometre is payable. However, this exploration rental is, as it constitutes petroleum costs, recoverable. Twenty-five per cent of the initial contract area, excluding production areas, shall be relinquished at the end of the initial term next to an additional 25 per cent of the remaining contract area, excluding production areas, at the end of each extension period;
  7. in the event of a commercial discovery, a production bonus is payable in addition to a recurring royalty (i.e., a portion of petroleum produced). Usually, the royalty rate for export crude oil and natural gas is set at 10 per cent;
  8. once commercial production commences, the contractor is entitled to recover all petroleum costs (e.g., production costs, exploration costs, development costs and decommissioning costs) incurred from the hydrocarbons produced. The remaining 'profit petroleum' is split between the KRG (through its public company) and the contractor pursuant to the quotas stipulated in the PSC; and
  9. during the exploration period, the contractor may terminate the PSC at the end of each contract year. Once the development period has been entered into, the contractor has the right to terminate the PSC at any time.

Unlike the TSCs and DPSCs offered by the central Iraqi Ministry of Oil, the PSC provides the contractor with a share in the petroleum discovered and, therefore, an interest in the value of the petroleum produced. PSCs concluded by the KRG have not been approved by the central Iraqi Ministry of Oil and are disputed by the central government in Baghdad.

Production restrictions

At present, the MNR does not impose any restrictions on the exploration, development and production of hydrocarbons (cost and profit oil) in the KRI. As per the PSC, the contractor shall be entitled to receive and export freely any available petroleum (cost and profit oil) to which it is entitled under the agreement.

Through the PSC, the KRG reserves oil for local markets. Upon written request of the MNR, any amounts of crude oil produced that the KRG deems necessary to meet the KRI's internal consumption requirements must be sold and transferred to the KRG at the international market price. All contractors active in the KRI must be treated equally in this regard.

With the Financial Rights Law (mentioned in Section II), the KRI lawmaker has again confirmed the right to export crude oil independently of the central government if and to the extent the latter fails to pay the KRG its share of oil revenues and exploration costs.

The central government in Baghdad strongly objects to all such efforts by the KRI to explore and produce crude oil independently of the Federal Ministry of Oil in Baghdad.

Moreover, there are still severe practical limitations on the export of oil produced in the KRI. Although the pipeline capacity has been greatly increased and should nominally be sufficient to transport the current production output, a steady flow of export oil is not guaranteed, as the pipelines are often subject to sabotage or illegal drainage.