Brief Review of the Federal Oil and Gas Law Proposed by the Ministry of Oil.
Ahmed Mousa Jiyad,
Iraq/ Development Consultancy and Research,
Norway.
29 August 2011
Introduction
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.
Part one: Main Conclusions
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.
Part Two: Articles Review
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”.