Exclusive - Two Members of the Drafting Group of the Iraq New Oil Law, Attack the Draft (Update 1)
In an unpublished article, leaked to Al-Ghad, Mr. Tariq Shafiq, a petroleum expert, former founding director of INOC in 1964, and a key member of the drafting committee of the Iraq Draft Oil Law, strongly criticized the law, supposedly prepared by him, and his two colleagues.
The Draft was approved by the Iraqi Cabinet recently and passed on to Parliament for legislation. Mr Shafiq mentioned also, in his article that another member of the drafting committee shared his negative opinion. These developments makes the Draft Law a mockery, adding to the already strong opposition among members and the country as a whole.
Al Ghad is publishing Tariq Shafiq’s important observations. Despite disagreeing with some of its contents, which we will be commenting on later, we are publishing the observations because they point out to glaring short-comings which will threaten the interests of Iraqi citizens and subject Iraq’s source of income to grave dangers, thereby making it illegal for Parliament to discuss or rubber-stamp the new legislation. The writer explicitly says that some of the main shortcomings in the third draft of the law are:
“As a result of all that, auditing and balancing are not possible to achieve with the complexities of Iraqi politics. Granting rights are also subject to foul play between political powers in the light of the current circumstances in Iraq. What is more dangerous for the future of oil and gas in Iraq is the transformation of power in administrating oil and gas from the centre to the provinces.
… Both me and my colleague Farooq Al Qassim, a geologist and contractual affairs expert, have come to the conclusion that the third draft of the oil and gas law is below our expectations because of the main amendments it was subjected to, especially clauses number 5, which stipulates the specializations of the authorities and number 6, which spell out how rights are granted.”
Original article by Mr.Shafiq follows ( Arabic here)
* * *
The Draft Oil Law … An Independent Point of View
by Tariq Shafeeq
1.1: Iraq is expected to be the world’s greatest oil reserve, with projected reserves exceeding 215 billion barrels. The amount of oil which is accounted for is 115 billion barrels, keeping Iraq on a par with Saudi Arabia. In addition, its exploration and excavation are relatively cheaper – in fact Iraqi oil is the cheapest to extract in the Middle East. Despite this, the recorded production average has never exceeded 3.5 million barrels per day, despite the passage of eight decades since the discovery of oil in Iraq. Historically, Iraqi oil production has never been in line with the huge reserves the country in sitting on, despite the low costs of excavation. The known reserves allows for production levels to reach 10 million barrels per day while at the same time maintaining similar production levels for a decade. Therefore, the priority in the next few months should be given to rehabilitating existing facilities and developing new production lines instead of investing in exploration and drilling.
1.2: Historically the price of extracting a barrel of oil in Iraq is 50 cents (US$0.5) while the running costs of production ranges from US$1 to US$2 for each barrel. For example, the price of expanding the current production capacity by one million barrels per day is estimated to cost US $3 billion while the overall investment capital for producing one million barrels is US$6 billion. These figures could leap to US$4.5bn and US$9bn respectively, if we took into consideration the cost of security protection and increasingly expensive oil extraction equipment over the previous two years.
1.3: The condition of Iraq’s oil refineries and production facilities are defunct, destroyed, stolen or derelict because of the war. Production dropped to about one million barrels per day in September 2003 from a pre-war level of 2.8 million barrels per day in March 2003. Oil production in Iraq stood at about 2 million barrels at the beginning of 2007. Of this, 1.5 million barrels are for export purposes. The average production, however, continues to drop.
2.0: The Draft Oil Law:
2.1: At the invitation of Iraqi Oil Minister Dr Hussain Al Shehrestani, a draft law governing the oil and gas industry in Iraq was drawn up by a panel of three oil experts, which included myself. Together, we had international, Middle Eastern and Iraqi experience spanning 120 years. The Minister of Oil for the Province of Kurdistan was expected to join us but that did not happen.
2.2: The Oil Draft Law was based on clauses 111 and 112 of the new Iraqi constitution. It was also derived from clauses 2, 49, 109 and 110 which stipulated the authorities and responsibilities of the central government, the provinces and governorates. To understand the vagueness of those clauses, and to work in a transparent manner, we sought the support of an independent legal and consultative team, which explained to us the clauses in the Iraqi Constitution related to oil and gas.
2.3: The Oil Draft Law aims at achieving an optimum environment for investment in the oil and gas industry as well as ensuring the highest levels of return possible and unifying the Iraqi people and nation.
2.4: The draft law encourages the private sector and welcomes international oil companies to work with and support the Iraqi National Oil Company, especially in the areas of technology transfer and providing technical and administrative training to Iraqis. It also calls for specialised tenders to open the floor for competition between the most technologically and financially eligible international oil companies, which are selected by the Oil Ministry in accordance with the first petroleum draft law, in a transparent manner.
2.5: The Iraqi National Oil Company will be an independent closed national company, which will have allied companies working in the different provinces linked to it administratively to guarantee coordination and administrative services. All explored oil fields will be administered and operated by the Iraqi National Oil Company.
2.6: The Federal Oil Ministry will be in charge of supervision and up coordination, in addition to drawing up plans and policies in cooperation and with the participation of all the provinces. However, the third revision of the Draft Law, transferred the responsibility of negotiations from the Federal Oil and Gas Council to the Government of the Province of Kurdistan for the region of Kurdistan and to the Federal Oil Ministry for the rest of Iraq.
3.0: Negotiations:
3.1: As mentioned earlier, the main goal of the first draft was to ensure the success of the administration and organisation of the oil and gas sectors in Iraq, as well as to achieve lucrative returns and ensure the unity of the nation. The draft was written for the benefit of our people as a whole, and was to be implemented on all provinces equally. Therefore, the ongoing debate and compromises being made on the goals and objectives of this law, will weaken the administration, remain an obstacle to making the utmost benefit of the development of the oil and gas industry and adversely affect the interest of the Iraqi people. This is because the draft law did not take into consideration keeping aside a margin for negotiations and making compromises.
3.2: The Oil Ministry adopted the draft law mentioned above without any changes. But since clashes between the sectarian and ethnic divisions have reached their peak, the for any discussions now is for them to be conducted by the larger parties, based on sectarian and ethical percentages, instead of taking place in Parliament in an open and transparent manner. It is a shame that this procedure was also adopted when taking the Oil Draft Law into consideration.
3.3: The stance of the Province of Kurdistan, which is expressed in their draft on the Oil Law, is based on a rather extremist interpretation of the main clause 111, which they read as saying that the oil and gas in Kurdistan belongs to its people only – and not to all the people of Iraq. What the clause actually says is: Oil and gas belongs to all the people of Iraq, in all the provinces and governorates. The draft oil law penned by the Government of Kurdistan leaves a lot of space for negotiation, while the Federal law, as I have mentioned before, doesn’t have a provision for that.
The temporary State Administration Law issued by the Coalition Forces says that the Federal Government is charged with consultancy and cooperation with the other provinces and governorates in managing oil and gas resources to guarantee the just distribution of their returns.
At the same time, the Constitution calls for consultation and cooperation in managing petroleum resources. However, the Federal Oil Draft Law has gone further than that as it stipulates the participation of the provinces and governorates in the management and decision-making processes related to these resources. The clause was drafted in this manner to guarantee the interests of the Iraqi people as a whole and in a manner which ensures that these rights are not open to negotiation between the Federal Government and the other provinces and governorates.
3.4: Negotiations did not seriously begin until after an agreement was made on how to distribute the petroleum resources between the Federal Government and the provinces and governorates.
But those negotiations were slow and stumbling, and took a long time. It was expected that the talks will be fast and serious, especially when the Minister of the Province of Kurdistan announced at the Oil Conference in London on December 8, 2006, that the stance of his government regarding the clauses 111 and 112 has changed and was now in line with that of the Federal Government. He also added that the clauses of the Constitution could be amended after a period of time which ensures that a suitable level of trust has been cemented between the Kurds and the rest of the Iraqi people.
The other hanging issue, is the large number of contracts closed by the Government of Kurdistan with small companies which aim at making quick and high profit (ranging from 60-100 per cent of the overall capital) and in a manner which contradicts the clauses of the Federal Oil Draft Law which is awaiting approval. However, the Government of Kurdistan refuses to approve amendments to the contracts by the Federal Oil and Gas Council in accordance with the Federal Law to the date of writing this paper on February 17. The Federal Government is also insisting that this refusal has no legal backing.
It is obvious that if the Government of the Province of Kurdistan continues in its opposing stance, this will mean refusing clauses 111 and 112 and other Constitutional clauses related to this. This will also encourage the other provinces to follow in their steps, which may result in a serious precedence of the other provinces and governorates signing contracts which may not be regularised and which may be lacking in transparency and accountability. This will have an adverse affect on auditing and balancing which are emphasised in the Federal Oil Draft Law.
It was mentioned recently that a compromise has been reached which enables the Government of the Province of Kurdistan to negotiate with companies in the presence of a representative from the Federal Oil Ministry and that the deals are approved by the Federal Oil Council. The Government of the Province of Kurdistan will also be allowed to ‘correct’ existing agreements and contracts and make them in line with the Federal Oil Draft Law, provided it gets the approval of the Federal Oil Council. Despite the passage of time, there is nothing to show that they have reached a quick settlement. However, it remains seen if it has been written with sufficient clarity which is not subject to misinterpretation as was the case with the Constitution.
It is worth mentioning here the importance of drafting clearly written laws which are not open to many interpretations. We should also never give up the legal rights of the Federal Oil Council to have the final say of accepting or rejecting parts or all of the contracts being negotiated.
The contents of the third draft of the oil law which has been approved by the ministerial negotiation council at the middle of January has yet to be accepted by the Government of the Province of Kurdistan, which is insisting on deferring its final approval until reaching a complete agreement on the laws which organise Ministry of Oil and the agencies related to it, as well as the formation of the National Oil Company, the division of the oil returns and a number of other provisions which there is no chance to mention now.
The Government of the Province of Kurdistan has not given its final approval yet as was mentioned before despite all the fundamental changes which were made to the Federal Oil Draft Law. The clauses which have been dropped from the draft law are in effect fundamental clauses which guarantee professionalism, transparency and accountability. Although the principles are there, dropping the mechanism in which the auditing processes will take place will lead to undesirable results given Iraq’s current circumstances.
There are a number of factors which do not guarantee an optimal manner of regulating the oil industry. Among them are:
a. The Federal Draft Oil Law stipulated that the national oil company should be a closed independent company, with an independent financial and administrative structure. The third draft makes provisions for unprofessional criteria in appointing directors, which will limit the independence of the company and its efficiency.
b. The third draft adopted exploration and drilling methods which ensure their just geographical distribution over Iraq. Despite the fact that social justice demands that, nature has unfortunately not distributed the oil and gas fields equally on all the provinces and governorates. Therefore, adopting this principle should not adversely affect the economic feasibility of exploration and drilling operations.
c. The role of the independent consultants’ office has been weakened and its authorities have been restricted to conducting studies of all that is related to the petroleum industry and coming up with an annual report containing their findings. Its authority is also restricted to the duties handed to it by the Federal Oil and Gas Council which in effect weakens the transparency of the process, especially after the clause which stipulates that the annual report should be published has been dropped. The duration of the membership of the consultants has also been decreased from five years to one year and that their appointment is now subject to the approval of each and every member of the Federal Oil and Gas Council, which is something unheard of before.
d. The appointment of members of the Federal Oil and Gas Council and the independent consultants is based on sectarian and ethnical divisions, which is a grave intervention of politics in the most vital economic commodity which has a direct impact on the people instead of ensuring professionalism and transparency as criteria for appointment.
e. The Federal Oil and Gas Council’s membership has been expanded by about 20 to 30 members, making it more of a discussion forum than a council to execute and make vital decisions. The negotiation clause for the oil and gas exploration contracts for the Federal Oil and Gas Council has also been dropped and its duties given to the Government of the Province of Kurdistan and the Ministry of Oil. Our fears are that the other provinces and governorates will seek similar rights, without taking into consideration the ability of their organisations in dealing with such an undertaking. This, in turn, will lead to discrepancies in procedures, which will discourage investors and not guarantee lucrative deals in negotiations.
f. It seems as if closing exploration and development deals in the third draft law takes into consideration the appearance of the contract rather their type and contents. Despite the fact that the draft stipulates that the investor should enjoy the necessary qualifications and that the negotiations are conducted in a certain manner, taking into consideration approved contract models, it does not stress the importance of ensuring that the clauses in the contract are the ones which have been approved. The Ministry of Oil in the first draft has made it a must for the contractor willing to invest to fulfill financial and technical criteria and as a result it is illegal to review his qualifications after winning the tender. It is more important for the Council and its consultants to study the contract before it is closed to guarantee the most returns to the Iraqi people in accordance to the draft law.
g. As a result of all that, auditing and balancing are not possible to achieve due to the complexities of Iraqi politics. Granting rights are also subject to foul play between political powers in the light of the current circumstances in Iraq. What is more dangerous for the future of the petroleum industry in Iraq is the transformation of power in managing the oil and gas reserves from the centre to the provinces.
4.0: Closing Observations
4.1: Without a centralised and unified policy, there will be competitiveness and differences between the National Oil Company (responsible for development operations and producing oil which guarantees revenue for the state) and the provinces and governorates (which will be responsible for exploration and drilling for reserves not important to tap at present) as well as between the provinces amongst each other. This will create envy between those who have and those who don’t have oil and gas resources. This will also lead to instability, which will adversely affect investment and lead to further divisions among people instead of unifying the population and the country.
The Constitution has made the Federal Government responsible for the oil and gas resources and not any village, or governorate or province. And the Federal Draft Oil Law insisted on the unity of planning, strategic studies, execution of projects, supervision and decision-making.. All that should happen by the participation of the provinces and governorates and not just by cooperation and consulting with them.
4.2: Instability will lead to an uneven oil industry, and weakens the seriousness of the National Oil Company, which has the necessary capabilities to develop excavation and drilling. In turn, this will lead to decreased investment and an increase in making use of middlemen who give more promises than they fulfill. Also, depending on small companies will not enable us to fulfill our objectives, as such companies do not have the capacity to develop Iraq’s gigantic oil fields.
4.3: The National Oil Company was charged with the task of carrying out the necessary rehabilitation of the infrastructure and expanding the production capacities of the oil fields which have been completely and partially developed, in addition to repairing the damage caused by pumping large amounts of oil from the reserves and developing newly discovered fields, with the help of international oil companies to guarantee the use of advanced technology.
4.4: There are a number of damaging trends today, of the size of tsunamis, which can wreak damage of unseen proportions to Iraq’s land and people at a time when insecurity and widespread lack of law and order are the norm as well as the growing numbers of murders, resulting from ethnic and sectarian divisions in addition to crime.
4.5: State departments suffer from a lack of capabilities, an absence of administrative work and sound administrative practices as well as a decrease in investment and widespread unemployment.
4.6: Everyone should stop at these dangerous trends and unite and cooperate for the happiness of the country and its people, considering this is a top priority. A strong and solid oil industry would guarantee the necessary tools for political and economical reforms and also provide a ripe environment for decreasing a lot of the trends mentioned above to a large extent.
4.7: And last but not least, I would like to praise the stance of the Ministry of Oil and all those involved in the negotiations from the Federal Government who are in an unenviable situation because of the stubborn attitude of the Government of the Province of Kurdistan, which is against the clauses in the Constitution which govern the ownership and management of oil and gas resources in Iraq. What is worse is that the Federal Government did not provide its negotiators which the necessary support, at the time the Government of Kurdistan gave its negotiators all the moral and political support they needed.
4.8: Finally, I am calling for the return to the spirit which resulted in the December 8 announcement made by the top Kurdish negotiator as a faithful gesture from the people of Kurdistan to work jointly for the benefit of all the people of Iraq.
Posted: March 8th, 2007 under Oil.
Comments: none
Write a comment