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 Debate continues on the legality of Kurdistan's petroleum contracts

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Debate continues on the legality of Kurdistan's petroleum contracts  8.6.2011  
By Thomas W Donovan, International Law office  









June 8, 2011

Introduction
'Present field' v 'future field' distinction
Federalist debate
Kurdish petroleum law
Comment

Introduction

Several recent events have prompted a return to the lingering debate over the legality of the production sharing contracts entered into by and                     

Thomas W Donovan, lawyer. International Law office
between the semi-autonomous Kurdistan Regional Government (KRG) and around 35 private international companies over the past few years. The KRG, through its own Ministry of Natural Resources, is adamant that the signing and negotiation of contracts for any 'new' petroleum developments (ie, those taking place under the 2005 Iraqi Constitution) remains its sole responsibility, and not that of the federal Iraqi government.

The current federal government in Baghdad, under the new minister of oil, Abdul Karim Al Luabi, has signalled a significant departure from previous policy, which was insistent that all petroleum policy be derived and managed by the federal Iraqi Ministry of Oil. Since assuming power in the new Iraqi government on December 21 2010, Al Luabi has made public statements confirming the legality of the production sharing contracts under Iraqi law, allowed Kurdish petroleum to be exported through Iraqi national pipelines and remitted payment to international oil companies operating in Kurdish fields under the contracts.

Many commentators have argued that Al Luabi's recent acts are conciliatory in nature and a realisation of the authorities that numerous international oil companies are already operating in Kurdistan despite Baghdad's attempts to derail the process. Other commentators assert that provoking the Kurdish bloc with a significant legal dispute will lead to further domestic political instability and increased calls for independence by the KRG.

Notwithstanding these considerations, the debate over the legality of the Kurdish production sharing contracts is grounded in an analysis of the division between federal and regional authorities in Iraq. The division is apparent in the notions underlying both the 2005 Iraqi Constitution and Iraqi law as applicable in the Kurdistan region. Previous pronouncements by the Ministry of Oil in Baghdad to the effect that the majority of the contracts were illegal or unconstitutional under Iraqi law appear difficult to support under close scrutiny. Instead, there appears at least a modicum of justification to the position that the future development and application of petroleum policy in Kurdistan remains under the sole jurisdiction of the KRG.

'Present field' v 'future field' distinction

The constitution allocates any power that is not reserved exclusively for the federal government to the regional or governorate governments and gives priority to regional or governorate laws where there are disputes over power-sharing.(1) Federalist notions were enshrined to the effect that no law may be enacted that contradicts the Iraqi Constitution or a part of any regional constitution, or any other legal text that contradicts the Iraqi Constitution.

In examining the language of the Constitution, a clear distinction is made between 'present fields' (which are to be jointly managed between the federal government and the semi-autonomous regions) and 'future fields' (for which the authority to manage is omitted from the constitution). Based upon the federalist notions within the same Constitution,
www.ekurd.netif the power is not specifically reserved for the federal government, then the authorised semi-autonomous regions may exercise jurisdiction. Petroleum activities are not among the list of powers reserved exclusively to the federal government of Iraq under the Constitution and may therefore be governed by the KRG. The following table outlines the division of powers between the 'regional powers' (elucidated in the 2005 Constitution as a 'regional power' or a 'shared power', which is today applied to the KRG).
 
Exclusive powers of the federal government Shared powers Regional powers
No exclusive authority in relation to petroleum (under Article 110 of the federal Constitution) Petroleum extracted from present fields and strategic policies for petroleum development (under Article 112 of the federal Constitution) Anything not listed as an exclusive authority in Article 110 of the federal Constitution

Federalist debate

Article 110 of the Constitution contains the list of powers reserved exclusively for the federal government in Baghdad, and this list does not include petroleum activities. Article 112 establishes shared jurisdiction in certain petroleum matters by requiring that the federal government and the relevant region jointly manage extracted petroleum from 'present fields' and formulate strategic policies for petroleum development. Article 115 allocates any power which is not reserved exclusively for the federal government to the regional or governorate governments, and gives priority to regional or governorate laws where there are jurisdictional disputes over power-sharing.

Article 121 (Paragraphs 1 and 2) reinforces the division of powers, as follows:

"The regional powers shall have the right to exercise executive, legislative, and judicial powers in accordance with this Constitution, except for those authorities stipulated in the exclusive authorities of the federal government (Article 121 Paragraph 1); and,

In case of contradiction between regional and national legislation in respect to a matter outside the exclusive authority of the federal government, the regional power shall have the right to amend the application of the national legislation within that region (Article 121 Paragraph 2)."

Given the distinction in Article 112 between 'present fields' and 'other fields', the division of powers in Articles 110 and 115 and the primacy of regional power in Article 121, the legitimacy in asserting control over undiscovered fields located within the Kurdistan Region appears to lie with the KRG, rather than the federal government.

Kurdish petroleum law

Looking to capitalise on this reading of the Iraqi Constitution, the KRG passed the Oil and Gas Law of the Kurdistan Region Iraq (22/2007). In Article 1 (Definitions), 'current field' and 'future field' are defined as follows:

"Current Field: a Petroleum Field that has been in Commercial Production prior to 15 August 2005;

Future Field: a Petroleum Field that was not in Commercial Production prior to 15 August 2005, and any other Petroleum Field that may have been, or may be, discovered as a result of subsequent exploration."(2)

To further legitimise the claims of the KRG, Article 2 of the same law states:

"Second: Pursuant to Article 115 and paragraphs (1) and (2) of Article 121 of the Federal Constitution, no federal legislation, and no agreement, contract, memorandum of understanding or other federal instrument that relates to Petroleum Operations shall have application except with the express agreement of the relevant authority of the Region."

As the 2005 Constitution does not specifically reserve the power to issue an oil law as an exclusively federal power, the Kurdistan Oil Law may be seen as valid and has not been challenged legally.

Comment

The definition of the term 'present' in Article 112(1) is the main focus of the argument that the Kurds will present to justify control over the region's oil. As the federal government may expressly assert management over only the 'present' oil fields (the word not being defined in the 2005 Constitution), and no mention is made of 'future' oil fields, Article 115 reserves all other powers to the regions. This would appear to open the door for Kurdish control over resources which do not fall under the definition of 'present fields'. This argument is bolstered on a plain reading of Article 121 of the Constitution, which empowers regions to override federal legislation that touches on areas which are outside of the exclusive authority of Baghdad.

For further information on this topic please contact Thomas W Donovan at Iraq Law Alliance PLLC by telephone (+964 7 901 919 425), fax (+20 2 760 4593) or email (thomas.donovan@iqilaw.com).

Endnotes
(1) Article 110, 112 and 115 of the 2005 Constitution.
(2) Oil and Gas Law of the Kurdistan Region Iraq (22/2007), Articles 1(16) to (17)).

- Thomas W. Donovan works in the Baghdad and Erbil, Kurdistan offices of the Iraq Law Alliance. His experience centers around structured & project finance and international investment in Iraq. He has a broad range of expertise including corporate governance in various Middle East jurisdictions including counseling corporations and specifically international oil companies in the establishment and their on-going foreign operations. Tom has also been involved in international dispute resolution proceedings in Iraq, Kurdistan, and other jurisdictions in the Arab Middle East, working in the procurement and enforcement of international arbitration awards.  

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