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Oil and gas rights of regions and governorates

TUE, 13 JUN 2006 23:20 | KRG Cabinet

Erbil, 13 June 2006 (krg.org) - In response to various enquiries, Dr. Ashti A. Hawrami, the KRG Minister of Natural Resources, answers questions about the constitutional rights of regions and governorates regarding oil and gas resources. The answers have been prepared in accordance with independent constitutional advice provided to the Minister.

There has been some media speculation as well as a number of press releases, articles and interviews, calling for federal constitution articles related to oil and gas resources to be amended. What are the views of the KRG on these issues?

Dr. Hawrami: These calls are irrelevant. They are initiated largely by those who hold anti-federalist views and are supported by some sympathisers of the former regime. These individuals seem to have conveniently forgotten that the Constitution is already in place. It has been ratified in a nationwide referendum and on this basis Iraq has formed its first democratically elected government.

It is understandable that not everyone likes all the articles, but the Constitution was adopted as a package by all the people; it is a single document. Therefore, its individual articles cannot be amended to suit the views and wishes of individual persons or parties. The rights of the regions and governorates are clear and cannot be modified in any way to enhance the powers of federal authorities.

Would the KRG consider renegotiation or amending these oil and gas related articles?

Dr. Hawrami: The constitutional negotiations are behind us now and we have to live with the constitution and respect it as the ultimate law of the land. The oil and gas articles are important for the whole country, so now we need to concentrate on providing the necessary guidelines to the federal and the regional parliaments and to all other authorities within the governorates to draft requisite petroleum laws. This should be conducted in private, without the intervention of unhelpful and uninvited guests or media speculators.

Has the KRG been in discussion with the federal authorities on the creation of the petroleum laws and on its relations with Baghdad?

Dr. Hawrami: The KRG is in regular contact through the senior Kurdish members of the federal government, and just before our respective appointments, I met Dr. H. Shahristani, the federal oil minister in Baghdad, and we agreed to fully cooperate for the benefit of all Iraq. The regions and the governorates will be represented and they will participate in the drafting of petroleum laws. The KRG intends to be proactive, constructive, and cooperative on these important matters.

How does the KRG interpret the oil and gas related articles?

Dr. Hawrami: The same way as all the commentators who have been complaining about them. These articles are clear to all concerned, so we do not interpret them differently from those who have been complaining about them. The only difference being is that we like them and they don’t.

Can you explain and elaborate on the oil and gas related articles, particularly the role of Baghdad, revenue distribution, control of field operations, relations with OPEC and oil exports?

Dr. Hawrami:There are two specific articles and a governing article in the federal Constitution relating to oil and gas resources.

Article 111 states, “Oil and gas are the property of all Iraqi people in all regions and governorates.”

This article is intended to clarify that these natural resources remain public and cannot be sold to the private sector. The additional text added at the end of this article (underlined) stresses the rights of the people in the regions and the governorates to these resources, but it does not deal with revenue sharing as this is defined separately in Article 112.

Article 112 has two distinctive parts. Part 1 deals with existing producing fields and states:

“The federal government in cooperation with the producing regions and governorates shall administer the extracted (produced) oil and gas from existing oil and gas fields provided that the proceeds (revenues) are evenly distributed in accordance with the demographic distribution around the whole country, and a specific share of the proceeds for a specific period of time shall be allotted to the regions which were unjustly deprived by the previous regime, and were affected by it, to secure a balanced development of the different areas of the country and this shall be regulated by law”.

This part of Article 112 makes it clear that the role of the federal authorities is only an administrative role confined to the handling, i.e. exporting and marketing, of the extracted oil and gas from existing producing fields. This does not entitle the federal authorities to a broader role on operations; otherwise, the word ‘extracted’ (‘produced’), would not have been inserted in the text.

The right to handle extracted oil and gas is directly related to revenue distribution. Therefore, the federal administrative role does not extend to the actual oil and gas extraction process, such as drilling, field operations, day-to-day running and management of oil and gas fields. This should not be a problem because these functions are currently, as they have always been, locally managed by the people living in the regions and the governorates.

Under the new constitution, however, the elected authorities of the regions and producing governorates are now entitled to administer and supervise the extraction process, in other words local oilfield managers are answerable to the local authorities. This is not a big deal, after all we all live in one Iraq.

It is also clear that even the limited handling role available to federal authorities is conditional upon an agreement being reached with the regions and the governorates on (a) an even demographic distribution of the oil and gas proceeds (revenues), and (b), a specific additional share or top-up above the demographic rights, for a period of time for all the deprived areas.

This means an agreement by the federal authorities with the regions and governorates is to be reached on a range of clearly defined and legally binding formulas to unconditionally allocate an additional percentage of revenue to each region and governorate for an initial period (to be defined) to redress the balance, and also for long-term entitlements beyond the initial period. Of course, there should be no dispute that the Kurdistan Region and many of the southern governorates have been deprived areas for a long time. Therefore, they would expect to receive or negotiate a reasonable share of the top-up revenues.

Part 2 of Article 112 deals with strategic policy issues and states:

“The federal government together with the governments of the regions and governorates shall put in place (draw up) requisite strategic policies for the development of the natural oil and gas resources in order to achieve for the Iraqi people the highest benefits by adopting the most modern market-driven principles and techniques to encourage investments”.

Here the emphasis is on an agreement being reached between the federal authorities and the producing regions and governorates to draw up strategic policies for all Iraq. This primarily pertains to overall short, medium, and long term production targets or limits that are to be achieved or allowed from each region and governorate, and to overall relations regarding the OPEC quota for Iraq.

Any laws related to Article 112 need to be agreed with the regions and the governorates. Therefore, the only difficulty here occurs if no agreements are reached, in which case the regions and governorates are entitled to create their own laws. These laws will prevail over federal laws by relying on the use of powers per Article 115, which is in their favour. While this would only happen if one of the parties becomes unreasonable, we should remain optimistic that this will not happen.

Is Article 115 specific to oil and gas, and how does it work?

Dr. Hawrami: This is a general overriding article which applies to oil and gas resources and to all other shared rights of the regions and governorates under the constitution. Article 115 states:

“Any rights that are not stated under the exclusive powers of the federal authorities shall come under the authorities of the regions and the governorates, and with regard to all the other jointly shared authorities between the federal government and the regions and governorates the priority shall go to the laws of the regions and the governorates in the case of conflicts between them”.

This article states the supremacy of regional laws over federal laws, and can be invoked if no agreement is reached on the management of oil and gas resources and the distribution of proceeds under Articles 111 and 112. This should only arise, however, if one of the parties becomes unreasonable, which is unlikely. If that occurs, then the regions and the governorates may exercise full control over all the fields, both old and new, including some oil and gas exports, and revenue collection and distribution.

Who controls infrastructure facilities, downstream activities, exploration or related exports, and revenues from new fields?

Dr. Hawrami: The articles are silent on many aspects of the oil and gas industry. However, anything which is not stated under the federal powers or under the shared powers comes under the absolute authority of the regions and governorates. For example as noted by many, with respect to oil and gas resources no reference has been made to the following and, therefore, these will be exclusive to the regions and governorates:

a) Article 112 does not mention anything about discovered undeveloped fields, or about any new fields, or any of the unexplored areas.

b) Article 112 does not mention the handling of extracted oil and gas, or related proceeds, from undeveloped fields, or from any new fields resulting from new drilling and further exploration activities.

c) Article 112 does not address any of the infrastructure and downstream activities such as refining, storage facilities, pipelines, pumping stations, export terminals, tankers, filling stations and buildings, and thus, these are the property of the regions and governorates.

Who controls new contracts, production sharing agreements and major service contracts?

Dr. Hawrami: Again, as these are not defined under the shared powers, the regions and governorates will have all the controls. It would be easier, however, and preferable for all to adopt common contracts, common fiscal terms and models to simplify matters and to avoid confusions with potential investors and service providers. Once again, this is not a big deal, we all live in one Iraq so the contracts can be awarded and managed locally. But officials, wherever they may be, should be fully transparent and must be accountable to their parliaments and authorities for all their decisions.

We should not listen to the alarmist views that these arrangements will not work and they may become uncontrollable. If a few people sitting in their offices in Baghdad can be trusted to do all these things, why can’t the real people who do all the actual work within the regions and governorates be trusted to do the same? Some can argue that the regions and the governorates may lack some expertise to perform some of the functions on these contracts. However, even if that were the case, the answer is not to change the articles, but let the experts go and work in the regions and the governorates instead of sitting in Baghdad.

Is the KRG awarding new contracts?

Dr. Hawrami: We just had our first excellent discovery by DNO earlier this week under the new Constitution and that is good for attracting more investment to the Kurdistan Region and hopefully to all of Iraq in the future. The KRG is moving ahead with its local activities as defined under the Constitution and is discussing potential contracts with a number of parties.

Has your appointment as the KRG’s new Minister for Natural Resources, and your background as a well known experienced former international oil executive, lead to more enquiries?

Dr. Hawrami: Yes since my return, the KRG has received a number of enquiries from experienced, reputable and capable companies who wish to set up bases in Erbil or Suleimaniah to invest in this Region and perhaps further south once the security situation improves.

What types of contracts do you intend to issue and what about transparency?

Dr. Hawrami: We will be fully transparent and shall adopt standard internationally recognised contractual models, which can be defended at all times and hopefully resulting from petroleum laws that we wish to be put in place during the next few months. The Kurdistan Region is safe, secure, and stable, and we have already started to discuss and negotiate with some well-known companies. Hopefully this process will pave the way for the rest of Iraq in the near future.

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