A general introduction to oil and gas law in Iraqi Kurdistan

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Introduction

The Republic of Iraq, including the Kurdistan Region of Iraq (KRI), is a country vested with many easily exploitable oilfields. The exploration and production of oil in Iraq started as early as the 1920s. The Iraqi oil sector was fully nationalised by the central Iraqi government in 1975.

The Kurdistan Region Ministry of Natural Resources (MNR) estimates the KRI's reserves at 45 billion barrels of oil and at 25 trillion cubic feet (tcf) of proven gas reserves and up to 198 tcf of largely unproven gas. If the KRI were an independent country, the amount of oil and gas reserves would place it among the top 10 oil-rich countries in the world. However, the region is still an integral part of the Republic of Iraq even though it enjoys semi-autonomy. According to the MNR report, the KRI's total exported and consumed oil for Q1 2022 stood at 39,088,710 barrels, down from 40,512,784 barrels in Q3 2021.

Up until the coming into force of the current Iraqi Constitution of Iraq in 2006, the KRI played no active role in the development or utilisation of the substantial oil and gas reserves in the KRI. Since then, the Kurdistan regional government (KRG) enacted the Kurdistan Oil and Gas Law No. 22/2007 (KOGL) and concluded more than 50 production-sharing contracts (PSCs) with international oil companies (IOCs). Initially, the contracting partners were minor oil companies such as Gulf Keystone, Genel and Western Zagros. Gulf Keystone discovered the giant Shaikhan field with 14 billion barrels of oil in place (subsequently adjusted downwards). It was one of the world's largest onshore discoveries in more than 20 years. In 2012, ExxonMobil pioneered as the first major IOC, followed by Chevron, Total and Gazprom.

Given certain constitutional ambiguities regarding the management of oil and gas in Iraq, the KRG and the central government in Baghdad are constantly at odds over the authority to administer and dispose of oil being produced in the KRI. In the course of these quarrels, the central government has repeatedly withheld the payments of federal budget portions allocated to the KRI. In turn, the KRG continued and expanded its independent oil exports, which have continued to thrive, with several producing fields, including Taq Taq, Tawke, Peshkabir and Atrush under its control.

To date, Baghdad and the KRI remain at odds over the regions' oil reserves and the rights of the KRI to export crude oil independently of Baghdad's Ministry of Oil (MoO) and SOMO, the Iraqi oil marketing organisation. In February 2022, the Iraqi Federal Supreme Court (FSC) issued a decision in a claim filed by the MoO from 2012 deeming the KOGL unconstitutional for violating Articles 110, 112, 115, 121 and 130 of the Iraqi Constitution of 2005 (FSC Decision). The FSC Decision did not in and of itself annul the PSCs entered into by the KRG but did provide that the Ministry of Oil may pursue the annulment of such PSCs.

The KRI has publicly challenged the FSC Decision and the competency of the FSC itself on the basis that the FSC is not properly constituted or regulated by a law enacted by a two-thirds majority as required by the Constitution of Iraq. Although the argument that the FSC as currently constituted and regulated is not constitutional is not unfounded, there is no higher court in Iraq to decide on the matter. To date, the KRG has refused to give effect to the FSC Decision and continues its independent oil and gas operations under the KOGL.

In the absence of a legal means to force the KRI to comply with the FSC Decision and hand over oil and gas operations to the MoO, the MoO has taken various measures to pressure the KRG including commencing legal proceedings against nine IOCs operating in the KRI, renewing a blacklisting policy for oil service companies that operate in both the KRI and central Iraq, threatening such oil service companies with blacklisting in central Iraq if they do not cease operations in the KRI, and it is foreseeable that budget allocations for the KRI under the federal budget law will also be impacted.

Legal and regulatory framework

Iraq's legal framework for the petroleum industry is quite ambiguous. Pursuant to the Iraqi Constitution, 'oil and gas are owned by all the people of Iraq in all the regions and governorates'.² However, the exploration and production of oil and gas are not governed by the Iraqi Constitution. It only states that 'the central government, with the producing governorates and regional governments, shall undertake the management of oil and gas extracted from present fields, provided that it distributes its revenues in a fair manner in proportion to the population distribution in all parts of the country . . . and this shall be regulated by a law'.³

The Iraqi Constitution only refers to 'present fields' where the management of present fields falls under the shared jurisdiction, while the management of other oil and gas resources that are not 'present fields' are not expressly addressed in the Constitution. Nonetheless, the term 'present fields' does not reflect common concepts of the oil industry such as 'proven – probable – possible', 'developed – undeveloped' or 'producing – non-producing'. That said, the KRG maintains that present fields within the meaning of the Iraqi Constitution refers only to the oil and gas fields that were producing at the time of enactment of the Iraqi Constitution in 2005. All other oil and gas resources (i.e., fields not producing or even not discovered in 2005) are not encompassed. The KRG takes the position that non-producing fields (as of August 2005) do not fall within the shared jurisdiction of the central government and the KRG, and, therefore, the KRG has exclusive jurisdiction over such fields. Hence, the KRG regards itself as the competent authority to regulate all oil and gas resources in the Kurdistan region other than 'present fields'. The central government in Baghdad rebuts this interpretation of the Iraqi Constitution and believes that the KRG lacks the requisite constitutional authority to sign contracts with foreign oil companies, which it deems illegal.

Pursuant to Article 112(1) of the Constitution, the foregoing varying interpretations should have been regulated by a law creating a comprehensive and fair framework for the management of the Iraqi oil and gas sector, including the rights and competencies of the governorates and regions to have an active role in the management and a share of the revenues. For years, the KRG and the central government failed to agree on a unified federal oil and gas law in implementation of the Iraqi Constitution. Finally, in 2018, a new Iraqi National Oil Company Law No. 4/2018 (the INOC Law) was passed by the Iraqi parliament and came into force in April 2018. While the INOC Law contains some provisions that appear to implement some of the requirements of the Constitution and to liberate the oil and gas sector, the INOC Law is far from a federal oil and gas law as envisioned by the Constitution as it does not address in any detail the management and cooperation between the central government and the KRG with respect to oil and gas from present or future fields. The INOC Law was immediately challenged on the basis of the constitutionality of some of its provisions. In January 2019, the Federal Supreme Court found that a number of the INOC Law provisions were unconstitutional, effectively rendering the INOC Law impossible to implement without first amending or replacing the unconstitutional Articles, which has not happened to date. An amendment of the INOC law remains under review by Parliament.

In the continuing absence of a comprehensive federal oil and gas law, in 2022 the FSC issued the FSC Decision and the MoO commenced proceedings to annul the KRI PSCs.

The Iraqi Constitution gives the regions the right to legislate on any matters that do not fall within the exclusive jurisdiction of the central government⁴ and, pursuant to the Kurdistan National Council (the predecessor to the current Kurdistan parliament) Decision No. 11/1992, federal laws passed after 1992 are not applicable in the KRI unless specifically adopted pursuant to a KRI law. The Constitution further provides that where a conflict exists between a federal law and a regional law, the regional law shall prevail.⁵

Premised on the foregoing, in 2007 the KRI legislator passed the KOGL. The KOGL applies to all petroleum operations in the KRI. According to the KOGL, no federal legislation and no agreement, contract, memorandum of understanding or other federal instrument that relates to petroleum operations applies in the KRI except with the express agreement of the relevant authority of the KRG.⁶ Hence, the federal Iraqi legislation and regulations with respect to petroleum operations are not applied in the KRI.

In April 2013, the KRI adopted the 'Law of Identifying and Obtaining Financial Dues to the Kurdistan Region – Iraq from Federal Revenue' (the Financial Rights Law). The Financial Rights Law grants the KRG the right to independently export crude oil produced in the KRI if the central government fails to pay the KRG its share of revenues (including oil revenues), budget items, other national allocations and reparations.

The regulatory agencies competent for overseeing upstream oil and gas activities in the Kurdistan region are:

1. the Iraqi Kurdistan parliament: the Kurdistan parliament is the legislative body of the KRI and passes its laws;
2. the KRG: the KRG governs the KRI in accordance with the laws enacted by the Kurdistan parliament;
3. the Regional Council: the Regional Council consists of the Prime Minister, the Deputy Prime Minister, the Minister of Natural Resources, the Minister of Finance and Economy and the Planning Minister;⁷ it mainly formulates the general principles of petroleum policy, prospect planning and field development and approves petroleum contracts;⁸ and
4. the Ministry of Natural Resources of the Kurdistan Region: the MNR oversees and regulates all petroleum operations in the KRI⁹ and it negotiates and signs PSCs on behalf of the KRG jointly with the Prime Minister representing the Regional Council. The Minister of Natural Resources may license petroleum operations (i.e., activities including prospecting, exploration for, development, production, marketing, transportation, refining, storage, sale or export of petroleum; construction, installation or operation of any structures, facilities or installations for the transportation, refining, storage, and export of petroleum; or decommissioning or removal of any such structure, facility or installation)¹⁰ to third parties¹¹ after approval of the Regional Council for the Oil and Gas Affairs of the Kurdistan Region – Iraq (the Regional Council). The MNR shall encourage public and private sector investment in petroleum operations.¹²

Other agencies and ministries such as the Social Security Directorate, the Residency Directorate and the Ministry of Agriculture and Water and Irrigation have regulatory oversight for their areas of competence that fall within the activities of IOCs operating in the KRI.

Pursuant to the Iraqi Constitution, the central government in Baghdad has the sole authority to sign and ratify international treaties and agreements.¹³

Iraq has signed several bilateral investment agreements; however, only a very limited few have entered into force – France, Japan and Kuwait – all others are pending ratification by the Iraqi Council of Representatives.

In addition, Iraq has entered into bilateral free trade agreements with Algeria, Egypt, Jordan, Lebanon, Oman, Qatar, Sudan, Syria, Tunisia, the United Arab Emirates and Yemen.

On 11 July 2005, Iraq and the United States penned a Trade and Investment Framework Agreement. The Iraqi government ratified the agreement in December 2012. The aim of this agreement is to promote and facilitate investment and trade between the two countries. At present, the United States does not have a bilateral investment treaty with Iraq.

With regard to judicial cooperation and dispute resolution, Iraq, including the KRI, is a signatory state of the Riyadh Arab Agreement for Judicial Cooperation of 1983 (the Riyadh Convention). According to the Riyadh Convention, each contracting party shall recognise the judgments made by the courts of any other contracting party in civil cases having the force of res judicata and shall enforce them in its territory.¹⁴ Nonetheless, judgments made against the government or against any of its employees in respect of acts undertaken in the course of duty or exclusively on account thereof are exempted.¹⁵ The same applies to awards of arbitrators.¹⁶

The ICSID Convention entered into force in Iraq on 17 December 2015.

The Iraqi Cabinet in 2018 voted to approve Iraq's accession to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (NY Convention). However, Iraq's accession to the NY Convention only came into force for Iraq when the Iraqi Parliament officially passed the Iraqi Law on Ratifying the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, which was published in the Official Gazette on 31 May 2021. According to the ratification law, the NY Convention will not apply in Iraq retroactively to awards issued prior to its coming into force, will only apply with regards to other member states on the basis of reciprocity and will only apply to awards issued in commercial matters.