One of the fascinating aspects of working in the oil and gas industry is its political context. Take Iraq, a country in which we are doing an increasing amount of work. Iraq could fairly be described as one of the most vibrant and, at the same time, the most legally unstable, hydrocarbon jurisdictions in the world today. Just consider that:
o More than a dozen hydrocarbon contracts have been awarded by the Federal Government since 2009 to a diversity of international oil companies but the adequacy of the legal basis of these contracts has not yet been finally settled;
o The Kurdistan Regional Government (KRG) has also granted more than 40 contracts but these KRG contracts have not been approved by the Federal Government and are considered illegal by the latter;
o An additional Federal licensing round for 12 new blocks is in the pipeline with more than 40 IOCs having been shortlisted to bid;
o And, last but not least, several drafts of a Federal Hydrocarbon Law have been put forward since 2007 by the Iraqi Parliament and the Federal Government but none of the drafts have been passed into law.
This column gives a brief overview of some of the recent developments relevant to international oil companies (IOCs) and service companies with an interest in Iraq.
Iraq’s 4th Licensing Round
Competition for the new hydrocarbon exploration blocks in Iraq has been pending for some time after the announcement of the 4th licensing round in 2011.
Originally scheduled to take place in November 2011 and postponed at least twice since, it is now not due to start before May 30.
The delay may have been initially due to requests by the Iraqi Parliament to postpone the licensing round until a new Hydrocarbon Law has been adopted, although it is known that the Government has rejected this request.
Other more relevant reasons for the delay may include uncertainty over the contract terms to be offered to IOCs.
In recent developments, it has been reported that based on the feedback received by the Ministry of Oil from industry players, the Ministry agreed to a number of amendments to the initial drafts of the model contract suggested for the 4th licensing round.
It is said that one of the major amendments include the possibility of 100% foreign interest in the project, thus no longer requiring IOCs to carry a state partner with 25% interest. The introduction of such major concession may have been made to balance other unfavourable terms such as the discretion given to the Ministry of Oil to defer development of oil fields for a period of up to seven years after commercial discovery.
It seems that Iraq is determined to continue to retain such discretion rights, possibly for wider strategic reasons connected with its national oil reserves. The draft model contract is expected to be ready next month in order for the Ministry to share it with bidders in April.
Should this round proceed as planned, a total of 12 blocks would be on offer including five with oil potential and seven with gas potential. It has recently been reported that 47 companies have been shortlisted (the latest being SK Innovation); however, this number may change, especially given the apparent intention of the Federal Government to ban companies such as Exxon Mobil from taking part in this licensing round as a result of contracts entered with the KRG.
Two new drafts for the Iraqi Hydrocarbon Law
IOCs will want to keep a close eye on the latest discussions around the proposed drafts of the Hydrocarbon Law. There are differences of view between the legislative and the executive branches and even at various levels within them.
The legal department of the Ministry of Oil proposed in July 2011 a draft of the Federal Oil and Gas Law that was approved in August 2011 by the Council of Ministers, and forwarded to the Iraqi Parliament for discussion. However, at the same time, the Iraqi Parliament was considering another draft law presented by the Parliament’s Oil and Energy Committee, which is reported to be substantially different from the draft proposed by the Government.
The enactment of the Hydrocarbon Law, or at least an initial agreement as to its general terms between the legislative and executive branches, would provide much-needed stability within the general Iraqi legal system – a system that seems to be in a continuous work-in-progress/pending mode.
First report of the Iraq Extractive Industries Transparency Initiative
In a move towards increasing transparency, the Iraqi Government made commitments in 2008 towards implementing the Extractive Industries Transparency Initiative (EITI). The EITI provides international standards for transparency in the oil, gas and mining industries, particularly for review, analysis and publication of revenue flows between extractive industry companies and governments.
Within the framework of this commitment, the Iraqi Government agreed to start publishing all the revenue from its export sales in the oil sector.
The first EITI reconciliation, in relation to 2009 cash inflows, was published in December 2011. The results showed that around $41billion of revenue was reported by Iraq’s State Oil Marketing Organisation to have been received from the 34 oil companies which bought Iraqi oil.
Initially, discrepancies of over $1billion were reported, however these were later justified and reconciled as a difference between cash and accrual methods of accounting.
Iraq is now due to be considered for “compliant” status under the EITI in August but no doubt there will be continued international pressure for it to work towards enhanced transparency in its oil and gas industry, both within the framework of the EITI initiative and beyond.
The oil industry has a long history of working in unstable regions of the world and in that sense the risks faced by operators and service companies in Iraq are nothing new – no doubt there will be pitfalls along the way but industry players will weigh those risks against the undoubted opportunities offered by the opening up of Iraq’s oil resources both for the international industry and for the people of Iraq.
Penelope Warne is head of energy at international law firm CMS Cameron-McKenna