Monday, February 19, 2007

Iraqi Oil Law (and the Constitution)

Below are the comments of an Iraqi oil & gas expert in London to a group of Iraqi technocrats who met in Amman on Saturday to discuss the draft oil law.


I am writing to you with regard to the latest Iraqi draft oil law. I have a few simple comments, which I will mention later. However, I am really surprised why this hurry in making this law. Is it because Iraq now is in peace and international oil companies (IOCs) are flocking in droves to Iraq to share in the development and production of Iraq's huge reserves? Not at all. Violence in Iraq is worse than ever, and I really do not believe that force alone (i.e the latest Maliki/Bush security plan) will solve the problem unless it is coupled with a sincere political plan to negotiate, compromise and positively respond to any legitimate demands the insurgents have. I am, however, pessimistic about any political solution being undertaken now because, simply, those in power are driven by religious/sectarian beliefs and, by definition, cannot compromise. In the absence of a political solution, therefore, the ongoing bloodshed and strife will continue in Baghdad and elsewhere in Iraq, and the IOCs will not come to Iraq any time soon because they are not prepared to risk the lives of their personnel under such conditions.

Then is it that the Iraqi government is under pressure from the American administration and have to hurry up with this law? Maybe so. Perhaps one can infer this from the attachment (US Congress.doc) where Condoleezza Rice was being grilled by US senators on the delay of the Iraqi oil law, as if everything in Iraq is now just fine, and the only obstacle that is standing in the way of Iraq's reconstruction is absence of the oil law!

Although the Iraqi government is pushing for this law to be written and ratified quickly, I do not think this is the Iraqi people's priority right now. If we put the violence and political issues aside, it is the Iraqi constitution which we really should care about, given that it should be amended by May this year. As it stands now, the Iraqi constitution is a big disappointment. It divides and does not unite. It is gravely biased towards the regions and provinces to the detriment of the federal government. As a social contract it is not legitimate (in my view) since it was rejected by the Sunni Arabs and by a good portion of the Shi'a Arabs, and even those supposedly majority Shi'a Arabs who said yes to it, their choice was not made under full comprehension of the constitution's content. This is, indeed, true! People who are with no basic services, hungry, unemployed, living under extreme fear of being kidnapped or killed, misguided by their leaders and misinformed by the media, cannot make a free choice. And, as if this was not enough, the party leaders, especially the Shiites and the Kurds, reciprocated, behind closed doors, convenient changes in the constitution's articles, and that was in itself a betrayal to the whole Iraqi parliament and to the Iraqi people, whom they were supposed to represent.

Oh yes, we know what happened! For us, oil and gas people, we could realise with a single glance at the oil and gas articles, that something was seriously wrong. In addition to the pervasive vague language, the inexplicable bias towards the region and governorates, it is beyond belief to see that one of the articles allows the federal government to participate with the governments of the region and producing governorates in the oil and gas management of only the present fields (what is the definition of present fields?) to the exclusion of future fields!! What is the reason for this exclusion is beyond my comprehension, other than to leave Iraq's future oil and gas riches, which are, by the way, about twice the size of the presently proven reserves, to the custody of the self-interested region and weak and competing governorates, who could very easily be cornered and overcome by the IOCs. This is not withstanding CORRUPTION, which can play havoc with the Iraqi people's only remaining assets.

I am sorry to have taken so long to express my bitter feelings about the shortcomings of the Iraqi constitution. All I want to do here is to take the opportunity of your gathering in Jordan, and ask you, as Iraqi patriots and cultured men, to raise the people's awareness regarding the upcoming constitutional amendment, and to encourage the media and other Iraqi institutions, civil societies and organisations to loudly voice their opinions as to what articles they are not happy with and what amendments they propose, and put extreme pressure on the Iraqi parliament to come up with the desired constitutional amendments. We have a successful example now before us when the liberal media (especially the western media) have recently imposed pressure on the Iraqi government and the American administration concerning the proposed oil and gas law. One last thing I should mention, and that is the oil and gas law, which you are working on, should be constitutional, i.e. in compliance with the constitution, and it would be difficult to write such law if the amended constitution in its final shape is not yet known and properly understood.

Comments on the oil and gas law:

1. In Article 4 (Definitions), No. 19 (p.7) Oil Operations: All activities concerning exploration, development, production, etc.
The first three activities mentioned seem to be in logical order as, in the case of a risk contract, a contractor starts with exploration, and in case of a commercial discovery the next step would be development and then production. But this sequence (or the proper part of it) does not seem to have been followed in the text of the law. For example, in Article 9 (Licensing), oil operations' licences are given on basis of exploration and production contract(EPC). In this case why development was skipped, shouldn't this contract be called exploration, development and production contract (EDPC)? Also, shouldn't the contract mentioned in Article 12B, first line, (P.17) be called development and production contract (DPC) since the field is already
discovered and no exploration is involved? In a nutshell, when there is exploration involved it is (EDPC) and when no exploration involved it is (DPC).
Of course when only service is involved, then it is none of the above, as it is a service contract.

2. In Article 9, a model contract should make it possible for the Iraqi National Oil Company (INOC) to partner with the potential contractor in a joint-venture or have a working interest with the contractor the percentage share of which would be decided, in each case, by INOC.

3. As you all know, the PSA has been subjected to severe attacks by some media and NGOs, and was discredited, among others, in the eyes Iraqi oil workers (see haasan Juma'a attachment). Indeed the name of a contract is immaterial since it is the contract terms which govern the contract, as you can have a PSA with contract terms highly favourable to the host country and gives little to the contractor and, on the other hand, you can have a service contract with terms and conditions that squeezes the host country and in the meantime highly favourable to the contractor. So the name is not the issue, as you do not judge a book by its cover but by its content. Since the contracts DPC and EDPC are similar to PSAs in content, I suggest that in the model agreement no specific percentage of profit oil to the contractor is allowed, and his remuneration after recovering the cost would be an acceptable rate of return on investment plus reasonable incentives if he fulfils certain conditions.

4. Since it does not make a difference for Iraq to pay in cash or oil at the market rate, it may make a difference for the contractor to receive his cost and remuneration in oil, and he should be allowed to do that.

5. The contractor prefers the oil he receives to be bookable. Booking means that the estimate of his cost and remuneration he is going to receive in oil can be presented to the United States Security and Exchange Commission (SEC) as his own reserves. This helps the standing of the company in the market but, to the best of my knowledge, this is only an accounting procedure between the contractor and the SEC, and booking, as such, will not create for the contractor any ownership rights on the Iraqi reserves. However, to be on the safe side, and in case of booking, a perfectly legal language should be incorporated in the contract to the effect that booking will not in any way, shape or form, give title or create for the contractor ownership rights on the reserves underground. We should give incentives to the contractor as long as there is no cost to Iraq. The same applies to 4. above.

6. Article 35B requires that records, etc. should be kept in the two languages (Arabic and English). The model contract should, nevertheless, mention which language to be considered in court in case of a difference in interpretation.

7. The model contract should mention that corruption (such as bribing Iraqi employees, etc.) is a criminal act and will be subject to prosecution under Iraqi law.

Gentlemen, these are all I can mention so far since, I am sure, you will enrich the law with more and far better suggestions. I wish you success and all the best in your endeavours.

-With my best personal regards,

Muhammad-Ali Zainy
Centre for Global Energy Studies, London

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