J. Jay Park on the Iraq Oil Law.

This fellow obviously knows his stuff. The mainstream media hardly noticed the Dubai meeting even though it was obviously very important. I guess it was just not sexy enough! Interesting that Park was involved in drafting a law for Somalia. The development of oil there is a part of the determination not to allow the Islamists to gain control. Until the security situation improves there is not likely to be much development.
The Iraq oil law still seems to be in limbo.

Interview: J. Jay Park on the Iraq oil law


Published: Sept. 26, 2007 at 6:02 PM
Print story Email to a friend Font size:By BEN LANDO
UPI Energy Editor
DUBAI, United Arab Emirates, Sept. 26 (UPI) -- J. Jay Park's work on international legal petroleum regimes has taken him around the world. He helped craft Somalia's new hydrocarbons law and has led training sessions for officials in Iraq's Oil Ministry.

He also represented Western Oil Sands, a Canadian firm, in its deal with the Iraqi Kurdistan Regional Government.

Earlier this month in Dubai, Park held a daylong workshop on the ins and outs of Iraq's draft oil law, as part of the Iraq Petroleum 2007 summit, organized by The CWC Group. Also at the summit were representatives from oil firms around the world, as well as top Iraqi oil officials, including Oil Minister Hussain al-Shahristani.

United Press International sat down with Park on the sidelines of the summit to discuss the mind frame for crafting an oil law; what decisions the Iraqi government now faces; what type of regime Iraq can choose from; and what types of contracts -- including the controversial production sharing agreement -- work for Iraq's oil.

UPI: You’ve worked either with companies working within certain legal regimes or helped the governments set up legal regimes, so you’ve seen this from both sides. Looking at the Iraq situation, how do you see them being able to find compromise, to agree on … to pass an oil law, either this (draft) one or another one?

Park: When I’m looking at a resource law from a legal standpoint there are certain attributes that I want to see it addresses. The attributes from the point of view of the state are: is there going to be fair share of resource revenue going to the state? Is there going to be adequate addressing of environmental, health and safety issues? Are they going to ensure there are local benefits accruing to the economy through employment, through training, through technology? Are they going to ensure that opportunities for development in respect to the resource can be seized within the economy and not just exported? And is there a transparent process for the award of rights and the administration of the business?

From the point of view of the investor, what they want to know is: is this a regime in which if they make a discovery they will be able to complete that development so they can monetize the investment that they make? Number two, is the agreement a stable agreement so that once they make an investment they’re going to be able to recover what they’ve invested, so the deal won't change on the them, which is a problem we see in a lot of places, what we call the problem of the obsolescing bargain? And then finally, are they going to be able to have adequate legal means for remedies if there is non-compliance with the agreement?

So if you’ve got all those features addressed in a petroleum law then I think the law itself is a good law because it addresses well the issues that arise between a state and investor. That’s what I look at. That’s a technical kind of analysis.

When you then say, politically, how are they going to get this passed, that to me is really an issue for Iraqis. One of the things that I always look to is this issue of the sharing of the resource. In Iraq, they address this issue in part in the constitution. It needed more definition in the petroleum law and a revenue-sharing law, and that is part and parcel of the process.

Now the biggest issue you have with respect to sharing of the resource revenue is who gets to receive the revenue. And I’m advised that there has been a deal, that they have agreed to share the revenue resulting from the resource economy on a demographically equal basis. That’s the biggest issue. If they have solved the biggest issue, all the other issues about who controls activity, they’re less important. So if they’ve solved the big issue, then already then in my view the other issues are surely able to be solved and therefore I’m optimistic the (oil) law is going to be passed. Because once you’ve solved the revenue issue and how you’re going to share it, then it’s in everyone’s interest to make the revenue pie bigger. And when you’ve got everybody aligned in that sense, then I think you’re going to see success.

Q: In the oil minister’s presentation, when asked about what happens if the law is dragged out for so long, and he said ‘well we have the legal right to move forward on our own because we need to develop whether there is a new law or not,’ can you explain that, what he bases that on?

A: Iraq has an oil law. It was passed in the 1980s. It is a short law, seven or eight pages, 17 articles. It grants the power to the government to manage the industry and award rights in respect to petroleum activities. It doesn’t contain a great deal of detail on how that is to be done and you can follow from that then there is a great deal of discretion in the government as to how it may run the industry under the terms of that law.

What I believe the ministry is saying by that is ‘there is not a vacuum with respect to petroleum law in Iraq. We’d like to see the new law passed because it’s a better law than the old law,’ and I’m inclined to agree. From a technical petroleum law viewpoint, the new law is a better law than the old law. What I think the minister is saying, in effect, ‘we want this law passed and if it isn’t passed then we’ll have to just work with the old law.’

Q: You started your presentation explaining your frame of mind when you go into drafting an oil law. We have the Iraq scenario where we know there’s a lot of oil and gas and we assume there’s a lot more oil and gas and the industry is already established for a long time. Compared to, for example, Somalia or another country where we think there might be oil and gas but we don’t know so that’s why we’re creating this regime so we can figure it out, we can have the legal tools to do the exploration and development. So what are your thoughts when you’re creating, what is the difference when you’re creating the law, your mind frame when you sit down to write it.

A: The difference between developing a law for a regime that does not know if it has any oil and gas versus developing a law for a regime that knows it has a substantial existing base is what do you do with a substantial existing resource base?

What many countries have done is they’ve established a state oil company and give it the management and ownership of the existing resource base. The enhancement and the development of that resource base is then within the control of that state oil company. But new exploration operations would then be open for assessment as to how the state should deal with that. Many states take different approaches to that.

Mexico says only the state oil company can do any exploration. Consequently, there’s not a great deal of exploration and Mexico’s production is declining because their state oil company lacks the capital to explore it extensively.

Other countries, I come from Canada, says ‘no, we’re not going to have a state oil company but we’re going to award these rights to private investors.’

Iraq has chosen a middle ground. Iraq has said a state oil company will hold the existing producing base. It will also hold the discovered but undeveloped areas that are close to existing production and it may invite other companies to assist it in developing those resources but fundamentally they will be owned by the state oil company.

Then with respect to exploration areas and other discovered areas that need a lot of work to develop them, the scope is broader for how that can be done in terms of many different types of petroleum contracts that could be used, with many different structures, although it's clearly suggested that a joint venture with Iraqi participants is to be encouraged.

Q: What would you say are the risks in entering Iraq’s oil sector?

A: The principle risk that oil companies are designed to address is geological risk …

Q: Is there oil or not, will you put the money in and come up with nothing …

A: … Exactly. That generally the record on exploration is that out of every 10 exploratory wells only one or two are going to be successful. But the geology and opportunities around the world vary widely and so clearly Iraq is one of those places where the geology offers wonderful opportunities because we’ve already seen how much exploration there’s been and there’s a great deal more yet to be explored. Clearly the geological risk in Iraq is less than it is in Ireland.

Q: In your presentation you had the four annexes up there. (The annexes are a draft list of the categories of Iraq’s oil fields and exploration blocks, which the Iraq Oil Ministry has created.) You said this is the contract that you would use for each. Can you explain what specific contract per annex and why not the other ones?

A: Annex 1 is just producing fields. It’s likely the existing producing fields involve minimal to no risk in terms of, you know, it’s producing and what’s needed is services to enhance production and enhance facilities to allow production to occur. In those regimes around the world that use a service contract, that’s the type of contract that it’s used for.

Other fields that need development work, drilling of further wells, construction of more significant facilities because they are not currently producing, often a development type contract is designed differently and has different work commitments and even you might need a different skill set as well, so that’s why I deduced from the language of the draft law that a development contract is something that is suited to that kind of an arrangement.

And finally when it comes to areas that don’t have a discovery, that’s where there is a more significant degree of risk and a risk exploration contract is best suited to that. It’s designed to encourage exploration activity and if exploration is successful, to allow development.

Q: What’s the difference between the risk contract and the exploration and development contract?

A: In my opinion you’re just mixing up different terms. An exploration and development contract and a risk exploration contract, to me, would mean the same thing.

Q: So the terms that they’re (Iraqi government) putting up there, why do they have these two mixed terms?

A: One, I believe, is intended to be a broad term to describe a wide range of contracts called exploration and development contracts and then the other term, the risk exploration contract, is a specific contract they have in mind. It’s one of the details of the law that needs to be further elaborated, either in the regulations or in the model contract.

Q: And if they decided to go the route of the production sharing agreement or some modified version that would fit within the law, where within these annexes would that fall? Would that be Annex 4?

A: A production sharing type contract could be a form of risk exploration contract that would be suited to Annex 4. The word development and production contract doesn’t to me define a specific type of agreement, it defines what the activities will occur under the agreement. Consequently, that’s another area that needs better definition in the regulations and in the model contracts that will follow.

Q: But when you just take a production sharing agreement or production sharing contract, and if those were to be one of the model contracts that are available for the Iraq government to sign with an oil company, where do you see this being applicable, in the four annexes, and where would it not make sense to do a production sharing agreement, from the government’s standpoint? In Annex 1, would you sign a PSA in Annex 1?

A: The problem is we’re using a set of terms that are designed to apply to a different concept, which is exploration activities and all the types of activities we tend to see for exploration type petroleum activities, and seeking to apply it to an existing, producing resource base.

Q: So you’re saying a PSA is for when exploration is involved.

A: It would be rare to see a production sharing agreement used and granted at a time of, for a field with existing production.

Q: What about for a discovered but not producing field?

A: A discovered but undeveloped field could conceivably be the subject of a production sharing contract if the state decides that that’s the appropriate tool to use.

Q: But there’s far less risk because you know that there’s oil there.

A: The usual kinds of activities under a production sharing contract would need to be suitably revised to suit the development, instead of an exploration and development situation.

--

(e-mail: energy@upi.com)

Kurds object to oil law annexes

Quite a bit of detailed information here. The general press has almost nothing on the Dubai meetings. I can't imagine that the annexes make the law unfriendly to foreign investment since the revisions according to another article are supported by the US. Perhaps some parts are toned down to avoid rejection in the Iraqi legislature. The Kurds are most concerned that they should be able to write their own contracts--as they already have. They do not want the central govt. to have as much power as the law seems to give it.

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The Kurdistan Regional Government (KRG) clarifies its position regarding the latest developments on the Draft Oil Law

In the light of the recent developments, the Kurdistan Regional Government (KRG) expresses serious concerns regarding the draft Annexes to the proposed Oil and Gas Law that were recently circulated, and that were discussed last Wednesday at a conference in Dubai (“the Dubai Annexes”).

These are concerns that should be shared by all Iraqi citizens. In summary, the Dubai Annexes are inconsistent with the overriding policy goal of maximizing economic returns to the Iraqi people, and inconsistent with Iraq’s federal Constitution. The Dubai Annexes are inconsistent with the proposed Oil and Gas Law that was agreed by the Council of Ministers on 15 February 2007.

As a member of the Federal Oil and Energy Committee, I urge the Committee to address these concerns, and consider the merits of the attached KRG-proposed amendments to the Annexes. Until our concerns are addressed, the KRG cannot support any Oil and Gas Law package of legislation in the Council of Representatives.

Our concerns with the Dubai Annexes are as follows:

1. Concentration of unaccountable power: The Dubai Annexes attempt to allocate almost 93 per cent of Iraq’s proven petroleum reserves to a new “Iraq National Oil Company” (INOC), leaving barely 7 per cent for Regions and other entities to use for inward investments. Furthermore, the majority of the fields included in the 7 per cent remainder are marginal or not commercial. Massive power will be concentrated in the hands of INOC without any clear investment and production targets, and without clear accountability to the people of Iraq. With this level of concentration, the proposed Oil and Gas Law, and any regulatory apparatus, will become irrelevant.

The Board of INOC must be entirely separate from the Oil Minister and the Oil Ministry: INOC must be a regulated, not a regulatory, body. Because it is supposed to be a federal institution, INOC must be accountable to the Federal Oil and Gas Council, and not to the Council of Ministers. INOC must not be given almost the entirety of Iraq’s oil and gas reserves.
The proposed Federal Oil and Gas Council, an intergovernmental institution, will recognise to the fact that Regional rights over petroleum have paramountcy in the Constitution over federal rights (Article 115) and the right of Regions to be represented in federal decisionmaking (Article 105).

2. Return to old regime methods: The concentration of power in the hands of INOC will represent a return to method of petroleum management of previous Iraqi regimes, where centralized oil power was a corrupting influence, and used to fund violent campaigns by elites against neighbouring countries and against our own Iraqi citizens.

Iraq’s petroleum regime must be modern. The KRG is well aware that all successful oil producing federations have a decentralized petroleum sector, with some level of national cooperation, and all are open to private investment. Iraq’s Constitution, in Article 112, mandates just such a petroleum sector, and the Constitution must be honoured.

3. Breach of constitutional rights of Regions: The allocation of petroleum to INOC as proposed in the Dubai Annexes is unconstitutional. Specifically:
(a) The Dubai Annexes purport to give to INOC petroleum fields that are undeveloped, including fields that must be managed by future Regions in Iraq, including a future southern Region or Regions. These fields must be under the management control of Regions and Governorates pursuant to Article 112 of the Constitution. Undeveloped fields over which no Region or Governorate asserts jurisdiction should be allocated, temporarily, to the Oil Ministry, and open to bidding.

(b) The Dubai Annexes give to INOC currently producing fields, but do not place INOC under an obligation to manage those fields jointly with Regions and Governorates. Article 112 of the Constitution is clear on this point also, but the INOC law, as drafted, does not acknowledge the role of Regions and Governorates as joint partners in management decisions, but rather refers only to a diluted consultation mechanism.

(c) The Dubai Annexes do not clearly recognize KRG authority to contract in the Kurdistan Region, and indeed propose exploration and development blocks in the Kurdistan Region that differ from those which are already the subject of KRG contracts with private investors. Annexes 3 and 4, in particular, must recognize the fact that the Constitution itself, in Article 112, allocates fields other than currently producing fields to the Regions and Governorates, including the Kurdistan Region. The Annexes must recognize that the KRG has already allocated exploration and development blocks in the Kurdistan Region under Production Sharing Agreements pursuant to the Iraq Constitution. The Annexes must clearly acknowledge that fields and blocks in the Kurdistan Region are under the KRG’s jurisdiction, that it is for the KRG to define the coordinates of the fields and blocks, and that the KRG will be contracting authority for those fields and blocks.

The KRG considers that, in the unlikely event the proposed Law with the Dubai Annexes were presented to the Council of Representatives and approved by the Council, the law would be immediately void as unconstitutional by virtue of Article 13 of the Constitution.

4. Breach of constitutional revenue sharing rules: It is also unclear whether the Dubai Annexes will require INOC’s revenues to be shared throughout Iraq according to population. Article 112 of the Constitution is very clear on this requirement.

With these Dubai Annexes, Iraq is in great danger of losing its main source of revenue to an unaccountable entity that will absorb funds for alleged reinvestment and expansion but without returning funds to the people of Iraq. The KRG has advanced several discussion drafts of a revenue sharing law for Iraq that would pool all petroleum revenue, wherever that revenue is raised, for sharing throughout Iraq according to the Constitution. We have received no response.

5. Failure to maximize revenue for Iraq: The legal obligations of INOC to develop Iraq’s petroleum are unclear in the Dubai Annexes. Article 112 of the Constitution requires oil production in Iraq to maximize returns to the peoples of Iraq. The Dubai Annexes provide Iraq with no assurance that INOC will be any better than the current bureaucracy in increasing petroleum revenue for Iraq. Many of the fields which are proposed to be allocated to INOC have been discovered for up to 30 years, without any development. With no accountability or contractual requirements to produce, why should we expect the performance of INOC to be any better than that of the Oil Ministry in past years and decades?

INOC must be clearly defined as a contract-holder for each of the particular fields allocated to it, like any other contractor in Iraq, with contractual obligations to the Iraq federation to develop fields and generate revenue for Iraq-wide sharing. This was the intent of the 15 February Draft Oil and Gas Law. Each field for which INOC is the contractor must, depending on the particular nature of the field, have a mandatory program for field development. If the mandatory program is not met, the field should be put on the market for open bidding, to obtain maximum timely returns to the Iraqi people. INOC should be given a mandatory target of increasing Iraq’s petroleum production to 4.5 million barrels per day within 5 years, and should lose some of its contractual rights if individual field targets are not met.

6. Deters investment: The Dubai Annexes will deter investment in Iraq’s petroleum sector. The Annexes, and the comments conveyed by some of the presenters at the Dubai conference, send a clear message: Iraq is closed for business. This message is obviously designed to undermine the 15 February proposed Oil and Gas Law with respect to private sector opportunities in Iraq, and to stir up anti-foreign and reactionary sentiment. This was the message that the organizers wanted to convey through their hand picked speakers.

The authors of the Dubai Annexes announced to the conference that INOC will not enter into any contractual arrangements with the private sector, including Iraqi companies. They also announced that the earliest possible bidding round for the very small number of non-INOC fields will be December 2008. One Iraqi expert who had been originally invited to speak at Dubai was at the last minute barred from addressing the conference when the organisers realised that he would be supporting private sector participation in Iraq’s oil and gas sector. The authors of the Dubai Annexes also announced that the Annexes had been made available for discussion “three months ago”, a statement was blatantly false.

This is an obvious effort to return, by the back door, to the early anti-investment negotiating drafts of the Oil and Gas Law that the Oil and Energy Committee rejected as long ago as August last year. The principle underpinning the 15 February 2007 draft Oil and Gas Law approved by the Council of Ministers was that private sector investment under Production Sharing Agreements would be at the center of Iraq’s petroleum strategy, with the additional use, if necessary, of risk-reward service contracts. This principle was agreed in the draft Law. The principle is inscribed in strong terms in Article 112 (2) of the Constitution itself, which obliges the federal government, with Regions and Governorates, “to develop the oil and gas wealth in a way that achieves the highest benefit to the Iraqi people using the most advanced techniques of the market principles and encouraging investment”. One of authors of the Dubai Annexes, himself serving under a Constitution adopted by nearly 80 percent of Iraq’s voters, denigrated key provisions of the Constitution. As our Prime Minister has repeatedly stressed, the people of Kurdistan are only willing to remain part of the Iraqi Federation on the basis of full implementation of Iraq’s Constitution.

The Dubai Annexes are unconstitutional, against the interests of the Iraqi people, and contrary to the 15 February agreement and Draft Oil and Gas Law. The undeveloped fields to be listed in Annex 3 and the blocks to be listed in Annex 4, must be clearly stated as fields and blocks which will be developed using Production Sharing Agreements.

KRG-proposed amendments to the Annexes:
I understand that some members of the Federal Government wish to maintain firm Iraqi control over Iraq’s petroleum sector. That wish is understandable. However these draft Annexes will not give control to the Iraqi people: it will create a new oligarchy in which Iraq’s oil is left in the ground and the interests of Iraqi citizens are once again ignored.

The overriding goal of the Oil and Gas Law must be to maximize returns to the people of Iraq in all the Regions and Governorates, consistent with the Constitution of Iraq. The KRG has proposed Annexes which I believe will achieve this goal, and which strike a fair balance between the interests of the Federal Government, the Regions, and Governorates. Even under the KRG proposal, INOC will receive almost 58 per cent of Iraq’s proven petroleum reserves, including INOC’s carried interest on four projects. This will enable INOC, under a clear mandatory program, to raise its share of production to around 4.5 million barrels per day, but still to allow reasonable scope for the private sector and inward investment to boost Iraq production levels to approximately 8 million barrels per day. The result with be a united and prosperous federation.

Outstanding matters:
In these circumstances, I note the outstanding matters that must be agreed before there is a serious oil and gas package for the Council of Representative’s consideration:

1. Annexes: The Oil and Energy Committee must agree the Annexes to the Law.

2. Model Contracts: The Oil and Energy Committee must agree model production sharing and service contracts. I note that the KRG has seen no proposed model contracts of any sort from the federal government. We once again strongly urge the federal government representatives on the Oil and Energy Committee to adopt model contracts that are similar to the Model Production Sharing Agreement that the KRG has adopted and will continue to use in the Kurdistan Region.

3. INOC and Ministry of Oil Laws: The Oil and Energy Committee must agree laws for the structure and organization of INOC and the Oil Ministry. The KRG has received from the federal government representatives no official draft of a proposed INOC law or Ministry of Oil Law, though they have been promised for some time. These draft laws must be consistent with the Constitution and the principles of the draft Oil and Gas Law.

4. Revenue Sharing Law: The KRG has to date received no response to its proposed Federal Revenue Sharing Law, which we circulated in early March. The KRG draft proposes that all petroleum revenues, defined as broadly as possible, should be received and shared by an intergovernmental entity pursuant to Articles 106 and 112 of the Constitution, so that all Iraqis, and all levels of government, may benefit from Iraq’s petroleum assets. To date there has been no response and not one single meeting regarding a Federal Revenue Sharing Law.

The time has come for a serious discussion on revenue sharing. The KRG still awaits the Federal Government to authorize its representatives to meet with the KRG at the earliest opportunity to discuss the draft Federal Revenue Sharing Law. This is obviously a critical piece of legislation without which the Oil and Gas Law cannot progress.

Finally, I express the hope that all these matters can be concluded as quickly as possible. The KRG has at every point in these discussions worked diligently and honestly to solve the difficult problems that face Iraq’s oil sector. We have done so not only in the interests of the Kurdistan Region, but also in the name of the Constitution of Iraq and, we believe, in the interests of all the Iraqi people. We remain available to the Federal Oil and Energy Committee to agree the remaining issues. In the meantime, the KRG remains open to business and will continue to exercise its full authority under the Constitution of Iraq, including the negotiation of competitive Production Sharing Agreements with experienced international investors, for the benefit of all Iraqi people.

Dr. Ashti Hawrami
Minister for Natural Resources, Kurdistan Regional Government