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Iraq: Summary Of Draft Oil Law

An oil refinery in Al-Sulaymaniyah (file photo) (AFP) March 2, 2007 (RFE/RL) -- On February 27, Iraq's cabinet approved a long-awaited federal oil law, with the aim of distributing oil revenues fairly among the regions. The law must now be approved by parliament to take effect.

The National Assembly's Council of Representatives is responsible for enacting legislation on crude oil and natural gas and shall approve all international petroleum treaties that Iraq signs with other states.

The Council of Ministers (cabinet) is responsible for proposing legislation related to the development of petroleum resources to the National Assembly. It formulates federal petroleum policy and ensures that the Oil Ministry works in consultation and coordination with provincial petroleum-production authorities.

Federal Oil And Gas Council

A Federal Oil and Gas Council will be established. It will be chaired by the prime minister, or his appointee, and will include the oil, treasury, and planning and cooperative development ministers. It will also include the director of the Central Bank, a minister representing each region; a representative of each governorate not belonging to a region; executive managers from relevant petroleum companies, including the National Iraqi Oil Company and the Oil Marketing Company; and not more than three experts specializing in petroleum, finance, and economics appointed to five-year terms.

The council determines federal petroleum policies, exploration plans, field development, and pipeline plans inside Iraq and has the authority to approve any major changes to those plans and policies. The council is also responsible for reviewing and changing exploration and production contracts. The council will rely on an "independent consultants bureau" made up of oil-and-gas experts from Iraq and abroad who are experienced in exploration and production operations and in petroleum contracts. The experts will be hired through one-year, renewable contracts.

The council is also responsible for ensuring that petroleum resources are explored, developed, and produced in an optimal manner and in the best interests of the Iraqi people.

Oil Ministry

The law issues guidelines for the restructuring of the Oil Ministry, including the following:

The Oil Ministry must establish a new department to oversee planning, developing, and following up the process of obtaining rights. It will comprise individuals trained and specializing in operating tenders and auctions and individuals capable of carrying out professional negotiations with oil companies to sign contracts related to exploration and production rights. "This department must include in each and every negotiation representatives from the related producing governorates."

The ministry must establish mechanisms for restructuring the relationship between the ministry and related companies and for regulating entities in a way that guarantees the full separation of production companies and oil services from the regulatory, monitoring, and supervisory departments of the ministry. Moreover, production departments must be separated from -- yet integrated with -- service departments in a way that guarantees increased productivity and maximum profits.

The ministry is authorized to sign service contracts and administrative contracts with oil or service companies.

The ministry should strive for the speedy and efficient development of fields that have been discovered but are undeveloped or partially developed, and may do so in collaboration with reputable oil companies.

The Oil Ministry is responsible for proposing federal policy, laws, and plans. It is also responsible for creating legislation and issuing regulations and guidelines to implement federal plans. It will undertake monitoring, supervisory, and regulatory steps to ensure unified implementation of legislation.

The ministry shall coordinate with governorates and regional administrations to draw up federal policies and plans related to short- and long-term exploration, development, and production.

The ministry is empowered to negotiate multilateral and bilateral agreements related to oil and gas with other countries and organizations subject to approval in accordance with the constitution. It is responsible for monitoring petroleum operations to ensure adherence with the laws, regulations, and contracting terms. It is also responsible for verifying costs and expenditures incurred by the holders of rights to ensure the correct and justified cost recoveries in order to determine revenues owing to the government.

The ministry must coordinate with regional governments and producing governorates to create specialized entities that carry out the ministry's responsibilities.

Contracts will be entered into by the ministry (or regional entity) and an Iraqi or foreign entity that has demonstrated the technical competence and financial capability to complete the contract, and according to transparent and accountable tendering, according to international petroleum-industry standards.

Contracts should stipulate, among other things, national control, ownership of resources, optimum economic rent to the country, an appropriate return on investment to the investor, training and development of Iraqi personnel, and technology transfers.

Iraqi National Oil Company (INOC)

The INOC's scope of operations includes managing and operating existing production fields, including the operations of the North Oil Company and South Oil Company. It will also participate in the development and production of discovered but undeveloped fields and carrying out exploration and production operations in new areas by applying for exploration and production rights based on competition. It shall own, operate, and manage the oil and gas pipeline networks, as well as export terminals. However, after two years, the federal Oil and Gas Council will decide the entity responsible for operating the pipeline network and terminal operations based on a proposal submitted by the Oil Ministry in consultation with the INOC. Such a proposal will need the approval of the Council of Ministers.

The INOC may take part in exploration and production operations inside Iraq on behalf of the federal government. It is obligated to sell its share of crude oil to the Oil Marketing Company based on a delivery price that covers the cost of production in addition to a reasonable profit that will facilitate the company's development in the areas of exploration and production.

The INOC has the right to participate commercially in international projects related to the transportation, marketing, and sale of oil and gas. It may also participate in exploration and production ventures outside Iraq if approved by the Council of Ministers.

The INOC may establish associations with other relevant companies or acquire shares in existing companies inside Iraq and abroad if such actions are approved by the Council of Ministers.

The INOC may establish wholly owned subsidiaries to perform common services in participation with partners from regions and governorates.

The board of the INOC -- comprising federal, regional, and governorate officials -- will oversee the INOC and its subsidiaries.


Governorate authorities are required to propose to the federal authorities activities and plans for the governorate to be included in the federal plan for petroleum operations.

Governorate authorities will also participate in the licensing process for activities related to the exploration and production of discovered but undeveloped fields in accordance with the provisions set in this law and in accordance with regulations issued by the federal Oil and Gas Council.

Contracting Mechanisms

Exploration and production contracts must include the following clause: "This contract is valid unless it is rejected by the federal Oil and Gas Council."

All contracts must be submitted to the council within 30 days of the day of the initial signing or they will be considered cancelled.

The Oil and Gas Council may call on the Independent Consultants Bureau to analyze contracts and assess their adherence to the council's regulations pertaining to exploration and production rights. Should discrepancies be found, the council will rule on the contract based on the recommendations of the Independent Consultants Bureau, with a decision requiring a two-thirds majority of the members in attendance.

The council must inform the Oil Ministry, the INOC, or the regional entity of the rejection of a contract within 60 days of receipt of the contract. The contract will be considered approved should no decision be given within the specified period. Should the council be unable to convene for extraordinary reasons, it will have another 60 days to rule on the contract or else it will be considered approved.

Petroleum Revenues

According to the constitution, the Council of Ministers must submit to parliament a draft federal law regulating matters pertaining to the distribution of oil and gas revenues.

Oil revenues include all government revenues from oil and gas, royalties, signing awards, and production awards from petroleum contracts with foreign or local companies.

Revenues must be deposited into an Iraqi Central Bank account labeled "Oil Revenue Treasury" and managed by the Council of Ministers and the Treasury Ministry.

The Oil Revenue Treasury must be administered by an independent entity headed by a person holding the rank of minister. This entity must include representatives of the federal government, regional governments, and governorates, as well as a number of independent consultants. The entity must be associated with the Council of Ministers and must be formed immediately.

The government's revenues, including oil revenues, must be distributed in a fair and just way in adherence to the constitution.

Another treasury must be created, called the "Future Treasury," to hold a percentage of oil revenue.

Exploration-And-Production Contracts

The holder of an exploration-and-production contract will have the exclusive right to conduct petroleum exploration and production in the contract area, as well as the right of transportation.

The holder will have exclusive exploration-and-production rights for a maximum of four years; but may be granted an additional two years to complete the work. A third period of exploration may be granted for a period of two years, provided the extension is justified by "the quality and substance of the work program."

Should a discovery be made, the exclusive exploration-and-production right may be retained by the holder for the purposes of completing the operations initiated within a specified area to assess or determine the commercial value of the discovery for an additional two-year period or, in the case of a nonassociated natural-gas discovery, for an additional period not to exceed four years.

The INOC and other holders of an exploration-and-production contract may retain the exclusive right to develop and produce petroleum within the limits of a development and production area for a period to be determined by the Oil and Gas Council, but not exceeding 20 years from the date of the approval of the field-development plan. In cases where technical and economic considerations justify a longer production period, the Council of Ministers may grant an extension not to exceed five years.

Contract Areas

A discovery that spans two or more contract areas shall be developed and operated jointly pursuant to a unitization agreement approved by the Oil and Gas Council. Should the contract holders fail to agree on the terms of unitization, the council will make a decision within six months of notifying the parties.

A discovery that extends from areas authorized for production into unauthorized areas shall be developed only after consultation with the Oil and Gas Council, taking into account the interests of the Iraqi state.

The Council of Ministers shall adopt the necessary measures to protect the state's interests in petroleum discoveries extending beyond the borders of the state. In such cases, efforts shall be made to seek joint solutions with neighboring states.


The main pipelines are the property of the federal government

The INOC is obligated to transport, without discrimination and according to reasonable commercial terms, the petroleum of third parties, provided it has the available capacity and there are no insurmountable technical problems to prevent utilization of the pipeline.

Disputes arising over the transport of petroleum through a main pipeline or a field pipeline for oil or natural gas will be sent to the Oil Ministry for resolution.

Production Levels

In the event that there is a need to set limitations on petroleum production, such limitations will be set in a fair and equitable manner and on a pro-rata basis for each contract area on the basis of approved field-development plans.

Main Pipelines

The INOC, or a specialized company created by the Oil Ministry, shall own all the main pipelines.

The ministry in coordination with the INOC and in consultation with operators shall ensure that the main pipeline network is optimally designed, operated, and maintained so as to serve the overall requirements for petroleum transportation in the state of Iraq.

The INOC and other holders of exploration-and-production rights shall deliver oil and natural gas to the main pipeline at appropriate transfer points. The transportation of crude oil or natural gas beyond the transfer point shall be carried out by the specialized company designated by the Council of Ministers on the basis of a contract.

The Oil Ministry is responsible for the coordination of tasks related to the transport of crude oil through new pipelines outside Iraqi territory.

Exploration and production contracts shall provide a nonexclusive right to access main pipelines on reasonable commercial terms. It shall also confer the right to construct and operate field pipelines to deliver oil or natural gas from the contract area to the transfer point for further transportation through the main pipeline to the delivery point.

The INOC and holders of exploration and production rights shall implement the field-development plan and construct field pipelines connected to the main pipeline following approval by the Oil Ministry.

The INOC and holders of exploration and production rights shall present a decommissioning plan to the Oil Ministry no later than two years before the planned termination of production.

Natural-Gas Utilization

The INOC and other holders of exploration-and-production rights shall diligently pursue all alternatives for optimal commercial utilization of surplus produced gases. Should they fail to do so, surplus natural gas shall be offered after treatment to the government at no cost at the field's outlet. The cost incurred by the holder of exploration-and-production rights shall be recoverable under the respective contract. Similar terms apply to the production of associated natural gas.

The development and production of natural gas or liquid components thereof from a nonassociated natural-gas discovery shall be subject to the approval of the ministry of a field-development plan supported by a signed agreement for the sale of natural gas from the discovery and approved by the Council of Ministers.

Land Usage

The duration of the right of use and benefit of land shall be the same as the duration of the contract.

The INOC and other holders of contracts who cause damage to crops, soils, or property are obligated to compensate the holders of title to the assets and relocate the persons affected.

Subject to the payment of the compensation due, the holder of the right to conduct petroleum operations may require the right of way in accordance with legislation in force in order to access locations where petroleum operations are carried out.

In cases where lands and rights of way are owned by an Iraqi citizen, the land shall either be rented or purchased by the relevant state-owned company according to applicable laws.


The INOC and other holders of exploration and production rights shall pay a royalty on petroleum produced from the development and production area at the rate of 12.5 percent of gross production measured at the entry flange to the main pipeline.

The collection of royalties shall be in kind or in cash at the option of the Oil Ministry.

If the royalties are paid in cash, they shall be calculated according to the prevailing market price.


In the interests of transparency, the following information shall be made public: all revenues, payments, and receipts delivered to any governmental unit or entity run by the government from activities related to oil or gas; all revenues of oil and gas usage and distribution, including distributions among government entities; all financially significant contracts related to exploration, development, processing, and marketing of oil and gas resources; all financially significant contracts related to importing and exporting services and goods for the oil-and-gas industry or by any governmental unit or entity controlled by the government; and the annual report of the Oil and Gas Council, as well as the annual and quarterly reports of the INOC and its subsidiaries.

Anticorruption Laws

Any rights contract shall be voided if found to violate any laws of the state of Iraq, and in particular anticorruption laws.

Violations may lead to the cancellation of the contract in whole or part.

Competitive Public Bidding

All oil companies working in Iraq shall submit public bids on a competitive basis in order to offer any goods or services in accordance to the general bidding laws.

All public bidding must be published within a reasonable time frame and the reasons for selecting the chosen bid declared. Competitors must be given the chance to raise objections to the outcome.

Existing Contracts

The Oil Ministry and the regions must review all existing exploration-and-production contracts signed with any entity before this law was in place to ensure harmony with the goals and the general regulations of this law. This review must be submitted to the Oil and Gas Council to ensure the maximum benefit for the Iraqi people, in a period not exceeding three months from the time the Oil and Gas Council issues model contracts and related regulations.

Changes In Administrative Borders

In the case of changes in borders of regions or producing governorates, or in the case of establishing new governorates, the newly affected places shall be dealt with in accordance with this law regarding the granting rights and petroleum operations.


Any disputes arising from the interpretation and application of this law should be attempted to be resolved first by the parties involved. If a resolution cannot be reached, the case will be referred to the oil minister, and in the last case, to the competent judicial authorities.

In the case of a dispute related to technical, engineering, operational, or accounting matters relative to petroleum operations, the parties may refer the dispute to an independent technical expert. If a party does not accept the expert's recommendation for the resolution of the dispute, the case may be referred to the courts.

Arbitration between the state of Iraq and foreign investors shall be conducted in accordance with the Rules of Procedure for Arbitration Proceedings of Paris or Geneva Chamber of Commerce for the Settlement of Disputes between States and Nationals of other States or pursuant to the Convention on the Settlement of Disputes between States and Nationals of other States and based on Iraqi law.

(compiled by Kathleen Ridolfo on the basis of material from

Sharing Iraq's Oil

Sharing Iraq's Oil

The pipeline from Kirkuk to Turkey is one of Iraq's main oil-export lifelines (epa file photo)

THE FUTURE OF THE ECONOMY. The uneven distribution of Iraq's oil resources has long been a source of tension among the country's ethnic and sectarian groups. Since the fall of Saddam Hussein, the tangled quest to find an equitable way to share oil revenues has been a major stumbling block on the road to national unity.


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