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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 & South Asia, and Subcommittee on International Organisations, Human Rights and Oversight
Joint hearing on "Reconstruction in Iraq's oil sector: Running on empty?"

Iraq's Petroleum Law - Revisited
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

Iraq may prove to have one of the greatest endowed petroleum resource bases in the world, with oil potential reserves in excess of 215 billion (bn) barrels, and proven reserves in the region of 115bn barrels housed in 80 oil fields.

Moreover, its finding and development costs are low - amongst the lowest in the Middle East. However, its historical maximum production rate in any one year has not exceeded 3.5mn barrels per day (mbpd), although its exploration and development history has stretched over seven decades.

Iraq's oil production level, historically, has lagged behind its oil reserve production capability and its low extraction costs. This has been due to a number of factors, the access of the Major oil companies to huge reserves throughout the Middle East pre-1970s, Iraq's confrontational policy since the 1960s, the wars and sanctions of the 1990s, and the instability created post March 2003.

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.

Iraq's proven reserves can comfortably support a production plateau of 10 million barrels per day (mbpd) and maintain it for a decade. Iraq requires nearly two decades to export such a volume to the world's markets. Priority should, therefore, be given to the rehabilitation of infrastructure and the building of production capacity.

Russia produces today nearly 10 mbpd from its reserves of some 74 bn barrels.

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.

Iraq's finding and lost opportunity costs are prohibitive enough without piling on additional wasted wealth.

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 Iraq's social and economic development plans. This clearly requires unified plans, policy management and execution, avoiding un-coordinated competing projects of each of Iraq's 18 provinces.

Iraq's oil economics today is such that, finding cost per barrel (pb) of oil is in the region of US Cent 1.0 (not $1 or its multiples, common cost elsewhere in the world). Development investment cost per produced barrel is estimated at US $1.0-1.5, which is equivalent to some US$6,000-9,000 per bpd (a rate of 1 barrel per day, bpd) or $6-9 billion per 1 mbpd. Operating cost is US$1.5-2 per barrel. These figures make Iraq one of the least expensive in the Middle East

Today, Iraq's production facilities are dilapidated, looted, sabotaged or war-torn, to the extent that in September 2003, its production rate sank to around 1mbpd from the pre-war level March 2003 level of some 2.8 mbpd. Thus far, by the beginning 2007, Iraq produces around 2 mbpd and exports around 1.5 mbpd and declining.

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.

Iraq today is enduring a number of damaging trends of what may be termed 'Tsunami' dimensions. There is widespread lack of security and law and order. Public assassinations are common place, motivated by ethnic and sectarian divides, or criminal intent. There is widespread corruption, lack of efficiency in government organizations and a near absence of institutional performance or sound management at the centre, and especially in the provinces.

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.

Iraq clearly requires a petroleum law but not at any cost, especially if it could become another divisive element, in the same way as the constitution itself, which revision is already overdue.

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 Iraq's potential reserves, are assigned for urgent exploration. Exploration calls for tendering to IOCs to explore and develop while there is no need for new oil for many years to come. Furthermore, developed oil by the IOC's would undergo fast track production to pay back a return and profit to the investing company, competing with Iraq's own INOC oil over limited markets and destabilising markets and prices.

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 Iraq's current turbulent situation, have been removed or circumvented in away that could produce damaging effects.

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 Iraq needs no more than 17Bb, calculated on the generally accepted Reserve to Production ratio of 20. In line with this rule, Russia, for example, produces some 10 mbpd from its reserve of 74 bn barrels. In effect, Iraq is wasting the finding cost and the earning capacity of 98 bn barrels of undeveloped stored reserves.

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. Iraq would then find itself accepting speculators with more promises than they can deliver, and the minor companies which do not have the capability to develop Iraq's giant oil fields.

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 Iraq's political and economic development would be viewed as mortgaging the reserves of future generations. It would provide fuel to the view that the war was for oil.

4.4 There are today a number of damaging trends of 'Tsunami' dimensions, engulfing Iraq. There is a widespread lack of security and law and order, widespread killing for reasons of identity, ethnicity, sect, or for no reason other than criminal ends.

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.



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