Name: Tariq
Shafiq
Title & Organisation: Consultant,
Petrolog & Associates
Date
of hearing: 2.00pm,
Wednesday, 18 July, 2007
Name
of Committee: House Committee on
Foreign Affairs
Subcommittee
on Middle East &
Joint
hearing on “Reconstruction in
Running
on empty?”
Tariq Shafiq
July 2007
Contents Page
1.0 Introduction
2.0 The Draft Petroleum Law
2.1 The Ministry of Oil
2.2 The Iraq National Oil Company (INOC)
2.3 The Provincial Authorities
2.4
The Federal Petroleum Commission
2.5
The Petroleum Advisory Council
2.6 The Negotiations Committee
2.7 The Licensing Code
3.0 The Negotiations
4.0 Concluding Remarks
Iraq’s Petroleum Law Revisited
1.0 Introduction
Moreover, its finding and development
costs are low – amongst the lowest in the
The present era is characterised by the lack
of institutions, law and order, sectarian and ethnic divisions, and a dis-unified
government under the influence of armed militias, and ongoing warfare, leaving
the Iraqi people in desperation without security and basic life support systems.
Besides, there is no reason for new
discovery while there are already huge oil reserves in some 60 discovered but undeveloped
or produced fields, ready for immediate production capacity expansion or
development.
Planning oil field development and
production capacity growth is carried out on a composite master plan which
examines the capacity of all 80 discovered and producing fields distributed unevenly
throughout the country (including each and every multiple producing formations
within each field), from the technical and economic feasibility aspects and on
local and regional scales.
In the meantime, oil development should
take into consideration
Today,
A draft petroleum law has been written almost
a year ago by three Iraqi oil technocrats, including myself. Since then, negotiations
amongst the Government Ministerial Committee but mainly between the Kurdistan
Regional Government (KRG) and the Federal government, has been going. The KRG’s
initial position was tantamount to a confederate state and, in effect, is a status
in itself and by its implications that could encourage fast, unplanned,
uncontrolled devolution into federation based on sectarian and ethnic basis.
This will exacerbate damaging trends by inducing similar provincial moves among
the ‘haves’, and potential border disputes, with the ‘have-nots’ watching in envy.
The KRG had already published their own
draft petroleum law, based on a radically different interpretation of the
constitutional articles governing the oil and gas resources from that adopted
in the draft of the federal Ministry of Oil (MoO). The divergence in positions
was somewhat narrowed by December 2006, when the KRG declared that it was
prepared to “voluntarily” come to an interpretation which was more or less
close to the federal perspective, but not without two major concessions secured
in a January 2007 draft and again in the latest March 2007 draft in favour of
the KRG and the regions and at the expense of the country’s interests.
It must be emphasised here that the
initial MoO draft was strictly envisaged as a professional document without
margins for negotiation.
However, like the January 2007 draft
before it, the March 2007 draft was soon thereafter denounced by the KRG on the
basis that their government had not been party to examining the four
attachments, three of which allocate the discovered fields between Iraq
National Oil Company (INOC), the MoO and the regions, while the fourth defines
65 exploration blocks. Even today, 12 July 2007, there is no sign of a
successful outcome.
The Council of Ministers approved the
latest draft and passed it to the Parliament around 10 June 2007, after it had
been checked and linguistically corrected by the Shoura Council. This is
a legal unit whose function it is to ensure that laws are properly formatted
and in legal language consistent with the constitution.
The draft was passed to Parliament,
however, without the four attachments, in a conciliatory move to the KRG. The
KRG, however, maintained its objections, considering this latest revision as having
"unauthorized changes” made to it. This is how things stand today.
Action to reverse these damaging trends
ought to be all-embracing in nature, co-ordinated and united in approach,
having the welfare of the country and nation at heart above all considerations.
In fact a parliamentary committee has
already agreed on a new draft constitution. It has successfully amended the oil
and gas governing articles whereby the management of future exploration falls
in line with the management of the producing fields under the umbrella of the
federal government, in co-operation and jointly with the regional and
provincial governments. Placing the management of exploration under the auspices
of the Regions Governorates, not the Federal Government, posed serious problems
to efficient and unified plans and policy in the management of the oil and gas
resource as a whole.
The question to ask now is, if good will
exists: Shouldn’t the revised constitution be approved ahead of any petroleum
law, in order to avoid falling into the complications of having to be taken to
Arbitration for nullifying contracts which have resulted from the grants of
rights for exploration and development contracts on long-term basis (25-35
Years), based on a petroleum law which then becomes invalid?
2.0 The Draft Petroleum Law
The first draft law, written by Farouk
al-Kasim, Thamir Ghadhban and myself, aims at uniformity of plans and policy
throughout the country. It provides prior consultation with the provinces
(regions and governorates). Decisions taken at the centre involve provincial
participation. Supervision of oil and gas operations is shared between the
Provinces and the Ministry. The decision-making process has checks and balances
to enhance transparency and anticorruption practices. The overall objective is
to optimize the oil and gas exploitation, maximize the return and unite the
country. It has been based on the legal interpretation given above.
The draft law has defined the tasks,
principles and roles of each authority as outlined below.
2.1 The Ministry of Oil
The Ministry is the competent authority
for proposing Federal policy and legislation, as well as issuing regulations
and guidelines and undertaking the necessary monitoring, supervisory,
regulatory and administrative actions required to ensure the proper
implementation thereof at all times in consultation with the Regions and
Governorates. It is tasked with pre-qualifying candidate International Oil
Companies (IOCs) for bidding to compete over acquiring oil and gas explor
Undesirable changes in the latest
negotiated draft by the Ministerial Committee:
·
The Ministry’s functions to suggest plans and policy have been
duplicated by the Federal Oil and Gas Council, at its own initiative.
·
Regions are authorised to pre-qualify IOCs for bids in their
regions, approve IOCs development plans and appoint the oil and gas company Operator,
and to negotiate and initial finalised contracts.
2.2 The Iraq National Oil Company (INOC)
INOC is an independent, financially and
administratively, upstream holding company, fully owned by the government. It
is ear marked all discovered fields and operates through operating companies. INOC’s
operational activities in the provinces shall be carried out by affiliated
companies where the Provincial authorities have an option to participate up to
50% through ownership in the respective affiliates. INOC is permitted to team
with IOCs on service contracts to acquire management and technology.
Undesirable changes in the latest
negotiated draft by the Ministerial Committee:
·
Government officials and others from the Regions are designated to
hold board directorships in conflict with its true independence.
·
INOC is appointed as member of the Federal Oil and Gas Council
thereby playing both roles of a regulator and “regulated” body deciding on its own
projects in the Council.
·
While the producing fields have been allocated to INOC only 2/3 of
the discovered but partially developed fields are allocated to it in contradiction
to the terms of the constitution.
·
Furthermore 65 exploration blocks, housing the bulk of
This is a very divisive issue
which appears to have been planned under pressure from within and without.
2.3 The Provincial Authorities
Provincial authorities should propose to the Federal
authorities activities and plans for the Province to be included in the
country’s plan for Petroleum Operations. They shall further assist and
participate with the Federal authorities in discussions leading to the
finalisation of the Federal plan as required.
Provincial authorities should participate
as part of the Commission’s (changed to Federal Oil and Gas Council, the Council)
negotiation team in licensing preparations, evaluations and negotiations
regarding areas within the Province.
Provincial authorities should be represented in the
activities carried out by the Petroleum Commission (the Council) and Petroleum
Council (a think tank renamed Independent Consulting Bureau, the Bureau).
Undesirable changes in the latest
negotiated draft by the Ministerial Committee:
·
Regions are authorised to pre-qualify IOCs for bids in their
regions, approve IOCs development plans and appoint the oil and gas company
Operator, and to negotiate and initial finalised contracts.
·
The provincial authorities are appointed as members to the Federal
Oil and Gas Council, thereby would play both roles of a regulator and
“regulated” body deciding on their own projects.
2.4 The Federal Petroleum Commission (changed to the Federal Oil
and Gas Council)
It carries out and examines on behalf of
the Council of Ministers matters related to the approval of Petroleum plans and
policy which are prepared by the Ministry, and in granting Exploration and
Production rights.
It is chaired by the Prime Minister with
the secretariat of the Minister of Oil.
Undesirable changes in the latest
negotiated draft by the Ministerial Committee:
·
The Federal Petroleum Commission’s role has been
changed from a sole decision-making Council to include proposing its own plans
and policy, which is the Ministry of Oil task.
·
Its membership has been unreasonably increased to some
15-20 or even more in the future.
·
It has been politicised by the addition of ministers
and making its membership appointments subject to conforming to the sectarian
and ethnic division of the nation, and not necessarily based on the
qualifications and experience of managers who are skilled decision-makers.
·
The inclusion of INOC, the Regions and the producing Provinces
conflicts with the basic task of the Council as a decision-making body. On the one
hand, they propose plans and on the other, decide on them as members of the
Council.
·
Decisions requires a 2/3 majority instead of simple
1/2, which can be blocked by an influential Regional member managing 1/3
opposition.
·
There is duplication of authority between the Council,
the Ministry, Regions and Provinces, such as in pre-qualifying companies to bid
or approval of development plans, amongst other matters.
·
The checks and balances system is weakened leading to
potential malpractice.
2.5 The Petroleum Advisory Council (changed to the Independent
Consulting Bureau)
This examines and provides comments and
recommendations on overall Petroleum plans and strategic policy, licensing
contracts, overall Development policy, as well as key projects and any other
relevant matters referred to it by the Federal Petroleum Commission or the
Ministry. Members are appointed to 5 a year membership, tasked with all matters
referred to the Council and required to publish their annual report.
It consists of nine professionals, three of
whom are from the regions and governorates.
Undesirable changes in the latest
negotiated draft by the Ministerial Committee:
·
Members are appointed to a one-year term and their appointment by
the Council requires unanimity of all members.
·
They will be limited to advise only on matters passed to them by
the Council and not to all matters referred to the Council.
·
They will not be allowed to publish their annual report.
·
The checks and balances system is weakened leading to potential
malpractices and transparency obstructed.
2.6 The Negotiation Committee
This is an entity for planning and executing
the process leading to the allocation of Exploration and Production rights.
It consists of specially trained members
of the Ministry, INOC and related entities with appropriate skills and
experience. For specific negotiations, the Committee shall be supplemented by
representatives from the Region or the Governorate where the particular acreage
is located.
Undesirable changes in the latest
negotiated draft by the Ministerial Committee:
·
The committee is removed. Each of the Regions, INOC and the Ministry
negotiate their own contracts based on model contracts, in accordance with Council
set rules.
·
There is the risk of disparity and possibly inferior results due
to lack of experience at a time when the Regions suffer from poor institutional
capacity.
2.7 The Licensing Code
The licensing process shall be carried
out by a specially trained Licensing Unit (where the province concerned shall
be represented) and based on transparent and accountable tendering in
accordance with model contracts.
All model contract shall be developed
based on the following criteria:
·
National control
·
Ownership of the resources
·
Optimum economic rent to the country
·
Appropriate return on investment to the investor
·
Reasonable incentives to the investor for ensuring solutions which
are optimal to the country in the long-term related to.
Undesirable changes in the latest
negotiated draft by the Ministerial Committee:
It would have been desirable to have had
the model contracts decided on and attached to the draft law for approval by
the Parliament. Neither the model contracts or the allocated fields and
exploration blocks to their respective authority have been included.
3.0 The Negotiations
As highlighted above the negotiations have
resulted in a number of significant changes to the original draft. The most vital
concern the administrative units, the process of decision-making and the expediting
of a large exploration programme.
3.1 The role of the independent advisory professional think tank, named in the first original draft as the Oil and Gas Independent Council renamed as the Bureau, has been weakened and lacked transparency. Its former scope to examine all issues has been reduced to only those issues selected by the Council. The requirement to publish its annual report has been removed. The appointment of its members is reduced to one year from five and the appointment requires unanimity of all the members of the Council, a most strange rule, indeed. The appointments to the Council and the Bureau have been made to conform to Iraq’s sectarian and ethnic groups, an alarming indication of the politicizing of the most vital economic commodity that concerns the nation when, instead, sound independent professional management is badly needed.
The Council has been enlarged from nine to some 15 or ultimately 20 members, depending on future development, which makes it more fit as a debating society than trusties tasked with a vital decision-making role on optimizing the proper resource development of the nation. Moreover, while its size has been inflated and its tasks increased, overlapping those of the MoO, its role and ability to make decisions have been considerably weakened as a regulator. “Regulated” parties, the regions and INOC, have become members where they would decide on projects of their suggestions as exploration and development operators. Furthermore it has been politicized by including additional ministers and the appointment of its members made subject to conforming to the country’s sectarian and ethnic divide.
In fact, the negotiating task with regards to oil and gas contracts and other vital decisions have been passed to the Regions. At the present time there is only one region, the KRG, but this is an invitation to the other 15 Provinces to form Regions to follow suit at a time of when their institutions lack capacity and risking disharmony of practices. This would make the haves richer and the have-nots envious, in addition to the border disputes it would create as a result of oil fields crossing under geographical borders, contributing further to disunity. The critical items that have been
removed in the latest petroleum draft are fundamental to professionalism,
transparency
and accountability. The principles are still there but the mechanisms for enforcing
them, in a process of checks and balances within
The resultant checks and balances in the draft are now insufficient to cope with Iraq ’s internal political complications, and are more of a façade, leaving the competence of authorities and the processes of the grant of rights open to manipulation by the political forces that prevail in today’s circumstances in Iraq 3.2 The first draft law prioritised the
rehabilitation of the infrastructure and building production capacity to
monetize the reserves and make the most of the country’s bulk of idle proven
reserves of 115 bn barrels. At today’s production of 2 mbpd
The latest draft called for the immediate
grant of rights to IOCs for the exploration and development of 65 blocks with
billions of potential oil reserves. The discovered reserves shall be developed
and produced to unrestricted capacity without delay or a cap to earn investment
capital and provide a healthy return. They will, therefore compete with INOC’s
oil large production capacity over a limited share of markets open to Iraq,
cause oversupply, destabilize the crude oil price structure and contravene
Iraq’s obligation towards OPEC, among other undesirable consequences.
The latest Shoura Council examined petroleum draft and
passed by the Cabinet to the Parliament omitted reference to these exploration
blocks, in a conciliatory move by the Cabinet to the KRG, and left the matter to the Federal Oil and Gas Council to decide.
KRG, however, maintained its objections,
considering this latest revision by the Shoura Council as having
"unauthorized changes” made to it. KRG formal policy considers unacceptable
any changes made post the stage of approval at the Ministerial Negotiation Committee.
This is how things stand today.
4.0 Concluding Remarks
4.1 Without a central unified policy
there will be disharmony and competition between INOC (operating on production
and marketing its export oil to provide the state’s income) and the Regions
& Governorates (prioritising exploration for additional reserves that will
not be required for many years to come), and among the various Regions and Governorates.
This will lead to disharmony and envy between the haves and have-nots.
Such development would cause instability
which is discouraging to investment, as well as a multitude of damaging
consequences contributing to fragmentation, instead of promoting the uniformity
of oil and gas practices and the unity of the nation and the country.
The Constitution has tasked the Federal
Government with the job of oil and gas resource management, not any one
village, governorate or region. The initial draft law was drawn up to unify
plans, policy and decision-making through participation (beyond cooperation or
consultation) of the regions, governorates and the federal government at the
centre, without ignoring participation at the operating and supervisory processes.
4.2 Instability, especially when
associated with insecurity, would lead to an unhealthy oil industry and would
discourage the serious IOCs, who have the required knowledge, capital and
markets.
4.3 IOCs, in my view, are advised to aim
for urgently needed rehabilitation of the infrastructure, expansion of production
capacity of the producing and partially developed fields, improving damaged
reservoir performance, and to develop the many discovered but not yet
delineated oil fields, in partnerships with INOC, rather than going for
extensive exploration for unnecessary new oil. A rush for exploration and
development contracts at this particular juncture of
4.4 There are today a number of damaging
trends of ‘Tsunami’ dimensions, engulfing
There
is widespread lack of efficiency in government organisations and a near absence
of institutional performance or sound management at the centre and especially
in the Provinces, in addition to a lack of investment and extremely high
unemployment.
Action to reverse these damaging trends
ought to be all embracing in nature, co-ordinated and united in approach, and
having the welfare of country and the nation at heart above all considerations.
A healthy and robust oil industry would provide the revenue necessary for
social and economic reform and the right environment for easing much of the
above trends.
4.5 Unless the draft petroleum law is
revised to conform to professional practices rather than politicised
concessions among the political parties, the petroleum law could further fragment
the country. To pass the petroleum law by simple majority ignoring the rest of
parliamentary representatives would further fragment the country and nation.
And, to enact the petroleum law ahead of
the revision of the constitution would appear as an act of folly. Clearly, a
path of action to defer enacting the petroleum law and advance the revised
constitution, which is logical, requires sufficient will to abandon much of
prevailing political attitude by the major political parties that has brought
the country to the calamity it is in today. Indeed it is a challenging path
worthy of mentioning by an oil technocrat.