Legal Focus: The Iraq/Kurdistan divide

Clyde & Co. recap on dispute between the KRG and the Iraqi government

Although there is uncertainty about the legitimacy of contracts, many companies are have a successful time in Iraq.
Although there is uncertainty about the legitimacy of contracts, many companies are have a successful time in Iraq.

Clyde & Co’s George Booth and Zainab Al Qirnawi offer a fresh overview of the legal developments in the Iraq Oil & Gas Sector

The ongoing disagreement between the Federal Government of Iraq (IFG) and the Government of the Semi-Autonomous Kurdistan Region (KRG) over which authority has the right to enter into petroleum agreements and manage oil and gas in Kurdistan has been well documented.

The IFG maintains that the KRG has breached its constitutional obligation to act jointly with Baghdad in oil and gas matters by passing the Kurdistan Oil and Gas Law 2007 (“Kurdistan Oil & Gas Law”) and signing Production Sharing Agreements (PSAs).

The KRG on the other hand maintains that it has not breached its constitutional obligations and instead claims autonomy under the Iraqi Constitution, approved by referendum in 2005 and implemented in 2006, to manage oil and gas in Kurdistan, on the basis that this power is omitted from those powers exclusively reserved for the IFG.

Therefore, it is clear that only once an agreement between the IFG and the KRG has been reached, and federal oil and gas law is passed, will Iraq’s oil and gas industry be placed on a predictable legal footing.

However, this new oil and gas law has already been years in the making. In the meantime, investors entering Kurdistan do so not certain whether the contracts they acquire with the KRG will be recognised when the new federal legislation comes into force.

In any event, it is highly likely that when the new oil and gas law does materialise, all existing PSA’s and probably, to a certain extent, all existing technical service contracts (“TSCs”), will be reviewed by a body set up under the law, to determine whether they meet the new legislative requirements. This will be an interesting time not least because if certain contracts do not meet the legislative criteria, how will they be dealt with?

Tensions between the IFG and the KRG
An agreement between the IFG and KRG that was meant to, in practical terms, acknowledge the existence of PSAs (even though Baghdad’s position on their legality remains reserved), has now, we understand, faltered, leaving relations between the parties strained.

The compromise deal agreed on 13 September 2012 between Erbil and Baghdad was put in place to increase oil exports from Kurdistan and provide for a trillion dinars (USD $833 million) in advance payments from Baghdad to be made to KRG and for future payments to be included in the 2013 federal budget.

The IFG made an initial transfer of 650 billion dinars (USD $541 million) but we understand that it has not made a second payment that was called for under the 13 September agreement.

These payments were to compensate oil companies operating in Kurdistan according to their PSAs, with surplus revenue going to Baghdad.

Most recently, in early January 2013, KRG confirmed that it had started independently exporting oil to Turkey. According to sources close to companies operating in Kurdistan, the Taq Taq Operating Company (a joint venture between Genel Energy and Addax Petroleum) began exporting 15,000 barrels per day from the Taq Taq field.

In response, the IFG published an announcement on the website of the State Oil Marketing Organisation (SOMO) claiming a legal monopoly over all oil exports based on the provisions of Law No.101 dated 1976 and Law No.272 dated 1987.
Contained in this announcement was a threat to prosecute those who were “smuggling” oil across the border as well as any buyers in Iraq and abroad.
Whether this results in an Iraqi court action by IFG against oil exporters out of Kurdistan inter alia for loss of income arising out of an alleged breach of the constitution remains to be seen but if that happens, it is possible we may see an urgent attempt being made to find a compromise which both KRG and IFG can live with.

As tensions escalated between IFG and KRG, it was reported that both governments sent troops to reinforce their positions along the disputed internal border.

This is not the first time that mutual attempts to resolve the dispute have failed, and in the absence of a clear legal and regulatory framework governing the Iraqi oil and gas sector, this may well not be the last.

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Enforceability of PSAs
The governing law of the Kurdistan PSAs is English Law, with any dispute arising out of the PSA, which can’t be resolved between the parties, being referred to the London Court of International Arbitration (“LCIA”) in accordance with the LCIA Rules.

However, given that Iraq is not yet a full signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York” Convention) which provides for the enforcement of foreign arbitral awards, Iraqi courts are not legally obliged to enforce a foreign arbitral award except in accordance with the Iraqi Enforcement Law.

Iraq has entered into few bilateral treaties, but it is a signatory state of the 1983 Convention on Judicial Co-operation between States of the Arab League (the “Riyadh Convention”).

The Riyadh Convention applies to foreign judgements and arbitral awards and consequently an award under an arbitration whose seat is in a signatory country to the Riyadh Convention may prima facie be the best possible option for a company signed up to a PSA to enforce an award made in respect of the PSA in Kurdistan.

The downside however is that the Riyadh Convention expressly prohibits enforcement against Governments.

Furthermore, the KRG waives its right to claim sovereign immunity under the PSAs, however, whether the courts in Kurdistan will support this waiver is yet to be truly tested.

Review of Oil & Gas Contracts
It must be noted that the current status of negotiations between the KRG and IFG does not allow for any definite conclusions to be drawn on how the balance of interests would be reflected in any new oil and gas draft law.

Furthermore, it is also not clear whether the parties will make any progress in their negotiations in the near future.

Nevertheless, it is noted by many commentators that the version of the Federal Draft Oil and Gas Law dated 15 February 2007 (the “Draft Law”), as published by the KRG on its website, comes closest to a compromise between the interests of the KRG and some political groups in Federal Iraq.

All successive drafts of the Iraqi oil and gas law to date have required a “review” of pre-existing petroleum contracts, whether awarded by the IFG or the KRG.

It is difficult of course to comment on the scope of such review, but as mentioned above no contract is likely to be immune from review although setting aside any such contract is beset with problems of its own.

However according to some commentators, PSAs may even be transformed into a type of contract based on the principles of a TSC used by the IFG, although this position is not fully supported by the Draft Law.

It remains to be seen whether in this process the KRG will seek to honour any stabilisation or grandfathering provisions of the existing PSAs, or eventually whether the KRG will be forced to reduce the contractors’ entitlements under the PSAs.

Other aspects that may well be reviewed are the choice of English Law as the governing law of the PSAs and the duration of the exploration and production stages of the PSAs.


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