Regulating the Oil and Gas Sector in Iraq

ARISTOTLE UNIVERSITY OF THESSALONIKI FACULTY OF LAW

HALAH HADI

PhD Thesis

Thessaloniki, March 2017

This thesis was publicly defended at the Faculty of Law of the Aristotle University of Thessaloniki on 18 May 2017 before a jury of seven academics, namely:  Mr. Konstantinos Hadjiconstantinou, Honorary Professor at the Faculty of Law of Aristotle University of Thessaloniki  Mr. Petros Stangos, Professor at the Faculty of Law of Aristotle University of Thessaloniki  Mr. Panayotis Glavinis, Associate Professor at the Faculty of Law of Aristotle University of Thessaloniki  Mr. George Psaroudakis, Assistant Professor at the Faculty of Law of Aristotle University of Thessaloniki  Mr. Timoleon Kosmides, Lecturer at the Faculty of Law of Aristotle University of Thessaloniki  Mr. George Makris, Professor at the Faculty of Balkan, Slavic and Eastern Studies of the University of Macedonia  Mr. Konstantinos Karfakis, Professor at the Faculty of Economics of the University of Macedonia.

Nothing contained herein shall be deemed to represent the views of the above academic institutions or any of the aforementioned academics.

LIST OF ABBREVIATIONS

AGP-Arabic gas pipeline MOC-Missan Oil Company

Bbls/d - barrels per day MOU-memorandum of understanding

CNG-compressed natural gas NOCs- National Oil Corporations

E&P- Exploration and Production NOC-North Oil Company

FDI - Foreign Direct Investment OPEC - Organization of Petroleum Exporting Companies FOC- Foreign Oil Company PSA - Production Sharing Agreement FOGC- Federal oil and gas council PSC- Production Services Contract HG - Host Government RFB-Remuneration Fee per Barrel INES - Integrated National Energy Strategy ROC-regional Oil Company IOC- International Oil Corporation SPM-Single Point Mooring IPC- Iraq Petroleum Company SOC-South Oil Company IPSA –Iraq pipeline Saudi Arabia SOMO-state oil marketing oil organization ITF-Iraq Trust Fund

JMC- Joint Management Committee STATE-a host petroleum country

KRG-Kurdistan regional government TA - Technical Assistance

LNG- Liquefied natural gas TSCF-Trillion standard cubic feet

LPG-Liquefied petroleum gas TSC- Technical Service Contract

MB/d-Million barrel per day UN - United Nations

MCF-Million cubic feet VLCC-Very Large crude carriers

TABLE OF CONTENTS

INTRODUCTION 13

CHAPTER I: THE ACTORS

SECTION A: State Sovereignty over its Resources and Wealth

A.1. Regional Level 22

A.2. International Level 23

A.3. The development in the Iraq constitution policy 25

A.4. Development plans 26

A.5. National Energy strategy in Iraq 27

A.6. Policy Delivered from America to Iraq 31

A.7. General Principles of petroleum legislation 32

SECTION B: The State Companies

B.1. North Oil Company, based in Kirkuk 43

B.2. South Oil Company, based in Basra 44

B.3. Midland Oil Company (Iraq Drilling Company) based in Baghdad 45

B.4. Missan Oil Company based in Missan 46

SECTION C: The international oil companies

C.1. Private Sector’s participation in the development of the oil & gas sector in Iraq 53

C.2. Foreign direct investment 55

C.3. Investment Disputes (Iraqi Judiciary & National Courts) 60

C.4. Investment Disputes (International Arbitration) 65

SECTION D: Organization of Petroleum Exporting Countries (OPEC)

CHAPTER II: THE ACTIVITIES

SECTION A: Upstream activities in Iraq

A.1. Reserves 80

A.2. Production 81

A.3. Expansion of development, production, and export capacities 84

A.4. Upstream Iraq gas production 86

SECTION B: Midstream Activities – distributed SCADA system

B.1. Oil Pipeline in Iraq 91

 Kirkuk-Ceyhan Oil Pipeline 94  Kirkuk-Banias Pipeline 94  Mosul–Haifa oil pipeline 95  Kurdistan Pipeline 96  Basra Haditha pipeline 97  IPSA pipeline 97

B.2. Midstream Iraq gas (export/pipeline plans) 99

B.3. Transport the Iraq oil and gas by ports 99

B.4. Overland export routes 101

SECTION C: Downstream activities – The construction and operation of pipelines

C.1. Refining 103

Baiji Refinery 105 Basra Refinery 106 Daura Refinery 107 Erbil Refinery 107

C.2. Exports (oil exports) 108

C.3. Profit sharing 110

CHAPTER III: THE INSTRUMENTS

SECTION A: The Concession in general (The legal nature of the oil concession)

A.1. The legal effects of the oil contract 115

A.2. Exploitation concession leases of foreign oil companies 116

A.3. Right associated with the rights of exploration 117

1. The Non-Ownership Theory 118 2. The Qualiﬁes Ownership Theory 119 3. The Ownership Place Theory 119 4. The Ownership Theory Classes 119

A.4. The right of the ownership 119

A.5. The right to export 120

A.6. Joint Venture Terms (Transactions) 121

SECTION B: The production sharing agreement (PSA)

B.1. Iraq oil and gas licensing round 152

B.2. Instrument Corresponding to upstream activities – the PSAs 158

SECTION C: The Technology services contracts and Production (TSCs and PSCs)

C.1. Production sharing contracts 165

C.2. The Role of the PSCs and TSCs in the development of upstream sector 169

SECTION D: Instrument related to infrastructure development

D.1. Construction Contract 172

D.2. Iraq & Construction contract 183

D.3. Engineering, Procurement, Construction Management (EPCM) 185

D.4. Consulting Services Contract 188

D.5. Goods or Supply of Services Contract 190

CHAPTER: IV FROM PAST TO FUTURE

SECTION A: Oil field crossing international borders

A.1. Joint oil fields 199

A.2. Types of joint oil fields 201

SECTION B: The problems with Past claims against Iraq oil and gas

B.1. Paris club 206

B.2. Oil for food program 209

SECTION C: The uncertainty of the future: Kurdish autonomous region

C.1. Oil and gas in Kurdistan 216

C.2. Oil and gas dispute between Baghdad and Erbil 219

CONCLUSION 225

BIBLIOGRAPHY A. Primary Sources 229 1. Laws and Statutes 2. International Treaties 3. UN Resolutions 4. Cases

5. Standard Forms of Contracts used in Iraq B. Secondary Sources 231 1. Books a. Arab authors b. Others 2. Journals 3. Reports 4. Internet 5. News and Newspapers

Introduction

On August 27, 1859 Edwin L. Drake was able to create and complete the first oil well in

Titusville, Pennsylvania. Therefore in 1984 the oil industry had achieved its 125th anniversary and, perhaps more importantly1, the oil and gas industry has experienced rapid and successive changes throughout the years, making it very difficult for one to keep up with those changes sometime. Due to this phenomenon, however, upstream oil and gas contracts have been influenced by both the Contractor and the Host Government.

Host Governments are primarily motivated by socio-economic objectives, securing risk capital, and using modern exploration and production technology. Contractors, on the other hand, are primarily motivated to acquire a sufficient return on their investment.

Contract provisions for exploration and production, technology services, marketing, or other such matters were therefore designed with the intent of reconciling competing interests of both the Host Government and the Contractor. Nevertheless, the high cost of production in addition to the technological challenges have made oil and gas serious and demanding energy resources. It is due to this reason that the Middle East had become a strategic theater of operations during the First World War. At the end of this conflict

Great Britain emerged as the largest shareholder of the Middle East’s oil wealth reservoirs. From this point, onwards this region had been a critical focal point for political, economic, and military interests. Moreover, Iraq became a key country as it found itself engulfed in open warfare for many years. Oil in most oil-producing countries, including Arab countries, is now state-owned.

1 First Oil Well Fire, http://aoghs.org/oil-amanac/first-oil-well-fire/.

It is also known that these countries are not able to carry out investments because of the inadequacy of national monetary funds for these operations along with other shortfalls of national powers. These oil producing states depend on international oil companies to perform all or most stages of the oil industry due to their huge financial capabilities, methods of modern industry, technology, and sophisticated marketing techniques and facilities in global markets. It has been common in oil investment contracts or oil concessions to grant companies the exclusive rights in both the discovery and production of oil. The sharing contracts, which are also evident from its name, works to ensure all participating parties are financially tied together by sharing of profits and costs. In contrary, production contracts dictate that the state owns the exclusive rights in exploration and production. Therefore, the state does not share any financial ties to the outsourced companies and simply seek their services.

It is known that the oil industry in Iraq is currently experiencing a decline in oil production due to a lack of technological infrastructure required for oil production. One of the most obvious reasons for this delay in technological advances is due to the economic blockade and years of conflict and war that have torn the country apart. Due to the aforementioned reason, the host country of Iraq has no other option but to seek foreign oil production companies to help assist them in exploiting their natural resource.

These foreign companies seem to control the market as the host nation has very limited options to exploit this resource themselves and must look for outside assistance.

Therefore, by adopting the best contractual formulas, the host nation has concluded to use the service contract option. This option not only helps to preserve the wealth of Iraq but also achieves the interests of the foreign investment companies. It is worth mentioning

14 that Iraq is one of the oil-rich countries, which currently has had less exploration and nevertheless still has some of the richest sedimentary basins in the world, second only to

Saudi Arabia. In fact, about 526 fields have been discovered and identified with their sites located on maps, which have been classified as being of great potential. But development includes only 20% of the total number of fields discovered so far. A large part of Iraq's natural resource remains unexplored, waiting for future discoveries and development. This does not exist at the moment as only 15 fields of the total of 73 were developed. This includes 11 new fields in the south with the production capacity of 3 million barrels per day, and 11 fields in the north with a production capacity of about

500,000 barrels per day. Three fields in the center of production with 300,000 barrels per day and the capacity to produce 900,000 barrels per day of oil deposits have been partially developed in the currently producing fields. In other words, Iraq has the capacity to produce 4.7 million barrels per day of fields ready for development but work has been intermittent due to political problems and technological handicaps2. And despite the fact that Iraq's oil was discovered in 1927, its full potential was not discovered for many years even though other countries’ potentials were, such as those in the Arab Gulf. In 1961 identified reserves of 34 million barrels were made by international oil companies and the

Iraqi national oil company. Although these exploration efforts continued during the sixties, there was limited activity in the eighties because of the wars that halted and slowed oil production ever since. In 1991 there was no deep drilling as water injections were the only means used3. This meant that gas injections were tried in only a few cases.

2 Energy economist, OPEC http://www.energyeconomist.com/a6257783p/archives/ee120126exp_opec.html accessed 12 Feb 2013 3 David Klein, Mechanisms of Western Domination: A Short History of Iraq and Kuwait, California State University, Northridge, 2003 p 32.

It is worth mentioning that there were many difficulties, due to a lack of available resources, the lack of cooperation from the Iraqi Oil Ministry and its departments, as well as the unstable security situation in Baghdad.

Chapter I: The Actors

Petroleum is perhaps the most important commodity in the modern world. It is a precious substance indispensable to the economic progress and prosperity of all countries. The technology investment and foreign companies still need the authorization of the host countries to carry out exploration and production operation. This sets the stage of the contractual relationship between the government as the landlord and the company as the tenant. Petroleum exploration and exploration by foreign companies in developing countries is a unique business in a complex industry. It links government owners of the natural resources to companies and investors with private capital, technology, and equipment necessary for resources development into a single sector. The stakes and risks as well as the possible profits have always been fundamental issues in arrangement between the two such contracting parties, but this relationship is also inherently unstable due to a number of factors. First the underlying objectives of the two parties are different.

At times, host countries are interested only in making use of foreign investment to develop the resources for the benefit of national economic progress rather than also for profits. Second, petroleum contract are long term agreement which normally run for 30 or

40 years4. During the life of the contract, the bargaining positions of two parties may change and the balance of power may shift from one party to another. Third, the relationship is vulnerable and subject to the impact of various externalities such as changes in oil price, international politics, and events. Thus, it has always been crucial for the contracting parties to maintain a mutually beneficial relationship.

4 Christian Dufournaud, Long Term Contracts for Crude Oil Imports into Costa Rica a General Equilibrium Analysis, the Energy Journal, and Vol. 10, No. 1 (January 1989), pp. 119-125.

The definition and meaning behind oil concessions involves the granted privilege by the

State to authorize oil companies’ access to energy resources5. Included is the fact that the natural resource of oil is a main source of energy for most major industrialized countries, and control is needed for economic growth. That is the subject of the concession oil contract, which comes from the oil-producing State. As a matter of public law, these contracts enjoy the privileges and benefits found within this category of legal control between the State and oil companies6. The topic of sovereignty of the foreign international party found within the 20th century can be divided into two parts.

First are the oil concession agreements themselves, and second are the parties that are bound to those concession agreements. There has been controversy among legal scholars about the meaning of the concept of concession. It is correct to say that it is an investment treaty in an agreement of legal binding force. This is also the case with in the international project Joint Bidding Agreement. Those who work within the purview of the State are assigned under the public law’s authority to enter into oil concession contracts. Whether a contract or decision of unilateral responsibility for macro- management or partial services is made falls within the responsibilities of the State and creates third party risks. Operations of these services are interpreted by the European

Commission for that term. In order to explore for oil and gas, or “petroleum” as they are generically known, it is necessary to have access to land or subsea areas which are not usually owned by the company conducting the exploration. Even if they are, an oil company must ensure that it has all necessary and relevant permits and authorities to enable it to do so. This will involve the cooperation of the host government (State) and

5 Concession Agreement, http://www.investopedia.com/terms/c/concessionagreement.asp. 6 Jenik Radon, the ABCs of Petroleum Contracts License Concession Agreements. Joint Ventures, and Production Sharing Agreements, 2005.p26.

18 compliance by the company with whatever consents are necessary7. There will inevitably be a price for any such consent. Procedurally these consents in most jurisdictions come in one of two forms: either the grant of concession, whether in the form of a license or a lease, or alternatively by the conclusion of a production sharing agreement. Not all licenses cover the full exploration and production process, and in some regions exploration licenses which do not confer the right to produce are also required. Offshore, exploration acreage may be in territorial or in international water. The host government

(State) will normally have obtained, usually by international consent, certain rights in relation to those waters. Though they rights may fall short of outright ownership, they will still convey full regulatory power over them. If right are asserted in areas where the limits of offshore jurisdiction have not yet been agreed between two governments, or where there are outstanding disputes that need to be resolved, an operator’s title may be open the question and therefore at risk.

7 Thomas Walde and George K. International oil and gas investment moving eastward, Graham and Trotman of the Kluwer Academic publishers group, London/ Dordrecht/Boston,1994. p. 37.

SECTION A. State Sovereignty over its Resources and Wealth

Territorial sovereignty is defined as the legal right of a State to govern the functions of their own territory within its boundaries territory al sovereignty ext.8. This includes the

State’s airspace, maritime boundaries, lands, subsoil and everything that is in the ground as well as everything else that extends to the outer sea within its maritime limits, including islands. The deﬁnition of State sovereignty and its contents with regards to territorial Resources and wealth, results in the understanding that the State has the ultimate power and authority to govern its own territorial assets and natural resources.

The idea that the State is allowed to exercise full rights over its resources parallels certain aspects of individual property rights in terms of giving the owner or State the right to do anything they want with its property or resources9. This dictates that an obligation is placed on others to respect this right and not interfere with the exercise of these rights without their full consent.

The State’s sovereign rights over their territorial wealth and energy resources, speciﬁcally oil and gas, translates into their ability to dictate how that resource is exploited and the conditions upon which they may be used. In the long term, these conditions are dependent upon the interests of the Contracting Parties and the agreed upon terms of the contract itself, which is the base of their International relationship. Therefore the

International Law report dictates that the State has the right to govern its oil and gas

8 Gary B. Sullivan, Implicit Waiver of Sovereign Immunity by Consent to Arbitration Territorial Scope and Procedural, Texas International Law Journal Vol.18 No.2 1983. p. 329. 9 United Nations Convention on Jurisdictional Immunities of States and Their Property was adopted during the 65th plenary meeting of the General Assembly by resolution A/59/38 of 2 December 2004. In accordance with its articles 28 and 33, the Convention shall be open for signature by all States from 17 January 2005 until 17 January 2007, at United Nations Headquarters in New York.2 Dec.2004

21 reserves located anywhere within its territorial boundaries10, whether that be beneath the surface of the earth on its land or under the seabed within its maritime boundaries and continental shelf11. The role of the international community is to prove State sovereignty over natural resources of both the international and domestic territories.

A.1 Regional Level

The most important aspects of the International System’s laws and regulations, which are stable and non-changing, are those that pertain to the sovereignty of States over their resources within their land and maritime territories. These are the geography- areas where the States exercise full sovereignty over their territorial assets, without exceptions12. The international community’s awareness of the importance of this principle was duly noted as it received a great deal of attention at the regional and international levels. Thich emerged as an important role in Latin America.

Latin America was the ﬁrst region of the world where the State had the authority to dictate the conditions of all agreements. That emphasized the principle of sovereignty as well as the active role exercised by their respective scholars who appraised the value of natural resource access. Afterwards, most of the Asian States had similar agreements to those found in Latin America. These movements were then followed by African countries within the Bandung Conference in 1955.

10 Schwarzenberger, title to territory Response to challenge, A.J.I.L, Vol. 51, 1957, p 308. 11 Brownlie, Principles of public international law, 2nd ed, oxford, 1973.p22 12 Usha Natarajan, Creating and Recreating Iraq Legacies of the mandate system in contemporary understandings of third world sovereignty, Leiden Journal of International LawVol.24 2011p. 799.

A.2. International Level

At the international level, there was a conﬂict between the United Nations and the Oil companies due to their relationship with the developing countries that relied on their energy natural resources for the development of their Industry and international trade.

The establishment of the United Nations Industrial Development Organization (UNIDO) in 1966 was a result of the fact that the Industrial countries were trying to keep the privilege achieved via the exploitation of the natural resources obtained from the developing countries. It had a prominent role in transforming the UN into an organization interested in being on the economic side of international peace and security, and it was one of the most important achievements of UNIDO13. The announcement enacted by

Lima in 1975 stressed the rights of the States to impose its sovereignty and permanent

Control over its natural resources located within its territory or ground water. it stated that every State has the alienable right to exercise freely its sovereignty and permanent control over its natural resources, both terrestrial and marine and overall economic activity for the exploitation of these resources in the manner appropriate to its circumstances14.

A draft resolution recommending that member States undertake the action of respecting the rights of a State with regards to its investment of natural resources resulted in a discussion of a project that was decided by the General Assembly on December 21, 1952.

This decision affirmed the sovereignty of States over their natural resources and wealth, while also stressing their freedom to exploit their resources as they see fit. In addition,

13 United Nations Industrial Development Organization, www.unido.org. 14 Zeyad Al Qurashi, Renegotiation of international petroleum agreement, Journal of the international arbitration Vol.22,No.4 2005, p. 20.

23 freedom from exploitation or control from any other country was also high-lighted15 this was followed by resolution 1803 in 1962, which confirmed that the rights of a State, did not contradict the fact that the obligations of international economic cooperation are built on the basis of international law16. Resolution No. 2158 was established in 1966, which was then followed by Resolution No. 3018 of 1972, which called on States to refrain from doing anything that may lead to prejudice or interfere with a State’s freedom to exercise their right of sovereignty over their own natural resources. In addition, the international presence of universal declarations within the oil industry included the

International Covenant on Economic and Social Rights, which was ratiﬁed by the

General Assembly in 1966. The second article of this ratiﬁcation, the freedom of States to dispose of its resources, was confirmed. The announcement of the General Assembly provided the establishment of a new international economic order named the Charter of

Economic Rights and Duties of January 5, 1974, managed by the Nations Conference on

Trade and Development (UNCTAD)17.It also emphasized the importance of the sovereignty of States over their natural resources.

Perhaps the most recent international agreement to confirm the principle of a State’s sovereignty over its own resources is the Declaration of the United Nations Conference on Trade and Development in 199818. Within the sixth paragraph of the declaration, the legal and economic benefits and problematic issues can be found, along with how best to resolve them.

15 James N. Hyde, permanent sovereignty over natural wealth and resources, the American Journal of international law Vol.50 No.4 (Oct.,1956) p. 854. 16 Feuer, Guy et Cassan, Hervé, Droit international du développement, Dalloz, Coll. Paris 1985. p200-201. 17 ODI briefing paper, UNCTAD. Overseas Development Institute, London No.2. 1979. 18 Trade and Development Report, the General Assembly of the United Nations 1998 P. 12.

A.3. The development in the Iraqi constitution policy

The constitution does give the regions and the governments certain powers to modify or nullify federal legislation19. All power not stipulated as the exclusive power of federal governments belongs to the authorities of the regions and governments that are not organized in a region. With regard to other powers shared between the federal government and the regional government, priority shall be given to the law the regions and governments not organized in a region in case of dispute. That means validity of existing Kurdistan contracts and the Kurdistan government have the power to enter into certain oil exploration or development contract with foreign companies. The contracts have not been made public and their scope and the fields to which they apply are unknown. In support of its authority to enter into these contracts, Kurdistan representative point to Article 141 of the Constitution which preserves the validity of certain actions of the region of Kurdistan taken since 199220. Article 141 provides that legislation enacted in the region of Kurdistan since 1992 shall remain in force, and decisions issued by the government of the region of Kurdistan, including court decisions and contracts, shall be considered valid unless they are amended or annulled pursuant to the laws of the region of Kurdistan by the competent entity in the region, providing that they do not contradict the Constitution.

Although that clause is very broadly drafted, it is subject to the last limiting clause that any such legislation, court decisions, or contracts cannot conflict with the Constitution.

Any existing contract could conflict with Article 112 of the Constitution to the extent that

19 Constitution of the Republic of Iraq of 2005 published in the Official Gazette, issue 4012 of 28/12/2005. 20 The Investment Law of Kurdistan No (4) of 2006 published in the Official Gazette, issue 62 of 27/08/2006.

25 it deviates from the authority give to the federal and regional government with respect to the management of the production from existing oil fields or to the extent that it conflicts with the strategic policies that are to be adopted pursuant to article 11221. If such contract represent an exercise of authority within the areas committed by Article 11022 exclusively to the federal government (e.g., foreign sovereign economic and trade policy), the contracts may also be invalid or subject to modification with respect to activity taking place after the constitution became effective. Any more definitive analysis would require review of the contract and might also have to await decisions regarding management and policy pursuant to Article 112.

A.4. Development plans

Iraq has an ambitious program to develop its oil fields and to increase oil production.

Passage of the Hydrocarbons Law would provide a legal framework for investments in hydrocarbons. Passage remains a main policy objective. Despite the absence of that law, the Iraqi Ministry of Oil signed 12 long-term contracts between November 2008 and May

2010 with international oil companies to develop 14 oil fields23. Under the first phase, companies bid to further develop 6 giant oil fields that were already producing from reserves of over 43 billion barrels of oil. Phase two contracts were signed to develop oil fields that were already explored but not fully developed or producing commercially.

Together, these 12 contracts cover oil fields with proven reserves of over 60 billion barrels, or more than half of Iraq’s current proven reserves.

21 Iraqi Constitution of 2005 publishes in Official Gazette issue 4012 of 28 May 2005. 22 Full text of Iraqi constitution http://www.washingtonpost.com/wpdyn/content/article/2005/10/12/AR2005101201450.html accessed 10 Feb 2013. 23 oil turns on taps at West Qurna-2, Iraq, www.arabianoilandgas.com accessed 17 Feb 2013.

As a result of these awards, Iraq boosted production by 200,000 bbls/d in 2010, and increased production by an additional 400,000 bbls/d in 2011. When these fields are fully developed, they will increase total Iraqi production capacity to almost 12 million bbls/d.

That would be 9.6 million bbls/d above 2011 levels. The contracts call for Iraq to reach this production target by 201724 Iraq faces many challenges in meeting this timetable.

Most significant is the lack of facilities for major increases in crude oil production. Both

Iraqi refining and export infrastructure are bottlenecks that need to be upgraded. Iraqi oil exports are currently running at near full capacity in the south, while export capacity in the north has been restricted by sabotage. Capacity would need to be expanded in any case to export significantly higher volumes.

A.5. National Energy strategy in Iraq

The Iraqi government, in an attempt to redevelop its domestic oil and gas industry following years of war and sanctions, is drawing upon the Iraqi Trust Fund. Iraq has also developed an Integrated National Energy Strategy25 that details ambitious plans to transform its most important economic sector, planning reforms and investments of over

US$600 billion in its oil, gas and electricity sectors, and in linked industries that could realize up to US$6 trillion in public revenues by 2030 plus the addition of 10 million jobs within the Iraqi economy26.

Iraq’s economic prospects are highly dependent on the appropriate development of its energy sector, with 98 percent of total exports and 96 percent of budget revenues flowing

24 Daniel Canty, Oil and gas Middle East present its fingertip guide to the biggest energy project in the middle east today, http://www.arabianoilandgas.com/article-9424-new-top-20-upstream-projects/1/print/, accessed 5 August 2015. 25 Integrated National Energy Strategy report for Iraq,www.iier.org. 26 The Iraqi Ministry of Planning, Development Plan report, 2014.

27 from the sector.

In 2009, oil production remained below pre-war levels27, gas was being flared in significant and increasing volumes, and a lack of domestic energy supply was restricting economic growth with unmet electricity demand. Most Iraqis had less than 8 hours of power every day, costing the Iraqi economy around US$40 billion yearly28. While Iraq was struggling to re-build its weakened energy sector, institutions and environmental and social concerns were largely ignored, and corruption and lack of transparency plagued the sector. Iraq's Integrated National Energy Strategy was developed through the support of the World Bank which managed Iraq Trust Fund. It was the result of the closely coordinated efforts of a number of significant Iraqi ministries Oil, Electricity, Finance,

Planning, Water, Environment, and Industry and Minerals. The World Bank provided grant funding to hire an international consultant to support the Government of Iraq in the development of its national energy strategy29..

It also provided a team of specialists who provided critical advice and comments at key points in the strategy's development, and worked closely with the Iraq Prime Minister's

Advisory Commission to ensure that the strategy was developed through a strong consultative process, with input from stakeholder Ministries, the Iraqi parliament, civil society and academia. The Integrated National Energy Strategy (INES) goes beyond

27 Iraq integrated national energy strategy technical assistance project emergency project, http://documents.banquemondiale.org/curated/fr/2009/12/12374728/iraq-integrated-national-energy- strategy-technical-assistance-project-emergency-project-paper 28 Developing a national energy strategy in Iraq 2014 http://www.worldbank.org/en/results/2014/04/15/developing-a-national-energy-strategy-the-iraq- experience, . 29 World bank group, Developing a National Energy Strategy in Iraq, Report April 15, 2014.

Iraq's short-term focus of maximizing oil export and revenues30.

Through a strategy that also develops its gas sector, power sector, and value adding industries, it seeks to diversify Iraq's economy, and create almost 10 million new jobs in the economy by 203031. The strategy will guide US$600 billion in investments in the energy sector, and related ‘value adding’ sectors such as petrochemicals, fertilizers, steel, and aluminum production. It will also reform and strengthen Iraq’s energy sector institutions and significantly increase private sector participation and investment in Iraq’s energy sector and related industry. Iraq’s focus on revenue maximization from its energy sector is now also balanced by a drive towards economic diversification, environmental excellence, social responsibility, sustainable energy security, and job growth. The

Technical Assistance (TA) was funded by the Iraq Trust Fund for a total envelope of

US$6.9 million which included an additional financing component of US$1.9 million32.

A team of World Bank specialists provided critical advice and comment at key points in the strategy's development, and worked closely with the Iraq Prime Minister's Advisory

Commission to ensure that the strategy was developed through a strong consultative process, with input from stakeholder Ministries, the Iraqi parliament, civil society and academia. Aside from the donors that contributed to the Iraq Trust Fund (ITF), this was a

TA prepared by the World Bank and the Iraqi Government33. The ITF Donors included the following: Australia, Belgium, Canada, Denmark, European Commission, Finland,

Germany, Greece, Iceland, India, Ireland, Italy, Japan, Korea, Kuwait, Luxembourg,

30 Merza A. oil revenues, public expenditures and saving stabilization fund in Iraq International Journal of Contemporary Iraqi, Vol 5, No.1 (2011) p. 47-80. 31 The Iraqi Ministry of Planning, Development Plan 2014. 32 World bank group Developing a National Energy Strategy in Iraq, 2014. 33 International reconstruction fund facility for Iraq,www.irffi.org,.

Netherlands, New Zealand, Norway, Qatar, Spain, Sweden, Turkey, United Kingdom and the United States. All that shows that there is great revaluation for the Iraqi future in the oil and gas sector.

The strong ownership developed across the Government in the strategy means that implementation is now well underway. Even though the strategy was only completed last year, oil infrastructure continues to be strengthened and expanded. Significant investments are being planned to reduce gas flaring and ensure that gas is made available to downstream industries, and replace heavy fuel oil and diesel as the fuel for power generation. Agreements are already being struck with private companies to invest in energy related industries that hold the key to jobs growth in the Iraqi economy34. As a result of the strong relationships forged through the development of Iraq's Integrated

National Energy Strategy, the Bank is continuing to expand its support for Iraq's energy sector. The Bank is now in dialogue with the Government on TA, Reimbursable

Advisory Services (RAS), or prospective operations in gas sector reform, electricity loss reduction and distribution sector reform, renewable energy developments, and energy efficiency. In the end the beneficiaries are the Iraqi citizens through improved service delivery, job creation, and poverty reduction, and the private sector through economic diversification, investment opportunities and energy sector service delivery35. Multiple institutions must work together to accomplish these goals as well as the effective management of large numbers of complex interconnected tasks. The strategy recognizes this dual need for economic and institutional direction in both areas. Iraq also plans to

34 Beyond Conflict: Iraq's Energy Sector Targets Jobs and Prosperity May 6, 2014 http://www.worldbank.org/en/news/feature/2014/05/06/beyond-conflict-iraqs-energy-sector-targets-jobs- and-prosperity . 35 Middle East Economic Survey, Iraq’s integrated national energy strategy report 2013.

30 sign delineation agreements covering shared oil fields with Kuwait and Iran. Iraq would like to set up joint committees with its neighbors on how to share that oil36.

A.6. Policy Delivered from America to Iraq

Production sharing agreements have been heavily promoted by oil companies. They were also proposed by the US State department prior to the 2003 invasion37. These proposals were then developed by Iraq’s interim government and by the transitional government.

The Iraq constitution also opens the door to foreign companies, but in legally vague terms. What ultimately happens will depend on the outcome of elections and on the political and security situation. The government is fast tracking the process. It was already negotiating contracts with oil companies in parallel with the constitutional process, elections, and passage of petroleum laws in that time. The constitution provides for decentralization of authority over oil contracts, at the national and approved regions’ level. If implemented, the regions would have weaker bargaining power than the national government. This could lead to poorer terms from Iraq in any deal with oil companies. In reality, regions are not submitting contracts for approval, but are proceeding with implementation. The Exxon Mobile contract with KRG is a major example of such reality38. In order to make their case, oil companies and their supporters argue that PSAs are standard practice in the oil industry and that Iraq has no other option to finance oil development. Neither of these assertions is true. According to international energy

36 Walid Khadduri, Pricing and Profitability in the Gas Deal of Southern Iraq Preliminary Evaluation, Energy and Geopolitical Risk, Volume 3, No. 9, (October 2012). 37 PSC Discussion Forum, https://pscforum.wordpress.com/2008/09/01/psc-is-not-always-the 38 Iraq -Kurdistan, Exxon Mobile breaks silence over oil, http://www.unpo.org/article/13945

31 agency figures, PSAs are used for only about 12 percent of world oil reserves39. They are used in countries where oil fields are small and often offshore where production costs are high and exploration prospects are uncertain. None of these conditions apply to Iraq, and some governments that have signed PSAs regret doing so. These include financing oil development with government borrowed funds using future oil production as collateral to borrow money, or using international oil company funding through shorter-term less restrictive and less lucrative contracts. These might include buyback contracts, risk service contracts, or development and production contracts. PSAs represent a radical redesign of Iraq’s oil industry, transferring it from public into private hands.

A.7. General Principles of petroleum legislation

Petroleum legislation can practically be described in a few concepts and terms:

“Petroleum legislation”; includes all legislation specifically designed for the purpose of regulating petroleum operations, to include the construction and operation of oil installations and pipelines. It also includes legislation concerning the imposition of any specific special charges or duties on petroleum revenues, such as royalties, or any sharing of petroleum profits on petroleum and any legislation specifically imposing a tax on income realized from petroleum operations. It also covers licenses and contracts of work40 “Relevant legislation” includes all legislation, other than petroleum legislation, that is relevant to the conduct of petroleum operations and includes legation concerning the conservation and protection of the living and non-living natural resources and environment generally as well as legislation concerning the occupation, use and

39 Jonathan M. Karpoff, Scott lee, Gerald S. Martin, the economics of foreign bribery evidence from FCPA enforcement actions, university of Washington, US.2014 p.3. 40 Bernard Taverne, Petroleum Industry and Government, a study of the involvement of Industry and Government in the production, London, 2008. P 79.

32 restoration of surface areas41.

“Fiscal legislation” includes all general applicable legation concerning taxes on income and other taxes42. Petroleum legislation may restrict the application and scope of fiscal legislation as far as petroleum revenues or petroleum incomes are concerned. “Licenses” and “contract of work” includes authorizations, permitting the license holder or contractor to undertake one or more types of petroleum operations, subject to fulfilling the obligation imposed by the license or contract. A license is granted by the competent governmental authority usually the government minister responsible for petroleum affairs, and a contract of work is entered in to with the designated state oil enterprise.

Subject to the approval of the competent authority, the license entitles its holder to obtain and win petroleum and constitutes a transfer of title to petroleum if and when produced.

The transfer is between the owner of the petroleum in situ and the license holder43. With a single exception a license does not make its holder the owner of petroleum in situ. This ownership rests with the grantor of the license, the competent authority of a state, or the owner of land depending on the legal regime. A contract of work does not involve the same transfer of title, although it usually leads to an acquisition of the petroleum produced. Before these contracts are entered into the designated state’s oil enterprise, an exclusive license will have been granted by the government to obtain and win petroleum.

In its capacity as an exclusive license holder the state organization is then authorized to engage a contractor to undertake the work. A license is not only a simple transfer of title

41 Ghanim Anaz, Iraq oil and gas industry in twentieth century, Nottingham, UK,2012 p. 227. 42 Frank Jahn, Mark Cook and Mark Graham, Hydrocarbon exploration and production, 2nd ed, Tracs international consultancy Ltd. Aberdeen .UK .2008 p.117 43 Bryan George. The law of petroleum and natural gas with forms, Hackensack, Fred B. Rothman, and Company, 1984, p.77

33 of petroleum, as the elaborate conditions, rights and obligations lend to a strong contractual aspect of the license.

It should be added that under some legislations a contract has to be approved by the body of people’s representatives, whereby it will achieve the state of formal law. Petroleum legislation has two objectives:

1 -To regulate the conduct of petroleum operations,

2- To determine the sharing of the petroleum revenues and income between the states and to authorize certain persons to undertake these operations44.

Almost universally a basic petroleum law contains the provision that the ownership of petroleum occurring in the subsoil of the country belongs to the state. There are however, countries where on their land territory the ownership of the petroleum in the underground either belongs to the owner of the land, which overlies the petroleum accumulation, or to no one all.

In Iraq legislation discussion, we will be dealing with two issues raised by the proposed

Iraqi legislation covering the oil and gas sectors. The topics of contract choices and renegotiations will also be discussed. More importantly, the contract types spelled out by the legislation concur with the private partnership sector of the general public. More specifically the contributions of technical, managerial, operational skill sets, and capital resources exhibit the importance of attracting commercial interest. In addition to having the private sector onboard, it is also favorable to have significant national participation.

Through this collaborative approach of both national and private companies, gains will be

44 The Turkish petroleum company, us library of congress http://countrystudies.us/iraq/53.htm .

34 seen in the sectors of Iraqi products, services, training, and technological transfers.

Affiliations, joint ventures, and other forms of mutual cooperation will serve as the catalyst to promote rapid growth in the Iraqi private sector. This approach will in turn result in enhanced Petroleum Operations that will not only benefit the private shareholders, but the nation as well (Article 15). With the background issues clearly stated, other identified issues should be addressed and understood. This includes topics on the Federal Oil and Gas Council, which plays an advisory role to the Council of

Ministries and has the ability to propose legislation. In agreement with the Iraqi

Constitution, the proposed Oil Laws of Iraq recognize that it is the people of the country that ultimately hold ownership to the nation’s natural resource of oil and gas. It is the

Federal Government that ultimately holds control over these resources, producing both governorates and regional governments. The proposed oil laws shed light on how these resources will be controlled by the governing bodies of this resource. Representatives from each of these entities sit on the Federal Oil and Gas Council, with the Federal

Government seemingly wielding greater primary control. Therefore, the Ministry of Oil is the final authority on issues pertaining to the nation’s natural resource of oil. It is the

Federal Government of Iraq that holds ownership rights to the main pipelines in the country. The Ministry of Oil’s purpose is to consult with the producing provinces along with their respective regional authorities to devise policies and plans. It is these provincial authorities that feed into the federal decision-making process by creating policy proposals, and participating in administration discussions. Finalized federal planning is one of the end results of this collaborative involvement. Another role that the provincial authorities play is in the licensing, exploration, and production of oil.

Moreover, they are also known to monitor operations. One of their proposed mandates is to work alongside the Ministry of Oil in order to ensure uniform and consistent implementations throughout the Republic of Iraq (Article 5(F)). They also work to include the oil-producing provinces in every contract negotiation (Article 7), and come to the final decisions on exploration processes (Article 8 (E)). While individual regions may exercise their ability to enter into contracts by themselves (Article 9 (A)), the Federal Oil and Gas Council have the final say and ability to void these contracts (Article 10 (B)).

The proposed national legislation has developed a process for reviewing contracts made within the Kurdistan region with the aim of judging and ensuring that the contract agrees with the parameters of the legislation. Contracted by the Federal Oil and Gas Council

(Article 4 (38)), it is the Bureau of Independent Experts that get the final say over the true validity of these contracts (Article 40(A)). The Ministry has also undertaken the position of reviewing other pre-existing contracts prior to sending them before the Federal Oil and

Gas Council (Article 40 (B)). In the revision of all contracts, including those from the

Kurdistan region, the interests of the Iraqi people remain the guiding principle. With regards to contract revisions, agreements, and design, the legislation provides the government with great flexibility in approaching to their conclusion. One of the stated goals is for the aim in choosing the right contract that will guarantee the maximum benefit for the people of Iraq (Chapter II, Article 5(C)). Proposed legislations present itself with a myriad of contract types such as the service, the exploration and risk, and the exploration and production contracts (Chapter II, Article 9). Attention must also be paid to how much of an extent the Iraqi National Oil Company is involved in the various oil and gas projects. The exploration of proven oil reserves by oil and gas companies

36 experience less control and oversight than companies that are involved with areas that have been considered untested. Although political and exploration risks should not be mistaken for being the same, they are inextricably linked as international banks are more willing to finance projects with greater foreign private participation. Of interesting importance is the fact that the legislation acknowledges the possibilities of honoring, renegotiating, or the possible repudiation of pre-war contracts. This level of flexibility is also applied to new contracts that may be subject to future legislative changes. Proposed legislation clearly states that exploration and production contracts outlined in Article

10/A must abide by the follow statement the contract is valid unless the Federal Oil and

Gas Council objects, in accordance to this law (number of 2007). This statement also applies to negotiation and contracting mechanisms, contracting models, and any future changes issued by the Federal Oil and Gas Council (Article 10 (B)). Based on the above discussion, one can conclude that the proposed legislation can be considered very flexible in its approach and application to contracts. From the development perspective, overarching statements with regards to its advisability is difficult. Simultaneously, one must keep in mind that it is in the process of contract formation that decision will ultimately be made. The promotion of transparency will foster a sense of legitimacy and help mitigate any potential political risks. With both the combination of transparency and open public debate with regards to contract choices and clauses, the validity of foreign criticisms about Iraqi resources may be a thing of the past.

SECTION B: The State Companies

The old civilization knew about the Oil in Iraq. Oil was seen as liquid over the rocky hills or floating above the water, as well as steam coming from underground. Found there among ancient relics unearthed in different parts of the territory of Mesopotamia were a tube and pot used to collect oil droplets percolating from the ground. Also, Alexander the

Great (Alexander of Macedonia) used oil to light fires during the war in Persia and India.

Oil was an important element to achieve victory and to build the Great Empire. The oil swamps displayed oil on their surface in Kirkuk for many generations dating back to the time of Nebuchadnezzar in 604-515 BC45. Iraq was and still is rich in oil wealth. Oil pools and fountains of bitumen mixed with water are found near the Euphrates, and in mineral water in the city of Hit. The Sumerians used bitumen in the construction of the city of Babylon 400 years ago. They could use the people of Lagash bitumen and crude oil in industry. Known at the time the source is a current area of Kirkuk. Oil was also used for river transport, and as construction and embalming materials46. Oil also benefited Akkadians in Sumeri in the use of material asphalt. It is emphasized that the business of drilling and exploration existed in the city of Ur, where it has been proven that use of asphalt in the construction of the city and plating manufactures exists..

Bitumen was also used in irrigation canals to prevent water leakage. Oil was used in the construction of water dams and in the heating in the villages on the banks of the

Euphrates River. All this is proven by archaeologists47. The Babylonians used oil for building and industry statues and water transport.

45 Tawfiq Yassin Mohan, a brief history of oil in Iraq, Journal of Petroleum Studies, Vol.9 No. 51, April, 2013.p.36 46 Qasim Thanked Mohammed, the pages of the past, Journal of SOC, Vol.1No.52 (May2013) p.46 47 Shin T. Kang, Sumerian economic texts from umma archive, University of Illinois, Vol.2, 1973p. 24

They also benefited from using oil in lighting and cooking tables as well as treatment of skin diseases in humans and animals and in the treatment of mild coughs. When mixed with alcohol, oil was useful in treating rheumatism, toothaches, gallbladder disease, and treatment of bites from scorpions and snakes. Camel herders were to take advantage of it to disinfect and clean wounds. The mixture was also used by women for beauty. Oil was an essential factor in the construction of the city of Babylon, where asphalt fluid remains were found in the Temple of Nebuchadnezzar, being made from soaked stone in the most coherent and sound construction so far. It was also used to strengthen the walls of the hanging gardens. Bitumen was used in the wars where missals cast in the form of flaming blocks were fired on enemies. It was also used to coat warships to prevent water leaks inside, as well as coating water tanks to prevent leakage in the summer due to the heat.

Oil was used by the Assyrians to construction grain storage and dams and to regulate the water on the Tigris River. They were the first to import grain and built dams to regulate the water on the Tigris River48. The first to import oil was Hulagu, where he imported to the peninsula Eicheron in the Caspian Sea, conveying a vessel on the backs of mules, donkeys, and camels49. In 1743 during the reign of the Ottoman viceroy Mustafa Pasha, the phenomenon of international oil lanterns spread50. Oil has been and apparently continues to be a major cause of the war in Iraq. In 1912 the Turkish petroleum company was founded with it goal of prospecting oil inside Iraq, where the company received a concession from the Ottoman authorities. Later when the First World War broke out, all exploration activities halted.

48 Rasoul Sorkhabi, oil from Babylon to Iraq, Geoexpro, Vol.6, No.2-2009. 49 Robert Marshall, Storm from the East from Genghis Khan to Kublai Khan, university of California, US,1993. P.143 50 Rosenthal Renate, Sivan Renee, ancient lamps in the Schlesinger collection, the Hebrew University of Jerusalem Monographs of the Institute of Archaeology, Vol. 8: 1978, p 54.

At the same time the importance of oil also became starkly apparent. The status and ownership of the company was a major issue at the San Remo Conference of 1920, which discussed the fate of non-Turkish parts of the Ottoman Empire51. In 1925, the British government took control of Iraq after the collapse of the Ottoman Empire52, and granted new concessions to the Iraq Petroleum Corporation (these concessions covered the whole of Mosul and Baghdad provinces, and most of Iraq, excluding the southern Basra province)53. The Iraq Petroleum Corporation held a monopoly on all Iraqi production from the beginnings of the industry up until 1962. In 1927 oil was discovered at Baba

Gurgur in Kirkuk that made Iraq into one of the most valuable concessionary areas in the world. In mid-1928 the Americans, under the Near East Development Corporation, were allowed into the concession by holding an approximate 23 percent Anglo-Persian share.

In 1961 the Iraq Petroleum Company was forced to relinquish 99.5 percent of its land as outlined in their concession, which had been awarded on 1931. In accordance with the provision of the Iraqi Law Number 97 of 1967, the foreign oil companies shall be assigned the exclusive right to develop oil and hydrocarbon substance in all Iraq territory including territorial waters, the continental shelf and the Iraq interest in neutral zone, and shall have the right to engage therein in all the operations provided for in the law54. The

Iraq National Oil Company was created in 1964, leaving Iraq in the situation of having two production lines, which were in competition with each other 55.

51 From Anglo -Persian oil to BP Armco, BBC, Aug. 1998 http://news.bbc.co.uk/2/hi/business/149259.stm 52 Iraq Petroleum Company Archive, Archives Hub, https://archiveshub.jisc.ac.uk/search/archives/12a33a3d-d4a9-3b57-a223-bc4aed2d00e2 accessed 2 Feb 2015 53 Bamberg James, the history of British petroleum company, Vol 2, Cambridge university, (1994) 54 J. Hashim, Development planning in Iraq, Baghdad, 1975.p.80 55 Iraq and the Battle for oil. A historical Insight, http://www.globalresearch.ca/iraq-and-the-battle-for-oil- a-historical-insight/24810

During that time, the Iraq Petroleum Corporation and its subsidiaries, the Mosul

Petroleum Company and the Basra Petroleum Company, were still responsible for the vast majority of Iraqi production. Iraq signed a series of deals with other foreign companies, to do some of research for offshore areas in southern Iraq, under the Iraq-

Soviet pact of 1967, which finally led to the development of the Rumaila field, which created deterioration between the Iraqi government and the Iraq Petroleum Corporation56.

On the Banias pipeline in 1966, the Iraq Petroleum Corporation refused to pay Syria, who responded by closing the pipeline therefore resulting in the Iraqi government losing a lot of revenue57. When the Suez Canal was closed as a result of the 1967 War, the Iraqi government demanded a higher price on oil compared to rates paid to Libya. The Iraq

Petroleum Corporation refused, responding that Iraqi oil was a heavier grade and more expensive to process. Iraq Petroleum Corporation continued to control Iraqi production but the Iraq government kept its control of the oil prices by increasing transit fees through

Basra port almost immediately by 1200 percent58. In 1970 the Iraq Petroleum

Corporation was fully nationalized. On the first of June 1972, the concession was nationalized by the government. This nationalization measure was formally settled on the

28th of February 1973. Iraq Petroleum Company’s main asset consisted of the Kirkuk field. At the end of 1973 Iraq nationalized forty three percent of the share capital of the

Basra petroleum company, which held a concession in the southwestern part of the country. This nationalization of share capital was politically motivated. In January 1975

Iraq concluded with Basra petroleum an agreement under which the sixty percent

56 Iraq Post World War II Through The 1970, Library of Congress, US.2013 57 Iraq Post World War II Through The 1970, Library of Congress, US.2013 58 James A. Baker, Iraq’s oil sector past, present and future, Rice university, Houston 2007

42 participation became applicable with retroactive effect from 1 January 197459.

As result, thereof Iraq’s involvement the direct and indirect operations of Basra

Petroleum Company amounted to 77.2 percent60. Later in 1975 Iraq decided to take over

Basra Petroleum Company remaining forty percent share in the concession. Settlement negotiations took several years. Iraq's state-owned oil company, the Iraqi National Oil

Company, was founded in 1964 and took over all aspects of the industry after nationalization of the Iraq Petroleum. In 1987, under Decree 267, the Iraq National Oil

Company with the Oil Minister merged, which became the direct operator in the industry as well as its regulator61. The Iraq government formed a general director for oil marketing to manage and run all marketing operations related to crude oil and its refined products.

B.1. North Oil Company, based in Kirkuk

The dissolution of the Iraq National Oil Company in 1987 was followed by the creation of the North Oil Company (NOC), which became a state company within the Iraqi

Ministry of Oil. Its purpose was to oversee the production in the northern region of Iraq, most notably the supergiant Kirkuk field. The company was responsible for the governorates of Kirkuk, Erbil, Diyala, Nineveh, Baghdad, and parts of Hills and Kut62. In addition to its many responsibilities, the North Oil Company supplied different types of crude oil to many Iraqi refineries. Additionally, it associated gas to the North Gas

Company units as well as to various electric generation stations. Exportation was also

59 Creation of Iraq national oil company not essential', Saudi Gazette, retrieved 4 January 2013. 60 Iraq National Oil Company, http://www.petroleum.co.uk/iraqi-national-oil-company accessed 16 September 2015 61 James A. Baker, Iraq’s oil sector past, present and future, Rice university, Houston 2007 62 Iraqi north oil company, http://www.noc.oil.gov.iq/english_ver/homepage_en.htm .

43 conducted via a network of pipelines to both Syria and Turkey. The NOC also provided for many of the basic necessities of its employees. These other establishments were the company housing units provided for its employees, the creation of a 200-bed capacity hospital in the city of Kirkuk, 11 clinics distributed throughout its fields of operations, and a pipeline network dedicated to the supply of drinking water from the River Zab to multiple installations in the Kirkuk field. Lastly, a private telephone network and station was created for public communications for the region.

B.2. South Oil Company, based in Basra

The South Oil Company was once a subsidiary of the Iraq National Oil Company prior to the year of 1973. Due to mounting political tensions, the Iraqi Government had retaliated against the United States by nationalizing the American oil companies of Exxon-Mobil.

A similar situation repeated itself with the Royal Dutch Shell due to political instability between nations. By December of 1975, the naturalization process was officially achieved as the President of Iraq announced the complete takeover of all foreign interests in the oil sector. From this point onwards, one of the biggest producers in the world, the

South Oil Company, became an Iraqi state-owned company that was run by its own Iraqi people63. According to findings from the Iraq Oil Report, the South Oil Company based in Basra became the most dominant company in Iraq, with its own autonomous company management structure. This company increasingly responds to the regional leadership of the area. Many of the important southern Iraqi fields that fall under the control of the

South Oil Company include the Majnoon, Luhais, Zubair, West Qurna, and the largest

63 South Oil Co. chief Dhia Jaffar, Iraq Oil Report, 15 February 2012.

44 producing Rumaila64. In order to support production growth in the region, the company has contributed greatly by playing a key role in expanding export infrastructure. By the year of 2012, the South Oil Company had plans to ease the process of exportation by fixing the single-point moorings, and creating metering stations and pipelines.

Additionally, plans were also made to repair and upgrade the al-Basra oil terminal with the end goal of maximizing its capacity to a second phase. One of the many achievements by the South Oil Company was in early 2004, when it was able to restore production of over 2 million barrels per day (bpd)65. By the year of 2012, this production was recorded at just over 2 million bpd as Iraq’s oil industry experienced another phase of expansion.

B.3. Midland Oil Company (Iraq Drilling Company) based in Baghdad

In 1987, during the period that the Iraq National Oil Company was dissolved, the

Midland Oil Company was created66. Headquartered in the cities of Baghdad and Kirkuk, this state-owned company was under the control of the Iraqi Ministry of Oil. This company specialized in the activities of drilling and creating oil and gas well works. By the year of 2006, this company had also accomplished to maintain up to 18 rigs in full operation. The organization of the Midland Oil Company included two separate departments, each with their own respective regions of operations and responsibilities.

They were the Northern Operations Department, and the Southern Operations

Department67. A 2009 deal between the Midland Oil Company and the Mesopotamia

Petroleum Company from the United Kingdom resulted in the first joint venture in the

64 Exploration and production, business report Iraq, BP, 2010. 65 Fares Sharify, SOC, Oil studies, Vol.9 No.50, 2013, P.40 66 Iraq National Oil Company, http://www.petroleum.co.uk/iraqi-national-oil-company accessed 16 September 2015 67 Iraq Drilling Company, Iraq Energy Expo, http://www.idc.gov.iq/ Accessed 20 sep.2015

Iraqi Oil Industry68. This trend towards forming business alliances continued in 2010, when the Midland Oil Company agreed to sign a memorandum with the British Oil and

Gas Service Company known as KCA DEUTAG for joint drilling and training opportunities. Unfortunately this joint venture did not last long, as it was dissolved in

2011.

The Midland Oil Company went on to win a contract to collaborate and work alongside

Schlumberger, the world’s largest oil-field services provider at the time, to drill in the

Rumaila oil field. The Midland Oil Company went on to drill a total of 189 oil wells in the year of 2011, with the additional goal of rehabilitating 140 other wells during the course of that same year69. For the first time in 21 years, the Midland Oil Company was able to begin drilling and repairing operations in the Hamrin Mountains, located in the north side of the city of Baghdad70.

B.4. Missan Oil Company based in Missan

The Missan Oil Company’s headquarters are located in the capital city of the Maysan province71. It was created in 2008 as a spin-off from the South Oil Company, with the purpose of dealing with plans for the expansion of production in the Maysan governorate.

The goal and plan at the time was for each Iraqi province to be able to reach a production capacity of at least 100,000 barrels per day. Additionally, it was also planned to have fully functioning state-owned oil companies in order to focus its efforts on developing its own oil fields. In accordance to these plans and outlines, the result was the creation of the

68 Iraq finalizes oil drilling joint venture with Mesopotamia petroleum, Iraq oil report 2009. 69 Iraq Drilling Company, Iraq Energy Expo, http://www.idc.gov.iq/ 70 Iraq Starts Drilling for Oil in Hamrin Mountains, http://www.iraq-businessnews.com/tag/iraqi-drilling- company/ 71 Maysan Oil Company, http://moc.oil.gov.iq/english/

Maysan Oil Company. It’s oil-producing fields of responsibilities includes those located within the Maysan province such as the Abu-Gharb, Fakka, Bazergan, Halfaya, and the

Majnoon, the latter having operated in partnership with the South Oil Company. In addition to these fields, there are another five fields such as the al-Rafie, Dujaila, Kuwait,

East Rafidan, and the Huweiza that have already been discovered to be potential grounds, but have yet to be exploited. When the Maysan Oil Company was initially created, the

Maysan Province had a total oil output of 100,000 to 110,000 bpd72. According to government statements and records, the start-up capital of the company was valued at about 8 million USD73.

72 Foreign company keep to work for Missan oil http://www.iraq-businessnews.com/tag/missan-oil- company/ 73 Oil Stampede, Iraq's 2nd Bid Round Results http://www.oil.gov.iq/index.php

SECTION C: The international oil companies

Whether investments are either national or foreign in origin, they can be undisputedly linked to the political philosophy climate that is practiced by the host nation in addition to the delicate issues of sovereignty. It has been a held belief by some states that the allowance of foreign investors to enter and operate within a host nation’s territory may cause infringement upon that nation’s sovereignty. Therefore, there has been a pattern of foreign investment prevention or restriction in order to counteract the possibility of an infringement of sovereignty74. This aforementioned pattern can be illustrated by the policies that Iraq had practiced from the beginning of its modern state in 1921 to its immense changes of 200375. Foreign investment practices by Iraq during those years were never of high priority or necessarily favored. Due to a history of volatility and conflict in the country, Iraq has had a weak record in its ability to attract any forms of investments. Its present status highlights the fact that the country is very unstable with problems of ethnic rivalry, in addition to the oppression of people who are seeking change within its own country76. Prior to the 2003 US-led invasion, Iraq’s economy was somewhat stable as it was run by its own central government. One of the most prominent features of Iraq’s economy was its reluctance to accept any kind of foreign investment relationships, and its strict prohibition to allow foreign businesses to own any Iraqi companies77.

74 Ornarajah, The International Law on Foreign Investment 3rd, ed, Cambridge University Press, New York 2011, p. 72. 75 Abbas Alnasrawi, The economy of Iraq Oil, Wars, Destruction of Development, and Prospects, 1950- 2010, Connecticut London, 2010, p. 62. 76 Adeed Dawisha, Iraq a Political History from Independence to Occupation, Princeton University Press 2009. 77 Abbas Alnasrawi, The economy of Iraq Oil, Wars, Destruction of Development, and Prospects, 1950- 2010, Connecticut London, 2010, p. 145.

Nevertheless, the Iraqi government did allow for the foreign investment of Arab investors due to the fact that their local companies were also predominately state owned entities.

As a measure of safeguarding their economic interests in keeping their companies state- controlled, the Iraqi government implemented heavy penalties, and tariffs on foreign goods. Iraq did not witness a change in economic policies until after the US-led invasion.

At this point in time, the interim government issued several binding regulations in order to privatize its own local enterprises, thus opening the economic floodgates to foreign investors78. The newly formed government and governing legislators also gave full legal legitimacy to these changes when they made the attempt to introduce foreign capital into the country of Iraq79. This was reportedly done to improve the economic situation following what was a long period of economic inflation and lack of resources. This decline in the economy was the result of several events that encompassed many wars and economic sanctions imposed after 1991 by international resolutions80. These aforementioned economic reforms were not sufficient. In order to be able to successfully sustain its international investments from foreign companies and attract further international economic attention, Iraq was additionally required to reform its legislative laws and government institutions81.

Generally, the Iraqi government did not favor international investments, except for Arab investors, because its local companies were predominantly state-owned. In order to safeguard the domestication of the Iraq economy, heavy tariffs and penalties were

78 Ornarajah, The International Law on Foreign Investment 3rd, ed, Cambridge University Press, New York 2011, p. 72. 79 Abbas Alnasrawi, The economy of Iraq Oil, Wars, Destruction of Development, and Prospects, 1950- 2010, Connecticut London, 2010, p. 62. 80 Adeed Dawisha, Iraq a Political History from Independence to Occupation, Princeton University Press 2009. 81 Abbas Alnasrawi, The economy of Iraq Oil, Wars, Destruction of Development, and Prospects, 1950- 2010, Connecticut London, 2010, p. 145.

50 imposed on foreign goods. After the US-led invasion, Iraq witnessed a turn of events because the interim government issued several binding regulations to privatize its local enterprises—a move which opened up the Iraqi economy to foreign investments82. It also has been fully legally considered when the newly formed legislators and government83, attempted to introduce foreign capital into Iraq for a better economic situation following long-standing inflation and lack of resources. These resulted from several consecutive events, including wars, and economic sanctions imposed by international resolutions, post-199184. Economic reforms were not the only kind of reforms being undertaken in the

Middle Eastern nation; it was affirmed that, for the country to sufficiently sustain its international investments, it had to reform its legislative laws and government institutions to attract more international investments85.

82 Christina C Benson, jus post bellum The Development of Emerging Norms for Economic Reform in Post Conflict Countries' Richmond journal of global law and business, Elon university, Vol11No.4,2012 p.315 83 Foreign Investment Order This legislation, which was part of the 100 orders issued by the former US civilian administrator, https://www.regulations.gov/ 84 Christina C Benson, jus post bellum The Development of Emerging Norms for Economic Reform in Post Conflict Countries' Richmond journal of global law and business, Elon university, Vol11No.4,2012 p.315 85 Christopher J Coyne and Adam Pellillo, 'Economic Reconstruction amidst Conflict: Insights from Afghanistan and Iraq http://www.tandfonline.com/doi/abs/10.1080/10242694.2010.535392, accessed 6 Feb.2014

Major international oil companies in Iraq86

86 http://www.worldculturepictorial.com/images/content/cartoon_provinces_of_iraq.jpg

C.1. Private Sectors participation in the development of the oil and gas sector in Iraq

Foreign investment into Iraq was not welcomed due to the 1988 Article 2, Paragraph 3 of the Arab Investment Law No 4687. This legal preventative measures were enough to stop the contribution by or incorporation of any Iraqi joint venture with a foreign Arab company. This position was upheld regardless of the joint venture’s respective share percentage. Another legal measure such as the 1991 Law No 25 stopped any Iraqi expatriate from having investments in Iraq. This same law also applied to any Arab company and stopped them from owning any investments inside Iraq, regardless of how small their share capital in the company might be88. Regardless of such imposed laws, the government did create free zones via the 1996 Law No 3 as a result of the growing economic burdens experienced by Iraq89. This legal change was created in a bid to attract much needed Arab, foreign, and Iraqi capital. In addition to this legal change, many facilities were also offered to attract foreign investments. The 1998 Decree No. 011 was also created to help achieve this end result and exempt free-zone working capitals from income taxation. This continued effort was again supported by the 1999 creation of the

Supreme Investment Authority in Iraq, headed by the Minister of Planning. The stated mission of this entity was to oversee investment venture propositions made to the Iraqi government90.

Unfortunately, these legal changes and creation of laws and decrees never accomplished

87 Article 2, paragraph 3 of the Arab Investment Law No 46 of 1988. 88 Essam Al Tamimi and Adil Sinjakli, legal aspects of setting up business in Iraq and Iraqi company regulation, Iraq 1999 p. 32. 89 Law of the General Authority for Free Zones No. 3 of 1998 published in the Official Gazette, issue 3586 of 18/05/1998. 90 Abdul-Hussein Tariq, Economic Development, and Workforce Planning in Iraq, 2nd ed, Dar Al Adalah, 2013. p.63

53 the stated mission. These changes were created only to later be revoked, showcasing the country’s inability to foster economic changes and lack of vision when it comes to reformatory considerations91. Regardless of the provided facilities by the laws and decrees of that time, there was a failure to lure and attract both Arab and foreign capital into Iraq. This was the result of a lack of trust in the Iraqi regime of that time and its decisions that ran counter to international laws. Therefore, the Iraqi government pushed itself out of the foreign investment arena and suffered the consequences of not being able to obtain the foreign technical and financial support at a time when its country needed it the most92. Not only did the former Iraqi regime deny its country of the foreign investments and capital opportunities, but it had also squandered its own monetary funds that were realized during the 1970s. During these times, the cash surpluses.were spent on wars and political activities that resulted in a balance of debt. Even today, Iraq’s economy is currently in a position where it is in need of foreign investments. This is the result of backward production methods, a failing infrastructure, and a lack of sufficient finances that has resulted in their inability to address such weaknesses. What has been produced is the private sector’s inability to fully contribute to further economic development. What must result from all these events is that the government needs to realize that it holds the responsibility to attend to various basic requirements for the achievement of development. This includes the provision of infrastructures such as ports, roads, water, and the electrical grid. The current legal framework that comprises the economic backbone to Iraq is not conducive to an open economy.

91 Antonio F. Perez, legal frameworks for economic transition in Iraq occupation under the law of war vs global governance under the law of peace, journal of Transaction law Vol.2, No.8 2005 p.53 92 Essam Al Tamimi and Adil Sinjakli, legal aspects of setting up business in Iraq and Iraqi company regulation, Iraq 1999 p.32

More specifically, the legal situation in Iraq does not support or encourage a policy of openness to foreign investment93. Unfortunately, it is normal that Iraqi laws are lacking in providing incentives and much-needed guarantees for foreign investors.

C.2. Foreign direct investment

Since its moment of naturalization in 1975, the Iraqi oil and gas industry has experienced a lack of foreign investments due to its isolating foreign policy stance on the western nations94. In addition to this political position, there has also been a lack of funding due to the multiple conflicts Iraq has been through95. A specific example of a conflict depriving

Iraq’s oil and gas industry of monetary funds would be the 1991 Gulf War. From the year

1990 up until the US-led invasion in 2003, Iraq had experienced 13 years of international sanctions. The resurrection of Iraq’s economy and the rebuilding of its nation cannot be done without its natural resource of oil. To further illustrate this point, it is worth mentioning that the oil revenues of 2012 provided the Iraqi government with 92.23 percent of its total domestic revenues. In 2013, 93.11 percent of total domestic revenues were contributed by the oil industry. In relation to this economic trend, the largest industrial consumer of electricity has been the oil and gas industry (United States Energy

Information Administration, 2013). This is due to the fact that large increases in oil production will require large consumptions of electrical power. Unfortunately, with the common issue of electrical shortages in Iraq, it has been an uphill battle to be able to keep up with the power demands needed by the oil and gas industry.

93 Zhiguo Gao, Environmental regulation of oil and gas, Kluwer Law International, London, Boston, 1998, p. 34. 94 Shwadran, Benjamin, Middle East Oil Issues and Problem, Tel Aviv University, 1977. p.30 95 Foreign direct investment, net outflows (% of GDP) in Iraq was 0.23 as of 2012. Its highest value over the past 7 years was 0.47 in 2006, while its lowest value was 0.01 in 2007. http://www.indexmundi.com/facts/iraq/foreign-direct-investment

Foreign investment and involvement is of upmost importance to a nation that does not only need to meet higher energy demands in its immediate future, but also needs to improve its current electrical power infrastructure. Improvements need to be made to rebuild Iraq if its energy sector plans to meet its ambitious plans to increase energy output production. The 2003 US led invasion of Iraq acted as the catalyst that resulted in the 2006 Investment Law 1396. This law opened up its state-led economy to the global market of economic investors for the first time. Despite the newly implemented laws designed to encourage foreign investments, Iraq was only able to attract a limited and unsatisfactory level of interest. The root of this result stems from the fact that Iraq has had a problematic security and politically unstable situation, in addition to having a business environment that is not conducive to foreign investment. To help illustrate this point, it is fair to mention that Iraq has consistently ranked low in a list of 185 nations, when it comes to the easiness for local entrepreneurs to open and run small to medium sized businesses, while complying with the regulations set in front of them. Of the 185 nations, Iraq was ranked 152nd in 2009 and by 2013, had only the rank of 165th, due to their inability to create an environment that is conducive to business97. When compared to other Middle Eastern countries using the same ranking system for the year of 2013,

Saudi Arabia ranked 22nd, the United Arab Emirates ranked 26th, Jordan ranked 106th, and most surprisingly Iran came in at 145th. Even Iran who has been facing its own range of problems with the international community was able to come in at 20 points ahead of

Iraq, who again ranked in 165th place out of the 185 nations.

96 The Investment Law No. 13 of 2006 published in the Official Gazette, issue 4031 of 17/01/2007 97 Ghassan F. Hanna, Foreign Direct Investment in Post-Conflict Countries: The Case of Iraq’s Oil and Electricity Sectors, International Journal of Energy Economics and Policy, Vol. 4, No. 2, (2014) p137-148

According to the published reports by Transparency International, Iraq was ranked the

171st most corrupt nation out of a total of 177 countries in the 2013 Corruption

Perceptions Index. One must note that this index measures the perceived levels of corruption in the public section. Unfortunately, Iraq has consistently scored near the bottom of that list between 2008 and 2012. Factors that may have contributed to Iraq having 25 percent of its population living below the poverty line include corruption, a decline in the education level, and a high unemployment rate. These results occur despite the fact that Iraq receives enormous income from its oil and gas sales. Beginning from the time that the pro-west monarchy of 1958 was toppled up until the 2003 US led invasion, the Iraqi nationalist governments had always looked at foreign investment companies with great suspicion and distrust. In order to understand why this sense of suspicion had prevailed for so long, one needs to look at the dependency theory and its explanation of how the exploitation of developing countries occurred by the advanced western nations.

Throughout the time frame of 1958 up until 2003, the nationalist government of Iraq had treated foreign oil companies as the extension and continuation of old colonial powers.

Thus they implemented policies that discouraged the oil industry to become entangled with foreign investors98. In studying the dynamics of the dependency theory, one may be able to comprehend the underlying basis for why the FDI is currently experiencing many challenges in Iraq99. The popular trend to look at foreign investors with distrust and apprehension continues today in Iraq’s political circles.

The issues illustrated by the dependency theory not only applies to the immediate case of

98 Iraqi Nationalization Law No 69 in 1th February 1972 99 United nation conference on trade and development .http://unctad.org/en/Pages/Home.aspx accessed , 4 July 2014.

57 what is happening in the Middle East and North African in countries such as Iraq, but also applies to cases that have occurred in Latin American within the 1950s and 1960s.

Unfortunately, due to the continuous political instability that has haunted the countries in the Middle East and North Africa, globalization has not been able to bring with it the much-needed independence for the citizens of these nations. Even its neighboring rich

Arab nations have decided to shy away from investment opportunities with nations such as Iraq. Other factors that affect foreign investment opportunities include the huge trade deficits that threaten the financial resources of that country, when dealing with the advanced economies of other nations. The dependence of these struggling countries on foreign aid and goods in order to help keep their economic activities afloat is due to this unfortunate circumstance of both low levels of FDI and a high trade deficit. A more direct example is the fact that the manufacturing sector of countries like Iraq are very weak, thus entrenching their dependence on the aid of more advanced economies. This makes them vulnerable and highly susceptible to financial or economic problems. A stark contrast is visible when highlighting that the combined exports of non-oil goods of all

Arab nations with a total combined population of 350 million does not exceed those of

Finland, which itself has a population of only 6 million. A recurring theme here is that major conflicts, such as those being waged in Iraq, stunt and halt economic growth through both direct and indirect means. Direct effects of conflict include the destruction of the lives of citizens and of property and include the halt of essential public services.

Indirect effects are a result from the diversion of finite national resources from the productive investment in human and infrastructural capital to that of disruptive military activities. Conflicts also play a detrimental role in the state’s long term goals as it

58 negatively impacts the state’s abilities for post-conflict recovery. Economic strife ensues as the state is forced to borrow heavily from foreign countries in order to attempt to reconstruct what was destroyed. This leaves behind huge debts that only work to burden future state budgets and further impede economic progress. As is the case with most post- conflict nations, the state’s political climate and security situation is intertwined with the country’s economic activity. The economic governance issues such as human capital, institutions, policies, and laws help determine the context in which a nation’s economic activity takes place. Economic growth and conflict work in opposite directions, with one negatively affecting the other. Poor economies only exacerbate the issues of violence in a conflict-ridden nation, further complicating efforts to reach political reconciliation.

Country risk factors include those such as the political climate, the economy, and financial risks negatively affect the cash flows generated by FDI Projects100. In order to assist in attracting FDIs, nations need to manage and lower their country risk factors101.

One way to help attract foreign investment companies is to improve the standards of living for the citizens. This can be done with the rebuilding efforts needed to restore destroyed infrastructure. The transition from a war economy to a global market economy is paramount for any country trying to transition back to the rule of law. A nation in transition faces major hurdles as its increased investment risks due to a decrease in institutions and systems only serve as a detriment to acquiring international investment partners. The assessment and study of factors that deter foreign direct investments in

Iraq’s energy sector would be of particular interest for the development and testing of the

100 The Middle East, http://www.cotf.edu/earthinfo/meast/mepeo.html- accessed 12 July 2014 101 Foreign Investment Order This legislation, which was part of the 100 orders issued by the former US civilian administrator, https://www.regulations.gov/

FDI Theory in post conflict countries, rich in the abundance of natural resources102.

Although ownership and internalization advantages are uncontested, specific location advantages address the factors that contribute towards increasing the attractiveness for a country’s FDI inflows. The location advantages are also referred to as FDI determinants.

These location factors may result in having either a symbiotic or antagonistic relationship to FDI inflow.

C.3. Investment Disputes (Iraqi Judiciary & National Courts)

An Investment Dispute Settlement will vary accordingly depending on the type of dispute that is occurring and the parties involved. In this discussion, Iraqi Law is the enforceable rule of law, with the Iraqi courts having the power and jurisdiction to handle such disputes103. Regardless of that power, the Law of Investments in Iraq grants litigating parties the option to opt for arbitration as a means of settling potential disputes. The national law and Iraqi courts thus play key roles in the investment dispute settlements.

Due to their key roles, it is important to discuss and highlight the key features of the Iraqi judiciary system in order to showcase its potential capabilities in achieving foreign investment dispute settlements. Additionally, this highlight of information will also assess the capabilities of the local laws and court systems to cope with foreign investment contracts. The first Iraqi law put in place to help regulate the judiciary was the 1929 Law

No 31104 that helped create the Judges’ Affairs Committee105, which in effect assisted in

102 Robert E. Morgan, Constantine S. Katsikeas, Theories of international trade, foreign direct Investment, and firm internationalization: a critique, Cardiff Business School, University of Wales, UK, 1997, p.68. 103 Sami Shubber, the Law of Investment in Iraq, Brill, New York, 2009.p.129 104 The Law of Judges and Governors No. 31 of 1929 105 Article 3 of the Law of Judges and Governors No. 31 of 1929.

60 serving as the caretaker of judges and court systems106. It was during that period of time that the Judicial Council experienced administrative and financial independence.

However, this independence came to an end when the Ministry of Justice enacted the

1977 Law No 101, which resulted in the creation of the Justice Council107. Due to this law, the judiciary became an integrated component of the Ministry of Justice for all intents and purposes, more specifically the courts’ administrative and financial affairs.

With this in mind, the Justice Medhat Al-Mahmoud108 said: “The dissolution of the

Judicial Council and assigning the Justice Council the affairs of judges and prosecution general members have served as a dangerous recantation in the history of the Iraqi

Judiciary and from the independent judiciary principle. A council presided over by the

Minister of Justice! A minister, no matter how much independent, is still a part of the executive power, enforcing its policies and caring for its interests, even if such interests are in conflict with individual rights”109. In accordance to the quote, judges were unable to freely accomplish their mission and perform their rightful duties. They experienced unjustified forms of punishment such as arbitrary relocation, a demotion to a civil position, and in other cases imprisonment. Actions such as standing up to the government’s Ba’ath Party and contradicting their wishes or personal interests resulted in said punishments. Not by coincidence, honest and independent non-Ba’athist prosecutors, judges, and legal officials were denied senior judicial positions. Rather, these positions were open to less qualified persons who seemed to have a different agenda that coincided with that of the Ba’athist party. Other issues such as a lack of accountability and

106 Medhat Al-Mahmoud, The Judiciary in Iraq,3rd ed, Judicial Institute 2011.22 107 The Law of the Ministry of Justice No. 101 of 1977 108 Medhat Al-Mahmoud, The Judiciary in Iraq,3rd ed, Judicial Institute 2011.p 42 -43 109 Medhat Al- Mahmoud is the SJC Chairperson for the period 2005 to date.

61 transparency created obvious weaknesses in the judiciary system110.

Litigation was the only arena where access to information and accountability of court activities was held open111. Judges unfortunately also lacked higher levels of legal education that left them incapable of keeping up with the fast pace of legal developments.

For a newly placed judge within a court system, furthering one’s education was considered a luxury112. From the years of 1984 to 2003, women were denied access to judicial positions, thus violating gender equality rights. Additional rights were denied, as there was an unequal representation within the judiciary system of all the different ethnic and religious sects. This misrepresentation occurred due to the overwhelming control that the Ba’athist party exercised within the country’s legal system. Thus certain sects were favored at the expense of others.

Structure of the National Courts

There have been numerous laws that have worked to regulate the court structure. Most notably, these include the Constitution, the CCP, and the 1979 Judicial Regulation Law

No 160113. The structure of the court system is comprised of both the civil and criminal courts. The civil courts can be further deconstructed into two litigation degrees, with the first being the courts of first instance, and second being the courts of appeal. The criminal courts can also be organized into two channels, with the first being the courts with jurisdiction over serious crimes and misdemeanors, and the second being the courts of

110 Adnan Almrjani, Impact of the Judiciary Independence, Najaf, Al Nibras 2008.p.168 111 American Bar Association, Judicial Reform Index for Iraq https://apps.americanbar.org/rol/publications/jri-iraq-2006.pdf 112 Adnan Almrjani, Impact of the Judiciary Independence, Najaf, Al Nibras 2008. p. 172 113 The Judicial Regulation Law No 160 of 1979 published in the Official Gazette, issue 2746 of 17/12/1979.

62 less serious crimes and juvenile delinquencies114. This structure in the court also includes the Court of Cassation, which defined by the 1979 Regulation Law No 160, is the supreme judiciary body responsible for the supervision of all other courts’ activities. The sole jurisdiction this court has is to hear cassation appeals submitted against orders handed down by the court of appeal115. This court does not constitute as being a litigation degree, but instead is a court tasked with the responsibilities to review and supervise other courts. Therefore it has the jurisdiction to hear any plead in the course of any case.

If any such plead is found to have validity, it has the power to hand down its own verdict and supersede the previously stated judgment mandated by the previous courts116.

This Court of Cassation and the Supreme Judicial Council work independent of one another and each have their own independent budget117. Iraq’s appeal court system can be divided into its 14 appeal jurisdictions. Within each jurisdiction, the court of appeal serves as the supreme judicial body118. The court of appeal is tasked with distributing the judicial work amongst all the judges in the courts within their jurisdiction, while simultaneously providing them with what is needed in accordance with the SJC119. The

CCP is tasked with assigning to a court of appeals the duty of overlooking the appeals filed against any court of first instance120. These judgments must involve monetary values of over 1,000 Dinars and include bankruptcy and liquidation court orders. Therefore a

114 Essam Al Tamimi and Adil Sinjakli, legal aspects of setting up business in Iraq and Iraqi company regulation, Iraq 1999 p. 320. 115 Article 12 of the Judicial Regulation Law No 160 of 1979 published in the Official Gazette, issue 2746 of 17/12/1979. 116 Article 13 of the Judicial Regulation Law No 160 of 1979 published in the Official Gazette, issue 2746 of 17/12/1979. 117 Adam Wahib Al-naddawy, Civil Procedure, Baghdad University, College of Law 1988.P.70 118 Medhat Al-Mahmoud, The Judiciary in Iraq,3rd ed, Judicial Institute 2011. p 63 119 Adnan Almrjani, Impact of the Judiciary Independence, Najaf, Al Nibras 2008. P 57 120 Article 21 of the Judicial Regulation Law No. 160 of 1979 published in the Official Gazette, issue 2746 of 17/12/1979.

63 court of appeal is considered to function as a second-degree court. With regards to the courts of first instance, the CCP provides, One or more courts of appeal shall be formed in the provincial capital of each governorate121. A court of first instance is supported by a judge whose job is to conduct their tasks and duties in accordance with competences as outlined by the CCP. These courts are also tasked to consider civil cases set forth in the aforementioned law122. Any judgments handed out can be contested within the court of appeal assigned to that specific geographical jurisdiction. Additionally, the Labor Law stipulates that one or more labor courts are to be assigned in each governorate and convened by one judge123.

In the occurrence of a non-creation, the jurisdictions are to be vested in the relevant courts of first instance. With regards to the concluded decisions handed out, they are final with the ability to be appealed before the Court of Cassation. When it comes to the issues of labor law related cases, social security for employees, and retirement laws, the 14 Iraqi

Labor Courts oversee such legal casework124. The three Customs Courts of Iraq oversee cases with regards to the issues of customs. This court is comprised of a chief judge, a member judge, and an advocate officer nominated by the Minister of Finances.

Judgments concluded by said courts are also considered to be final, unless appealed before the Court of Cassation. In contrast to these courts, the Administrative Courts are not a part of the SJC; as such a court is created based on the 1989 Administrative Law

121 Adam Wahib Al-naddawy, Civil Procedure, Baghdad University, College of Law 1988.P.62 122 Article 137 of the Labor Law No. 17 of 1987 published in the Official Gazette, issue 3163 of 17/08/1987. 123 Medhat Al-Mahmoud, The Judiciary in Iraq,3rd ed, Judicial Institute 2011.p 63 124 Adam Wahib Al-naddawy, Civil Procedure, Baghdad University, College of Law 1988.P.64

Court No. 106125. The connection between the State Shura Council and the

Administrative Court is also considered126. The Administrative Court is tasked with looking into the validity of administrative orders and decisions taken by employees and authorities of the state. Final decisions made by the Administrative Court may be appealed before the State Shura Council’s General Authority. The creation and implementation of this court has been limited to the Baghdad, the capital city of Iraq127.

In addition to the courts previously discussed, there are also other types of specialized judicial bodies that exist128.

C.4. Investment Disputes (International Arbitration)

Regardless of the fact that Iraq has its own set of arbitration laws, it is critical to understand that any proceedings undertaken within the country are treated as a domestic issue129. This is true regardless if a foreign party is involved, as is stated by the articles

251-276 of the CCP. Due to recent reforms in legislation, foreign parties may now decide to choose foreign arbitration as an alternative130. In agreement with the Iraqi laws, arbitration can be applied to existing and future cases, with optional provisions included as a separate clause in most investment contracts131. Within insurance cases, the clause no longer becomes optional, rather it is mandatory. An arbitration clause is treated like any

125 Law No. 106, Second Amendment to the State Shura Law No. 65 of 1979 published in the Official Gazette, issue 3285 of 11/12/1989 126 Essam Al Tamimi and Adil Sinjakli, legal aspects of setting up business in Iraq and Iraqi company regulation, Iraq 1999.320 127 Adnan Almrjani, Impact of the Judiciary Independence, Najaf, Al Nibras 2008. P207 128 Adam Wahib Al-naddawy, Civil Procedure, Baghdad University, College of Law 1988.P.66 129 Sophie Lafont, L’arbitrage en Mésopotamie, Revue de l’Arbitrage 2000, P.557 130 Sami Shubber, the Law of Investment in Iraq, Brill, New York, 2009.P.129 131 Mahir Jalili, International Arbitration in Iraq, Baghdad, 1987. P.109

65 other contractual clause that comes included in the contract132. Regardless, the disputes that have a high probability for a settlement between parties involved may be subject to arbitration. The cases that are determined to be of low settlement probability are often solved with the use of other mechanisms133. The issues that seem to be resolved under the

Iraqi arbitration laws are outlined in the 1951 Iraqi Civil Law No 40, article 704/2.

Saleh134 describes: “Matters which are capable of being compromised are those which are capable of being disposed of for valuable consideration, and they must be defined or known. Matters related to public policy or criminal acts may not be subject to arbitration in case of a dispute. But, financial consequences or damages arising from criminal acts or from personal matters may be subject to arbitration”135. In some in stances there will be a case that arises where a contractual agreement is considered nullified or void regardless if an arbitrary clause is in full effect. This confusion arises as there is a conflict in interpretation as to whether or not arbitration still stands valid or invalid along with its contractual agreement counterpart. Unfortunately, the 1951 Iraqi Civil Law No. 40 does little to provide a clear framework for analyzing such a dispute136. Saleh also acknowledges that parties often assume that the arbitration clause is independent from the contract agreement and must therefore be considered void once the contract is rendered

132 Akram Yamulki, National Report for Iraq in Yearbook Commercial Arbitration, Kluwer Law International 1979, P,105 133 Article 704/2 of the Iraqi Civil Code No. 40 of 1951 (No composition may be concluded in respect of matters related to the public order or morality; but composition is allowable in respect of financial interests which result from the personal status or which arise from the composition of an offence.) The Iraqi Civil Code No. 40 of 1951 published in the Official Gazette, issue 3015 of 08/09/1951. 134 Saleh Majid is a member of the Chartered Institute of Arbitrator and listed as an arbitrator by the Euro- Arab Arbitration System. And he is licensed as a Middle East Legal Consultant in Germany and in the UK, http://www.iraqilawconsultant.com/majid.html accessed 7 August 2014. 135 Saleh Majid, Arbitration in Iraq, Baghdad 2004 P. 267-268 136 Akram Yamulki, National Report for Iraq in Yearbook Commercial Arbitration, Kluwer Law International 1979, 106

66 invalid137. This argument is based on the Iraqi Civil Code, article 139 that states, “Where a part of the contract is void that part only will be void and the remaining part of the contract will remain valid and considered as an independent separate contact unless it is revealed that the contract would not have been the intention to execute”138.

In the aspect of how the arbitrators are appointed, some universal benchmarks are applied, yet clearly defined methods by which judges are appointed is currently not present139. Due to a lack of provisions in the Iraqi Laws, the country does not prohibit the use of foreign arbitrators140. An example of such a case was noted when an Iraqi construction company and a dissolved reconstruction council of Iraq referred their arbitration cases to a foreign party. This decision to involve a foreign party was appealed by one side, although it was ultimately permitted by the Court of Cassation. The total number of arbitrators assigned to a case is usually an even number in order to equally represent the interests of both parties involved141. Based on the CCP’s article 256, in the case that one party fails to appoint an arbitrator, the matter in question may be referred to the Iraqi court, where the final decisions and functions will be ultimately carried out. In the event that the court is required to act on behalf of a party, the final decision may not be contested. This is due to the idea that they had originally been given the opportunity to choose the correct candidate but failed to do so142. In the event where one party believes

137 Saleh Majid, Arbitration in Iraq, Baghdad 2004 P. 267 138 Article 139 of the Iraqi Civil Code No. 40 of 1951 published in the Official Gazette, issue 3015 of 08/09/1951 139 Akram Yamulki, National Report for Iraq in Yearbook Commercial Arbitration, Kluwer Law International 1979, 107 140 Abdul Hamid El Ahdab and Jalal El Ahdab, Arbitration with the Arab Countries, Kluwer Law International, 2011. P.231 141 Abdul Hamid El Ahdab and Jalal El Ahdab, Arbitration with the Arab Countries, Kluwer Law International, 2011. P.242 142 Mahir Jalili, International Arbitration in Iraq, Baghdad, 1987. P.109

67 that the opposing party has appointed the wrong arbitrator, that party may request to the courts for some type of intervention143.

The summarized grounds for disqualification reference the CCP’s Article 93. It states that reasons such as an existence of an employment relationship, friendship between the judge and party concerned, or evidence of preconceived opinion on the case, or bribes may be grounds for the arbitrator to be disqualified by the courts144. In addition, the arbitrator’s appointment may also be revoked under CCP’s Article 91 that states if a party has a direct relationship with the arbitrator such as by blood or marriage145. In the case where one party feels that the decision of the court to disqualify an arbitrator was wrong, they may still appeal that decision in accordance to the CCP’s Article 261146. Additionally, in cases where the final judgment has already been concluded, it may be revoked and nullified, based on the grounds that the arbitrator was later found to be wrong. Protections are outlined in the CCP’s Article 260 that stipulates that the resignation or dismissal of an arbitrator cannot be done unless enough evidence and valid reasons conclude that there is no alternative147. The procedural law can be used as one of the applicable laws in arbitration in accordance to the Iraqi arbitration laws. Also to consider is that according to CCP’s article 265, all arbitration processes will follow and be dictated by the procedural laws as outlined by the CCP, unless both parties can decide otherwise. This means that the parties may choose other procedural regulations such as the UNCITRAL

143 Article 261/1 of Code of Civil Procedure No. 83 of 1969 published in the Official Gazette, issue 1766 of 10/11/1969. 144 Saleh Majid, Arbitration in Iraq, Baghdad 2004.P.269 145 Akram Yamulki, National Report for Iraq in Yearbook Commercial Arbitration, Kluwer Law International 1979, 108 146 Saleh Majid, Arbitration in Iraq, Baghdad 2004P.267 147 Abdul Hamid El Ahdab and Jalal El Ahdab, Arbitration with the Arab Countries, Kluwer Law International, 2011. P.230

68 arbitration rules148.

The CCP defines other procedural regulations that may also be avoided by both parties involved, as long as they are of optional nature and do not contradict the moral philosophy of the nation149. During an arbitration dispute, the substantive law is applied in accordance to the Iraqi arbitration proceedings to define which laws are applicable to that case150. When disputes occur between two Iraqi parties, there is usually a resolution that concludes in accordance to Iraqi laws. The issue arises when arbitrating foreign disputes occur in Iraq. The Iraqi Civil Law’s Article 25/1 resolves this issue by stating that, “The contractual obligations shall be governed by the law of the state wherein lies the domicile of the contracting parties if they have a common domicile; where they have different domiciles the law of the state within which the contract was concluded will be applied unless the contracting parties have agreed otherwise or where it would be revealed from the circumstances that another law was intended to be applied”151. When looking at the previous analysis, it can be seen that the Iraqi arbitration law allows the use of foreign laws as long as one of the parties if from outside of the country. This application of foreign law is allowed as long as it is follows the moral philosophies of the host nation and does not disagree with any of its moral considerations. What can be concluded is that foreign laws may be application in certain arbitration cases where the application of such laws do not contradict Iraqi social morals or erode public order. The final say as to whether or not these laws pose any risk to undermine Iraqi morals or threat

148 Akram Yamulki, National Report for Iraq in Yearbook Commercial Arbitration, Kluwer Law International 1979, 109. 149 Mahir Jalili, International Arbitration in Iraq, Baghdad, 1987. P.109. 150 Akram Yamulki, National Report for Iraq in Yearbook Commercial Arbitration, Kluwer Law International 1979, 109 151 Article 25/1 of Iraqi Civil Law No. 40 of 1951 published in the Official Gazette, issue 3015 of 08/09/1951.

69 to public order is done by the Islamic and Sharia Laws152.

When it comes to arriving at a final decision, the Iraqi arbitration courts often require that the arbitrators do so in a specified amount of time. This must also fall in agreement with both parties and current arbitration laws153. When a specified time frame is not provided by both parties involved, the arbitrators are usually dictated by law to come up with a decision within six months of commencing the case154. In examples such as cases concerning criminal elements such as forgery, the arbitrators may be limited to offering interim remedies during the course of arbitration. The arbitrator is powerless, as they are prohibited from handing out punishments to parties who fail to appear for court proceedings155. In those particular situations, the arbitrators may exercise the option to suspend proceedings and recommend that both parties seek legal redress for any outstanding issues that are outside their mandate156. When handing out their verdict, the arbitrators much usually come to a unanimous decision. In the case where the number of arbitrators is uneven, the majority vote will decide the outcome of the case157. Arbitration awards are treated by the Iraqi law the same way as conventional judicial rulings158.

Therefore, such awards should be written and referenced like any other court ruling. At the conclusion of most cases, when the award is given, the parties are enabled by the

152 Abdul Hamid El Ahdab and Jalal El Ahdab, Arbitration with the Arab Countries, Kluwer Law International 2011. P.230. 153 Article 263 of Iraqi Civil Procedure Law No. 83 of 1969 published in the Official Gazette, issue 1766 of 10/11/1969 154 Saleh Majid, Arbitration in Iraq, Baghdad 2004P.267 155 Abdul Hamid El Ahdab and Jalal El Ahdab, Arbitration with the Arab Countries, Kluwer Law International, 2011. P.232 156 Article 269 of Iraqi Civil Procedure Law No. 83 of 1969 published in the Official Gazette, issue 1766 of 10/11/1969 157 Article 270, Paragraph 1 of Iraqi Civil Procedure Law No. 83 of 1969 published in the Official Gazette, issue 1766 of 10/11/1969 158 Article 270, Paragraph 2 of Iraqi Civil Procedure Law No. 83 of 1969 published in the Official Gazette, issue 1766 of 10/11/1969

70 courts to enforce it. In cases where one of the parties is dissatisfied, there may be a failure for an end in the conflict. When this occurs, the court has the right to thoroughly examine the arbitral award in order to find out if the court’s final decision did in fact abide by all

Iraqi laws159.

In most cases, this route is taken by one of the party members as a strategy to buy time so as to not enforce the decision that was concluded by the initial arbitration. The CCP’s

Article 274 tells the court that it has the power to either accept the arbitration award in its entirety, or to reject it completely. It may also have the ability to reject parts of it that do not fall in accordance to Iraqi laws. In the occurrence where the court rejects the award, whether partially or in its entirety, it will usually recommend that the arbitrators fix the mistakes present within the original award or come out with an entirely new ruling160. In some rare cases, the court may make a final decision to adjudicate the case. Regardless of the decision, it is still subject to appeal in agreement with the stipulations outlined in the

CCP. This is just one example that showcases how the arbitration process can be a frustrating one in Iraq, as the final award can be extensively delayed. This present loophole only works to defeat the primary purpose of arbitration161. From this analysis, it can be seen that the Iraqi arbitration awards are stuck at a stalemate; since they must first be confirmed by the courts in order for any form of enforcement can be done. As a matter of fact, Saleh states that in order to enforce the award given by the courts, one of the parties must first apply for the court for authentication. Once confirmed by the court system, the award is finally enforced and becomes final, as long as no party decides to

159 Saleh Majid, Arbitration in Iraq, Baghdad 2004 P.267 160 Mahir Jalili, International Arbitration in Iraq, Baghdad, 1987. P.109 161 Saleh Majid, Arbitration in Iraq, Baghdad 2004.P.267

71 apply for an appealing process162. There are usually no time constraints with regards to when both parties must seek approval or rejection of an award given by the courts163.

Nevertheless, the CCP does dictate its own rules with regards to how a court may annul such an award164. Examples that fall under acceptable reasons for an annulment as outlined in article 273 include the invalidity of the arbitration agreement, arbitrators stepping outside their scope of practice or jurisdiction, a lack of documented evidence, and the contradiction of the public order to the nations code of morality165. Moral philosophy and public orders are somewhat vaguely defined, but the law does make an attempt at defining them through examples outlined in the CCP’s article 130.2166. Other reasons, for which the court may terminate the awards, include the detection of an error in judgment when deciding the outcome of such an award. Failure to observe and abide by the specific rules outlined in the CCP procedures is also grounds for terminating the award. If there is enough reason to suggest that falsification of evidence played a factor or that the competence of the arbitrators can be rightfully questioned, then the awards are also terminated until further analysis167. With regards to an international arbitration within Iraq, it is considered a domestic dispute as outlined by the CCP168. Since there is a lack of laws that specifically outline the cases of international arbitration, it is implied that there are no laws that prohibit foreign arbitration. In the earlier years of the 1970s to

162 Article 272, Paragraph 1 of Iraqi Civil Procedure Law No. 83 of 1969 published in the Official Gazette, issue 1766 of 10/11/1969 163 Hamzeh Haddad, enforcement of foreign judgment and award in Jordan and Iraq(1989) 2013 http://www.aiadr.com/aiadr%20re/2.pdf 164 Saleh Majid, Arbitration in Iraq, Baghdad 2004.P.267 165 Abdul Hamid El Ahdab and Jalal El Ahdab, Arbitration with the Arab Countries, Kluwer Law International 2011. P.232 166 Mahir Jalili, International Arbitration in Iraq, Baghdad, 1987. P.109 167 Hamzeh Haddad, Enforcement of Foreign Judgments and Award in Jordan and (1989) 2013 Iraqhttp://www.aiadr.com/aiadr%20re/2.pdf 168 Mahir Jalili, International Arbitration in Iraq, Baghdad, 1987. P.109

1980s, the Iraqi people and government were known to resist the inclusion of clauses within their foreign arbitration governmental contracts. Inclusion of clauses was perceived as being retrogressive when it came to the country’s desire to maintain and uphold sovereignty.

During those earlier years, the move to resist the inclusion of clauses was also viewed by some as undermining the local courts. Due to the increase in international oil prices at the time, Iraq had experienced a surge in economic growth that slowly forced the government to accept and include clauses of international arbitration within its contracts169. The courts had extensive powers within the arbitration process. This is the cause for needing the courts’ final approval in order to consider the arbitration process final and complete.

Even with the final decision reached by these courts, it may still be appealed by any participating parties. Many researchers have pointed fingers at the arbitration process for being the source of constant frustration. Although designed to resolve disputes, this process of arbitration does not do so in an efficient manner and thus compromises its designed purpose170. Not only is international arbitration strongly desired by foreign investment companies, but unfortunately lacks the enforcement of awards decided in the courts. On a positive note, just the fact that Iraq allows the foreign investors the option to choose between foreign arbitration and local arbitration laws is a step in the right direction171. This progress is visible when placed in the context that Iraq has had a history of resistance when it comes to allowing any foreign policies to influence their laws172. It is likely that due to this historical attitude, Iraq has remained very hesitant in signing with

169 Saleh Majid, Arbitration in Iraq, Baghdad 2004, p.267. 170 Akram Yamulki, National Report for Iraq in Yearbook Commercial Arbitration, Kluwer Law International 1979, 112 171 Sami Shubber, the Law of Investment in Iraq, Brill, New York, 2009. 172 Mahir Jalili, International Arbitration in Iraq, Baghdad, 1987. P.109

73 the New York Convention. At this time, most of Iraqi’s laws are not flexible enough to keep up with the demands of the 21st century’s implementation of laws. An example can be visible when realizing that the courts are given powers that allow them the ability to supersede any progress that can be made by foreign legislation.

These findings display the realities of Iraq’s arbitration laws that only accomplish to ward off any interest by foreign investors. The state of Iraq’s arbitration laws is more attractive in theory than in actual everyday practice173. Lingering reminders of the Saddam regime is evident by the fact that the country is still slow to adopt international arbitration procedures that are not only fair, but non-bureaucratic174. As previously discussed, one of the biggest challenges faced by Iraq in the implementation of arbitration awards, are the excessive powers granted to the courts as they have the right to approve or disapprove of such procedures175. This disconnection between reality and theory only causes frustration for foreign investors who see this system as being risky, slow-moving, and highly bureaucratic. Therefore, there needs to be a push towards giving arbitration its own independence from the current judiciary system in order to make it more efficient, faster, and reliable. A second major issue that remains unsolved within the Iraqi arbitration process is the subjection of awards to scrutiny by the moral philosophies of the land176.

There is the possibility for awards to be nullified if found to contradict the moral considerations of Iraq. What complicates the situation is that these moral principles and philosophies are not clearly defined and thus create a potential barrier to obtaining a

173 Hamzeh Haddad enforcement of foreign judgments and award in Jordon and Iraq (1989) 2013 http://www.aiadr.com/aiadr%20re/2.pdf 174 Mahir Jalili, International Arbitration in Iraq, Baghdad, 1987. P.109 175 Hamzeh Haddad, Enforcement of Foreign Judgments and Award in Jordan and Iraq (1989) 2013 http://www.aiadr.com/aiadr%20re/2.pdf 176 Akram Yamulki, National Report for Iraq in Yearbook Commercial Arbitration, Kluwer Law International 1979, 113

74 smooth arbitration process. Additionally, there is a lack in differentiation between international and national public order177. The CCP’s laws and rules define moral philosophies and public order by vague examples, rather than concrete textual reference and definitions178.

What results is the creation of various grey areas within the application of the law, which extrapolates to the problematic overall implementation of awards. This lack of finite clarity opens the possibilities of potential loopholes to be used by individuals who may push for outcomes to fall in their favor. In the ratification of arbitration awards, Iraq does not recognize the New York Convention. Regardless, Iraq still takes part in the judicial ratification of awards of member states that participate in the Arab League Convention on

Judicial Cooperation. Therefore, Iraq is required to enforce awards issued to its member states179.

177 Saleh Majid, Arbitration in Iraq, Baghdad 2004.P.267 178 Mahir Jalili, International Arbitration in Iraq, Baghdad, 1987. P.10 179 Hamzeh Haddad, Enforcement of Foreign Judgments and Award in Jordan and Iraq (1989) 2013 http://www.aiadr.com/aiadr%20re/2.pdf

SECTION D: Organization of Petroleum Exporting Countries (OPEC)

OPEC is a major Intergovernmental organization that allows any country with a substantial net export of crude oil to apply for membership. The coordination of these countries in OPEC establishes uniﬁed petroleum policies governed by international laws applicable to all members180. OPEC’s goal is stabilize petroleum markets in order to achieve an efﬁcient, reliable, and economic supply of oil to consumers. This is done while also allowing for steady incomes for producers and a fair return on capital for those investing in the petroleum industry. It is currently composed of Iraq, Algeria, Ecuador,

Indonesia, Iran, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Emirates, and

Venezuela181. Together they created an institution for the set purpose of regulating oil supply, which was accompanied by an increase in oil demand within the world oil markets in the 1960’s. Although these oil producing countries and members of OPEC were attending meetings with one another, the major oil companies were still able to manipulate and stir these host nations against one another, with the declared aim of reducing prices of oil182. Saudi Arabia, Iraq, Kuwait, Iran, and Venezuela agreed to set up the Organization of Petroleum Exporting Countries in September 15, 1960, to take the lead and function in preserving the rights of its members183.They defended their stance in

March, 2000, when OPEC controlled prices via a Price Band Mechanism, where the ceiling of oil production was established to maintain the price of oil in between the lowest and highest bounds of 22-28 dollars per barrel. In the end, we can see the

180 Organization petroleum Exporting countries, www.opec.org 181 Abdul Razak, the Impact of Public International Law to Develop Petroleum Concession Agreement an Empirical study about OPEC1952-2000, Iraq, 2010 182 OPEC Annual Statistical Bulletin http://www.opec.org/opec_web/static_files_project/media/downloads/publications/ASB2016.pdf 183 Mabruk E, Offshore Oil Concession Agreements in OPEC Member Countries Monaco, 1965.

77 continuation of the global oil trade, with its risks and benefits, is inevitable, as is a role for State companies in many economies that are dependent on oil exports.

However, the industry is Entering a new era when the narrow focus on supply and OPEC needs to be expanded .Uncertainty about demand will affect investment in new oil

Capacity generally, not just in OPEC. For the industry, competition is increasing among new crude oil substitutes such as biofuels and fracking gas, and the use of new technologies for coal and renewables that deliver service while reducing the use of crude oil. Also among oil exporters, OPEC will have a continuing role in supporting prices when demand falls short of supply184. Producers, however, cannot get any price they want. The success of Governments in oil exporting countries in reducing dependence on such exports will be what determines the benefits they can achieve for their populations185.

184 Lbilia L. worker OPEC, legal office, Legislative and judicial challenges to OPEC and international laws issues challenges and prospects 23 rd. Vienna, 2008. 185 John Manfeda, support for OPEC Production cut is increasing http://oilprice.com/Energy/Crude- Oil/Support-For-OPEC-Production-Cut-Is-Increasing.html

Chapter II: The Activities

The activities in the oil and gas industry are usually divided into three major sectors: upstream, midstream, and downstream. The upstream oil sector is also known as the exploration and production sector.

SECTION A: Iraq’s Upstream activities

The upstream sector witnessed three unprecedented developments after 2003. These include an opening to foreign direct investment, offering of the most prized petroleum fields in a rather short period of time, and formulation of the basic model for long-term service contracts. The upstream sector is the main pillar of the Iraqi economy. National development plans, State budgets, the balance of payments and trade balance depend largely on oil production and export revenues. Hence, all economic activities in the country are affected by developments in upstream petroleum. Ministry of Oil plans address the main components and direction of various activities within the upstream petroleum sector. Signed contracts illustrate the actual methods by which these plans are being implemented. In the National Exploration Program, official Iraqi data issued in

October, 2010, show proven oil reserves of 143 billion barrels from 66 known oilfields.

This represents only 28 percent of the estimated oil in place. Moreover, proven gas reserves are estimated at 127 trillion standards cubic feet, but probable gas reserves are estimated to be almost 300 trillion standard cubic feet. The Ministry of Oil’s plan for

2011 to 2014 aims to attain significant increase in the oil and gas reserves. This could mean adding around 29 trillion standard cubic feet of gas and 10 billion barrels of oil.

The National Exploration Program, with funding of $644 million, has three components-- to hold a fourth bid round (which took place on May 2012); to launch massive exploration activities using national efforts and capacities; and finally, to drill 12 exploration wells across Iraq. During the fourth bid round, 12 exploration blocks were offered. Seven were gas-prone and five oil-prone. Only four blocks were contracted, three of which are classified as oil-prone186. After the fourth bid round the oil minister promised a future fifth bid round. He said that Iraq has more than 60 blocks ready for offer, and in few months 10 to 15 oil and gas blocks would be offered.

A.1. Reserves

Iraq may be one of few places left where vast oil reserves have been under exploited.

According to the oil and gas journal, Iraq’s proven oil reserves are 115 billion barrels.

These statistics have not been revised since 2001 and are based on December 2010 data from nearly three decades ago187.Geologists and consultants have estimated that relatively unexplored territory in the western and southern deserts may contain an estimated additional 45 to 100 billion barrels of recoverable oil188., Iraqi oil minister

Hussain Alshahristain said that it Iraq is reevaluating its estimate of proven oil reserves, and expects to revise them upwards189.

A major challenge to Iraq’s development to the oil sector is that resources are not evenly divided across sectarian borders. Most known hydrocarbon resources are concentrated in

186 Original data in Iraqi dinars converted at $1= ID1168. Ministry of Oil Summary of the Four-Year Plan 2011-2014 for the Oil and Gas Sector https://igoil.gov.iq/ig/ 187 Donovan, Thomas W. Iraq’s petroleum industry, unsettled issues, Middle East institute 2013 188 David Brent Grantham, Caveat Investor Assessing the Risks and Rewards of IOCs Entry into Iraq, Journal of World Energy Law and Business Vol.28, No.8, (2010) p. 304 189 Mackey, Iraq sees hefty return to oil growth in 2014, http://www.reuters.com/article/2013/10/23/iraq- oil-idUSL5N0ID2K820131023 & http://www.iraq-businessnews.com

80 the Shiite areas of the south and the ethnically Kurdish north, with few resources are under control of the Sunni minority. The majority of the known oil and gas reserves in

Iraq are in a north-south belt that runs along the eastern edge of the country. Iraq has 9

ﬁelds that are considered super giants with over 5 billion bbls as well as 22 know giant

ﬁelds with over I billion bbls190. 191. According to independent consultants, the cluster of supergiant ﬁelds of southeastern Iraq contains the largest know concentration of such

ﬁelds in the world. They account for 70 to 80 percent of the country’s proven oil reserves.

An estimated 20 percent of oil reserves are in the north of Iraq, near Kirkuk, Mosul and

Khanaqin192. Control over rights to reserves is a source of controversy between the ethic

Kurds and other groups in the area193

A.2. Production

In 2009, Iraq’s crude oil production averaged 2.4million barrels per day (bbls/d), about the same as 2008 levels and below its prewar production capacity level of 2.8 million bbls/d in 2003. About two thirds of production comes from the southern fields, with the remainder from the north central fields near Kirkuk. At present, the majority of Iraq oil production comes from just three giant fields--North and South Rumaila in southern Iraq, and Kirkuk. Currently, the ministry of oil has central control over oil and gas in all but the Kurdish territory through its three operating entities--the North Oil company (NOC), the South Oil Company (SOC), and the Missan oil company (MOC), which was spilt off

190 Iraqi Oil Ministry official website, www.oil.gov.iq/ U.S. Energy information Administration Country Analysis Brief: Iraq, http://www.eia.gov/beta/international/analysis.cfm?iso=IRQ 191 Iraqi Oil Ministry official website, www.oil.gov.iq/ U.S. Energy information Administration Country Analysis Brief: Iraq, http://www.eia.gov/beta/international/analysis.cfm?iso=IRQ 192 Abdul-Hussein Tariq, Economic Development, and Workforce Planning in Iraq, 2nd ed, Dar Al Adalah 2013.p224 193 Ministry of Natural Resources, Kurdistan Regional Government, "Update on oil export from the Kurdistan Region of Iraq," http://mnr.krg.org/index.php/en/

81 from the SOC in 2008194. According to the NOC’s website, their jurisdiction extends from the Turkish borders in the north to 32.5 degrees’ latitude (about 100 miles south of

Bagdad), and from Iranian borders in the east to Syrian and Jordanian borders in the west.

This area spans the following governments: Tamim Kirkuk, Nineveh, Irbil, Bagdad,

Diyala and part of Babil to Hilla and Wasit to Kut. The remainder falls under the jurisdiction of the SOC and MOC. Thought smaller in size, it includes the majority of proven reserves. MOS’s oil ﬁelds hold an estimated 30 billion barrels of reserves195. They include Amara, Halfaya, Noor, Rifaee, Dijaila, Kuwait and east of Raﬁdain. The

Kurdistan Regional Government (KRG) is the ofﬁcial ruling body in northern Iraq that is predominantly Kurdish. The Kurds passed their own hydrocarbons law in 2007. Despite the lack of Iraq law governing investment in hydrocarbons, KRG has signed oil production sharing, development, and exploration contracts with several foreign ﬁrms.

KRG began exporting its own oil brieﬂy. Norway’s DNO and Sinopec/Addax are currently producing, at volumes that could be ramped up to 100,000 bbls/d and reach

200.000 bbls/d within a year, according to the KRG natural resources ministry196. KRG ceased oil exports after four months in 2009. The Iraqi oil ministry has been adamant that oil produced in KRG will have to be shipped via SOMO, Iraq’s oil exporting arm. Iraq has begun an ambitious development program to develop its oil ﬁelds and to increase its oil production.

Passage of the proposed Hydrocarbon Law remains a main policy objective. Despite the absence of that law, the Iraqi ministry of oil signed 12 long–term contracts between

194 Shwadran, Benjamin, Middle East Oil Issues and Problem, Tel Aviv university, 1977.p. 30. 195 Total Petroleum and other liquids production, http://www.eia.gov/beta/international/. 196 KRG Ministry of Natural Resources, http://mnr.krg.org/

November 2008 and May 2010 with international oil companies to develop 14 oil ﬁelds.

Under the first phase, companies bid to further develop 6 giant oil fields that were already producing proven oil reserves of over 43 billion barrels. Phase two contracts were signed to develop fields that were already explored but not fully developed or producing commercially. Together, these contracts cover oil field with proven reserves of over 60 billion barrels, or more than half of Iraq’s current proven oil reserves. As a result of these contract awards, Iraq expects to boost production by 200,000 bbls/d by the end 2010 and to increase production capacity by an additional 400,000 bbls/d by the end of 2011197.

When these field are fully developed, they will increase total Iraq production capacity to almost 12 million bbls/d or 9.6 million bbls/d above current production levels. The contracts call for Iraq to reach this production target by 2017198. Infrastructure constraints that Iraq faces impose many challenges in meeting this timetable. One of the most significant issues is the lack of an outlet for significant increases in crude oil production199. Both Iraq refining and export infrastructure are currently bottlenecks, and need to be upgraded to process much more crude oil. Iraq oil exports are currently at near full capacity in the south, while export capacity in the north has been restricted by sabotage. It would need to be expanded in any case to export significantly higher volumes200. Production increases of the scale of the planned will also require substantial increases in natural gas and/or water injection to maintain oil reservoir pressure and boost oil production.

197 Iraqi Oil Ministry official website, http://www.oil.gov.iq/ 198 Salahodeen Abdul-Kafi, Iraqi Oil Reserves, Stanford University, 2010 p.20 199 Iraq oil field goes to Royal Dutch shell and Petronas http://www.nytimes.com/2009/12/12/business/global/12iht-oil.html?_r=0 200 Kirkuk oil, http://www.globalsecurity.org/military/world/iraq/oil.htm

Iraq has associated gas that could be used, but it is currently being ﬂared. Another option is to use water for re-injection. Locally available water is currently being used in the south of Iraq. Fresh water, however, is an important commodity in the Middle East, and large amounts of seawater will likely have to be pumped in via pipelines that have yet to be built. Exxon Mobil has coordinated initial studies of water injection plans for many of the ﬁelds under development. According to their estimate 10 to 15 million bbls/d of seawater could be necessary for Iraq’s expansion plans, at a cost of over $ 10 billion.

Iraq’s oil and gas industry is the largest industrial customer of electricity, with over 10 percent of total demand. Increased oil production would also support increases in power generation. Iraq has struggled, however, to meet shortages common across Iraq. Major upgrades to the electricity sector would be needed to supply additional power. Iraq also plans to sign sharing agreements soon for adjacent oil ﬁelds with Kuwait and Iran201. Iraq would like to set up joint committees with neighbors on how to share the oil found on bordering fields.

A.3. Expansion of development, production, and export capacities

The second pillar of upstream activities comprises development, production, and export capacities. Most of Iraq’s highly prized oilfields and three gas fields were offered to international oil companies through bid rounds and one by direct negotiation202.

International oil company involvement began through direct negotiation with the Chinese company CNPC to convert the production sharing contract in respect of Alahdab oilfield, which had been concluded in 1997, into a long-term service contract, which was

201 Iran-Iraq War (1980-1988), http://www.globalsecurity.org/military/world/iraq/oil.htm 202 Zedalis, Rex the Legal Dimensions of Oil and Gas in Iraq, Cambridge University Press, November 2009

84 concluded in November 2008203. The other oil and gas fields were awarded through three bid rounds between June 2009 and October 2010. A total of 15 contracts were signed covering 17 fields, including three gas fields and 14 oilfields. The total oil production from oilfields offered under the first two bid rounds and from Alahdab will amount to

12.215 million barrels per day (mbd) when the contracted plateau targets are realized.

Total oil production in the country would be even higher if oil production from other oilfields and those from Kurdistan are added. Oil production also results in proportional volumes of associated gas. Technical information reveals that each million barrels per day of Iraqi crude oil produces 0.8 billion cubic feet per day of associated gas204.

Moreover, the development of three gas fields has a strategic importance independent of oil production. Oil production is intended mainly to satisfy world demand as domestic demand for oil is limited, and any future expansion in domestic economic activities and improvement in the standard of living would not absorb even 20 percent of the projected plateau production. Therefore, most of the crude produced must be exported. Thus, expanding and diversifying export outlets are prerequisites to realizing any level of production capacity expansion. Also, the Ministry of Oil adopted the Iraq Crude Oil

Export Expansion Project to expand and diversify export facilities through the Arabian

Gulf (8.5 mbd), Turkey (1.6 mbd), Syria (4.5 mbd) and even Jordan (1.0 mbd)205. Also, there is a plan for a pipeline to deliver surplus gas to Syria and the Arab Gas Pipeline with a possibility of a connection to the port of Ceyhan in Turkey on the

203 Wong E, China open oil field in Iraq The New York Times (New York, 28 June 2011) http://www.nytimes.com/2011/06/29/world/asia /29chinairaq.html? _r=0 > 204 Ahmed Mousa Jiyad, Legal, Fiscal and Regulatory Frameworks Governing Upstream Petroleum in Iraq, Iraq/Development t Consultancy & Research, Norway, http://www.iraq-businessnews.com/wp- content/uploads/2013/02/Iraqi-Frameworks-Final-Feb2013-Ahmed-Mousa-Jiyad.pdf 205 Regional Economic Outlook Middle East and Central Asia, World Economic and Financial Surveys, Washington, D.C., October 2014 http://www.imf.org/external/pubs/ft/reo/2015/mcd/eng/pdf/mreo1015.pdf

Mediterranean206 or through Egypt and then on to the European network. To optimize the pipeline network and attain its export targets, the Ministry of Oil signed a $13.3 million contract in May, 2011, with the Canadian consulting firm SNC-Lavalin.

A.4. Iraq upstream gas production

Iraq's proven natural gas reserves as of January 1, 2013, were the 12th largest in the world at 112 trillion cubic feet (Tcf), according to the Oil and Gas Journal. Most of these reserves are south of Iraq. Three-fourths of Iraq's natural gas resources are associated with oil. Non-associated reserves are concentrated in several fields in the North, including Ajil, Bai Hassan, Jambur, Chemchemal, Kor Mor, Khashem al-Ahmar, and al-

Mansuriyah. Iraqi annual natural gas production increased from to 81 billion cubic feet

(Bcf) in 2003 to 522 Bcf in 2008207. Some gas is used as fuel for power generation, and some is re-injected to enhance oil recovery. Over 40 percent of the production in 2008 was flared due to a lack of facilities for consumption and export, Royal Dutch Shell estimated that flaring losses exceed 1 Bcf per day. As a result, Iraq’s five natural gas processing plants, which can process over 773 billion cubic feet per year, sit mostly idle.

To reduce flaring, Iraq has been working on an agreement with Royal Dutch Shell to implement a 25-year project to capture flared gas for domestic use208. Iraq’s cabinet gave preliminary approval for the $17 billion deal covering development of 25 to 30 Tcf of associated natural gas reserves in Basra province through a new joint venture, Basra Gas

Company.

206 Zeyno Baran, The Baku-Tbilisi-Ceyhan Pipeline, Implications for Turkey, Central Asia-Caucasus Institute www.silkroadstudies.org/.../pdf/.../2013_0 207 Kentz Awarded, Contract at West Qurna 1, Construction & Engineering in Iraq, Iraq Oil & Gas News, http://www.iraq-businessnews.com/tag/kentz/ 208 EIA, Annual Energy Outlook 2011. Department of Energy, April 2011, pp. 2, 83.

The agreement to cover all of Basra province has been modified to include only the associated gas from the Rumaila, Zubair, and West Qurna Phase I projects.

Implementation is necessary for the new oil development projects to go forward209. Iraq had planned an upstream bidding round in late 2010 for three non-associated natural gas fields with combined reserves of over 7.5 Tcf210. This was to be the third hydrocarbon bidding round conducted by Iraq, following two earlier rounds that were held to develop

Iraq’s oil fields. All of the companies that qualified to bid in the three earlier rounds will be invited to bid in the future. Iraq has committed to purchasing 100 percent of the gas found211.

209 DOE/ELA, Iraq country report, http://www.eia.gov/countries/cab.cfm?fips=IZ . accessed 5 September 2014 210 Doing Business in Iraq, http://www.trade.gov/iraq/build/groups/public/@tg_iqtf/documents/webcontent/tg_iqtf_004087.pdf 211 3-Iraq Energy Data, Statistics and Analysis Oil, Gas, Electricity, 2010 http://wenku.baidu.com/view/701e5b00a6c30c2259019e06.html

SECTION B: Midstream Activities – distributed SCADA system

Midstream is used to describe one of the three major stages of oil and gas industry operations. It includes processing, storing, transporting and distributing oil, natural gas, and natural gas liquids212. The midstream sector involves the transportation (by pipeline, rail, barge, oil tanker or truck), storage, and wholesale distribution of crude or refined petroleum products. Pipelines and other transport systems can be used to move crude oil from production sites to refineries, and then deliver refined products to downstream distributors. Midstream operations are often taken to include some elements of the upstream and downstream sectors. For example, upstream may include storage functions, and downstream may include transport that overlaps into the midstream sector213. The

Natural gas pipeline networks collect gas, gas from natural purification plants and deliver it to downstream customers such as local utilities. Midstream operations are often taken to include some elements of the upstream and downstream sectors. Natural gas pipeline networks deliver gas from purification plants to downstream customers such as local utilities. Midstream operations may also include natural gas processing plants to purify natural gas and remove elemental sulfur and natural gas liquids (NGL)214. The midstream oil and gas market has also undergone significant change. As technology drives breakthroughs in multiple areas, the demand for midstream services provides both opportunities and risks for midstream companies.

Implementing new strategies are a necessary response to new market conditions. From

212 The petroleum service association of Canada http://www.psac.ca/business/industry-overview/#upstream 213 The road to convergence the revenue recognition proposal, oil and, technical line, technical guidance on standard practice issues, 6 Oct. 2010, p.13 214 What are natural gas liquid and how are they used, http://www.eia.gov/todayinenergy/detail.cfm?id=5930

89 volatile commodity prices and regulatory changes to working to improve performance and operational effectiveness, the midstream sector has much to consider. For example,

Shell Global Solutions used LabVIEW software to develop a slug suppression system215.

Developers take advantage of flexible computer programs to control severe slugging and transients. This allows communication with existing devices and real-time operation with

99.95 percent availability216.

The Distributed SCADA System - Alcatel-Lucent used NI PACs217 to develop an integrated communication and automation control system to perform local process control and data logging of oil wells and provide communication for remote operation and central monitoring for more than 300 oil wells218. The system has resulted in significant cost reductions and production increases. In other words, we can say the NI distributed data acquisition systems, supervisory control, and automation software platforms deliver a higher-level monitoring system to improve management and operation within midstream infrastructure. Another example is Cement Analyzer which

Halliburton developed as a stand-alone ultrasonic cement analyzer using NI Compact

DAQ hardware. The small size of NI Compact DAQ helped minimize the footprint of the analyzer, and the modularity of the platform provided the ability to incorporate additional measurement types for special deployment requirements219.

In the end, Midstream activities are commonly included as part of downstream operations

215 Shell Global Solutions, Slug Suppression System, Slug Control using National Instruments Hardware and Software, [email protected] 216 National Instruments, Solutions for the Oil and Gas Industry, Austin, TX, www.ni.com 217 https://www.ni.com/oilandgas/midstream.htm 218 Dynamic Communication for the smart grid Driving smarter energy management and usage, www.alcatel-lucent.com/smartgrid 219 Rick Bradshaw, Halliburton Uses NI Compact DAQ to Develop a Highly Reliable and Durable Ultrasonic Cement Analyzer, [email protected]

90 for much of the oil and gas industry. The midstream and downstream activities take place after the initial production phase and through to the point of sale. That is why many oil and gas companies are considered integrated because of their ability to combine upstream, midstream and downstream activities as part of their overall operations220.

Major activities involved in the midstream sector include:

 Transportation (pipeline, rail, barge, oil tanker, and/or truck); and

 Distribution of wholesale products.

B.1. Oil Pipelines in Iraq

One of the most economical methods to move large volumes of oil, natural gas, or refined oil products over vast distances of land is through the use of pipeline transport systems.

Data taken in 2014 depicts the accepted use of the pipeline transport system with an estimated 3.5 million kilometers of pipes in use in 120 countries throughout the world221.

Liquids, gases, or any chemically stable substance can be transported through these networks. Materials used to construct underground oil-carrying pipelines include both steel and plastic. Pump stations, located along the pipeline, move oil along the designated route towards their destination. Small NGL processing facilities are usually located in oil fields with butane and propane liquids being held under pressures of 125 pounds per square inch. Iraq’s highly abundant natural resource of oil is evident with the 2009 data records boasting the country as the world’s 2nd largest producer222. Iraq also had the world’s 5th largest proven petroleum reserves, with Canada, Iran, Venezuela, and Saudi

220 Invest in Iraq. Join Stock Company, http://www.invest-in-iraq.com/join-stock-company/ 221 OECD, Supporting Investment Policy and Governance Reforms in Iraq (OECD 2010) 212-214., Oil pipelines in Iraq http://www.snipview.com/q/Oil_pipelines_in_Iraq 222 U.S. Energy Information Administration Refinery Receipts of Crude Oil by Method of Transportation http://www.eia.gov/dnav/pet/pet_pnp_caprec_dcu_nus_a.htm

Arabia taking the lead. Of high importance was the fact that only a fraction of Iraq’s known oil fields is under development, leaving it as one of the few places on earth with high quantities of undisturbed natural resource potential. Unfortunately, Iraq’s oil industry has suffered major setbacks throughout the past decades due to conflicts, wars, and sanctions. Therefore, modernization of infrastructure along with investments is highly needed to turn the situation around.

Major crude oil and gas pipelines in Iraq 223

223 http://www.bing.com/images/search?q=iraq+oil+pipelines+map&qpvt=iraqi+oil+pipelines+map&qpvt=iraqi+oil+pipel ines+map&FORM=IGRE

 Kirkuk-Ceyhan Oil Pipeline

The Iraq-Turkey Crude Oil Pipeline is one of the longest export lines in Iraq with an approximate distance of 600 miles (970 km). It consists of pipes with two different diameters of both 46 inches (1.17 meters) and 40 inches (1.02 meters). Both of these pipes were designed to provide a total capacity of 1,100,000 bpd and 500 000 bpd respectively224. Currently, only 300,000 bpd is being transported by these pipes, therefore not reaching its full maximum potential. The purpose of this network of pipeline is to transport oil from the northern region of Iraq up to the Turkish port of Ceyhan. This export route was the only network available for Iraq’s northern oil production in 2012 and was operated by the Iraqi Oil Ministry’s North Oil Company225. Iraq also signed an agreement with Turkey to grow its operations of the 1.6 million bbls/d pipeline, as well as to upgrade its capacity by 1 million bbls/d. In order to reach the targeted design capacity, Iraq would have to receive oil from the south226. This can be accomplished if the Strategic Pipeline is used, as it was designed to allow for the transportation of crude oil to the north of Iraq227.

 Kirkuk-Banias Pipeline,

In 1952, the British-owned Iraqi Petroleum Company created the Kirkuk-Banias Pipeline for the transportation of oil from Kirkuk to the Port of Banias, located in Syria228. It was designed to provide a capacity of 700,000 bbls/d yet, portions of the pipeline have been

224 Associated press Iraq upheaval threatens oil development plans, http://www.dailymail.co.uk/wires/ap/article-2666140/Iraq-upheaval-threatens-oil-development-plans.html 225 Oil exports report form Kurdistan, . http://www.iraq-businessnews.com/tag/north-oil-company-noc/ 226 Iraq north oil company http://www.noc.oil.gov.iq/english_ver/homepage_en.htm 227 Iraq turkey sing renewed oil pipeline http://uk.reuters.com/article/iraq-turkey-pipeline- idUKLDE68I04V20100919 228 Blanchard, Christopher, Iraqi regional perspectives and US policy, congressional Research service, October, 2009.

94 closed and deemed unusable sine the US led invasion of Iraq in 2003229. Re-opening of the pipeline has been in talks between the Iraqi and Syrian government officials. Interest in repairing and reopening the pipeline has also been discussed by the Russian company

Storytransgaz, even though no plans or actions have been implemented as of yet230.

 Mosul–Haifa oil pipeline

The Iraq-Haifa pipeline, also known as the Mediterranean pipeline, transported crude oil from the fields of Kirkuk through Jordan to Haifa231. This pipeline was active and operational from 1935 to 1948. It traveled the length of 942 kilometers (585 miles), with a measured diameter of 300 mm (12 inches). Some areas of the pipeline contained diameters measured at 200 to 250 millimeters (8 to 10 inches). The length of time it would take for the complete transportation of crude oil would be 10 days232. Once arriving in Haifa, the oil would be distilled by the Haifa Refineries. Once complete, the oil would then be stored in tanks and placed onto tankers to its final destination of

Europe. The Iraq-Haifa pipeline was constructed by the Iraq Petroleum Company between 1932 and 1943. It was during this period that the League of Nations had granted a British mandate over the area which the pipe traveled through.

This pipeline was one of two pipeline networks used to transport oil from the Baba

Gurgur, Kirkuk fields to the Mediterranean coast. There was a double pipeline split located at the Haditha Pumping Station K3, with the second line carrying oil to Tripoli,

229 U.S. Energy Information Administration, Energy profile of Iraq, 2007, http://www.eoearth.org/view/article/152503/ 230 Mid-downstream: refining, transport and export capacity, https://energy.fanack.com/iraq/oil-and- gas/mid-downstream/ 231 Iraq sets Jordan pipeline into motion, Iraq oil report, 2 January 2013. 232 Washington's Blog, The Roots of the Iraq and Syria Wars Go Back More than 60 Years, 2014, http://www.globalresearch.ca/the-roots-of-the-iraq-and-syria-wars

Lebonon under a French mandate233. This second line was built for the purpose of satisfying the demands from the French partners in IPC, Compagnie Française des

Pétroles. The French associates wanted to maintain a separate line across their mandated territory. The Iraq-Haifa pipeline, along with its refineries was of high strategic importance for the British and American forces located in the Mediterranean during the

Second World War234.

 Kurdistan Pipeline

The Kurdistan Pipeline was completed in 2013 by the Kurdistan Regional Government of

Iraq. This pipeline was designed to transport oil from the TaqTaq Fields through

Khurmala and Dahuk all the way to its final destination of Pesh Khabur, located on the

Turkey Iraq border. At that location, the pipeline was then connected to the Kirkuk-

Ceyhan pipeline235. The pipeline was designed to have a transport capacity of 150,000 barrels per day (24,000 m3/d) and a diameter of 910 millimeters (36 inches)236. The oil that was transported throughout this network of pipelines originated from both the

TaqTaq and Tawke oil field. The Kurdistan Regional Government announced on May

23rd, 2014 that the first oil shipment was loaded onto the Tanker in Ceyhan via the transportation of the newly built pipeline237.

233 Al-Attar J, The Petroleum History in the Middle East 1901- 1972, Beirut 1977.P34 234 Bamberg James, the history of British petroleum company, Vol 2, Cambridge university, (1994 235 Brian Swint, New oil pipeline boosts Iraqi Kurdistan, the region made of three northern provinces,2014, https://www.washingtonpost.com/business/new-oil-pipeline-boosts-iraqi-kurdistan-the-region-made-of- three-northern-provinces/2014/06/12/50635600-ef30-11e3-bf76-447a5df6411f_story.html 236 Kurdistan Taq Taq oil export rise a head of sept deadline, 6 September 2012. & Taq Taq PSC, Genel energy http://www.genelenergy.com/operations/kri-oil-production/taq-taq/ 237 Barkey, H. J. Laipson, E., Iraqi Kurds, and Iraq's Future. Middle East Policy 12 (4): 66–76 p. 68. Also, http://www.genelenergy.com/operations/kri-oil-production/taq-taq/

 Basra Haditha pipeline

In 2013, the Iraq government began the operations of its third crude oil offshore export facility, with the plan to upgrade both its Basra and Khor al-Amaya onshore terminals.

The Iraq government was also in the process of constructing a 16 tank system for crude oil storage in the port of al-Faw. Each of these tanks has the capacity of storing a volume of 58,00 cubic feet. Iraqi crude-oil exportation rates are estimated to increase up to 3.5 million barrels. This is a notable increase from the 3.15 to 3.2 million barrels per day produced in June of 2013. An Oil Ministry Statement on June 29th declared that Iraq had signed an agreement with Jordan to further extend pipeline operations. This agreement stated that an extension of pipeline infrastructure would be implemented to transport oil through Haditha to the port of Aqaba located in Jordan, to its final destination of Egypt and North Africa238.

 IPSA pipeline

The Iraq Pipeline also known as IPSA travels through Saudi Arabia into the Red Sea Port of Mu’ajiz, located just north of Yanbu239. Unfortunately, IPSA had endured multiple closures due to conflicts, wars, and political events in the region. The last event that ended its operations for IPSA was the Gulf crisis. This pipeline had the total transportation capacity of 1.65 million barrels per day (bpd)240. Additionally, this pipeline network also had an approximate 10 million barrels of storage and loading capabilities at

238 Hassan Hafidh, Iraq beings design of pipeline to Jordan http://www.wsj.com/articles/SB10001424127887324662404578332253495395968 239 Iraq Ministry of Oil, The Iraq Strategic Crude Oil Export Pipeline Infrastructure Project, London Road Show December 14, 2012. https://www.meed.com/Journals/2013/01/09/q/b/g/Iraq-oil-pipeline- presentation-Dec-2012.pdf 240 Iraq-Saudi oil pipeline is unusable, Gas and Oil http://www.globalresearch.ca/the-secret-stupid-saudi-us- deal-on-syria/5410130

97 the terminal in al-Mu’ajjiz for tankers capable of handling up to 400,000 tons241.

Operations for IPSA halted in the 1980s in the attempt to diversify its exportation routes after multiple oil tankers were attacked in the Gulf during the Iran-Iraq conflict. Final transportation of Iraqi crude oil via the pipeline system occurred in 1990 as the relationship between both Iraq and Iran deteriorated. In 2001, Saudi Arabia confiscated the pipeline claiming it as collateral for the debt that Baghdad owed them. From that moment in 2001 up until 2012, the pipeline networks were used for the sole purpose of the transportation of gas to power plants located in the western region of the country242.

Attempts by the Iraq government to reclaim its pipeline did not occur until 2003, according to the former Iraqi Oil Minister. Political relations between Iraq and Saudi

Arabia have since remained tense243. Due to long term closures, the pipeline is currently not in use. Due to threats by the Iranian authorities in December 11, 2001 to shut down the Persian Gulf to international oil trade, talks were underway to consider alternative routes for exportation to the Strait of Hormuz. This led to further talks about considering oil pipeline routes that would travel across Saudi Arabia244. Both the IPSA pipeline along with the Trans-Arabian Pipeline would be able to carry up to 2 million bpd into the ports located at the Red Sea and Mediterranean coasts245. Regardless of its obvious potential,

Iraq’s current threats to oil infrastructure and reserves along with other security concerns

241 Baker Institute Paper Suggests Pipeline Alternative to Hormuz Oil Route Special to Pipeline and Gas Journal, Vol. 239 No. 5, (May 2012) 242 Iraqi oil export outlets, Middle East Economic survey, 30 November, 2009. 243 Charlotte Edwardes, Relations with Iraq remain sour in wake of Gulf War,2000, http://www.telegraph.co.uk/news/worldnews/middleeast/iraq/1370488/Relations-with-Iraq-remain-sour-in- wake-of-Gulf-War.html 244 Kaiyan Homi Kaikobad, legal implication of the Iran -Iraq war, and F. Dekker and Harry H. G. Post, The Gulf War of 1980-1988, The Iran-Iraq War in International Legal Perspective, Martins Nijhoff Publisher 1992, p.51. 245 Farhang Rajaee The Iran-Iraq War: The Politics of Aggression, The University Press of Florida 1993 p. 14.

98 in the country will continue to bring to a standstill the reopening of the IPSA pipeline.

B.2. Midstream Iraq gas (export pipeline plans)

Plans to export natural gas remain controversial due to the amount of idle and inefficient electricity generation capacity in Iraq due mainly to a lack of adequate gas feedstock.

Prior to the 1990 to 1991 Gulf War, Iraq exported natural gas to Kuwait246. The gas the gas came from Rumaila through a 105-mile long, 400 million cf/d pipeline to Kuwait's central processing center. In 2007, the Ministry of Oil agreed to fund a feasibility study on the revival of the mothballed pipeline. Iraq controls the northern export routes with the proposed Nabucco pipeline through Turkey to Europe. A second outlet is the Arab Gas

Pipeline (AGP) project247. It can now deliver gas from Iraq’s Akkas field to Syria and then on to Lebanon and Turkey, and then on to Europe. Other outlets include LNG exporting facilities in the Basra region248. Iraq renewed plans to participate in the

Friendship Gas Pipeline to transport natural gas from Iran through Iraq to Syria and then on to Europe. Iraq's export plans, however, have been complicated by KRG proposals to export their natural gas independently of Baghdad.

B.3. Transport the Iraq oil and gas by ports

Crude oil must be moved from the production site to refineries and from refineries to consumers. These movements are made using a number of different modes of transportation. Crude oil and refined products are transported across water in barges and

246 Iraq Business Law Handbook, Strategic Information and Basic law, USA Washington, DC, Iraq, 2013 http://avantgardeproject.conus.info/mirror/archive.htm 247 Shell and South Gas at design phase on first Iraq LNG Plant, http://www.2b1stconsulting.com/shell-and- south-gas-at-design-phase-on-first-iraq-lng-plant/ 248 Yaniv Voller, Kurdish oil politics in Iraq contested sovereignty and unilateralism Middle east policy council journal Eassy, Vol.xx,No.1 (spring 2013 )

99 tankers. Crude oil tankers are used to transport crude oil from fields in the Middle East,

North Sea, Africa, and Latin America to refineries around the world. Product tankers carry refined products from refineries to terminals. Tankers range in size from the small vessels used to transport refined products to huge crude oil carriers. Tanker sizes are expressed in terms of deadweight (dwt) or cargo tons. The smallest tankers are General

Purpose which range from 10,000 to 25,000 tons. These tankers are used to transport refined products. Very Large Crude Carriers (VLCC) is employed in international crude oil trade249. The size of tanker that can be used in any trade dependent on the tanker's length and loaded depth plus the size of the loading and unloading ports facilities. The larger ships are used because they reduce the cost to transport a barrel of crude oil. In

2011, total world oil production amounted to approximately 87 million barrels per day

(bbls/d),), and over one-half was moved by tankers on fixed maritime routes250. By volume of oil transit, the Strait of Hormuz, leading out of the Persian Gulf, and the Strait of Malacca, linking the Indian and Pacific Oceans, are two of the world's most strategic chokepoints. The Basra Oil Terminal (formerly Mina al-Bakr) on the Persian Gulf has an effective capacity to load 1.3 million bbls/d 2009, a little over 1.5 million bbls/d of oil in

2012, and support Very Large Crude Carriers. In February 2009, the South Oil Company commissioned Foster Wheeler to carry out the basic engineering design to rehabilitate and expand capacity of the terminal by building four single point mooring systems with a capacity of 800,000 bbls/d each251.

There are five smaller ports on the Persian Gulf, all functioning at less than full capacity,

249 International Crude Oil, http://www.osg.com/industry/international-crude-oil.aspx 250 U.S. Energy Information Administration World Oil Transit Chokepoints, August 22, 2012 251 H. Cordesman, Iraq in Transition: A Status Report, Washington, www.csis.org/burke/reports, 4 October 2014.

100 including the Khor al-Amaya terminal252. So, Iraq has the potential to play a key role in oil and gas production to the world253. That is why the international energy market is dependent upon reliable transport. Blockage of a chokepoint, even temporarily, can increases total energy costs. In addition, chokepoints leave oil tankers vulnerable to theft from pirates, terrorist attacks, and political unrest as well as shipping accidents causing disastrous oil spills. The seven straits highlighted above serve as major trade routes for global oil transportation. Disruptions to shipments would affect oil prices and add thousands of miles of transit in an alternative direction, if even available.

B.4. Overland export routes

The export routes are used to export some very limited amounts of crude from small fields bordering Syria. In addition, Iraq has resumed shipping oil to Jordan’s Zarqa refinery by road tankers at a rate of 10,000 bbls/d254.

252 Iraq ramps up its crude exports, Lloyds list interelligence, 20 September 2012. https://www.ogel.org/journal-browse-issues.asp 253 Meghan o Sullivan. Iraq politics and implications for oil and energy, heaved Kennedy school, 2012. 254 H. Cordesman, Iraq in Transition Governance, Politics, Economics, and Petroleum, Washington, 2011

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SECTION C: Downstream activities – The construction and operation of pipelines.

The downstream stage in the production process involves processing the materials collected during the upstream stage into a finished product. It includes the actual sale of that product to other businesses, governments or private individuals255. The type of end user will vary depending on the finished product. In the oil industry, the downstream process consists of converting crude oil into products and then selling those products to customers. Any kind of plant that processes raw materials, however, may qualify as operating within the downstream stage of production. A company that combines both upstream and downstream processes is an integrated company, so downstream includes all work done at the refinery, including distillation, cracking, reforming, blending, storing, mixing and shipping. Products from refining crude oil including diesel, liquefied petroleum gas (LPG)256, asphalt, petroleum coke, lubricants, gasoline, fertilizers, antifreeze, plastics, rubbers, pesticides, synthetic rubber, jet fuel and many more257. The major activities in the downstream sector include refining, transport to retail facilities and marketing of the finished products258.

C.1. Refining

Estimates of Iraq’s reﬁning capacity vary from 637,500 bbls/d according to the Oil and

Gas Journal to 790,000 bbls/d according to the special Inspector General for Iraq reconstruction. Iraq reﬁneries have old infrastructure and only run at 50 percent of

255 Brian Bass, Demand Media, The Definitions of Upstream and Downstream in the Production Process, http://smallbusiness.chron.com/definitions-upstream-downstream-production-process-30971.html 256 Rik DeGunther, Alternative Energy for Dummies, John wiley and sons.inc Hoboken, New Jersey 2009.24 257 Jung-Yung Jonathan Chang, Understanding The Oil Market - An Industry Primer With Breakdown Of Recent Trends By Segment, 2015 http://seekingalpha.com/article/2908886-understanding-the-oil-market- an-industry-primer-with-breakdown-of-recent-trends-by-segment 258 Adelman M A, The World Petroleum Market, Johan Hopkins University Press 1973.

103 capacity, with demand of about 600,000 bbls/d259. The refineries produce too much heavy fuel oil and not enough of other refined products. As a result, Iraq relies on imports for 30 percent of its gasoline and 17 percent of its LPG to alleviate product shortages. Iraq’s 10- year strategic plan for 2008 to 2017 sets a goal of increasing refining capacity to 1.5 million bbls/d. Iraq would seek $20 billion in investments to achieve this target. Iraq has plans for constructing 4 new refineries as well as plans for expanding the existing Daura and Basrah refineries.

259 Iraq energy data, statistics, and analysis, http://iaccidatabase.com/PDF_files/Iraq%20Oil%20Data5965/Iraq%20Energy%20Data.pdf

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Major refineries in Iraq 260

Baiji Refinery: Labeled as Iraq’s largest, the Baiji Refinery is the main supplier of refined petroleum products to eleven Iraqi provinces. This refinery is located 180 kilometers north of the capital city of Baghdad261. Operated by the North Refineries

Company, it was built in 1982 with the inclusion of a thermal power plant. Not only is the Baiji Refinery the largest producer of petroleum products in Iraq, but it is also the largest contributor of electricity to Baghdad. Baiji’s design capacity in 2009 was at 40 percent of the entire country’s overall design capacity, making it the largest in the

260 http://www.mapsofworld.com/iraq/oil-pipelines-map.html 261 Iraq’s Baiji refinery back to normal, https://www.iea.org/publications/freepublications/publication/WEO_2012_Iraq_Energy_OutlookFINAL.pd f

105 country. A distinction must be made between a design capacity and the actual operational capacity. The refinery was operating at 70 percent of its design capacity in 2011. Recent measures of the both the production and design capacities remain unresolved due to the damages that the refinery incurred within the last few years. As of recently, insurgents and organized crime networks have continuously attacked the Baiji Refinery. One such example involved an attack on the refinery supply chain that carried crude oil from the

Kirkuk fields. These actions have continuously interrupted production levels, as the security situation dictated that the refinery be shut down multiple times.

Basra Refinery: The Basra Refinery is owned and operated the Iraq South Refineries

Company, with production beginning in 1974. Equivalently known as the Ash Shabia

Refinery, it had experienced heavy damages during the 1980-1988 Iran-Iraq war. The refinery is situated on the far south side of the country, being 545 kilometers south of the

Iraqi capital, Baghdad, and 55 kilometers north-west of the Persian Gulf262.

This refinery has been labeled as Iraq’s primary terminal point for oil pipeline with a

2009 design capacity reported to have been 160,000 barrels per day (bpd)263. A milestone was marked on July 2011, when the South Refineries Company signed an agreement with the US Trade and Development Agency for a grant in the amount of $502,798. This deal would initiate a study in order to conclude what upgrades and rehabilitation projects were both requiredand yet feasible for the refinery264. This goal of modernizing the Basra

Refinery was in support of achieving the Iraqi Ministry of Oil’s intention to increase the

262 Baiji, Global security, http://www.thetimes.co.uk/tto/news/world/middleeast/article4122801.ece 263 Iraqi south refineries company 5, January 2011, http://www.src.gov.iq/en/ 264 Iraq upgrades oil rich Basra province http://www.ogj.com/articles/2015/04/iraq-lets-contract-for-basra- refinery-revamp.html

106 production capacity to 12 million barrels per day by the year 2020.

Daura Refinery: Built in 1953, the Daura Refinery is owned and managed by the

Midland Refineries Company with operations commencing in 1955265. Its location can be pinpointed to be 20 kilometers south-west of the capital city of Iraq. This refinery is considered to be Iraq’s second largest, after only the Baiji Refinery266. Although expansion in production was seen in 1996 to a nearly 130,000 barrels per day (bpd), the security situation of the region had resulted in the decrease in production to 110,000 bpd in 2005. By January of 2005, the Daura Refinery had reached another low level of production when it was reported they were at a 50 percent operational capacity. This was due to inadequate crude oil supplies from the Kirkuk-Banias Pipeline that was unable to fuel all the other users along its route. Increases in production were finally realized between the years of 2009 to 2011. The refinery capacity was raised to 210,000 bpd following the expansion and construction of new units267.

Erbil Refinery: Built in 2008, the Erbil Refinery was owned and managed by the KAR

Group, with operations beginning as soon as 2011. Oil is transported via a pipeline from the processing station at Khurmala Dome, with feedstock arriving from the disputed

Kirkuk fields. Having been the first private-sector refinery in Iraq, it was also the first and largest refinery within the northern Kurdistan region268. The creation of this refinery was of historical significance as it highlighted the importance of private and local

265 United States approves grant for Basrah refinery feasibility study, us Embassy Baghdad, 21, July 2011. 266 Daura refinery Expansion on time https://wikileaks.org/gifiles/attach/97/97493_BMI%20United%20Arab%20Emirates%20Petrochemicals%2 0Report%20Q3%202009.pdf 267 Midland Refineries Company, http://iraqministryofoil.com/midland-refineries-company-tenders-iraq/ 14 October 2014 268 The Daura Refinery, APS Review Downstream Trends, 11 May 2011. & http://mrc.oil.gov.iq/.

107 investments in the region.

Due to the demands by the Kurdistan Region Government (KRG) to increase and sustain higher levels of production, an expansion plan was formulated, which resulted in the creation of this refinery. Contracts between the Iraqi Ministry of Oil and the Iraqi

Ministry of Industry and Minerals marked the beginning of the refinery’s construction in

2005269. Due to budget difficulties, the KRG awarded the KAR Group the rights to commence construction of the Erbil Refinery in 2008, with initial production capacity levels measured at 20,000 barrels per day (bpd). Increases in production capacity levels were achieved in 2011, with a reported 40,000 bpd of crude oil being met270. Further expansion plans for the Erbil Refinery are predicting future production levels to reach 80 percent of the local needs.

C.2. Exports (oil exports)

Iraq’s effective export capacity is 2.5 million bbls/d, far lower than installed capacity because of disruptions, lack of maintenance, and because some facilities have been closed for years and unlikely to be reopened. Iraq exported 1.8 million bbls/d of crude oil in

2009271. About 1.5 million bbls/d of this came from Iraq’s Persian Gulf ports, with the rest exported via the Iraq Turkey pipeline in the north272. Refineries in Asia receive the majority of exports, especially in China, India and South Korea. Iraq’s Kirkuk Ceyhan

(Iraq Turkey) pipeline moves oil from the north to the Turkish Mediterranean port of

269 KRG Oil deals buoyed by refinery plan, Iraqi oil report, 29, March 2012. 270 KAR Group, http://karbusiness.com/ 271 Iran-Iraq war1980-1988 http://www.globalsecurity.org/military/world/iraq/oil.htm 272 International energy agency, fact sheet for oil supply in Iraq www.iea.org/media/Factsheet_OilSupplyInIraq.pdf U.S. Department of Energy, Uncertainties in the Short Term Global Petroleum and Other Liquids Supply Forecast, Washington, 2014 p.20

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Ceyhan273. It has been subject to repeated disruption this decade, limiting exports from the northern ﬁelds.

Iraq signed an agreement with Turkey to expand capacity of the 1.6 million bbls/d pipeline by 1.0 million bbls/d. For this pipeline to reach design capacity, Iraq would need to receive oil from the south. Iraq has proposed building a new strategic pipeline from

Basra to the northern city of Kirkuk, with the line connecting to two additional crude oil pipelines. The Iraq Syria Lebanon pipeline in the west has been closed and the Iraq portion reported unusable since the 2003 war in Iraq. Discussions were held with the

Syrian government to reopen that pipeline. It had a design capacity of 700,000 bbls/d274, although actual volumes have never reached this level. The Russian company

Storytransgaz accepted an offer to repair the pipeline in December 2007, but there was no follow-up. Iraq and Syria have also discussed building several new pipelines, including a

1.5 million bbls/d pipeline carrying heavy crude oil, and a 1.25 million bbls/d pipeline for carrying light crudes.

The 1.65 million bbls/d Iraq pipeline south to Saudi Arabia (IPSA) has been closed since

1991 following the Persian Gulf War275. There are no plans to reopen this pipeline. Iraq has also held discussions to build a crude oil pipeline from Haditha to Jorden’s port of

Aqaba Ports. The Basra oil terminal (formerly Mina al–Baker) on the Persian Gulf has an effective capacity of 1.3 million bbls/d for local use and support of very large crude carriers. In February, 2009, the South Oil Company commissioned Foster Wheeler to

273 Iraq Oil Exports, Iraq Oil & Gas http://www.iraq-businessnews.com/tag/oil-exports/ 274 H. Cordesman, Iraq in Transition Governance, Politics, Economics, and Petroleum, Washington, 2011 p.20 275 Anne Marie Johnson, Financial and Economic Consequences of the Gulf War, Iraqi Responses, 1987. 45

109 engineer, rehabilitate and expand capacity of the terminal by building four single-point mooring systems with a capacity of 800,000 bbls/d each276. According to the former minister of oil Issam Alchalabi, it would take at least 3 years to complete the project, providing financing is found. There are five smaller ports on the Persian Gulf all functioning at less than full capacity, including the Khoral Amaya terminal. Overland routes are used to export limited amounts of crude from small fields bordering Syria.

C.3. Profit sharing

A new oil and gas law would authorize production sharing agreements (PSAs) which guarantee a profit for foreign oil companies277. The central government would distribute remaining oil revenues throughout the nation on a per capita basis. The draft law would allow Iraq’s provinces freedom from the central government to award exploration and production contracts. Iraq’s constitution allows governments to form semi-independent regions, fully controlling their own natural resources. On the other hand, the Iraqi

Kurdistan already has given PSAs to foreign oil companies278 and is in favor of the proposed oil law. The region may gain control of oil rich Kirkuk through a referendum later this year. Nechirvan Barazani, the prime minister of the Kurdistan regional government, told prime minister Nouri al Maliki that Kurds would not approve the oil law unless a piece of companion legislation were amended to allow Kurds more freedom in their region.

276 The concept of production sharing http://www.rulg.com/documents/the_concept_of_production_sharing.htm 277 The concept of production sharing http://www.rulg.com/documents/the_concept_of_production_sharing.htm 278 The Investment Law of Kurdistan No (4) of 2006 published in the Official Gazette, issue 62 of 27/08/2006.

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Ashit Hawrami, oil minister for the Iraqi Kurdish region, said the Kurds would reject any amendment to the suggested law and that they would go ahead with deals they have already made regardless of the law’s passage. On the other hand, Imad Abdul Hussain, a leader of the Federation of Oil Unions in Iraq, said workers want oil production to remain in government hands279.

279 Exxon’s Iraq deal under tillers on defied us plea, https://www.pressreader.com/usa/the-washingtonpost/20170110/281509340872186

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112

Chapter III: The Instruments

The instrument is a legal term of art that is used for any executed written document that can be a formal contractual relationship or grant of a right.

SECTION A: The Concession in general (The legal nature of the oil concession)

The oil concessions arrange and grant a company the legal ability to extract oil from wells that have already been discovered or from the marketer of current developments.

They also include the agreed terms upon which authority is granted to the company to be exercised on the State property280. The reasons for these terms and the general principles involved prevail from the United Nations ruling that limited the right to exploit mineral resources that exist within the State’s ground. Even if the surface of the ground is owned by another person, the exploitation of these resources still requires a license from the

State281. In general, States are granting the contracting oil company the right to do the processing and filtering of the crude oil. Activities such as transportation, exportation, and marketing operations are complementary to the processing of the crude oil. At The earliest stages before refining, the crude oil is difficult to use. There are many Legal opinions analyzing the nature of the licensing procedures and oil Concession.

First Opinion: This focuses on the aspects of the principles that explain the oil licensing as an international agreement282. In the case of any violation of these provisions, there is to be an International responsibility. From the analysis of this view, we can see that the

280 OPEC Annual Statistical Bulletin http://www.opec.org/opec_web/static_files_project/media/downloads/publications/ASB2016.pdf 281 Nico Schrijver, sovereignty over natural resource balancing right and duties, Cambridge University 1997 p.11. 282 Lord McNair, the General principles of law recognized by Civilized Nations B.I.L.L., Vol 33, 1957 p.70.

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Vienna Convention of the Treaty of 1969 stipulates that the term treaty means an agreement between two or more parties subject to international law.

Second Opinion: This focuses on the managerial aspects under the doctrine of the administrative contract. One of the parties to the concession such as the State or legal party has the powers to amend the contract through a single annulment, while prioritizing the public’s interest. There are contracts formed by the administration subject to the provisions of private law, which are similar in terms to the nature of contract laws. On the other hand, there are administrative contracts between legally deﬁned entities such as companies or other organizations, which result in a distinct legal link to the private law and its foundation. We can see the desire of the contracting parties in the system being subjected to administrative contracts283. Therefore, the legal license or concession grant the permission for oil ﬁeld exploitation. This action is an independent administrative decision which considers the oil’s exploitation parameters.

Contracting States use the Petroleum Exporting Countries’ (OPEC) opinion284, which regards the State as a public authority acting on behalf of its people to exploit its natural wealth long term. As an example the sole arbitrators in the case of a petroleum agreement between the National Petroleum Company Anuk and the Canadian company Savir285, recognizes some elements of the administration contract within the oil concessions.

Alternatively, some of the decisions of arbitration in cases of oil refused to recognize the

283 H. Sultan, Legal Nature of Oil Concessions, Egypt, 1965 p.73 284 Chatham house, future trends in GCC, https://www.chathamhouse.org/event/future-trends-gulf 285 Paul Stevens Oil Prices: Energy Investment, Political Stability in the Exporting Countries and OPEC’sDilemma,2012http://www.chathamhouse.org/sites/default/files/public/Research/Middle%20East/05 12gcc_summarytwo.pdf

114 nature of the oil contract’s management286.

A.1. Legal effects of the oil contract

The outcomes of oil contracts between the host nation and foreign oil companies are the rights and obligations spelled out between the parties. What occurs is that one of them has responsibilities and obligations towards the second party, which will be described later in this chapter. The rights for each of the host countries are in the first research entry of this chapter. Those resulting from the foreign investor party will be discussed within the second research entry of this chapter. Analysis will be given to the different oil concession contracts themselves. We will also focus our attention on the most important developments in oil contracts granted by the governments of petroleum-producing countries and the contents of their rights and obligations. In fact, the distinction of rights arising from these concessions is what makes them differ from everything else in terms of patterns of investment287. In the long term the contract may be filled with uncertainty and ambiguity due to advances in petroleum technology. The contract is not limited to the content of its own legal privileges, but also extends to a number of principles and rules of international law used in the conflicts that appear between the parties288. On the other hand, this raises the issue of political risk as an influence in the oil industry and legal security. This has impacted the text on the principles of international law and the rules in a vast number of oil concessions, especially modern ones which have responded to the theories of the circumstances and national laws that legislated host oil-producing countries. The decisions of the international and regional organizations have led to the

286 International Law Reports Vol.20. 1953. p 545. 287 Arab Investment Law No 46 of 1988 published in the Official Gazette, issue 3199 of 25/04/1988. 288 M Sornarajah, The International Law on Foreign Investment 3rd ed,, Cambridge University Press, New York 2011, p. 75.

115 birth of new rules, which are distinct and recognizable in the ﬁeld of the global oil industry.

Consequently, oil contracts concluded between host countries and foreign oil companies have rights and obligations to each other289 where virtually both must uphold those responsibilities towards the other party. We will discuss in this chapter the rights arising from each of the host countries in the ﬁrst section of this chapter and those arising from the foreign investor party in the second section with regards to oil concessions. We will mention the most important developments in the oil contracts granted by the governments of the petroleum-producing countries and their rights and privileges. In fact, there are special rights for both parties within the oil concession contract. Ambiguity is not limited, but extends also to a number of principles and norms of international law, which are deployed to address the conﬂicts that may arise between both parties. One result of the ambiguity within the law is the political risk factors in manufacturing oil and its legal security.

A.2. Exploitation concession leases of foreign oil companies

Russia, China, and Western countries such as the USA and England are the most energy- consuming countries, especially with regards to oil. These countries depend mainly on major oil companies to meet those energy needs through discovery and production. The discovery of petroleum is the ﬁrst legal discourse within the oil concessions which serve as a commitment from the host country to the contracting oil companies. The second area of legal discourse within the oil concession contract involves the production and

289 Companies Law No. 36 of 1983 published in the Official Gazette, issue 2935 of 18/04/1983.

116 marketing of the petroleum.

Authorized oil contracts grant the rights for oil exploration within a selected area and allows for petroleum production during the agreed upon time period, which is finalized at the conclusion of the contract negotiation phase between both parties290. Previous oil contracts dealt with the rights to research, explore, produce, and market petroleum products and were called the search and exploration license. Exclusive right for the development of oil fields, which are included in the concessions, lead to the following rights with the first being relatively short term as compared to the second one. The first guarantees the right to drill in order to carry out oil exploration, while the second authorizes the oil production company to develop it. This is called the exploitation concession contract.

A.3. Right associated with the rights of exploration

In addition to being granted the right for oil exploration, other rights must also be granted in order to proceed and put it into practical application291. It is important for the land to be surveyed by the State prior to committing to a contract that allows the concessionaire the right to exploit. This is done through the use of map and booklets, resulting in the assignment of speciﬁed land for petroleum research and exploration. A problem arises when the land is owned by a non-State title holder who must seek permission by the State in order to lease their land to the foreign oil companies, who in turn should fairly

290 Michael Joachim Bonell, International Investment Contracts and General Contract Law, A Place for the UNIDROIT Principles of International Commercial Contracts, Brill,2nd ed university of Rome p. 140. 291 Commercial Companies Law No. 31 of 1957 published in the Official Gazette, issue 4035 of 09/01/1957

117 compensate the private owner292.

There is an ongoing debate with regards to the current process foreign investors undertake to own real estate located within the territories of the host country. In order to conduct the operations mentioned above, the laws of the host country’s legal system must be fulfilled to address the ownership of the land, which is where the oil resources lie. The jurisprudence ownership system of natural resources located within the ground is divided into three main sections, namely:

Res Nullius System; This applies to latent natural resources located within the ground which belong to those who discover it293;

The Accession System; Under this system, the owner of the land is also the owner of the subsoil and its natural resource contents294. This is the system in place within the United

States of America; and

The State Royalty System; The State owns the natural resources located beneath the earth’s surface regardless of who owns the topsoil land. This system applies to Saudi

Arabia and Iraq295. The adopted laws in the United States are those of the second system, which have been interpreted by the following jurisprudential trends:

1. The Non-Ownership Theory: This theory is based on the assumption that oil and

292 Article Twenty-Five of the concession agreement between the Government of Saudi Arabia and Standard Oil Company of California 293 Res nullius, https://en.wikipedia.org/wiki/Res_nullius 294 article 1 of the draft law of oil and gas in Iraq 2007 (that the ownership of the oil and gas back to all the people of Iraq in all the regions and provinces) http://www.jesaonline.org/index.php?option=com_content&view=article&id=680:owner-of-land-is-also- owner-of-minerals--supreme-court-of-india&catid=916:adivasis-and-dalits&Itemid=123 295 Non-Ownership Theory Law & Legal Definition, http://definitions.uslegal.com/n/non-ownership-theory/

118 natural gas locations in the ground are unknown and therefore cannot be conﬁrmed for possession, until discovered296.

2. The Qualified Ownership Theory: This theory contains restrictions which are placed on the rights and obligations of the owners of the land297. Subsurface oil wells should not be wasted or exploited to the detriment of the public or the resource298. This them or prevails in the State of Oklahoma.

3. The Ownership Place Theory: The United States relies on the abundance of oil from the states of Arkansas, Colorado, Kansas, Maryland, Mississippi, Montana, New Mexico,

North Dakota, Pennsylvania, Tennessee, Texas, Washington, and West Virginia. The bottom line of this theory is that the oil in the ground is a real issue of ownership like any metal.

4. The Ownership Theory Classes: According to this theory, the owner of the land surface also owns the sub-surface formations containing oil and gas. Some courts of the

United States apply the ownership theory classes, but in other cases such as France, a license is still required to exploit subsurface resources regardless of whether or not one is the owner of the land surface299.

A.4. The right of ownership

The right to the ownership of the oil product and its preparation for trade showcases rules

296 Woodward, M. K., Ownership of Interests in Oil and Gas, Ohio State Law Journal, Vol. 26, No. 3 (1965) 297 Ownership of Interests in Oil and Gas, http://hdl.handle.net/1811/68773 298 Bryan Clark, Migratory things on land, property right and a law of capture, Vol.6, No3 (October 2002) 299 General Assembly of the United Nations Confirmed in many of its resolutions on the right of the sovereign state to regulate the ownership and exploitation and marketing of natural resources and wealth and the right to set the rules without being in breach of the rules of international law and Resolution No. 1803 12.14.1962

119 of international law. The State has sovereignty over what is contained on or below the land, whether it is oil wealth or other mineral resources as long as they remain within their natural state300. The oil producer owns the oil once the production process commences, although this is not absolute. It is still limited and controlled by the host country, which is a contractual party, through the use of legal restrictions Control is especially accomplished through the use of ﬁnancial obligations, where the State may receive some shares of the oil produced301. Certain legal privileges are avoided by not using the ownership term within the contract, which can be seen between the Kingdom of

Saudi Arabia and the Aoxirab Company during the year 1965. Once the right is granted to the oil concession holders for oil exploration and excavation, they will be able to commence drilling procedures to discover oil wells in order to produce petroleum products and export them from the concession area.

A.5. The right to export

The right to export oil products without paying export duties or licenses is recognized by the majority of the oil contracts and legislation, where investors have the right to export oil products without the need to obtain an additional license or pay a fee to the host country302. This is a questionable case, since the contract may lack the explicit terms that should describe the exportation practices. On the other hand, if the State nationalizes the oil industry, they would be depriving foreign investors of their inalienable rights due to a breach in contract. This act is customary for some countries in the world. An example of

300 The contract between the Kingdom of Saudi Arabia and Japanese companies for oil in 1957 in Article 26, Saudi Aramco Annual Review 2010, http://www.aramcoservices.com/Home.aspx 301 Harold Demsetz, the Structure of Ownership and the Theory of the Firm, The Journal of Law and Economics. Vol. 26, No. 2, (1983) p.375 302 Article 33 of the agreement on Iraq and the Iraq Petroleum Company for the year 1925, http://www.oil.gov.iq

120 such a case is the Valentine Petroleum a Chemical Corp303. The provisions of nationalization and expropriation apply to the case in question if lead to deprive the owner of his property, despite their retaining of their property in theory through the obtained contract. This school of thought that supports nationalization is also supported by foreign jurisprudence. This legal description ﬁts with those described by the

Organization for Economic Cooperation and Development, the oil contract draft by

Harvard University, and the USA special laws that analyze the nationalization acts of other countries. Rights of the company include assignment to a subsidiary and the waiver of all or some of their rights to its subsidiaries without the prior consent of the host country. This can be seen with the example of Kuwait and Shell304, as well as the contract between Saudi Arabia and the company Aoxirab in 1965. It was decided that the foundation was to be controlled by the mother company of the concession contract, while the shares were controlled by the subsidiary companies assigned to it.

A6. Joint Venture Transactions

From the foregoing discussions of legal and judicial issues in Iraq, one sees that developing contracts there can be complex and very time consuming. Nothing tangible can happen there until and unless transaction documents are agreed and executed among involved parties. Using an excellent treatise about such transactions as a guide, I personally interviewed a transaction expert from a major international petroleum company to develop examples of issues addressed in unpublished and confidential agreements among United States and European companies in the past. Included below are

303 Oliver E. Williamson, The Economics of Discretionary Behavior, Managerial Objectives in a Theory of the Firm Prentice-Hall, Inc, 1964. 304 Article 70 of the contract between Kuwait and Shell, http://www.arabianoilandgas.com

121 illustrations of joint venture terms, codes of conduct for venture employees, governance terms, and due diligence questions that would typically be used to open negotiations for preparation of definitive transaction agreements.

A6A: Joint Venture Terms

Often it is appropriate for the State to enter into joint ventures with international petroleum companies to provide a means for resolving difference between them within a single entity. This is a common practice in the world, as for example in the United States and Europe. It is considered useful here to provide illustrative terms for such a joint venture (JV), including typical governance and service terms and a code of conduct for employees. These illustrations could provide a guide for entities to develop terms and agreements together, and are included below. Such transactions are complicated due to legal and other considerations in the countries involved. The illustrations come from international petroleum companies as a starting point for negotiations. The following summarizes many issues involved in JV arrangements, which can be complex. Each JV would have its own set of issues. The issues addressed here are focused on JVs involving a single international petroleum company ("Company") and a single sovereign country like Iraq ("State").

Purpose and Scope

In preliminary discussions, the Parties generally arrive at a tentative conclusion that a proper JV should provide resources needed to exploit petroleum assets and future plans of the State while accessing resources provided by the Company. Understandings at this stage are often documented in a non-bindingTerm Sheet and/or Letter of Intent. The JV

122 should enhance the rewards enjoyed by both Parties, many of which are identified below.

The State may have developed oil and gas fields and/or undeveloped fields which it could provide to the JV along with manpower, equipment, knowhow, and infrastructure needed in JV endeavors. The Company could provide technology, manpower, markets for oil, gas, and products developed from the fields. The JV could also develop refining, transportation, and another infrastructure needed. Some possible issues are addressed below.

Technology Scope

Generally, all technology needed in the territory and technology field and Scope of the

JV would be provided to the JV by all Parties as part of their contribution, but possibly with restrictions on transfers. The Parties and the JV could update technologies in the future on agreed terms, and would not compete with each other using such technologies consistent with the Scope of the JV. Technologies developed outside the JV Scope would normally be transferred to the owners305.

Markets

The State would normally have first priority to purchase hydrocarbons and products from the JV at fair market value for its use in its country. Other hydrocarbons and products would be sold by the JV or for the JV by the Company using reasonable commercial efforts at agreed fees.

Principal Terms

The Parties generally have a number of key issues to address while Due Diligence is

305 Interview with the oil expert, Dr. Faleh Al-Khayat, june 2016.

123 underway. Such terms would become part of a letter of intent between the Company and the State, and would be the basis for drafting definitive agreements. Many such key issues are addressed below as examples intended to cause the potential Parties to consider terms which must be agreed before proceeding to a JV.

Supply integration

Although upstream plants which supply raw materials or feed stocks would not necessarily be owned by the JV, supply or tolling agreements could provide the JV with exclusive access to key products and components manufactured by the Company or State.

A list of these should be included in an attachment. The Parties recognize that success in the JV's global business requires coordinated global management, regional operations, critical mass, leading technology, quality products, and customer responsiveness. If the individual Company and State businesses lack sufficient scale to compete effectively with the major global players, a merger could enhance the probability of success and survival of these businesses as viable long-term competitors. Company and State should have no intent to compete with the JV in its Field, and provision would be made in the agreements to ensure such outcome for at least the first years of JV operation.

Key Terms for JV Formation (JV name): A unique name, logo, and identity would be established with no direct reference to the Company or the State, although the affiliate connections might be identified in appropriate circumstances as a fact.

Contributions by Patties: The Contributions of assets, liabilities, contracts, leases, and businesses by Parties and their value must be identified. The Parties would normally agree to convey substantially all of their assets, working capital, contracts, leases,

124 businesses, and commercial liabilities in the Scope of Business to The JV on formation and make available all required Technology to allow the JV to operate within its Scope.

A list of the principal conveyances should be included in an exhibit along with identification of major assets which would not be conveyed. Conveyances, in the aggregate, would be at fair market value. To "convey" as used herein means to transfer, assign, license, agree, lease, or otherwise provide the entire economic benefit of an asset to the JV. Methodology, process, and definitions are also needed.

Transaction Expenses: Each party would bear its own direct and indirect transaction costs, including all costs associated with redundant or obsolete facilities, contracts, employees, or benefits plans not conveyed to the JV. As well, taxes related to JV formation and asset realignments would be included. Transfer, excise, and sales taxes would be paid by the transferring party. The JV would pay only those taxes associated with formation of its entity structure.

Debt: Long term debt would be assumed by the JV only to the extent needed to balance the value of the aggregate contributions of the Parties as agreed by Company and State. It would be intended that The JV be formed with no cash contribution in the aggregate from

Company to the State or vice versa. On the other hand, any guarantees by Parties would address performance only of individual Company and State companies to each other relative to the transaction, not to third parties or for JV performance.

Law: Agreements include clearly which law rules, and whether any law or any regulation in any jurisdiction would require a filing to consummate the transaction; all Parties would prepare and file the necessary documents to comply with such laws or regulations. JV formation would be delayed until all approvals had been received and all applicable

125 waiting periods had expired. The definitive agreements would provide needed operations prior to Closing and JV formation, except for adjustments and actions contemplated in definitive agreements executed by the Parties.

Key Terms for Structure and Governance

Company structure options, ownership percentages: The Parties anticipate that The

JV would be formed as one or more tax efficient companies under appropriate law, with the common voting shares owned in equal percentages by Parties in each jurisdiction.

There would be no employee owned or third party or public shares. There may be fiscal and other reasons for the JV to form subsidiaries to own or operate certain JV assets. An illustrative legal structure for the JV may be found below.

Management: It is intended that the JV would be managed from a headquarters located at a certain named location with operations managed at regional headquarters in satellite offices in each region. An exhibit should be included to illustrate the proposed management organization for the headquarters/regional concept. It is expected that

Company and State would nominate key staff in approximate equal numbers for the positions shown with some adjustment from that expectation on a regional basis where each is currently a major operator.

Board or Management Committee: Each Shareholder would be entitled to appoint one board member for defined percentage ownership, or fraction thereof, of outstanding shares owned, with all classes considered of equal value. Provision would be made for special voting requirements on certain key issues in accordance with an exhibit. Board members would not be compensated by the JV, and JV officers and employees would be

126 excluded from Board membership unless agreed by all Parties.

Resolution of Owner/Board deadlocks: Options abound in this area, including referral to CEO’s in the Company and State, mediation, binding arbitration, share dilution of non- funding owner, etc.

Key Technology Terms:

This is a complex area requiring considerable legal, tax, intellectual property, and financial involvement.

Background Technology contributions: Transferable Background Technology in the

Field from all Company and State companies (whether Parties or not) would be conveyed to the JV for use only in the manufacture and sale of products in the Scope of Business.

Provision would also be made for Affiliates to license transferable Foreground

Technology in the Field to the JV in the future at a reasonable commercial value, which could take the form of royalties or other consideration.

Valuation, ownership, and encumbrances: Where possible, conveyance to the JV of

Technology solely related to the Field would be by ownership transfer. Technology having overlapping applications would be conveyed to the JV by sole license in the Field.

There would be circumstances, as listed in an exhibit, which would require special or encumbered licensing or ownership sharing of certain technology for special reasons. In such case provision would be made to convey the economic benefit in the Field to the JV.

Rights to Technology developed by the JV and Affiliates inside and outside the

Field: Provision could be made for Affiliates to make available to the JV, pursuant to

R&D sharing or other appropriate agreements, all their transferable Technology in the

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Field acquired in the future, regardless of source. Likewise, provision would be made for the JV to make available to Affiliates, pursuant to R&D sharing or other appropriate agreements, all their transferable technology outside the Field acquired in the future, regardless of source. The intent is to avoid barriers among the JV and its Affiliates' technical staffs working together to further their respective businesses, while isolating technical staff in Company and State from cross contamination in areas outside the Field.

Research, Development, and Technical Service: The intent is to build strong, self- sufficient, and cost effective research, development, and technical service capabilities within the JV in core areas, and to utilize outside and Affiliates’ services only where that is more efficient. Technology would be coordinated globally and managed locally to the extent appropriate. Where existing affiliates' laboratories cannot be contributed to the JV but house considerable expertise, provision would be made to access RD&T services through service, cost sharing, and/or other agreements. Separation from Affiliates' operations in their facilities would be accomplished by appropriate means. A listing of laboratory facilities and their areas of responsibility should be included in an exhibit for sites to be conveyed and not conveyed.

Trade secret/patent policy: Proprietary technology would be protected by patents or trade secrets, with decisions made on a case-by-case basis. The JV would own or exercise all rights in the Field for technology it sponsors at affiliates' laboratories, while affiliates would own all rights outside the Field.

Patent maintenance, defense, and infringement prosecution: Technology shared with

Affiliates would be protected by patents unless agreed otherwise by all the affected

Parties. Shared patents would be filed and maintained by the affiliate, and defended by

128 the JV and/or the affiliate having the most at stake in a defense.

Trademarks: the JV would develop its own identity and trademarks independent of trademark licenses.

Due Diligence Phases

Parties should perform appropriate Due Diligence before executing definitive agreements to assure long term success is probable. Parties oftentimes have different laws, cultures, and objectives which could impact the success of a JV. These can be addressed during the

Due Diligence Process. Phase I of the process involves review of laws, documents, agreements, and other information pertinent to future JV operations and governance.

Phase II involves inspection of facilities, interviews of key personnel and customers, and vendor and contractor reviews. Some environmental issues are discussed in another section below. During negotiation of transaction terms, parties would normally request data from each other to satisfy concerns about formation of a JV. An illustrative example of a Phase I request used by an international oil company before it was modified here to fit a JV is provided below. Contemplated transactions could modify this list to better fit the proposed JV process. Due Diligence activities are normally covered by confidentiality agreements306.

Remediation before and after the JV formation:

Each Party would make reports and deal with regulatory bodies concerning its own facilities prior to Closing. After Closing, the JV would assume such responsibility but would cooperate with the original owner in accordance with provisions in the definitive

306 Kataleuna Due Diligence, not to publish agreement.

129 agreements. If the Parties elect to complete the transaction and a condition could be remediated or would need continuing monitoring or evaluation after JV formation, the appropriate Parties could contribute to the JV a mutually agreeable amount of money to be used by the JV to evaluate, monitor and remediate the condition. In such case, their obligations relating to such condition would be appropriately adjusted.

Indemnifications and liability limitations:

Assuming the satisfactory completion of any required mitigation or remediation from

Phase I and Phase II assessments, then from and for a period of several years after JV formation, each Responsible Party would indemnify the JV, the other Parties, and their

Affiliates for remediation of site based contamination. This would include contamination of adjacent properties from the site, and any environmental matters which would have been in violation of law as of the date of Formation and which were attributable to the prior operations of the Responsible Party, including operations by any predecessors on its land conveyed to the JV due to any prior operations. The JV would indemnify the

Responsible Parties, the other Parties, and their affiliates for all other environmental matters relating to or arising out of the assets conveyed to it, regardless of when such matters occurred or were discovered, as follows, without limitation:

(a) Those conditions which arise from the JV operations;

(b) Those conditions which are attributable to the operations of a Responsible Party

but which are discovered after the end of the indemnification period of such

Party;

formation; or

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(d) Those conditions for which a Responsible Party has contributed money to the JV

as described above.

JV objective, strategies, and Business Plan:

The JV should become during the first years of operations a recognized leading supplier by:

(a) Close, effective, and attentive communications with customers;

(b) Timely and efficient technical solutions for customers' needs and requirements;’

(d) Displaying a high-performance work culture where every employee is committed to excellence;

(e) Maintaining a consistent record of revenue growth, reflecting customer confidence and respect; and

(f) Providing an attractive return on investment supporting continued growth and market leadership. A Business Plan would define the JV's five-year business objectives and strategies, (possibly with strategy options), plus key activities and milestones in the

Marketing, Supply, Technology, Human Resources and Finance areas. It would address resources needed to accomplish defined objectives including Capital, Operating, and

Census Budgets for the first year of the Plan. The detail level would be consistent with the level of authority delegated by the Board. The Board of Directors would review and approve the Business Plan and all revisions thereto.

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Agreed startup plan:

A Transition Team would be appointed by the Parties to develop the first JV Business

Plan in parallel with negotiation of definitive agreements and prior to Closing. Such Plan would be presented for approval at the first Board meeting of the new company.

Membership on the Transition Team would be selected by the Parties, with preference given to individuals who would have a future role in managing JV operations with accountability for JV success. The Budgets would require Board approval, either as part of a Business Plan or separately.

Human Resources:

The JV would intend to employ Company and State staff required in the initial Business

Plan which meet its employment standards using a process consistent with an attached exhibit. The Transition Team should start work early in this area as a vital part of a due diligence process so that staff concerns could be addressed well in advance of JV formation.

Compensation policy:

The JV would be free to adopt its own compensation policies, but they are expected to be competitive within its industry and region in order to attract and retain needed people. A portion of pay at all levels would likely include incentive compensation related to JV business and individual performance.

Transfer and portability of benefits from and to Affiliates:

The JV would recognize past Company and State service in relation to vacation eligibility

132 and pre-existing medical conditions, and to retirement and retiree medical plans to the extent the Parties transfer assets from their plans or otherwise fund the liabilities of such service recognition, post-retirement benefits, financial obligations, and funding. Each

Party would bear its own costs incurred in the initial formation of the JV as a result of the transfer, relocation, or termination of any employees or plans; thereafter such matters would be subject to agreement between the JV and the former employer. Any qualified plan asset transfers must be acceptable to all involved Parties

Collective bargaining:

Bargaining units at existing plants would be recognized and negotiation of contracts would commence early in the Transition Process covering investments, distributions, capitalization, funding, debt, and dividend policies. It is intended that the contributions of assets and liabilities from Company and State to form the JV have equal after-tax value, with no concurrent cash payment between Company and State. Independent credit facilities may be established by the JV at formation or thereafter in accordance with

Board policies. It is anticipated that a cash reinvestment ratio to accomplish the strategic objectives of the Stakeholders would become part of the Business Plan. The Board would establish a dividend policy at formation and manage such policy.

Conflicts in Owner views on future issue of capital stock:

Provision would be made for the JV to raise capital from issuance of additional shares to the existing Stakeholders for acquisition or expansion purposes. If a shareholder declines to make additional investments, the willing shareholder(s) could proceed with a resulting adjustment in ownership and Board makeup. Withdrawal of an Owner could be covered

133 by the following:

(a) Assignability of equity to an Affiliate: Only the entire stake holding could be

assigned to a 100% affiliate without the approval of other Stakeholders;

(b) Equity dilution from partial withdrawal: Provision would be made for an owner to

withdraw in a manner which does not threaten the continued viability of the JV or

its business; and/or

of first refusal on sale of a party’s interest to non-Affiliates.

Dissolution could be addressed by the following:

(a) Causes permitted: These would include mutual consent, governmental action, material default, or insolvency only;

(b) Rights to assets on dissolution: Assets would preferentially be returned to the original contributor, with the value of tangible assets being in proportion to capital accounts at the time of dissolution. IP would be distributed in accordance with an agreement in force at the time or provisions of a governmental order; otherwise equally to Stakeholders on a non-exclusive, royalty-free, fully transferable worldwide basis;

(c) Continuation in Field by one Owner: Provision would be made for the JV to survive as a viable operating entity regardless of the unilateral actions of a shareholder;

(d) Governmental breakup: Provisions of a governmental order of divestment or breakup would prevail, but Company and State would endeavor to influence such order to provide for the JV survival post breakup;

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(e) Material default by an Owner: Provision would be made for the non-defaulting

Owner(s) to buy out the defaulting Owner's interest in the JV and continue operations of the business; and

(f) The surviving Owner would own and/or control all assets and the wherewithal to unilaterally conduct its business, using Affiliates' services, utilities, materials, and facilities, (SUMF), or not using them at its discretion, subject only to agreements executed at Closing. It is anticipated that certain of these would be provided by Affiliates in accordance with agreements with the JV.

Priorities versus Owners' other businesses:

The JV would be afforded the same priorities under SUMP agreements as Affiliates' own internal businesses. After formation, staff transfers between the JV and Affiliates would be negotiated at arm’s length consistent with the initial hiring process so far as pay and benefits are concerned. All the JV employees would be under the same pay and benefits plans and subject to a JV Code of Conduct illustrated below. It is an example of a code used by an international oil company before it was modified here to fit a JV:

Representations, Indemnities, and Liability Assumptions

In many countries, Representations are made by parties to a transaction that what one told the other party is true, and if not the first party can seek court damages for a period of time agreed in the Representation. These are serious matters in all transactions.

Indemnities against damages and liabilities assumed in a transaction by one party are also grounds for redress if Representations made by the second party are untrue or lawsuits arise that are covered by an Indemnity. Scope, reasons, duration, and assets behind them

135 are generally covered by Representations precisely defined in definitive agreements, and would generally expire within one year after closing. The JV would assume all liabilities not expressly retained by the Parties. The Parties would retain all product and other liabilities associated with their respective assets or businesses arising out of or resulting from the operation or use of such prior to their conveyance to the JV.

The JV role in mitigating product liability claims from Affiliates' past operations:

The JV would diligently assist the Parties in settling claims arising from such liabilities, including providing replacement products and performing needed services at cost. The JV would maintain its own risk management/insurance programs, which may or may not interlock with the Owners' liability umbrella policies. In general, the Parties usually intend that the JV be self-insured except for catastrophic events or major liabilities. JVs would adopt governance authorities, many of which require more than a simple majority of the Board to approve. Either Super Majorities or Unanimous Consents are often required for certain actions to protect all shareholders.

A.6. B: Codes of Conduct

Most international oil companies, give their employees a Code of Conduct to follow in their company dealings. Some violations of the Code can lead to disciplinary action which may include termination of employment. Such codes must be carefully considered in JVs where cultures or practices may differ among the parties, since litigation is so common in employment matters. So, a Code of Conduct includes the general business principles that govern how each of the JV companies could conduct its affairs, as well as specific policies and procedures applicable to JVs and its subsidiaries. Its Affiliates may

136 be a decentralized, diversified group of companies with widespread activities, where each affiliated company has wide freedom of action. However, what we have in common is the

JV’s reputation. Upholding the JV reputation is paramount. We are judged by how we act. Our reputation will be upheld if we act with honesty and integrity in all our dealings and we do what we think is right at all times within the legitimate role of business. JV companies have as their core values honesty, integrity and respect for people. JV companies also firmly believe in the fundamental importance of the promotion of trust, openness, teamwork and professionalism, and in pride in what they do. Our underlying corporate values determine our principles. These principles apply to all transactions, large or small, and describe the behavior expected of every employee in every JV Company in the conduct of its business. In turn, the application of these principles is underpinned by procedures within each JV Company which are designed to make sure that its employees understand the principles and that they act in accordance with them. We recognize that it is vital that our behavior matches our intentions. All the elements of this structure -- values, principles and the accompanying procedures are necessary. JV companies recognize that maintaining the trust and confidence of shareholders, employees, customers and other people with whom they do business, as well as the communities, in which they work, is crucial to continued growth and success. We intend to merit this trust by conducting ourselves according to the standards set out in our principles. These principles have served JV companies well for many years. It is the responsibility of management to ensure that all employees are aware of these principles, and behave in accordance with the spirit as well as the letter of this statement.

137

General Business Principles

JV employees are expected to understand the principles that govern their behavior. Some of these are illustrated below. Objectives: The objectives of JV companies are to engage efficiently, responsibly and profitably in the oil, gas, chemicals and other selected businesses and to participate in the search for and development of other sources of energy. JV companies seek a high standard of performance and aim to maintain a long- term position in their respective competitive environments.

Economic Principles: Profitability is essential to discharging these responsibilities and staying in business. It is a measure both of efficiency and of the value that customers place on JV products and services. It is essential to the allocation of the necessary corporate resources and to support the continuing investment required to develop and produce future energy supplies to meet consumer needs. The JV companies work in a wide variety of changing social, political and economic environments, but in general they believe that the interests of the community can be served most efficiently by a market economy. Criteria for investment decisions are not exclusively economic in nature but also take into account social and environmental considerations and an appraisal of the security of the investment.

Business Integrity: JV companies insist on honesty, integrity and fairness in all aspects of their business and expect the same in their relationships with all those with whom they do business. The direct or indirect offer, payment, soliciting and acceptance of bribes in any form are unacceptable practices. Employees must avoid conflicts of interest between their private financial activities and their part in the conduct of company business. All business transactions on behalf of a JV company must be reflected accurately and fairly

138 in the accounts of the company in accordance with established procedures and be subject to audit.

Political Activities

1. Political Activities of companies: JV companies act in a socially responsible manner within the laws of the countries in which they operate in pursuit of their legitimate commercial objectives. JV companies do not make payments to political parties, organizations or their representatives or take any part in party politics. However, when dealing with governments, JV companies have the right and the responsibility to make their position known on any matter which affects themselves, their employees, their customers, or their shareholders. They also have the right to make their position known on matters affecting the community, where they have a contribution to make.

2. Political Activities of employees: Where individuals wish to engage in activities in the community, including standing for election to public office, they will be given the opportunity to do so where this is appropriate in the light of local circumstances.

Health, Safety and the Environment

Consistent with their commitment to contribute to sustainable development, JV companies have a systematic approach to health, safety and environmental management in order to achieve continuous performance improvement. To this end, JV companies manage these matters as any other critical business activity, set targets for improvement, and measure, appraise and report performance.

1. The Community: The most important contribution that companies can make to the social and material progress of the countries in which they operate is in performing their

139 basic activities as effectively as possible. In addition, JV companies take a constructive interest in societal matters which may not be directly related to the business.

Opportunities for involvement - for example through community, educational or donations programs.

2. Competition: JV companies support free enterprise. They seek to compete fairly and ethically and within the framework of applicable competition laws; they will not prevent others from competing freely with them.

3. Communication: JV companies recognize that in view of the importance of the activities in which they are engaged and their impact on national economies and individuals, open communication is essential. To this end, JV companies have comprehensive corporate information programs and provide full relevant information about their activities to legitimately interested parties, subject to any overriding considerations of business confidentiality and cost.

Legal and Ethical Obligations under the Code of Conduct

These obligations are simply stated: Comply fully with all applicable laws, Foster an affirmative attitude concerning compliance with the law among those reporting to you and among your colleagues; Demand and exhibit best conduct in the communities where we operate. This is necessary to maintain the good reputation of JV for fair, honest and ethical conduct; and Report any violation of our Code of Conduct or any threat to human health, safety, the environment or JV assets that you have a good faith reason to believe has occurred or exists to your management, your Human Resources representative or to the JV hotline.

140

Company Compliance Policies

Most of the JV Compliance Policies covering the matters discussed below are recorded in a written document generally applicable to all employees and may be obtained from your

Human Resources representative or by calling the JV hotline. Others are adapted specifically to certain work areas or to employees dealing in the areas covered by the policy. It is the responsibility of every employee to know what applies to his or her job performance, to be familiar with all relevant policies, and to conduct his or her job in strict compliance with such policies. Questions concerning all policies may be addressed to your supervisor, your Human Resources representative, the JV Legal Firm or, in to the

JV hotline. The JV also conducts ongoing educational programs and training on certain compliance issues for employees. Because written policies and training programs cannot cover every situation, each employee has an obligation to seek advice whenever a question concerning compliance with our Code of Conduct arises.

1. Conflicts of Interest: Employees must avoid situations that might be a adverse to

JV's interest, or result in conflicting loyalties or interests. JV's Conflicts of Interest policy letter includes discussions of prohibited involvement with suppliers, contractors, competitors or customers, prohibited gifts and entertainment, prohibited use of company information and prohibited transactions involving oil and gas interests.

2. Drug and Alcohol Abuse: JV strives to provide employees with a workplace free from substance abuse; i.e., the illegal or illicit use of drugs and the abuse of alcohol; and a workplace where all individuals are safe productive. JV's Substance Abuse Policy is an extensive program that includes education, substance abuse identification and

141 rehabilitation.

3. Equal Opportunity: JV is fully committed to a workplace that is founded on diversity and equal opportunity and is free from discriminatory action. In support of this commitment, JV's Equal Opportunity Policy clearly prohibits discrimination on the basis of race, color, religion, sex, sexual orientation, national origin, age, physical or mental handicap, status as a disabled veteran or citizenship. Any form of harassment for any of reason is also prohibited.

4. Export Control: All exports of commodities and technical data are regulated under federal law. Violations of export control regulations can result in serious criminal penalties to JV and to individuals. A summary of the export control laws and regulations is available through the JV Legal Firm.

5. Government Contracts: Governments impose reasonable obligations on companies with which they do business. Failure to comply with these requirements may be a criminal offense in many instances. Further information on this subject is available for employees dealing in this area by consulting the JV Legal Firm.

6. Health, Safety and the Environment: The JV has adopted the most stringent policies of the Owners, namely a Commitment to Health, Safety and the Environment and Health,

Safety and Environmental Policy. Every JV employee is expected to share the commitment to pursue the goal of no harm to people, protecting the environment, using material and energy efficiently, and promoting best practices, thereby earning the confidence of customers, shareholders and society at large, being a good neighbor and contributing to sustainable development. JV has a systematic approach to HSE

142 management designed to ensure compliance with the law and to achieve continuous performance improvement. Contractors are required, and joint ventures under JV's operational control are expected, to apply this policy. Also, HSE performance is part.

Political Contributions and Foreign Corrupt Practices

The JV has adopted a policy setting forth the standard of conduct to be observed and procedures to be followed in all matters pertaining to political contributions, illegal or questionable payments, and related accounting procedures. Such policy and related guidelines can be found in JV's Policy Statement on Political Contributions, Illegal

Payments and Accounting Procedures and Policy Guide and Procedures Concerning

Political Contributions, Illegal or Questionable Payments and Related Accounting

Procedures. The use of corporate funds or assets for any unlawful, including payments to governmental employees or any other person as a bribe, or kickback, is prohibited.

Specifically discussed are matters dealing with entertainment of or gifts to government officials and employees. As a policy, JV does not make payments with corporate funds to political parties or candidates for public office. This does not mean, however, that JV will not participate in public debate. JV has the right and responsibility, in the pursuit of its legitimate commercial objectives, to make its position known on any matter which affects

JV, its employees or customers. JV also has the right to make its position known on matters affecting the community if we have expertise and can make a significant contribution to JV and society. JV will support Political Action Committees (PACs) in accordance with applicable law and employees are encouraged to make personal political contributions to PACs, candidates and organizations of their choice. However, any employee who elects to make a personal political contribution must bear the entire

143 financial burden of such a contribution. If any employee wishes to engage in community activity, including standing for election to public office, he or she will be given the opportunity to do so where this is appropriate in light of local circumstances.

Product Quality and Safety: The laws require the reporting of suspect chemical hazards and/or defects in consumer products to the proper authorities. Failure to report can result in substantial civil and criminal penalties for the company and for individuals aware of the hazard. JV's Reporting of Suspect Hazards contains a summary of applicable laws and the procedure to be followed by employees in reporting hazards or defects which could pose substantial risks to human health or the environment. Such reports may also be made through the JV hotline.

Protection of Assets: The JV has a large variety of assets, including extremely valuable proprietary information and physical assets. JV proprietary information includes intellectual property and the confidential data entrusted to employees in connection with their jobs. Protection of JV assets and third party confidential information properly in

JV's possession is the personal responsibility of each employee. Further details concerning these obligations can be obtained by contacting the JV Legal Firm.

Procedures for Obtaining Guidance: JV policies summarized above and numerous specific policies, training programs and operating procedures exist for the various jobs in

JV. Each employee is charged with the obligation to understand applicable policies, procedures and training made available, and Seek clarification when necessary. Managers and supervisors have the additional duty to monitor the continuing adequacy of policies, procedures and training within their areas of responsibility and compliance with the Code of Conduct by persons reporting to them. Compliance Officers who are the senior

144 operating management within each organization have been designated for each segment of the Company and for each subsidiary. When you have a concern, or are called upon to evaluate the legal or ethical correctness of a course of action as a result of your employment with JV: Seek out the appropriate policy statements and training manuals and ask your supervisor for clarification when needed. Don’t debate alone; seek the advice of Legal, Tax, Human Resources, Corporate Affairs other administrative organizations that can be of assistance. As a guide in making your decision, consider whether if all the facts surrounding your decision were published you would have any regrets or concerns. Understand that JV's best interests can never be served by illegal or unethical conduct and that JV will never condone it, any question concerning legal compliance that cannot be answered promptly and clearly should be referred to the JV

Legal Firm. Legal and other appropriate administrative organizations, working with the

Compliance Officer or his or her designee, will seek to explain in a practical and readily understandable manner what is required of employees in order to comply with the law and with JV's ethical requirements. The compliance policies and training, our

Compliance Officer network and the Code of Conduct are all aimed at avoiding unethical conduct. The long-term success in this area will depend on each commitment to these goals, seeking advice on matters as needed to avoid problems.

Reporting Compliance Issues

If an employee has a good faith reason to believe that any violation of the Code of

Conduct has occurred, he or she is required to report such violation. Additionally, any good faith reason to believe that a threat to human health, safety, the environment or JV assets has arisen or exists in or as the result of conduct in the workplace must be reported

145 promptly. Reporting to your supervisor or your Human Resources representative discharges this obligation. Such parties have the responsibility to see that the appropriate

Compliance Officer or his or her designee and, when compliance with law issues is raised, the appropriate representatives of the JV Legal Firm are promptly informed. Any attempt at retaliation or intimidation against anyone reporting in good faith a suspected violation of our Code of Conduct or any condition thought to constitute a threat to human health, safety, the environment or JV assets is a serious violation of our Code of Conduct.

Investigating Suspected Violations of the Code of Conduct

When non-compliance with the Code of Conduct is reported or otherwise suspected, the responsible Compliance Officer or his designee and the appropriate members of the JV

Legal Firm, in the case of an alleged violation of law, will be informed. A prompt investigation will follow. If unlawful conduct is detected and continuing, JV will make all efforts to stop such conduct immediately will cooperate with government agencies investigating such matters. Prompt action shall be taken upon notice of any such investigation to preserve documents believed to be relevant. It will be a serious violation of JV policy to conceal an offense or to alter or destroy evidence in any such case.

Discipline: JV will consistently and appropriately enforce the Code of Conduct and company policies. Discipline will be determined by the Compliance Officer, the Human

Resources Vice President or their designees in appropriate cases. Intentional violations could cause dismissal or other serious discipline. Especially when laws are violated.

Employment-Related Conflicts: JV has implemented a program (applicable to non- represented employees) for resolving employment-related conflicts quickly and

146 equitably, as an alternative to costly and time-consuming litigation. The process involves early workplace resolution (always the preferred alternative), or external mediation required as a condition of employment before resorting to arbitration or litigation.

147

148

SECTION B: The production sharing agreement (PSA)

A common type of contract signed between a government and companies concerns how much oil and gas, can be extracted from the country a how it would be shared. A PSA is a contract between one or more international oil companies and a host government in which the IOC provides capital investment in exchange for control over an oilfield, plus access to a large share of the revenues from it. Contracts are usually for 25 to 40 years, and sometimes even longer depending on negotiation between the State and IOC307. The

PSA often contains a "stabilization clause”308, which restricts future governments' ability to change tax rates or pass any new law which affects the company's profits. That is why to some "privatization" meant the transfer of legal ownership of Iraq's oil reserves into private hands. In all countries of the world except the USA, the reserves are legally the property of the State. This is the case in Iraq, and remains so under the new Constitution.

There has never been a realistic prospect of USA-style privatization of Iraq’s oil reserves.

This does not mean that private companies would not develop Iraq’s oil using PSAs like those often used in the Middle East and Central Asia. The country's government can contract an oil company that bears risk and develops and ultimately produces the field.

The company would be permitted to use sales from produced oil to recover capital and expenses. This is known as "Cost oil”. The remaining money is known as "profit oil”309 and is split between the government and the company, typically at a rate of about 80

307 Kirsten Bindemann, production sharing agreement an economic analysis, oxford institute, UK,1999, p.13 308 Ziman J, Crude behavior the social and environmental costs of oil company divestment from US refineries, US,1997, P.18 309 Valerie Marcel, oil titans national oil companies in the middle east, royal institute of international affairs 2006, p.16.

149 percent for the government, 20 percent for the company. In a standard PSA, changes in international oil prices or production rates can affect the company's share of production.

Production Sharing Agreements can be beneficial to governments of countries that lack the expertise and/or capital to develop their resources and wish to attract foreign companies to do so310. They can also be very profitable agreements for the oil companies involved. The simplicity, transparency and fairness of these contracts have been recognized throughout the global energy community. A report by Dr. Pedro van Meurs, a world expert on petroleum fiscal regimes, concluded that the KRG's production sharing contracts encourage oil companies to perform well. PSAs could serve Iraq's national interests better than the Iraqis services contracts311. Some Iraqi oil experts, however, see

PSAs as long-term agreements for foreign companies to invest in certain oil operations and fields only to profit from production and sales. When oil extracted by the company is sold, revenues are divided according to predetermined ratios in the contract. This distribution would continue until the company at least recovers the amounts spent in their operations. After the expiration of that period of oil cost recovery, the company would profit at rates agreed upon in the contract as well. Both theoretically keep ownership of oil reserves of the State production contract which is therefore consistent with the standard of state ownership of the oil as provided for in Article 16 of the draft oil and gas law. If the extraction of oil becomes unrestricted, ownership rights are ultimately dependent upon being held throughout the contract period which may last for a period of forty years. Why, then, would some governments agree to such contracts? One finds

310 Zhiguo Gao, J.S.D, International petroleum contract current trends and new direction, Graham and Trotman, Boston, 1994 p.9 311 International expert finds KRG oil contract in the national interests far superior for Iraq than model contract proposed by Bagdad federal oil ministry http://cabinet.gov.krd/a/d.aspx?r=223&l=12&s=02010100&a=24710&s=010000

150 justification for such production sharing contracts in the countries in which coincide two cases: Firstly: Production costs would be very high for deep fields or in the sea, or for very small-sized fields; and Secondly: Funds necessary for the completion of oil operations would not be quickly available. In that case, the foreign company would provide funds and technical expertise to carry out operations. Also, since there are no offshore fields in Iraq312, the total cost of production there normally does not exceed two dollars per barrel313. This low cost on currently producing fields supervised by the Iraqi

National Oil Company under the second paragraph of Article 13 of the draft law is not limited, but also include non-productive and non-discovered fields. They would normally be assigned to foreign companies under production sharing contracts. Iraq needs to pass

Busby production sharing contracts due to the fact that Iraq is suffering from a financial crisis and cannot monitor the huge sums in order to develop its oil industry quickly. From other side, it is clear that foreign companies desire to exaggerate the cost estimates to increase profits and strengthen their positions in front of their shareholders.

If the federal government is weak in its negotiations, the government of the Kurdistan

Region’s authority under the Constitution in the signing of oil contracts will be weaker.

Weaknesses will foster the possibility of both competing to attract foreign investment and the consequent rise in the proportion of corporate profits. That is why a huge increase in local production could negatively affect the OPEC policy, and does not rule out the possibility of Iraq withdrawal314. Iraqis benefit from private Saudi Arabia, Kuwait and

312 World Energy Resources, Oil World Energy Council 2013, https://www.worldenergy.org/wp- content/uploads/2013/10/WER_2013_2_Oil.pdf 313 Majnoon filed, Iraq http://www.offshore-technology.com/projects/majnoon-field/ 314 Munir Chalabi, an objective look at the Iraqi contract, http://www.ahewar.org/debat/show.art.asp?aid=494094

151

Iran experiences as neighboring countries that have concluded oil contracts with appropriate verification of profits for foreign investments without granting any right to production using service risk contracts for repurchase rather than PSAs, which makes up only a small percentage of the oil agreements at the international level. In end the one may wonder if the Iraqi oil licensing rounds with the oil companies, rather than just the oil, is its blessing or a curse.

B.1. Iraq oil and gas licensing round

At the time of the Ottoman Empire's first attempt to extract oil in Kirkuk, it took place in the modern era primitive ways by the family of Al Naftji. It is a Turkmen family in

Kirkuk from the nearby Wadi Dara CIA oil lands "Valley of oil" and found in the area surface wells amounted to three private wells family mentioned above was invested primitive - manual ways - and ensures the crop to members of the locals where the crude oil transported by animals and sold to residents and bathrooms for use as fuel. For the first time in the history of oil in Kirkuk a concession was given to the Naftji Zadeh family by the Ottoman Empire in the year 1639 under the decree issued by the Ottoman

Sultan Murad IV. After a period of time, some of the abuses and exposures occurred on this privilege by a third party. Due to its impact on the franchise, Naftji family owners complained to the Ottoman Sultan and in the year 1782. In the same year responded to

Kirkuk Farman second historian dated 1782 entitled to judge Kirkuk, confirming that the

Kirkuk oil franchise back to the family Naftji. This was the first Ottoman historical document for the privilege of oil privilege and the work of oil Baba Korkor at the

152 disposal of the Turkmen family in Kirkuk is about more than three hundred years315. In

2008, Iraq held a series of open bidding rounds for oil contracts, beginning with the first licensing round which took place that same year and experienced varying levels of success. This became the main avenue for foreign companies looking to invest in this sector. We can see the development by looking to the oil and gas licensing rounds in new

Iraq316.

In 2008, the domestic oil and gas industry sanctions opened two licenses for the further development of six existing and operational oilfields and two gas fields. The first results were announced in June 2009. The second licensing round was launched in December,

2008. Results were announced 12 months later317..The Rumaila oilfield, Iraq’s second largest, was offered in that licensing round, and 7 fields were awarded. The contracts awarded in the bidding rounds are 20-year technical service contracts (TSCs) based on companies accepting a fixed fee per barrel of oil instead of an equity stake. Under a TSC, the IOC becomes a “Contractor” for the relevant Iraqi regional oil company (ROC).

Examples include the South Oil Company or the North Oil Company. The Iraqi

Constitution of 2005318, (the Constitution) contains several vague provisions that address control and distribution of natural resources. The Constitution states that all oil and gas is owned by “all the people of Iraq in all regions and governments.” This does not admit ownership of any particular resource by any particular group or geographical or political region. Notably, the Constitution does not vest oil and gas resources in the “State”, nor

315 Najib Mohammed, did sold a Iraq’s oil licensing round for global companies http://alwatan.com/details/99444 316 Thomas Doherty, Improving Investor Protection in Iraqi Joint Stock Companies (USAID-TIJARA) Provincial economic growth program, July 2011 p 7. 317 Robert Hamill and Jonathan Musker, Iraq’s Fourth Oil and Gas Licensing Round http://www.mondaq.com/x/197818/Oil+Gas+Electricity/Iraqs+Fourth+Oil+and+Gas+Licensing 318 Constitution of the Republic of Iraq of 2005 published in the Official Gazette, issue 4012 of 28/12/2005.

153 does it allocate resources to particular regions or governments as defined by the

Constitution. It only States that the federal government, with the “producing” governments and regional governments, shall manage oil and gas “extracted from present fields” subject to a revenue distribution formula, that provides for distribution of revenues in proportion to the population as regulated law”.

However, the term “present fields” has not been defined. Thus, it is not clear if it includes fields that are only currently producing or if it also extends to other fields. It is also unclear whether the currently producing fields include the partially developed fields.

Another point of contention concerns the proper roles and authorities of federal and regional authorities for equitably sharing oil and gas and making strategic decisions on the utilization and management of resources. This ambiguity has contributed significantly to the deadlock between the Iraqi government and the Kurdistan Regional Governorate

(KRG) over the draft of a new legislation on oil and gas. The federal government maintains that the Constitution does not allow the KRG to adopt unilateral and permanent measures over the management of the oilfields and, as such, any contract signed after the draft oil and gas law was agreed in February 2007 is “illegal” until reviewed and approved by the Iraqi Ministry of Oil. Ironically, the Constitution does not expressly authorize the Ministry of Oil to award contracts to IOCs either319. However, the Ministry of Oil maintains the legality of the contracts awarded to the IOCs on the grounds that the constitutional requirement for the approval of the Councils of Representatives only applies to international treaties and agreements between the State of Iraq and other States, and so commercial contracts between an ROC and IOCs do not need such approval; and

319 Oil and gas contracts in Iraq, July 2010, http://whoswholegal.com/news/features/article/28421/

154 the TSCs were awarded under the proposed Hydrocarbons Law. The draft federal

Hydrocarbons Law was agreed, in principle, in February, 2007 and received the approval of the Council of Ministers. It was to be submitted to the Council of Representatives for approval.

The draft law contains laws and legal texts (e.g., revenue sharing and taxation)320, designed to restructure and rehabilitate Iraq’s oil and gas sector. The draft law calls for a nationalized oil system while also paving the way for privatization of the Iraqi oil and gas sector. This approach drew immediate criticism from certain commentators and interest groups in Iraq. They said that foreign and private-sector participation in exploration and production did not sufficiently preserve Iraqi national interest and sovereignty over its resources. A revised draft was circulated in April, 2007. It still did not include a clear mechanism for revenue sharing between the federal government and regional authorities and contained many provisions unfavorable to Kurdish interests321. For these reasons, and as the Kurdish regional government allegedly had not been consulted on the revised draft, discussions concerning finalization of the law broke down. Consequently, the KRG drafted its own “Kurdistan Region Oil and Gas Law”322 approved by the Kurdistan

National Assembly in August 6, 2007, and signed by President Barazani on August 9,

2007, along with a model Production-Sharing Contract (PSC). A number of companies entered into PSCs with the Kurdish authorities regarding blocks in the Kurdish region323.

The federal authorities in Baghdad have protested against this development on the basis

320 Jordan E Toone, Foreign Direct Investment in post war Iraq, investors introductory Guide to the legal formwork, 2013. 321 Ahmed Salih Al janabi, Oil &Gas contracts in Iraq http://whoswholegal.com/news/features/article/28421/oil-gas-contracts-iraq/ 322 Oil and gas law of the Kurdistan region law No.22,2007 323 Doing Business In Iraq, http://www.trade.gov/iraq/build/groups/public/@tg_iqtf/documents/webcontent/tg_iqtf_004087.pdf

155 that, inter alia, it is unconstitutional, declaring the PSCs as invalid.

This impasse in negotiations between the KRG and the Iraqi federal government has been a major setback for the draft law. It was intended to reform the Iraqi oil and gas sector.

One change would be the creation of the Federal Oil and Gas Council (FOGC) as the most powerful body in Iraq’s oil sector. It would have the power to review all contracts and to set the country’s oil and gas policy with the Council of Ministers. The FOGC would include the ministers of oil, treasury, planning, and cooperative development; the director of the Central Bank324; and a minister representing each region. Also, included would be a representative from each governorate not belonging to a region; executive managers from related petroleum companies, and several experts specializing in petroleum, finance, and economics appointed for five-year terms325.The creation of the

FOGC would introduce further policy and planning reforms in the Ministry of Oil. The draft oil and gas law does not mandate the use of a production-sharing agreement as the sole type of contract. It allows for other forms of service contracts as well as field exploration, development, and production contracts. The draft Hydrocarbons Law gives the holder of an exploration and production contract exclusive right to exploration and production within the contract area. It also sets limits contract duration for the exploration phase and the production phase. The initial exploration term is set at four years, extendable by two additional periods of two years each.

A third extension of two or four in the case of non-associated natural gas discovery is

324 Central Bank of Iraq, Iraq's Financial Market: The Reality and Future Developments (Ministry of Finance). http://www.cbi.iq/ 325 Kathleen Ridolfo, Draft Oil Law Aims to Please All Sides, Iraq Report, March 2, 2007, http://www.rferl.org/content/article/1347505.html

156 possible. Post-discovery development is set at 20 years, with the possibility of five-year extension on negotiated terms. Contract duration can therefore be up to 35 years. Under the proposed terms, 100 per cent of all profits can be repatriated326. The royalty required under the law is 12.5 per cent of gross production, to be paid to the government by the contract holder. It is clear that only the Ministry of Oil has the power to sign contracts with an IOC, but subject to approval by the Council of Representatives. The Iraqi Model

TSC defines petroleum as “all hydrocarbons including liquid and gaseous hydrocarbons produced and saved” from the relevant oilfield327. This definition is generally in line with that found in standard TSCs used in other countries. However, it is broader than the definition contained in the draft oil and gas law. According to that law, petroleum includes “all crude oil or natural gas, or other hydrocarbons produced or capable of being produced from crude oil, natural gas, oil rocks or tar sands”. Petroleum operation is defined to include appraisal, development, redevelopment, and production operations.

Production operations means “operations related to production of petroleum including work overs, stimulations, remediation, restoration, operating, staffing, supervising, repairing, decommissioning and maintaining of wells, plants, equipment’s, pipelines, tank-farms, terminals and all other installations and facilities”328. Once again, it seems that the definition of petroleum operations under the Iraqi Model PSA is broader than that provided by the draft oil and gas law according to which “all or any of the activities related to exploration, development, production, separation and treatment, storage, transportation and sale or delivery of petroleum at the delivery point, export point or to the agreed supply point inside or outside Iraq, and includes natural gas treatment

326 Ahmed Salih Al-Janabi, Oil and Gas Contracts in Iraq, London, July 2010. 327 Model producing oil field technical service contract (PFTSC) April, 2009. 328 Exploration & production http://www.investopedia.com/terms/e/exploration-production-company.asp

157 operations and the closure of all concluded activities”. The draft law would have to be amended to ensure consistency with the definitions under the model PSAs329. The Iraqi

Model PSAs protects against any “change to the law, or by revocation, modification, or non-renewal of any approvals, consents or exemptions granted to the contractor, in order to maintain the contractor’s financial interests under this contract reasonably unchanged”.

This clause effectively allows the IOCs to freeze the terms of the contract so that successive economic and political conditions cannot be used by the State to modifying the contract terms. Contract payment will have to cover 35 percent tax. The model contracts also provide for the payment of overhead charges as defined by the TSC330.

B.2. Instrument Corresponding to upstream activities – the PSAs

The upstream stage of the production process involves searching for and extracting raw materials but does not cover processing. This stage simply finds and produces petroleum.

In a more general sense, "upstream" can also refer to any part of the production process relating to the extraction stage331. In the petroleum industry, locating underground or underwater oil reserves characterizes the upstream process. Additionally, the upstream process in this industry involves bringing oil and gas to the surface, and may also include delivery to manufacturers or other businesses that ultimately process the materials332.

329 Hassan Hafidh, Iraq Amended Draft Law Sets Out New PSA Mode, Dow Jones Newswire, January 16, 2007. 330 Iraq oil and gas regime part II, http://www.lexology.com/library/detail.aspx?g=6c78b845-a73f-4554- be26-6ce88d79cea3 331 What is the upstream oil & gas industry, http://www.psac.ca/business/industry-overview/, 19 December 2014. 332 Daniel Canty, Oil and gas Middle East present its fingertip guide to the biggest energy project in the middle east today, http://www.arabianoilandgas.com/article-9424-new-top-20-upstream- projects/1/print/%20

158

SECTION C: The Technology services contracts and Production (TSCs and PSCs)

No oil company is equipped to undertake all activities involved in the exploration for petroleum, or to provide for itself most of the services it needs. There is therefore always a demand for contracts to include provisions for different kinds of services. In the exploration arena, these range from well services hiring standby or supply vessels, to seismic processing services that provide storage space for equipment. For some of these services a specific form of contract will be required. Most operators, for example, have a separate pro forma contract for geophysical data acquisition, and often for vessels or licensing of data. In relation to drilling, it is standard practice for operators to use pro forma contracts for rigs. It has also become increasingly common for operators to develop specific pro forma drilling services333. For any service that does not fall into any specific category, it will still be essential to have a standard contract pro forma flexible enough to cover general services. Most operators of any size have therefore developed their own pro forma “services” contract334. Inevitably there has been a degree of

“cannibalization “in the development of these contract forms. Many operators will have at least two variations on theme. The first variation being a full-blown “long form” general services contract, the second variation, a much simpler short form set of terms and conditions on usually a single sheet335. These two types of contracts albeit commercially desirable to the disclosing party, can lead to complications. For instance, where the recipient is proposing to dispose a package of assets and two or more other

333 Anthony Jennings Oil and Gas Exploration contract, Sweet and Maxwell, London, 2002p.26 334 Edward J. Collins, understanding and crafting development agreement, university of Massachusetts, Boston 2013,43 335 Andrew R. Thomas, Service Contracts in the Oil and Gas Industry, Cleveland State University, Ohio 2013. P.30.

159 companies wish to make a joint bid for the package.

If these legal obligations are not relaxed to allow broad discussion between the directors or senior managers of the respective bidders, each will automatically be in breach of its own agreement. Some companies have a combined service and purchase order format336.

This idea developed because of the increasing tendency for suppliers of many types of goods also to be involved in the provision of the service in parallel337. This seems sensible at first thought, but it can be a recipe for confusion. The two functions of supply and service are quite different and need to be addressed in different ways contractually338.

For example, this can be seen in relation to warranties, defect, correction, encumbrance, and indemnity. This requires a much longer document than what was initially predicted, addressing the two aspects separately. Also, not all procurement transactions involve services or attained goods. The pro forma thus needs a lot of wording of the “if applicable" type. Many contractors also have their own pro forma contracts. Most drilling service contractors, data suppliers, and some general service contractors have their own; but, with the exception of data licensors, the market has dictated that these are comparatively used339. Standard contracts for exploration services do not normally differ from other forms used for production operation services, although the nature of the infrastructure may give rise to detail difference340. Consequently, there are two types of service contract formats: for simplicity they could be termed the "one-off" and the "call-

336 Abbas Ghandi, C.Y. Cynthia Linotile and Gas Service Contract Around the World, United State,2014. p.21 337 Exploring Business, http://www.saylor.org/books 338 Adelman M.A. Modelling world oil supply. The Energy Journal Vol.14, No.1(Sep.1993) 339 Drilling contracts evolve with industry expansion, legislative, judicial trends, http://www.drillingcontractor.org/drilling-contracts-evolve-with-industry-expansion-legislative-judicial- trends-15190 340 Abbas Ghandi, C.Y. Cynthia Linotile and Gas Service Contract Around the World, United State,2014. p.21

160 off”341.

The first is a normal "performance" contract, under which the required work is actually carried out, containing all the standard provisions of any commercial contract for the performance of a service342. Thus, it will become effective, commence and terminate on specified dates or events. It will contain certain warranties and obligations, and there will be an agreed and specified consideration. On the other hand, the "call off" idea is quite different, where an enabling or "master" contract is executed343. This is for a specified duration, such as five years, and has few operative provisions. Any work performed during the agreed period will be performed under an agreed set of general terms and conditions. Additionally, during a specified period of years the operator will enter into a specific agreement with the respective parties for the particular work to be done. Thus, a call-off or "master" contract binds the parties to a specified and often lengthy set of terms and conditions such as an agreed rate of compensation, and its duration. It is not in itself the agreement under which any specific work is actually performed. The specific work will be performed under a supplemental agreement. There will therefore often be three documents: the master contract, the general terms and conditions, and the supplemental

(call-off) agreement344. This contractual concept raises certain questions which need to be answered in order to clarify the intent of the parties’. For example, will the contractor be committed to the supplemental agreement? Or will the contractor enter into the master contract? Or is each supplemental agreement still to be the subject of further agreement?

The operator is aiming for commitment on the contractor’s part, therefore normally

341 Estelle Rami, oil contract and policy in Iraq, West Law, US, 2014 342 The Oil Services Industry,http://www.investopedia.com/features/industryhandbook/oil_services.asp 343 Anthony Jennings Oil and Gas Exploration contract, Sweet and Maxwell, London, 2002 p. 94 344 Hall V. Henry, The Southwestern Reporter, ST. Paul west publishing CO. Vol. 239, (May-June 7, 1922). p.56

161 preferring the master contract. But if the contract is committed it will also want the operator to be committed, except as to the timing of the "call off" itself345.

If this is to be achieved, it is essential to ensure that all terms applicable to the supplemental agreement are fully ascertained and thus potentially enforceable at the time of signing the master, so that it is a "call off "in the future scene. All material terms, including the price, should be agreed. The price cannot always be ascertained in advance for every aspect of service, even by incorporating the mechanism of a formula or index.

Many problems arise from the relationship between the master contract and the supplemental agreement, the general terms and conditions are the terms applicable to the master contract, and the general condition will regulate the respective rights and liabilities of the parties if one or the other is in breach under the contract346. A valid call off type contract, regardless of its specific format, must contain statements that address the following main points:

 It is of the essence of the agreement that the contractor shall provide the services

on an "as required" basis and nothing commits the operator to services on a

continuous or exclusive basis, or at all until requested.

 Any such requirement for service shall be triggered solely by the issuance of a

call off order, binding on issuance.

 The duration, cost and scope of service shall be as stated in the call-off order, but

the operator reserves the right to vary the duration and service, provided that they

345 Gerrard Boyle, Problems in Upstream, Oil and Gas Service Contracts, https://www.linkedin.com/pulse/problems-upstream-oil-gas-service-contracts-gerrard-boyle 346 Terms and Conditions of Master Services Agreement, http://www.figmints.com/terms-and-conditions/ 23 December 2014

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remain within the general scope of service, at its discretion, by issuance of a

supplement order347.

In commencement and term of agreement there will need to be an effective date, and at least initially, a fixed duration, or an ascertainable one. Also in the "call off" master agreement type, the term will be for a specific term of years together perhaps with a subsequent period, terminable on notice or an option to extend if so required. In the "one off" contract the term may be just the same, but it may also be expressed to be coterminous with the project which it is associated with it. From all the above we must consider to list the various services contract types that should be developed by the operators. These can be broadly summarized as follows:

 General Offshore services348

 General onshore services

 General construction services

 Well (drilling) services349

 Vessel services

 Aircraft services

 Geophysical services

347 Contract types are generally grouped into two broad categories, https://www.ohio.edu/ptac/downloads/contract_types.pdf 348 Majnoon filed, Iraq http://www.offshore-technology.com/projects/majnoon-field/ 349 Bajari, P and S Tadelis, Incentives versus Transaction Costs a Theory of Procurement Contracts, Journal of Economics, Vol 32, No 3, (2001) p.387

163

 Data licensing and storage services

 Specialist (personnel) services

 Procurement contracts

The International Oil Companies in the service contract of arrangement has been described as a contractor or hired hand working for wages. An example would be the

Iraqi Technical Service Contract in respect of the Rumaila Oil Field. Article 2 is succinct on the role of the International Oil Companies and the scope of the contract. It states that this contract is a Technical Service Contract for the rehabilitation of improved production and enhanced recovery of Petroleum from the Rumaila Oil Field in accordance with the provisions herein. Another word A service contract is a long term contractual framework that is used by some host governments as in Iraq to acquire the international oil companies’ expertise and capital without having to hand over the field and production ownership rights to them. There is risk to the companies in the Production Services

Contracts350. They have a tighter focus on production and recovery rates as compared with Production Sharing Agreements favored by oil majors. The Central government in

Bagdad use PSCs instead of PSAs351, so the role of the IOC is essentially to provide the

HG and the NOC with services and information to help the country develop its own oil resources including the viability of a given field352. Once the existence of petroleum reserves is suspected, the company is obligated to develop the reservoir. The IOC may also be engaged to provide equipment and training for employees to operate the

350 Sorenrajah M, International Commercial Arbitration the Problem of State Contracts, national university of Singapore (Longman 1990). 351 Claude Duval et al, International Petroleum Exploration and Exploitation Agreement, Legal Economic and Policy Aspects 2nd ed Barrow Company Inc 2009.p.65 352 Ghanim Anaz, Iraq oil and gas industry in twentieth century, Nottingham, UK,2012

164 petroleum facilities. An example of a PSC is the Iraqi Technical Service Contract in respect to the Rumaila Oil Field353. Article 2 of the Iraqi Constitution defines the role of the IOCs and the scope of the PSC contract354.

It states that this contract is a Technical Service Contract for the rehabilitation of improved production and enhanced recovery of petroleum from the Rumaila Oil Field. In accordance with the provisions here, despite the company solely investing its own money in the exploration, it is entitled to no payment or compensation unless a viable find is made. The government retains ownership and control of the resources. At the end of the operations the ownership of the field and the assets therein are transferred to the HG In some jurisdictions for example, Iraq as the HG takes over control of the operations, including refining and marketing355. When the Company has made a successful find and production is undertaken, it is entitled to a taxable fixed fee for the services rendered. In cases of buy-back service contracts, the IOC is given priority to buy the first tranche of petroleum produced at a reduced rate.

C.1. Production sharing contracts:

Production sharing contracts were adopted by the Indonesian government in replacement of the exclusive licenses that had been terminated by virtue of government decree No. 44 of 26 October 1960356. This decree determined that oil and natural gas are part of the

353 Technical Service Contract For The Rumaila Oil Field, Between South Oil Company Of The Republic Of Iraq (SOC), And BP Petr china Company Limited And Oil Marketing Company Of The Republic Of Iraq (SOMO), www.fuelonthefire.com 354 The Oil in Iraq from Concession towards National Direct Investment 1912-1972, the publications and information office, the Iraqi National Petroleum Company, 1973. 355 Van Houtte H, The Law of International Trade Sweet and Maxwell, London 1995, p.22. 356 Draft production-sharing contract of August 1976 (model contract of Indonesia). Asia and Australasia: Basic oil laws and concession contract.Supp.52 Edited by Barrows company. New York: petroleum legislation Co, 1977, 1-55

165 national riches under the control of the state. Its origin can be traced back to the

Netherlands - Indies mining law of 1899, as amended in 1919357. An example in the

Middle-East is the concept of production sharing, introduced in Egypt when in May 1970 a typical Indonesian style production sharing contract was concluded between EGPC and the Japanese North Sumatra Oil Development Corporation. As from the time production sharing contract became generally applied in Egypt, the concept was adopted in Syria in an almost identical form. The Syrian government assisted by officially following the lead from the EGPC concession department. Under Egyptian style contract, EGPC as the licence-holder has been made responsible for paying the royalty out of its own resources358. Under the Syrian style contract the royalty was taken from setting aside a part of the production of the state, thereby reducing the production on which the contractor and state party could lay a claim by of cost production and profit production.

Also the Norwegian DNO and Turkish Pet Oil were the first companies to invest in the

Kurdistan region in the north of Iraq. They used the production sharing contract models that were followed by the super-majors ExxonMobil in 2012, Total, Chevron and

Gazprom359.

The PSA contract can vary widely in the details, yet all must focus on two issues: how profits are divided between the government and participating companies and how to manage the costs. The government acts like a normal business looking to maximize or increase revenues. Also, the host government faces the challenge of negotiating with

357 Bernard G. Taverne, Petroleum industry and governments, a study of the involvement of industry and governments in the production, Kluwer Law International, London, 2008. 255. 358 Barrows Company, ed. Middle East, north Africa, south and central Africa, Europe, Asia and Australasia, central America and Caribbean’s, and south America: Basic oil laws and concession contract. Vol s 1-2 and various supps. New York; petroleum legislation Co, 1959.308. 359 Shahristani, Architect of Iraq’s oil future, Iraq energy news, 17 January 2011.

166 major oil companies, which have the advantage of skilled legal representatives.

In fact, a host government often has considerably less knowledge about the technical and commercial data than the oil companies360. This point places the host government in a very difficult situation. The host governments need to try to balance these competing needs. What complicates negotiations is the high level of uncertainty caused by incomplete or even faulty information. Typically, neither the oil company nor the host government knows in advance how much it will cost to explore and develop a field, or whether, future oil or gas prices will justify that cost, or how much oil or gas there is in a field.

On other hand, oil companies have no choice but to take calculated risks about what price to bid for a license. There is no guarantee that the concession will cover the company’s costs and return a profit. As for the recovery of cost, usually the companies’ costs are important for the host governments’ revenues because the taxes that the companies pay are shared with the governments’ revenues because the taxes that the companies pay are shared with the government based on the companies’ profits361. There are two types of costs, current operating costs and capital investment costs. Current costs are expensed in the year in which they are incurred and are deducted from profits362.

Capital investment costs are long term and can be depreciated over a set period of time.

From a government perspective, the longer the rate depreciation, the higher its share of profits during that time period. A company, on the other hand, will look to recover its costs as quickly as possible through a more accelerated depreciation. Thus, the terms that

360 Zhiguo Gao, J.S.D, International petroleum contract current trends and new direction, Graham and Trotman, Boston, 1994,59. 361 World petroleum taxation Legislation report. Barrows company Inc., New York,1990 p.14 362 Dan R. Ward and Suzanne P. job order cost accounting, john wily sons Inc. Louisiana 2005.p.54.

167 the companies use for depreciating assets can have a significant impact on government revenues. Also, the government can apply different types of taxes. The first is profit tax can come from of a corporate income tax or can be subsumed as part of the amount the government agrees to take from any profit.

The second is a tax on productions, sales (the price at which the product is sold)363, the third tax imposed on oil companies is a royalty, which is normally a percentage of the value of the production364. The oil price is dependent on the market and directly impacts the compensation of the host government. Normally the companies report the price of oil sold to subsidiaries a price well below market rate so that it may affect the tax (host government revenue)365. Even a marginal difference in price per barrel, can make a considerable difference overall. In the end under a PSA regime there may not be a licensed interest or the licence may not create a proprietary right and thus there may be no transfer title in the same case. However, there is likely to be a right for the seller to assign its interest in the PSA to the third party. Additionally, a contractual entitlement to a share of production is created under the PSA interest366.

In any event, an agreement for disposal of an interest under a PSA will normally be an agreement for sale of a contract interest, rather than a proprietary interest, and this will usually make its fundamental nature and thus structure different. The main differences between a PSC367 and a TSC368 appear from the Standard Forms of Contracts we

363 International Tax and Investment Centre, Oil Lobby Calls for Use of Production Sharing Agreements in Iraq, report (2004) http://www.historycommons.org/entity.jsp?entity=chevron 364 Charlotte. Wright and Rebecca, A.Gallun, International petroleum Accounting, Penn well corporation 2005.36 365 Claude Duval et al, International Petroleum Exploration and Exploitation Agreement, Legal Economic and Policy Aspects 2nd ed Barrow Company Inc 2009.p65 366 State BAR of Texas, international oil and gas report, professional development program, 1983, 13 367 See Production Sharing Contract for the Kurdistan Region.

168 consulted:

 Ownership of the resulting oil resources;

 Extent of Host Government control on the operations and;

 Remuneration of the International Oil Companies.

C.2. Role of the PSCs and TSCs in the development of upstream sector

Under the terms of a standard KRG form of PSC, a FOC and the government (be it regional or federal depending on the territory in question) work together much like a joint venture. The ownership of the oil is shared and the FOC is permitted to use revenue from produced oil to recover costs. Once recovered, profit is then split 50/50369. Thus, under all PSCs, the FOC and the government share revenues and operating costs, the FOC supports all capital expenditure and financial risk. Under the Iraqi central government TSC, the relationship between the parties is fundamentally different. The Iraqi central government created its own National Oil Company370, (“NOC”) through which the government has absolute control of the operations and oil371. Rather than operating as a partnership with the government, the FOC operates as a contractor retained for its services and paid a fixed fee per barrel known as a remuneration fee per barrel (“RFB”). Under this TSC, FOCs bear all capital expenditures and financial risk, as under the PSCs. In addition, all operating costs are compensated only by the RFB, which is taxed at 35 percent372. All revenues apart from the RFB return to the Iraqi NOC. Crucially, the RFB is only paid if the production exceeds a certain specified minimum level. has made the TSC model particularly unattractive where bidding is for licenses over areas with largely unproven reserves. A FOC which falls short of the targeted production level will lose out on

368 See Model Producing Oil Field Technical Service Contract. 369 Reshaping Kurdistan’s regional and global footprint energy http://www.investingroup.org/publications/kurdistan/overview/energy/ 370 Law Nationalized some Companies and Establishments No. (99) of 1964 published in the Official Gazette, issue 975 of 14/07/1965 371 The Iraqi federal oil and gas law 2011 exploration and expropriation http://iraqieconomists.net/en/2013/02/15/a-critical-look-at-iraqs-oil-contracts-by-munir-chalabi/ 372 Chris Edwards, Iraq Oil and Gas Regime - Part 2, 4 July 2013, http://m.reedsmith.com/iraq-oil-and-gas-regime---part-2-07-04-2013/

169 payments. This explains why FOCs were quite competitive in bidding for the first and second licensing rounds, which featured fields with largely proven reserves. Later bidding during the third and fourth licensing rounds, covering areas with largely unproven reserves and requirements for expenditure on exploration, were much less competitive.

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SECTION D: Instrument related to infrastructure development

Iraq facing economic challenge volatility in oil prices is also a clear image of Iraq’s dependence on oil revenues, and also the need for economic diversification. Despite its abundant oil resources, Iraq lacks ability to use the revenues from oil for the benefit of its population. Because of weak public and private institutions, some areas have no connection to the public water network and huge problem with electricity. Iraq’s oil wealth alone therefore cannot generate sustainably high living standards for the majority of its population373. The government will need to use the revenues from oil and the contributions made from the World Bank in order to ensure that the country’s infrastructure is reconstructed and that the people benefit from better social services. The

World Bank’s current portfolio for Iraq consists of 22 projects valued at US$854 million funded by the Iraq Trust Fund with assistance from IDA374. Nearly all Iraq projects are managed by Iraqi’s government, with support from the World Bank and the International

Energy Agency. We can notice the reconstruction Project Intended to Increase the capacity of government to management of the projects. The projects include the following: water network renovation help; use of water injection technology; and increases in Storage capacity, transportation methods, and exporting capacities. All this affects the whole oil and gas industry in the Iraq oil production infrastructure, in particular some facilities like the extraction, production, storage, transportation and distribution of oil and gas in Iraq, including refineries.

373 Frank R. Gunter, Challenges facing the reconstruction of Iraq infrastructure, Lehigh university, 2013,p10 374 Iraq Investing in Infrastructure and Institutions to Create an Environment for Sustainable Economic Revival and Social Progress,http://www.worldbank.org/en/results/2013/10/04/iraq-investing-in- infrastructure-and-institutions-to-create-an-environment-for-sustainable-economic-revival

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D.1. Construction Contract

A contract issued by one of two contracting parties may be linked to accept the other in a manner to prove its impact on meeting him375. Also, known in the process is a time on restricted activity which has a beginning date and ending date. They are done once in order to provide the product or service in order to achieve beneficial change or create added value. Contracts may differ depending on prospective prices and other terms as follows:

1- Fixed -price contract: The contract price is fixed and is subject to future changes only in case of changes in the contract specifications. In this case, the contractor would bear all the risks of increased prices or higher taxes which have already been taken into account when setting the price376.

2- Price adjustment contract: In these types of contracts prices are increased or reduced based on specific factors. For example, a certain increase in the value of the contract in the case of high prices of raw materials or spare parts may cause an adjustment377.

3- Cost plus contract: These are contracts not covering the total price, but the contractor adds a certain percentage above his cost of the work to cover an agreed overhead and profit percentage. For example, the contract may cover "the actual cost of materials and the number of actual working hours as well as 30% of the value of the cost of downloads and profits", because there is clarity about the work but cost cannot be estimated at the

375 Article 73 of the Iraqi civil law No. (40) for the year 1951, http://www.refworld.org/docid/55002ec24.html 376 Ahsan Ibrahim Al Attar, contracting methods, and methods of implementation of oil and petrochemical project contracts, University of Technology, Baghdad 2012 p. 28 377 Newcomb, David, Russel lens and john Epps, price adjustment clauses report, Texas A&M Transportation Institute, Texas Department of Transportation, Federal Highway Administration, June 2013

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378 time of contracting accurately .

One needs for this type of contract to negotiate substantial operations with technical and administrative control plus good implementation processes. The contractor must also keep accurate records of expenses subject to inspection and supervision.

4- Target cost contract: This type of contract is a development of the former type so as to eliminate the gaps in it which could lead to conflicting desires between the company and the contractor. With experience and expertise, parties can agree on a particular number that represents the expected cost of the contract. This figure can be put in the agreement between the company and the contractor, and in the case of achieving cost less than the target it gives a certain percentage of the savings achieved. The difficulty in this process is actually defining the cost goal. If it is too low, it can be seen as a burden by the contractor since it does not provide enough incentive to him. If it is significantly higher, the contractor can realize substantial profits on the company's account. Sometimes this

379 risk to the company can be addressed by a guaranteed maximum contract cost to him .

5- Bill of quantities contract: This type of contract is used in particular in the contracting and construction business where there are clear lists of the quantities and qualities required for the construction determined by design and engineering drawings.

Each of the contenders for the contract must set prices for each item and when the contract must contain text covering whether the accounting will be based on the theoretical quantities such as the maintenance price per square meter for painting or

378 Juan Rodriguez, all about cost -plus contract basics and more option, https://www.thebalance.com/time- and-materials-contract-844534 379 Ulrika Badenflet, the selection of sharing ratios in target cost contracts, Engineering, Construction and Architectural Management, Vol. 15 No.: 1, 2008p.54-65

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380 cleaning floors and windows .

6- Schedule of rates contract: This type of contract is considered an alternative to the former type, and is used in the case where companies cannot estimate the required quantities carefully when hiring contractors and the contenders are allowed to submit their prices or rates without any knowledge of the quantities that would be determined

381 after implementation .

Division of contracts in general, "non-price"

1- Competitive contract: It is a contract reached by a group with competing bids for

certain specifications382.

2- Negotiated contract: It is a contract that is negotiated between the company or the

requesting authority to contract with the Contracting Authority, which has been

selected by the company. Usually this is done in case of failure to reach agreement

with the terms or the specifications by the parties. It must be clear that the

negotiation with a contractor or executing companies does not prevent the second

company from using confidential technical information that was retrieved from the

first company. It must therefore be clear what is and what is not secret

information383.

3- Package contract: This type of contract, in which more than one contract or a

number of contracts is possible, where each of them represents a solo contract, such

380 Stephen Ward and Chris Chapman, choosing contract payment terms, international journal of project management Vol.14 1994 .216-221 381 Engineering project-fixed price or schedule of rate? http://www.neboengineering.com.au/blog/whats- the-best-way-to-tender-an-engineering-project 382 Construction pricing and contract, http://pmbook.ce.cmu.edu/08_Construction_Pricing_and_Conctracting.html 383 W,Dudziak and C.Hendrickson, a negotiation simulation game, ASCE Journal Management in engineering, Vol.4 No.2,1988.

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as the design and implementation of water treatment units, supply and installation of

boilers, or supply and maintenance of equipment for a hospital, etc.

The contractor in this case would be responsible for several stages. He would handle the implementation and/or would subcontract to a specialist for the design phase and know also that any failure at this stage or a bad choice would be covered by more than the cost384.

4- Turnkey contract: It is an integrated contract (like the previous type), but it contains all the activities, whether civil or mechanical or electrical for the implementation of a major project. It is contracted in this case with a major contractor who in turn subcontracts with other contractors to implement the project385.

5- Continuation contract: It is a contract that is between the company and one of the contractors that already works for another to implement other works on the same basis and the rates used in the first work as a result of the two parties knowing each other and being satisfied with the deal together. This method of hiring may save time and effort, but sometimes one may feel that the prime contractor is in a position of strength, which may affect the negotiation386.

6- Serial contract: It is contracted to carry out several units beginning with the implementation of the first unit, while the remaining units come later387.

7- Running contract: It is contracted to carry out several units beginning with the

384 Carolin Schramn, Alexander Meibner, Gerhard Weiding, Contracting strategies in the oil and gas industry, http://www.ilf.com/fileadmin/user_upload/publikationen/3R_Schramm_Nov09.pdf 385 Andrew R. Thomas, service contract in the oil gas industry, Cleveland State University, Cleveland, Ohio 2013P.3 & turnkey drilling contracts101, http://hillcountryexploration.com/turnkey-drilling-contracts-101/ 386 Continuation agreement- http://www.yourdictionary.com/continuation-agreement 387 Allan Ashworth, contractual procedures in the construction industry, fifth edition, Routledge New York 2001,p.76. Serial contract: http://www.iamcivilengineer.com/2014/09/civil-engineering-contracts-and.html

175 implementation of the first unit, while the remaining units come later.

Also, it could be a contract for the supply of goods and services at set intervals from time to time depending on the customer's request. Usually the contract period is one to two years and usually determines the unit price on demand or the minimum required amount during the year or the duration of the contract. The contract can be a fixed-price or variable rate contract388.

8- Service contract: This contract specializes in providing all services without the supply of equipment or goods, such as contracts for the work of drawings and geometric designs.

A series of contracted activities or tasks that have specific goals must be accomplished according to specific specification and have a beginning and ending, and having a specific funding using different sources of money, time, equipment, and workers389. After

World War II there was a need for scientific and practical ways to solve management problems in large enterprises, using researchers active in finding efficient ways based on the amount. These researchers are oftentimes two teams of advisers working in the

United States, with a third working for the team in the United Kingdom. That way started

In the United States with a team of consultants in cooperation with de Pont Company (Du

Pont Chemical Industries Inc.) using Remington Rand’s Univac Division of Remington

Ran electronic brains to develop a method for planning and management of maintenance operations at De Pont, in December of the year 1965 until February of 1959390.

This team developed a method called the planning and scheduling critical path called

388 Michael likosky, contracting and regulatory issues in the oil and gas metallic minerals industry, Vol 18 No.1 (April 2009). P. 89. 389 Andrew R. Thomas, Service Contracts in the Oil and Gas Industry, Cleveland State University, Ohio 2013. P.12 390 Peck Merton J. and Scherer Frederic M, the weapons acquisition process economic analysis, 5th ed, Harvard business school, 1962. p.619

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Critical Path Planning and Scheduling - CPPS, later known CPM - Critical Path Method.

It is used to reduce the time required for maintenance at the De Pont Company to a minimum. The second team worked from 1954 until 1958 in cooperation with the US

Marine Corps with Lockheed (Lockheed) in project design and development of the

Polaris missile (Polaris), where it developed a method for evaluation and follow-up projects called Program Evaluation and Review Technique - PER. The third team worked in the United Kingdom in 1957 in the Operations Research Department of the Central

Electricity Authority. It developed a method known as the longest N path for the shortcut

(The Longest Irreducible Sequence of Events), and later known as the main relay (major sequence). It has resulted in the application of this method to get good results in the period from 1958 until 1960391. From all of the above we can focus of design and management of petroleum projects internationally as accepted now, including four basic types of contracts: Works contract, Supply of goods contract, Consultancy services contract, and Non-consultant service contract. Most Iraqi laws derived from global legislation in force to help the Ministry of Planning working with the help of the World

Bank to prepare a draft of the Iraqi contract law. It did not proceed yet by the House392.

There is no limit now for special law contracts, but they rely on provisions of Civil Law

No. (40) from the year 1951.

Enforced by the courts are documents released by the Ministry of Planning, which include Implementing Regulations of the general government contracts of 2008, as

391 A brief history of scheduling. back to the future, http://www.mosaicprojects.com.au/PDF_Papers/P042_History%20of%20Scheduing.pdf 392 David E. Pierce, Contract formation issues when contracting for goods service, http://washburnlaw.edu/profiles/faculty/activity/_fulltext/pierce-david-2013- 1rockymountainminerallawfdn.pdf

177 amended, as well as the General conditions for civil works and General Conditions for the work of electrical, mechanical and chemical engineering, consultancy services for feasibility work and the preparation of engineering design study contract, various types of materials, devices, processing contracts, Works for building and construction and mechanical and electrical installation contracts, Consulting services for housing, catering and transport security and protection393.

Projects are implemented in accordance with sequential steps as follows

1- Feasibility study and determination of the cost and providing financial allocations.

2- Preparation of tender documents or direct invitation, tender announcement or an invitation to tender.

3- Creating bidding by the participants and presenting them before the date of the closing or immediately after the bid opening.

4- Analysis of bids and recommendation of the assignment on the best one.

5- Preparation of the contract wording and for the signing by the parties.

6- Execution of the contract by the Contractor and follow-up by the boss (owner) work.

7- Trial run and check acceptance and receipt of the preliminary draft.

8- Final acceptance of the maintenance period and the liquidation of the contractor and

393 Mohammed Norii, A Guide to contracting with the Iraqi government, construction & supply contract, http://www.tamimi.com/en/magazine/law-update/section-5/september-3/a-guide-to-contracting-with-the- iraqi-government-construction-supply-contracts.html

178 discharged account394.

Turn-Key Lump Sum395

In major projects, it is difficult to prepare detailed designs and bills of quantities in advance by the employer within the tender documents, but only the main parameters are determined and the basic designs and setting of production units and buildings396. The contractor provides a comprehensive tender on this basis, including his preparation of detailed designs and equipment and materials required in addition to the construction and trial operation and maintenance work. In this type of contract, the Contractor shall be responsible for the biggest risk covering implementation of most of the petroleum and petrochemical project contracts in a turnkey way. According to Article (4) of the

Implementing Regulations of the general government contracts for the year 2008, one of the five following methods to lure bids from consultants, suppliers and contractors to carry out the required works and events in the implementation of oil projects.

The first four methods are applied on the basis of competition (having at least two tenders) and therefore one is not permitted to negotiate with the bidders, but must rely on the lowest responsive bid. The fifth in style does not compete, so one must negotiate in order to reduce the price to a minimum using the same specifications397. The best way to

394 Richard, J, critical path method the engineering handbook, https://www.scribd.com/document/118844221/Technology-Management-Handbook-Dorf 395 Eldosouky, Adel I. Principles of construction project management, Mansoura university, Mansoura, Egypt,1996 p.18 396 Black’s law dictionary, http://thelawdictionary.org/open-tender/ Manual of procedures for the procurement of goods and services http://www.gppb.gov.ph/downloadables/forms/GPM%20-%20Vol.2.pdf Two stage tender, https://www.designingbuildings.co.uk/wiki/Two-stage_tender Single stage tender https://www.designingbuildings.co.uk/wiki/Single-stage_tender 397 Determining bidder responsibility, http://www.ucop.edu/construction-services/facilities-manual/volume- 5/vol-5-chapter-4.html

179 analyze the bids projects that the tender is offered within three envelopes:

• First Envelope: requires Contractor to include documents, plus a bid bond if asked.

• Second envelope: includes the technical tender for the contractor.

• Third envelope: includes the commercial tender for the contractor398.

Technical Analysis: The Contractors open the first envelope and the second for all bidders to make sure they are eligible to participate and that their bids are responsive to the terms of the tender and so that all qualified respondents are considered successful while others are excluded at this stage399.

Business Analysis: The qualified Contractors open the third envelope for technical analysis and are audited for prices and bidding schedules mathematically (and corrected if needed), and are arranged in descending order by bidding prices. They must be recommended by a committee analysis in reference to the lowest price bidder among successful bids in technical analysis400.

It is not permitted at all in the competitive bidding for a committee to negotiate prices, except if there is only one qualified bid due to the lack of competition. Contract between the parties must contain the following documents, which must be read and interpreted as a whole and constitute an integral part of the contract: Contract Agreement, Special contract terms, General Conditions of Contract, Technical requirements –including the

398 doing business in Iraq, http://www.trade.gov/iraq/build/groups/public/@tg_iqtf/documents/webcontent/tg_iqtf_004087.pdf 399 general instruction to bidders, https://www.iom.int/sites/default/files/procurement/Recall%20Salah%20Aldin%20%20ITB_%20OFDA3% 20Rehabilitation%20of%20ShelterWASH%20infrastructure%20for%20critical%20shelter%20Project.pdf 400 procurement guideline for tender preparation, evaluation and award of contract, http://www.fao.org/docrep/012/i1531e/i1531e04.pdf

180 requirements and scale maps and charts and technical specifications– Contractor’s tender and schedule of quantities, Letter of acceptance of the tender. In case of a conflict or failure match between the Contract Documents, they prevail in the order above. The candidate is notified by a letter of assignment (tender acceptance), which is a binding contract until the signing of a formal contract. On the one hand, the contracting entity must inform all providers bidding on behalf of the winning bidder and the launch of their security, except for the top three. Within fifteen (15) days of receiving the acceptance

Letter, the Contractor must sign the contract and provide a guarantee of good performance (a Performance Bond) from an accredited bank inside Iraq amounting to 5% of the value of the contract in force to the date of final acceptance of the project401.

The contracting authority may consider the failure of the bidder amount by reference in the signing of the contract and his providing a guarantee of good execution reason enough to cancel the contract402. Moreover he may confiscate the tender guarantee (Bid

Bond) and include the contractor in the blacklist. The contract may be assigned to another bidder. After signing the contract and activation, the contractor may proceed with implementation of modules for the project (detailed designs, processing materials and equipment, construction and installation mechanic) under the direct supervision of a supervisor for the employer at the site. The Contractor will continue implementation in accordance with the provisions of the contract until the complete fulfillment of all parts

401 A guide to contracting with the Iraq government, construction &supply contract. http://www.tamimi.com/en/magazine/law-update/section-5/september-3/a-guide-to-contracting-with-the- iraqi-government-construction-supply-contracts.html 402 Suleiman Barak Rescission as a tool to Guarantee for Execution Journal of college of law for legal and political sciences, Al-anbar University 8, No.11,2013,109.

181 of the project and make it ready for trial operation and acceptance403.

Preliminary Acceptance Certificate (PAC): This certificate is issued based on the recommendation of the Commission on receipt of the project completion notice. After final examination of completion of civil works, building, roads and other facilities in the project, the Take-Over Certificate is issued404. The receipt issued for the first certification of the project by the employer (hand contract) supports the complete business and stops any delay penalties. When the project is ready for commercial operation, this begins the maintenance period, which is usually for twelve months405.

The Final Acceptance Certificate (FAC): The end of the maintenance period of the project (Committee approves the final acceptance of the project), which holds the disclosure of the components of the project and in the absence of the shortcomings of the issuance of the final acceptance certificate is formed (Final Acceptance Certificate)406.

This certificate is proof of the contractor’s fulfillment of all contractual obligations under the settlement account and he is discharged and the performance bond is released. The implementation of a project faces technical and financial obstacles and administrative potential before and after the contract, leading to the delay of the implementation process or even stopping it407.

403 Max Young. Cases and Materials in Contract Law. London 1997 p.573 404 Final acceptance inspection and testing, http://www.sgs.com/en/energy/energy-sources/wind/services- in-the-commissioning-phase/final-acceptance-inspection-and-testing 405 State company for oil projects, SCOP http://www.scop.gov.iq/english_email.htm . accessed 10 March 2015 406 Barnes M, Measurement in contract control, William Clowes limited Beccles, London, 1981.p63 407 Implementing Regulations of government contracts, http://wiki.dorar- aliraq.net/iraqilaws/law/21539.html accessed 23 February 2015

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D.2. Construction contracts in Iraq

Iraq is undertaking an ambitious program to develop its oil fields and to increase its oil production. The Iraqi Ministry of Oil signed a dozen long-term technical service contracts after two licensing rounds between 2008 and 2009. They are to develop or redevelop several giant oil fields, most of which were already producing408. With millions of dollars in contracts awarded to U.S. Companies that will help reconstruct the infrastructure and development of the Iraqi oil sector, the KBR had won via a competitive bid in 2001. This contract was taking place during the hostilities to repair the oil field. It was followed by one of the largest contracts given out to Bechtel, a San Francisco-based engineering and construction firm, who was awarded an initial $34.6 million capital construction contract that could grow to up to $680 million409. The second biggest contract belongs to Halliburton Kellogg, a Brown and Root subsidiary, who was granted a contract extinguish oil fires in Iraq by the U.S. Army Corps of Engineers. With a total estimated cost of up to $7 billion, the US Trade and Development Agency approved a grant of more than $500,000 to SRC410, to fund project’s 2011-12 feasibility study as part of a strategic framework agreement with Iraq it includes a commitment to help promote the development of the country’s oil sector, as well as the rehabilitation of its vital facilities, according to a release from the US embassy in Baghdad on July 21, 2011. On the other hand, Exxon-Mobil Corp. let a front-end engineering design (FEED) contract to

Kentz, part of SNC-Lavalin Group, for an oil processing facility that will increase

408 Iraq’s Petroleum Industry, Unsettled Issues the Middle East Institute Washington, DC www.mei.edu 409 The Bechtel Corporation, https://www.indybay.org/newsitems/2003/04/24/16037711.php 410 SRC Oil & Fuel, http://www.srcoilandfuel.com/index.html

183 production at West Qurna-field in Iraq411.

With its regional partner, Kentz is providing detailed design engineering, procurement, fabrication, construction, commissioning, and start-up of the facility, which will be capable of producing an average of 100,000 b/d of crude. The project will be executed out of Kentz’ Abu Dhabi engineering hub, with support from its Dubai operations, and is expected to be completed in 26 months412. Also, the Halliburton Multinational

Corporation, one of the world's largest oil field services companies, with operations in more than 80 countries have a major international office located in Iraq. It owns hundreds of subsidiaries, affiliates, branches, brands, and divisions worldwide. The Company has dual headquarters located in Houston and in Dubai; Halliburton's major business segment is the Energy Services Group. Energy Service Group provides technical products and services for petroleum and natural gas exploration and production, is a major construction company of refineries, oil fields, pipelines, and chemical plants. Halliburton was awarded a $7 million Iraq oil/infrastructure contract to forward the development of Iraq's state- owned South Gas Company, who signed two agreements with Royal Dutch Shell and

Mitsubishi to create a new joint venture, Basrah Gas Company, to capture flared gas at three large southern oil fields at Rumaila, West Qurna and Zubair413. The 25-year venture, which is estimated to cost $17 billion, entails upgrading current facilities and

411 ExxonMobil lets oil processing contract for West Qurna, http://petrodyne.net/exxonmobil-lets-oil- processing-contract-for-west-qurna-1-field-in-iraq/ 412 Foster Wheeler and Kentz Joint Venture Company awarded contracts by Shell for Majnoon Oil Field Development in Iraq http://www.kentz.com/media-centre/press-releases/foster-wheeler-and-kentz-joint- venture-company-awarded-contracts-by-shell-for-majnoon-oil-field-development-in-iraq.aspx & Kentz Award of Iraq Contracts, http://www.kentz.com/media-centre/press-releases/kentz-award-of-iraq- contracts.aspx & Kentz’ Abu Dhabi, http://www.kentz.com/# 413 Exxon, Shell Sign Final Deal for Iraq’s West Qurna 1 Oil Field', Royal Dutch Shell, 25 January 2010.& Shell to Replace Exxon at West Qurna http://www.halliburton.com/en- US/search/default.page?k=iraq&page=1

184 building new facilities and processing plants to increase gas processing capacity to 2 Bcf per day.

The joint venture is considering the construction of a liquefied natural gas exporting facility, the Basra Gas LNG Project414. Under the agreement, processed gas would go first to the South Gas Company for power generation.

D.3. Engineering, Procurement, Construction Management (EPCM)

The Engineering, Procurement, Construction Management (EPCM) may be defined as primarily a professional services contract. Although very similar in many ways to a typical construction management approach, there is a real difference where the detailed engineering and design functions are carried out by the EPCM contractor415. The responsibilities of the EPCM contractor includes the collection of materials, the gathering of equipment, the management of construction contracts, the actions of administrative duties, the production of basic engineering, and the development of detailed designs. A major difference between the EPCM and EPC form of contract can be highlighted by the fact that the contractor from the former model is the one providing the professional services. The contractor in this model is not the direct party member listed in the contract paperwork, with respect to the construction project416. Instead the group acts as the party’s agent and assists in creating contractual relationships between both the owner and the suppliers and service contractors. Each trade agreement is a contract formulated between the owner and the trade contractor or services specialist. As is the case with most

414 Country Analysis Brief: Iraq, https://www.eia.gov/beta/international/analysis.cfm?iso=IRQ 415 EPC vs EPCM, https://plexusconsultants.wordpress.com/services/epcm/engineering-services/epcm accessed 416 Project Profiles and Contract Types, http://www.the- eic.com/EICDataStream/EICDataStreamGlossary/ProjectProfilesandContractTypes.aspx

185 construction management firms, the owner places importance in having a large and experienced in-house team to assist the EPCM contractor with both the management and administration of these contracts. Although the EPCM contractor is financially compensated and tasked with these specific duties, the owner must still acknowledge its responsibility to keep a watchful and careful eye on the performance of their employed partner for reasons that will be discussed417.

It is the owner that shoulders the ultimate responsibilities when it comes to mitigating and solving the problems that arise under the contractual obligations between both parties.

Problems between both the trade contractors and owner may involve interfaces between trade contracts, delays, disruptions, claims for supplementary financial support, and property and work damage claims. The role that the EPCM contractor plays is that of a consultant for the owner, and therefore is not a party to any dispute which may arise between both the owner and trade contractors. The responsibilities of the EPCM contractor does not usually entail the delivery of the completed project by a completion date, therefore making it rare for liquidated damages provisions to be made418.

Additionally, the EPCM contractor will not assume responsibilities for the ultimate cost that the owners may experience for completing the project. However, incentives may be implemented and are often built into the EPCM contracts to address this issue of cost responsibilities419. Major potential liabilities of the EPCM contractor may involve a negligence or breach of contract in the performance of design work, the preparation of the cost estimate, estimated duration of the work, managing the procurement and

417 Amit Prajapati, EPC - Engineering Procurement Construction, 2014 https://www.linkedin.com/pulse/20140722061227-37950493-epc-engineering-procurement-construction 418 Statoil lets FEED contract for Trestakk subsea tieback, http://www.ogj.com/articles/2016/02/statoil-lets- feed-contract-for-trestakk-subsea-tieback.html 419 James A. Baker, Iraq’s oil sector past, present and future, Rice university, Houston 2007 p, 20

186 administration of the trade contracts, and the co-ordination of the design and construction between the trade contractors. EPCM contracts are also commonly used for the construction or expansion of large-scale heavy engineering facilities or manufacturing plants in the petrochemical oil and gas, mining, and energy sectors. With these contracts, engineering and project management skills are more likely to be separate to construction and supply capabilities. EPCM contracts are not generally used for civil projects, except for when the project can be delivered by relatively small, self-contained packages awarded to multiple contractors.

There are, of course, many other differences between the EPC and EPCM models of contracts. One fundamental difference is that the EPCM contractor does not perform construction work and take responsibility for delivering the completed project. As with any project delivery method, deciding whether an EPCM contract is appropriate can be a complex process, and requires a rigorous analysis of objectives, constraints and key risks in order to address suitability on a transaction-specific basis420. There has been a noteworthy rise in the use of the EPCM contract procurement route for international infrastructure and major construction works. Although history shows that this method of obtaining contracts was used in the minor sector, its use has shown greater prevalence in other sectors of construction. The EPCM contracts have seen a greater rise in projects within the petrochemical and mining sectors, in addition to the power and desalination sectors421. To avoid confusions with regards to how EPCM contracts operate, one must be able to distinguish between both the ideas of construction versus construction

420 Ail Abdullah al-Salem, Contracting practices in mega projects EPC and EPCM, King Fahd university of petroleum and minerals construction engineering and management department 2011. P.12 421 Phil Loots and Nick Henchie, EPC and EPCM Contracts Risk Issues and Allocation, http://fidic.org/sites/default/files/epcm_loots_2007.pdf

187 management. It is the latter that defines how EPCM contracts act on the owner’s behalf, as the contractor does not build or construct, but rather develops, designs, and manages the construction process itself. The distinction between both major contracts can be summarized as follows. The EPC contract involves a single contractor taking responsibility for all elements of the designing and engineering, construction, and procurement process. While in contrast, the EPCM contract is a professional services contract which has a radically different risk allocation procedure and implementation.

D.4. Consulting Service Contract

The first consulting service contracts consist of the following: an offer, an acceptance of terms, valid considerations of said terms, mutual assent, and a legal framework to ensure all requirements are met. The inclusion of both the contract title and parties involved in the agreement are also needed. When writing up this section, a detailed description of all party members is necessary as well. Common parties typically involved include both the contracting company and the consultant. It is the consultant’s services that the company is typically seeking through the finalization of a contract. Detailed information of both the considerations of each party and the consulting services are outlined in the consulting services contract. The specific services that are expected by the consultant are addressed in the contract422. The issues of compensation for the services provided by the consultant are also summarized. Some contracts dictate that periodic payments be made during the period of time that the services are provided, while others stipulate that a lump sum amount be paid at the end and termination of services. The role of the consultant as either

422 Contracts for Services vs. Goods: What's the Difference, https://www.rocketlawyer.com/article/contract- for-goods-vs-contract-for-services-cb.rl

188 an employee or independent contractor is also listed in the contract. This distinction is important and should be laid in the contract as to how the consultant will be treated. Most of the time a consultant will be employed as an independent contractor. If the consultant is to be defined as an independent contractor, that relationship needs to be labeled clearly by spelling out how and why the consultant will keep his or her independent status.

Included in the contract are stipulations that state the consultant would have to waive his or her rights to regular employee benefits.

These benefits include, vacation pay, sick leave, health benefits, or other employment perks. The contract length of employment is also put in place via the contract. An acceptable provision may state: “The term of this agreement will begin on the date of this agreement and will remain in full force and effect until the completion of the services.”

Term extensions to this contract may be done as long as written notices are given by both parties. These contracts say that they specialize in providing for services, without the supply of any equipment or goods. The contract will outline the series of contracted activities along with each of the specific goals assigned for each task. The method of accomplishing these goals will also be outlined in the contract according to the specifications desired by the party seeking the services423. The resources required for accomplishing the work may also be included such as funding activities, and the different use of sources such as money, time, equipment and workers. Contracts can also cover some types of hydrocarbon activities including: exploration, development and production licensing. Oil, non-associated gas, gas condensate, heavy oil, oil sands and shale gas may also be included in the contract. Experiences in standards and stock exchanges may also be included, along with experiences in the Petroleum Resources Management System

423 Deer park service agreement, not to publish, p .1-6

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(PRMS), Field Development Plans (FDPs) Development of feasibility, conceptual and detailed level FDPs, Auditing of FDPs Subsurface, and integrated FDPs FDP risk assessment. Other experiences in oil, non-associated gas condensate fields, sandstone and carbonate reservoirs will also be of benefit if mentioned in the contract. Integrated geological and reservoir engineering models, industry-leading software, developed reports and data sets, and finally Geophysical Services may also be included in the contract.

A review of existing geophysical data, interpretations, methods and analysis and risk reduction may improve the production delivery of a ranked prospect inventory and drilling program. Lastly, Field Development Planning can provide for optimum well placement for field development.

D.5. Goods or supply of Services Contract

This contract covers conditions and agreements between both the State and the IOC supplier of goods and services. The Goods can be generalized as a term that includes all parts set out in the order requested by one party member. The Services include all tasks performed by the supplying party as is set out in the contract to also include the provisions of any deliverables. The Supplier is the firm or party that has attained the goods or services that the other party is looking for. Prices and method of payments of these goods and services are mentioned within the contracts. Prices are quoted and stated in writing and should be inclusive of all related costs such as packaging, shipping, and insurance. No extra charges should be incurred, unless agreed in writing, thereby protecting all parties involved from unexpected fees. A Sub-Contract may also be used as

190 a means to create an agreement between two or more suppliers at any stage of a subcontracting chain424. The purpose of this form of agreement is to assist in the tasks required to accomplish the major needs of the original contract. When undertaking the task of delivering goods, the supplier must ensure that all goods are properly packed, secured, and stored in a manner that enables them to reach their final destination in the appropriate condition, in accordance to contractual obligations. Each of these deliveries should also come accompanied by a note that displays the date the order number, the specified type and quantity of the goods, and special storage instructions. Additionally, this note should also include information on whether or not further installments need to be made to accomplish the final result, and the outstanding balance of goods remaining to be delivered. The supplier has the responsibilities to ensure that the goods delivered correspond fully to their description and applicable specifications. Goods are to be of satisfactory quality, free from defects in design, material and workmanship and remain so for 12 months425. Once the delivery is made, the responsibilities do not stop there, as all applicable statutory and regulatory requirements relating to the manufacture, labelling, packaging, storage, handling and delivery of the goods must be in check. The supplier must also ensure that it maintains all licenses, permissions, authorizations, consents and permits that are needed to carry out its obligations under the Contract. When the service provider is located in Iraq, a list of procedures must be followed prior to conducting business activities as outlined in the contract. This specifically applies to those contracts

424 Christopher M, china supply chain management issues in the oil and gas industry, journal of business and economic, California state university Vol.5, June 2007 p.28. 425 There is not a special law contracts until now, but Iraq mainly they use Civil Law No. (40) from the year 1951. In recent years, it is used, mainly by the courts in addressing the legal aspects of contracts and disputes from arising issues. In addition, a set of documents released by the Ministry of Planning is used, including. (. Implementing Regulations adopted in 2008, as amended, for general government contracts).

191 where the parties involved in the delivery of goods or services and the place of payment is inside Iraq. The vendor or service provider may have a branch office in Iraq, and the contract may be signed by that branch or office representative. Any other company official may be authorized to sign a contract, so long as they are a resident of Iraq. The contract’s legal formalities and requirements are to be completed along with the details of payments, regardless of the currency used. Other topics to be stated and mentioned in the contract involve customs clearance, payment of customs duties, the opening of letter of credit, and any related procedures taking place in Iraq426.

426 Using General Conditions for civil engineering for the work of electrical, mechanical, and chemical engineering.

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Chapter IV: From the Past to the Future

Historically, 50 to 60 percent of Iraq’s arable land has been under cultivation427. Because of ethnic politics, valuable farmland in Kurdish territory has not contributed to the national economy, and inconsistent agricultural policies in the domestic market production. Despite its abundant land and water resources, Iraq is a net food importer.

Under the UN Oil for Food program, Iraq imported large quantities of grains, meat, poultry, and dairy products428. Experts predicted in 2004 that Iraq will be an importer of agricultural products for the foreseeable future. Long-term plans called for investment in agricultural machinery and materials and more prolific crop varieties. Such improvements did not reach Iraq’s farmers under the Hussein regime. In 2004 the main agricultural crops were wheat, barley, corn, rice, vegetables, dates, and cotton. The main livestock in 2004 were cattle and sheep. Despite its many rivers, Iraq’s fishing industry has remained relatively small. It is based largely on marine species in the Persian Gulf. In

2001 the catch was 22,800 tons. As one of the three most oil-rich countries in the world,

Iraq has the resources for complete energy independence. Production costs for Iraqi oil are relatively low by world standards. Three wars –the Iraq-Iran War from 1980 to

1988429, the Gulf War in 1991, and the Iraqi Invasion of 2003– have resulted in disputes over exploitation of Joint oil fields and reduced production. In addition to the UN sanctions, which lasted for twelve years from 1991 to 2003, left the industry’s infrastructure in poor condition with huge debt.

427 Joy Gordon, When Unilateralism Is Invisible, A Different Perspective on the Oil for Food Scandal, Global Governance 2007 p.59 428 Library of Us congress, federal research decision, country profile Iraq,aug.2006, p.11 429 Anne Marie Johnson, Financial and Economic Consequences of the Gulf War, Iraqi Responses, 1987. 22.

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Section A: Oil fields crossing international borders

Oil is one of the most important natural resources that are in the depths of the lower layers of the earth's surface, seabed, ocean floor, and subsoil. Nature has identified some areas of the world without the other's oil riches. Sometimes the rights of States interfere in the ownership of oil reserves in the wells located on cross-borders, leading to some legal disputes with regards to the exploitation, management, and development of joint fields. Also in legal dispute is how to divide the amount of oil that exists between those countries, as each one will try to lay claim to the largest amounts possible430. The questions as to how these countries will share these natural resources located on cross- borders will no doubt raise multiple disputes with regards to ownership, responsibilities, and compensation. These concerns have clear economic, legal, and political effects on sovereignty, property rights and ownership of natural wealth. International borders the state consists of three elements, which are its people, its territory, and the sovereignty of the state. In order to exercise its sovereignty over its territory, the state must have a well- defined border that encapsulates its territory. The borders of the state are not just the lines drawn on maps but of other importance is the view and perception of the public. It is the people therefore that influence the determining regional scale for each state.

There are several definitions used to try and define what border lines are. The first school of thought by scholars of international law defines borders as the line that begins and then

431 ends with two contiguous regions . In the second school of thought, scholars also define borders of the state as lines that distinguishes the borders of the region, which it exercises

430 S.w. Buffs, international Boundaries, New York, 1966,p 5. 431 B. Rintoul, west coast offshore, pacific oil world, Vol.64,Part II,1971, P.58.

195

432 sovereign rights . Of the two definitions stated, note that they agree on the idea that the international boundary is a dividing line between the territories of the States by which the point where the sovereignty of one nation ends, the sovereignty of another nation begins.

In other words, the international border is composed of two elements, where the material element is the interval between the regions’ international lines, and the intangible element are the lines that represent the beginning of a sovereign state of one country and the end of sovereignty of another. The International Court of Justice confirmed in the case of the continental shelf of the Aegean between Turkey and Greece, that the establishment of the boundary between the neighboring countries means to determine the exact line of the convergence regions over which the authorities and the sovereign rights by the designated countries. In this case, Turkey agreed in September 1973 to grant the Turkish Petroleum company privileges for oil in some areas of the Aegean Sea, which was located on

Greece's continental shelf of the islands and its affiliates433.

Therefore, Greece sent a memorandum to Turkey on February 7, 1974, objecting to the legitimacy of the privileges granted by Turkey. Greece retained its sovereign rights over continental shelf areas adjacent to these islands based on international law Article (b) 1 of the 1958 Convention on the continental shelf and demanded accordingly, to set the shelf

432 Dictionnaire de la terminologie du Droit international public, sous le patronage de U.A.I. 1960, p 293. 433 The issue of the valuable assets in the Aegean continental shelf resulted in referral of Greece to the International Court of Justice in the dispute. It stemmed from negotiations with Turkey. Turkey did not appear before the court, but instead sent a letter to remind the Court that the conditions required for the continuation of negotiations were frank and serious, and as well that goodwill was available to solve the problem through negotiations contrary to the continuation of international judicial procedures. The court did not accept this argument by saying: The position of the Government of Turkey is to be construed as implying that the Court would be unable to consider the case as long as there are constant parties in the negotiation, and with the existence of negotiations conducted in a manner to prevent the exercise of jurisdiction in the case, and the court is not able to approve the viewpoint of Turkey because of negotiations and compromise that judicial considered from the sound means of settlement. C.I.J. Report, 1978, p. 8.

196 boundary between states on the basis of equidistance or median line between the islands and the Turkish coast. But Turkey responded to the memorandum of Greece in the

February 27, 1974, which indicated that the Greek islands, which lie near the Turkish coast, are not quite in its own continental shelf and objected to the possibility of applying the principle of equidistance. According to the fact that the territory of the State in the broad concept extends towards an endless height and down all the way to the bottom, the boundary line between the two countries runs up and down to determine the specific state authorities on what is above its territory from the air, and on what is in the soil depths of this region. Confirmation of the border between Poland and the Soviet Union was agreed on this concept, which stipulates that "the designated boundary line in the documents referred to valuable first article, also determines the vertical direction in the air and ground space”434. So is the protocol re-demarcation of the border between Iraq and Iran, which is the second article of which states that “the border line, which was appointed in

Article I and II of this protocol, also defines the direction vertical airspace and underground”435. Using this information, we can define the characteristics of the international border and include stability and stabilization features which emphasize the issue of delimitation and demarcation in agreement parties concerned on a sound legal basis.

These defined characteristics would enjoy a degree of consistency and stability so that they cannot be modified by use of force or threats on the Vienna Convention of 1978, on

434 “the frontier line as defined in the documents referred to in Article I shall also divide vertically the air space and the subsoil” U.N.T.S, Vol.420,1962.13 435 the provisions of this protocol printed in international legal materials, 1975, No.5, p1136

197 international succession of States in respect of treaties establishing the limits436. To confirm land property claims, many judicial verdicts of disputed international boundaries have been used such as the opinion of the International Court of Justice, issued in

November 1925 concerning the interpretation of Article 2.3 of the Lausanne Treaty between Turkey concerning the city of Mosul437. The International Court implemented a guide in its judgment of the maritime boundary between Canada and the United States in the Gulf of Maine conflict. The guide came to the conclusion that neither party could determine the maritime border alone especially if it was deemed that it benefited directly from such proposed claims. Agreements need to be made between both parties through the use of negotiation in order to arrive at a unanimous decision for both parties438.

Property agreements not only deal with international borders located on land, but also include the maritime borders between opposite coast states. Therefore, the new reference to principles governing judicial settlement on the international border disputes can be derived from the most important principle of the borders inherited from colonization.

The principle of uti possidetis juris was inherited from the colonial borders of countries of the American continent, which were liberated from the colonial Spanish and ratified into the International Court of Justice in its ruling in the case of the land border conflict and marine islands (El Salvador against Honduras with overlapping Nicaragua)439. Each

436 A.O. Cukwurah, the settlement of boundary disputes in international law, Manchester university press, 1967, p122 437 Leslie moses, some legal and economic aspects of unit operation of oil fields 1943, p.758& Advisory opinion of the permanent court of international justice, serial B.No. 12 p. 2. 438 Case concerning delimitation of the maritime boundary in gulf of (Canada v.USA) judgment of Oct. 12 ICJ Reports, 1993, Maine Area p.248.Mcrae, Adjudgment of the maritime boundary in the Gulf of Maine Y.B.I.L,1979, P.292 439 “The principle of Ute Possidetis juris should apply to the waters of the gulf as well as to land”. Case concerning land, island and maritime Frontier Dispute (El Salvador v. Honduras), of 11 sept 1992, I.C.J. Report,1992, p.589

198 of the conflicting parties’ rights was acquired and inherited from Spain as they were the

Colonial power for each region, whether on land or sea. The second principle includes both the principle of stability and finality. According to this principle, the need for international limits enjoys a degree of consistency and stability. This does not mean an absolute stalemate or limit for this and is contrary to the principle of the use of force and threat of force against the territorial integrity. The application of this principle can be found in examples such as the Vienna Convention on the Law of Treaties of 1969, and the Law of Treaties between States and International Organizations to Gam 1986 Article

1-62 where the changing conditions was grounds for termination of treaties. The final principle is closing (estoppels) one of the most important general principles of law. The

United Nations, recognized by Article 38-B of the Statute of the International Court of

Justice, added this concept taken from the principle of good faith to deprive each party in a lawsuit of taking positions with the above principle.

A.1 Joint oil fields

When you cross the borders of the state and begin the limits of another state, it is the boundary between the different state properties of the wealth of natural resources, whether the border extends vertically to infinity in height and extends to infinity in the rear440. The State may tap into everything that exists in its sole territory indefinitely in the ground. This does not pose a legal problem for the fields and combinations of oil and gas, which lies entirely within the province of one country, especially if exploitation does not affect or prejudice the oil reserves found in the sole territory of a neighboring state or

440 In this meaning, Oppenheim, international law, vol. l, pp.501-502

199 cause other damage.

The State bears international responsibility for them, and can exploit these fields under national rules of domestic law which regulate property rights, define the rules of exploitation and the province's oil wealth laws. Because the state has the right to exploit the oil fields located in its territory, it is supposed (a) to keep track of sound technical assets used in oil production operations; (b) to avoid damage to the neighboring country;

(c) to take reasonable measures to ensure the prevention of any damage to the joint production or source of energy waste; (d) to prevent pollution the environment, and (e) to assure appropriate precautions are taken to prevent wasting energy or damage that happens to the oil and gas beneath the surface of the ground or above in drilling and production operations. Mainly, a state is also committed to respect the rights of other countries in their sovereignty and property, and not compromising reserves of oil or gas in the in the border areas between the two adjacent common fields.

Accordingly, the joint oil field in fact constitutes a connected indivisible area, and the natural characteristic of the oil is different from other natural resources. Oil is not leaking from aquifers under the surface of the earth to others. It can otherwise be transmitted within the field-scale cross-border between neighboring countries by low-pressure areas that arise as a result of the start of production from certain areas of oil field441. From all of the above, we can see that a joint oil field is the field that will be an extension of terrain across the borders of two or more neighboring states, or starts in one and ends in another. The ownership ratios vary for joint oil production in the field, according to the

441 The judgment issued by the supreme court of Texas, 1948, in case Elliff v. Texas drilling company, https://casetext.com/case/elliff-v-texon-drilling-co

200 oil reserves of the field relative to another and from one country to another, as well as by the nature of field configuration, the depth of field and the type of rock, and the method of exploitation and investment in terms of drilling and exploration and extraction. An example of such a field is the Kuwaiti-Iraqi field (North Rumaila), which starts from the city of Basra, Iraq and extends within the borders of Kuwait province. This is one of several giant fields. In addition to the Iran-Iraq fields are the Majnoon field, as well as the

Saudi and Kuwaiti fields (Khafaji), as well as fields in Britain, Norway, and Denmark

(North Sea oil fields)442, as well as such fields in Russia, Kazakhstan, Azerbaijan,

Turkmen, Georgia, and Iran (fields of the Caspian Sea).

It is noteworthy that US oil ownership laws were originally based on English wild game laws. It was reasoned that underground oil was like a wild animal roaming the territory, and whoever captured it owned it!

A.2. Types of joint oil fields

Shared bilateral and group fields as also divided according to the location, which lies among the wilderness of fields and other marine areas. We refer to them briefly as First fields depending on the number of participating States which have bilateral and joint oil fields. Examples of fields that are located between the borders of two causing the division include oil fields between Iraq and Kuwait and between Saudi Arabia and Kuwait.

Common fields are those in which the location extends within the borders of more than two triangular areas involving three other countries or regions. Examples include fields between Britain and promotion fields, and Denmark (North oil fields) plus the fields of

442 Case concerning North Sea, ICJ Report, 1969, para 94, 97, 99 and 101.

201 the Caspian Sea as mentioned earlier443.

Second Fields that are classified according to the place they are located on shared ground and fall within the land borders of the states’ parties involved in the field, whether the fields land stretches between two or more owners. Most of the Iraqi and Kuwaiti joint and

Saudi Arabia's oil fields are of this type, and there are no such fields offshore for these countries. Common maritime fields are located within the International maritime boundaries of two or more countries, such as those of the Caspian Sea. It is observed that the most important oil fields with common characteristics are the giant fields in terms of large production and huge inventories of oil. A cross-border field is one where the borders of two or more unlike national fields are within the regional framework of a single state. They require exploitation in common and need to conclude bilateral or multilateral agreements between the States concerned.

The international practices apply some basic legal principles that take into consideration their special requirements. Finally, we can say that bilateral or multilateral conventions for the exploitation of joint oil fields are often ignored in the absence of agreements.

Those principles are designed to deal with all the problems that one might experience from the multiple aspects of the exploitation of joint oil fields, and to reduce or prevent conflicts among producing countries.

443 B. Jones, law of the sea oceanic resources, Dallas, press university, 1972, p.39.Ch park, oil under troubled water, the north East Asia seabed controversy, Harvard journal of international law, Vol.14,1973,pp.227-228

202

Section B: The problems with Past claims against Iraq oil and gas

Debt can be defined as the amount that a central government is required to borrow in order to cover expenses that cannot be covered via tax revenues. There are multiple categories of debt that the central government must deal with such as public, national, and sovereign. One method for achieving the financial capability of undertaking government operations is through borrowing capital. Another method involves the government creating money in order to monetize their debts, which in return removes the need for paying interest. Although this may assist in reducing government costs in interest, it does not truly cancel the debt amount and may result in hyperinflation. Any

Nation that borrows money from foreign countries or entities is contractually obligated to pay back the principal amount, along with interests that accumulate. This may occur if a central government of a nation seeks out a commercial arrangement with foreign entities in order to purchase goods or services. The central government of Iraq has had a history of being indebted to others. In the past Kuwait had refused to provide financial assistance or payment of any means to the nation of Iraq444. On July 25th 1990, OPEC officials had declared that the Kuwaiti government along with the United Arab Emirates had come to an agreement. It was proposed that a daily limit of 1.5 million barrels of oil output would be enacted in order to potentially settle the differences between Iraq and Kuwait with regards to oil policies. Despite these efforts, an Iraqi invasion into Kuwait resulted on

August 2nd 1990445. The Iraqi Army deployed a squadron of helicopter gunships in

444 Rex J. Zadalis, Claims Against Iraqi Oil and Gas, Legal Considerations and Lessons Learned, Cambridge, 2009 p. 69. 445 Thomas W. Walde and George K., International oil and gas investment, Moving Eastward, Academic publishers group, London/ Dordrecht/Boston, 1994 p.26.

203 support of military units and operations. The capital city of Kuwait was targeted and bombed by the Iraqi military aircraft.

Twelve resolutions by the UN Security Council were then passed, demanding the immediate withdrawal of all Iraqi forces from Kuwait446. The world was watching and unanimously condemned the Iraqi invasion and occupation of Kuwait. Countries such as

India and France, that had once been considered allies to Iraq, were now calling for the immediate withdrawal of Iraq’s military from Kuwait. Countries such as China and the

USSR further sought Iraq’s cooperation by enacting an arms embargo on the nation. It was not until August 3rd 1990, that the UN Security Council passed Resolution 661, officially condemning the invasion of Kuwait by Iraq, and demanding that they withdraw their forces. Members of NATO were especially critical of Iraq’s actions to invade and occupy Kuwait. The United States led the movement in late 1990, by issuing Iraq a warning to withdraw all its forces from Kuwait or face military intervention447. Through

Iraq’s refusal to withdraw, the United States and its allies entered into the conflict via military means, with the goal of protecting Kuwait. The entire Iraq-Kuwait war lasted a total of seven months. In the process of retreating in 1991, the Iraqi military set many

Kuwait oil fields on fire. It was reported that an approximate number of 605 to 732 oil wells were set ablaze448. The fires were initiated around January and February of 1991, and lasted until the time period of April to November of that same year. The incineration of the oil fields during the Iraq-Kuwait War was considered a major environmental crime

446 Mamdouh G. Salameh, Oil Wars Centre for Energy Management (RCEM) at the ESCP Europe University, London, 2014 p.17 447 Austvik Ole Gunnar, the war over the price of oil, International Journal of Global Energy.Vol.15, No.2/3/4 (1993) p.89 448 Middle East Iraq https://www.cia.gov/library/publications/the-world-factbook/geos/iz.html

204 perpetrated by Iraq449. The consequences to Iraq for invading, occupying, and causing environmental crimes were great themselves450.

They include the financial and trade embargo put in place by the United Nations Security

Council that began August 6th 1990 and remained up until the month of May 2003.

Reparation initiatives still persist today, including some that will extend until 2017 or

2018. It can also be noted that the UN was divided into six different categories, labeled from A through F. The first four were responsible for the claims made by individuals and families. The last two were responsible for claims made by companies, governments, and international organizations. The sanctions that were initiated by the UN and imposed on

Iraq were for the state purposes of compelling them to leave Kuwait, pay the reparations due, and to disclose and eliminate their alleged programs for weapons of mass destruction. Initial economic sanctions placed on Iraq by the UN Security Council in accordance to the United Nations Security Council Resolution. Iraqi representatives reported to the United Nations Security Council in 1991 that the total external debt load had reached an amount of $42 billion, not including interest amounts. Later in 2003, it was reported that the estimation of debt for Iraq was $383 billion and was highly distributed to multiple claimants. Of that amount, about $57 billion was associated with awaiting commercial obligations for goods and services to be given to Iraq451. Of that same total amount, $127 billion was due to current contractual debt from loans and other borrowing services in addition to credit purchases by the Iraqi government. Lastly, an

449 UNSC Res 687 (8 April 1991) UN Doc S/RES/687. 450 UNSC Res 661 (6 August 1990) UN Doc S/RES/661. 451 Thomas Wälde and Abba Kolo, Environmental Regulation, Investment Protection and Regulatory Taking in International Law, In & Comp, 2001. p.42

205 approximately $199 billion of the debt amount was related to UN claims452.

B.1. Paris club

The earliest beginnings of the Paris Club began in 1956 as an informal group of officials representing creditor countries. Their role was to help create sustainable solutions for countries in debt that were having troubles making payments453. The Paris Club provided a debt-treatment plan that assisted in rescheduling debt payments for the debtor countries that were going through reforms themselves in order to stabilize and restore their macroeconomic and financial future. More specifically, this debt relief was accomplished by postponement of payments, concessional rescheduling of debt payments and a reduction in expected services during a particular time frame. Ten times within a year, creditor nations would meet in Paris, France for a tour d’horizon and conduct negotiations. This event was chaired by the Director of the General Directorate of the

Treasury of the French Ministry of Finance and Public Accounts. The Paris Club has been able to sign more than 430 agreements covering a total of 90 debtor countries, involving over $583 billion of debt from 1983 to May of 2014454. There are a total of twenty permanent members of the Paris Club and are listed as follows: Australia, Austria,

Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, the

Netherlands, Norway, the Russian Federation, Spain, Sweden, Switzerland, the United

Kingdom and the United States of America455. All of these creditors are given the permission to participate as observers in ongoing negotiation proceedings, regardless of

452 Cofer WR, Stevens RK, and Winstead EL, et al. Kuwaiti oil fires compositions of source smoke. Journal of Geophysical Research. Vol. 97, NO. D13, (1992) p.25 453 Paris Club principles and rules, http://www.clubdeparis.org 454 The Paris Club and International Debt, Congressional Research Service, www.crs.gov 455 Alexis Rieffel, The Role of the Paris Club in Managing Debt Problems. Princeton university 1985 p.16

206 whether or not they hold any claims on the nations involved.

In a similar light, if re-schedulable claims fall under a threshold limit called the “de minimis”, creditor nations of the Paris Club are allowed to participate in meeting as observers even if their claims are not the ones that will be rescheduled. Another way to participate in negotiation sessions as the observing party is through agreements conducted by both the permanent member of the Paris Club and the debtor nation456. In order to be able to remain as an observing party member, the invited creditors must act in good faith and follow various practices. Various nations have participated in Paris Club agreements as the observing party member. They include nations such as: Abu Dhabi,

Argentina, Brazil, People's Bank of China, Korea, Kuwait, Mexico, Morocco, New

Zealand, and Portugal. There are three different types of observing-part categories457.

The first includes those that are representatives of international institutions with examples that include the International Monetary Fund (IMF) World Bank, the

Organization for Economic Co-operation and Development (OECD), the United Nations

Conference on Trade and Development (UNCTAD), the European Commission, the

African Development Bank, the Asian Development Bank, the European Bank for

Reconstruction and Development (EBRD), and the Inter-American Development Bank

(IADB).

The second category includes representatives of the Paris Club’s permanent nations that are not directly affected by the treatment of debt as they themselves are not the creditors.

Rather, they wish to attend the negotiating table as an observing member. The third and

456 Rex J. Zadalis, Claims Against Iraqi Oil and Gas, Legal Considerations and Lessons Learned, Cambridge, 2009, 60. 457 Paris Club principles and rules, http://www.clubdeparis.org

207 final category includes the representatives of nations that lack membership the Paris

Club. This can only be done as long as both parties involved in the negotiating process agree to accept their presence as observers.

This high level of flexibility with dealing with the debtor countries is exhibited by the

Paris Club due to a lack of legal constitutive texts, and the presence of guiding principles and rules. Due to the fact that these are simply meant to guide the actions undertaken by the Paris Club, actions of negotiation are undertaken on a case-by-case basis for all countries involved458. Throughout the years, there was been a developing method for debt cancellation or rescheduling. One advantage that the Paris Club has is their ability to be able to change their rules whenever they deem necessary. One example of ever changing policies includes the fact that no debt stock cancellations were able to be made until the

1990s. Since then it has become a part of multiple agreements. One of the many astounding decisions came in November of 2004, when the Paris Club was able to cancel an approximate of 80% of the debt owed by Iraq. An additional nearly $30 billion in claims were canceled with further aid including the temporary suspension of Iraq’s payments until 2008459. The remaining 20% Iraqi debt was structured to be paid out from

2011 to 2028 over a 17-year time span and 34 semi-annual payments. The total reduction of 80% of the Iraqi debt occurred in three distinct phases. The first reduction in debt was

30%, which occurred in November 2005 when an agreement was signed. The second reduction of 30% of the total Iraqi debt occurred in December of 2005, with the final

20% in reduction occurring by the end of December 2008. The House of Representatives also reported that the GCC countries and both Saudi Arabia and Kuwait and Qatar

458 Lex R., Restructuring Sovereign Debt, The Case for Ad Hoc Machinery, Brookings Institution Press, 2003, p.11 459 Pairs club ANNUAL REPORT 2008.

208 submitted its demands to the International Monetary Fund and try to Iraq and through the delegation sent to negotiate with these countries in order to put out 100 percent, but did not take any decision on the settlement of those claims460.

B.2. Oil for food program

The Oil-for-Food Program was established in 1995 by the United Nations under the UN

Security Council Resolution 986461. The purpose of this program was to allow Iraq the ability to sell oil on the world market in order to be able to purchase food, medicine, and other humanitarian necessities for its citizens. This program was built to provide for the people of Iraq without boosting the military capabilities of the nation. The United State’s

President, Bill Clinton and his administration introduced the Oil-for-Food Program in

1995. This action was in response to concerns that the international economic sanctions placed on Iraq with the objective of demilitarizing Saddam Hussein after the first Gulf war, was negatively affecting the ordinary citizens of Iraq. Therefore, the program was created and instituted by the United States to help relieve the extended suffering of the

Iraqi people as a result of the sanctions placed on that nation from the UN after the invasion of Kuwait in August 1990. The sale of Iraqi oil with the purpose of purchasing food began in August 1991 with the Security Council Resolution 706. September of 1991 marked the implementation of Security Council Resolution 712 that confirmed Iraq’s ability to sell up to $1.6 billion in oil sales in order to help fund the Oil-for-Food

Program. Due to subsequent refusals by Iraq, a memorandum of understanding was

460 Total Iraq foreign debt of $ 39 billion, http://iraqidinarfacts.net/total-iraq-foreign-debt-of-39-billion 461 UNSC Res986{April 1995} UN Dos S/RES/986.

209 signed in May of 1996 to ensure the implementation of the resolution to the program462.

Therefore, the Oil-for-Food program began in December 1996, with the first shipments of food arriving by March of 1997463. Reports show that up to 60% of Iraqi’s population was highly dependent on the rations provided by the Oil-for-Food Program. Monetary funds were then apportioned to pay for war reparations to Kuwait464.

The remainder of revenues collected by the Iraqi government was then used to purchase regulated items that were not placed under the embargo and economic sanctions as governed by the UN. Reports help illustrate how the purchase of items by the Iraqi government were kept under the watchful eye of the international community. Purchases such as raw food items were immediately approved and expedited for shipment to Iraq.

Other requests such as pencils and folic acid were placed upon review and typically resulted in a process that took up to 6 months for approval465. Any requests for items that may have any potential application or link to chemical, biological, or even nuclear weapons was not granted authorization to the regime, regardless of what stated intended purpose. Unfortunately, records show that the UN governed Oil-for-Food Program was not a complete success as revenues collected by the Iraqi government were not fully utilized for the purpose of purchasing food. Large sums were used for UN staff and oil companies that accepted oil vouchers from Iraq. Prior to 2003, these oil vouchers added

462 Bell International control of Iraq oil how the oil for food program fits in and implication for future, Richmond Journal of Global law, and Business. Vol 1, (2004) p.8 463 Thomas D. Grant, the Security Council and Iraq, An Incremental the American Journal of International Law Vol. 97 2003.p.823 464 Frank R. Gunter, Corruption in Iraq Conflict, Costs, and Causes, http://martindale.cc.lehigh. edu/sites/martindale.cc.lehigh.edu 465 James Norman, Chalmers Charged in Iraq Trading Scheme, Platt’s Oil and Gas News, Vol.83, No. 72, (April 2005)

210 up to a total of 7.3 million barrels466. Scandals were involved with politicians and business men alike, taking advantage of the Oil-for-Food Program467. The program was officially terminated on November 21st 2003, with its major functions handed in to the

Coalition Provisional Authority. The remaining monetary value of the escrow account was about $14 billion, which was returned to the interim Iraqi government468.

466 Kenneth katzman and Christopher M, Blanchard, Iraq oil for food program illicit trade and investigation CRS report for Us congress, June 2005 p.19 467 Sharon ottoman, Iraq oil for food scandalhttp://www.cfr.org/iraq/iraq-oil-food-scandal/p7631, https://www.globalpolicy.org/security-council/42265-oil-for-food-programme.html Also see Paul A. Volcer &chairman Richard J. Goldstone and. Marke Pieth, the management of the united nations oil 5-for food program, http://news.bbc.co.uk/2/shared/bsp/hi/pdfs/08_09_05_volume4.pdf 468 Closure of the office the Iraq programmed, http://www.un.org/en/sections/where-we-work/middleeast/index.html

211

212

Section C: The uncertainty of the future: The Kurdish autonomous region

The Kurds are a people of Indo-European origin. They speak an Iranian language known as Kurdish, Kurdistan, or Greater Kurdistan "Land of the Kurds”469. That is an ancient name for a roughly defined geo-cultural region wherein the Kurdish people form a prominent majority population and Kurdish culture, language, and national identity have historically been based470. Kurdistan roughly encompasses the northwestern Zagros and the eastern Taurus mountain ranges “Kurdistan” is identified as four parts of Greater

Kurdistan, which include parts of southeastern Turkey, Northern Kurdistan, northern

Syria, Western Kurdistan, northern Iraq, Southern Kurdistan, and western Iran , Eastern

Kurdistan471.Some Kurdish nationalist organizations seek to create an independent nation

State of Kurdistan, consisting of some or all the areas with Kurdish majority. Others campaign for greater Kurdish autonomy within the existing national boundaries as Iraqi

Kurdistan comprising 40,643 Sq. KM and 4.7 million populations. It first gained autonomous status in a 1970 agreement with the Iraqi government, and its status was re- confirmed as an autonomous entity within the federal Iraqi republic in 2005. At the end of the First Gulf War, the withdrawal of Iraqi forces from three Northern provinces, Iraqi

Kurdistan emerged in 1992 as an autonomous entity inside Iraq with its own local government and parliament472. The relations between the Iraq central government in

Baghdad and the regional Kurdish government in Erbil cause constant irritation and

469 Castellino, J. International Law and Self-Determination. Martinuss Nijhoff Publishers, The Hague: 2000. & Zeynep N. Kaya, when sovereignty and self-determination overlap in claims to statehood: The case of Iraqi Kurdistan, London School of Economics, UK 2015, 20. 470 Iraq Kurdistan,http://www.self.gutenberg.org/article/whebn0000679693/iraqi%20kurdistan, . 471 Natali D. the Kurds and state evolving national identity in Iraq, Turkey and Iraq, Syracuse university press, New York, 2010 also see more http://pomeps.org/2015/08/17/when-sovereignty-and-self- determination-overlap-in-claims-to-statehood-the-case-of-iraqi-kurdistan/#sthash.XuQEjDQH.dpuf 472 Natali D. the Kurds and state evolving national identity in Iraq, Turkey and Iraq, Syracuse university press, New York, 2010.

213 controversy between Baghdad and Erbil because they have different opinions about how they deal with foreign companies. Erbil use sharing agreements and Baghdad used services agreements. The ownership of the resources is a matter that Article 111 of the

2015 Iraqi constitution indicates remains with all the people of Iraq473. In addition, there are many other challenges ahead. One of them is the relationship between the Central

Government and the Kurdistan Regional Government (KRG). Under the constitution,

Baghdad requires the Kurdish Regional Government (KRG) to share its own oil production with the rest of Iraq. The Kurds should then be reimbursed with 17 percent of the total nationwide budget, which is currently set at $105bn (£71bn). This is in addition to an agreement signed at the beginning of 2014 by the Iraqi Ministry of Industry and

Shell for a petrochemical plant in Basra474. It is uncertain at this point in time whether these two agreements are interlinked or separate projects. There are many other challenges to come of course, such as the progress of the contract re-negotiations with

International Oil Companies (IOCs) which is steady but slow. Steps are also being put into place to solve the obstacles that might prevent foreign companies from working in

Iraq within the current licensing framework475.

Iraq’s oil and gas sector is constantly undergoing active transformation. The country is expected to witness significant growth and attract new investments in the medium to long term future. Amidst the series of recent developments, commercial expertise is crucial to success, and development plans have the potential to impact the whole workforce.

Having a skilled workforce is the key to develop Iraq as a nation. In November 2011,

473 David Romano, oil deal between Erbil and Baghdad,2014 http://rudaw.net/english/opinion/041220141 474 National trade estimate report on foreign trade barriers, untied state 2014. 475 Rex J. Zedalis, Oil and Gas in the Disputed Kurdish Territories Jurisprudence, Regional Minorities and Natural Resources in a Federal System, USA, New York, 2012, 117.

214

Exxon challenged the Iraqi central government's authority with the signing of oil and gas contracts for exploration rights to six parcels of land in Kurdistan, including was one contract in the disputed territories just east of the Kirkuk mega-field476. This act caused

Baghdad to threaten to revoke Exxon's contract in its southern fields, most notably the

West-Qurna Phase 1 project477. Exxon responded by announcing its intention to leave the

West-Qurna project. As of July 2007, the Kurdish government solicited foreign companies to invest in 40 new oil sites. The government hopes to increase regional oil production over the following 5 years by a factor of five, to about 1 million barrels per day (160,000 m3/d). Gas and associated gas reserves are in excess of 2,800 m3/d.

Notable companies active in Kurdistan include Exxon, Total, Chevron, Talisman Energy,

Genel Energy, Hunt Oil, Gulf Keystone Petroleum and Marathon Oil. Other mineral resources that exist in significant quantities in the region include coal, copper, gold, iron, limestone (which is used to produce cement), marble, and zinc. The world's largest deposit of rock sulfur is located just southwest of Erbil. In July 2012, Turkey and the

Kurdistan Regional Government signed an agreement for Turkey to supply the KRG with refined petroleum products in exchange for crude oil. Crude deliveries are expected on a regular basis.

476 Petroleum and mineral resources, http://copenhagenerbil.dk/business/krg%20economy.html 477 Gulf Keystone Petroleum Limited Annual report and accounts 2012 Directors, www.gulfkeystone.com & http://www.gulfkeystone.com/operations/kurdistan-region-of-iraq

215

C.1. Oil and gas in Kurdistan

The KRG have a large natural resource base, plus significant potential to export gas even with a fast-growing domestic demand. In 2012 Iraq become OPEC's second largest oil producer. This development was fueled in part by the output gains in the Kurdistan region. In addition, already established European markets, coupled with the expanding needs of the developing economy of Turkey, bring further opportunities to Kurdistan, where the potential for export is immense. As result of its vast oil reserves and production capacity, the Kurdistan region is quickly becoming a powerful player in the world energy markets. At present the region is home to a total 57 oil and gas field. That is why The

KRG and the federal government in Baghdad agreed to a draft revenue sharing law for

Iraq in June, 2007478. The KRG Minister for Natural Resources discussed the draft revenue sharing law and hydrocarbons policies of the KRG and the Iraqi federal government at a UN hydrocarbons conference in April 2009. In May, 2009, the companies OMV and MOL announced investments to access natural gas from the

Kurdistan Region for local supply and export through the Nabucco pipeline479. Also,

KRG has signed oil & gas production sharing contracts under the Iraqi Constitution and the Kurdistan Oil and Gas Law. As an example, on June 25, 2008, KRG and Korea

National Oil Corporation signed a new petroleum contract480. I agree with the Legal and economic opinion that oil and gas contracts in the Kurdistan Region are “far superior” for

Iraq than the model contract proposed by Baghdad’s federal oil ministry because this type of contract encourages foreign companies to increase investment and the search for new

478 The Kurdish law of Oil and Gas No. 22 of 2007 publishes in Kurdistan Official Gazette 15 November 2007 479 http://www.danagas.com/en/pressrelease/media-center/press-releases/mol-and-omv-join-dana-gas-and- crescent-in-kurdistan-region-of-iraq.html 480 Korea National Oil Corporation, http://www.knoc.co.kr/ENG/sub03/sub03_1_5_1.jsp

216 oil fields in the region. The current markets for Kurdish gas are domestic.

Turkey purchases (with possible onward transit to Europe), federal Iraq policies, and current gas-flaring challenges may lead to shortages, especially in Baghdad. KRG is currently producing about 3.5 BCM annually entirely for domestic electricity generation, according to Manaar Energy’s figures, and it has plans to export 5 BCM/year by 2019 and 10 BCM by 2020 to Turkey481. With longer-term internal demand in the range of 10

BCM, these plans are consistent with a discovered resource base that could support 28

BCM/year or more of production from 2020 the gas pipeline to Turkey is expected to start operating by 2019, and the feasible export price of gas from KRG to the Turkish border within the range of $3.50 – $6.59/MMBTU is quite competitive compared to current Turkish gas imports prices from Russia at a base price $8.75/MMBTU, and from the Caspian region at a base price of $7.16/MMBTU482. The Kurdish gas price for

Baghdad of $3.50 to $3.80/MMBTU would also have a significant advantage over the current prices of Iranian gas supply to Bagdad in the range of $8.80 to $9.19/MMBTU.

Although general production levels in Kurdistan tend to fluctuate, estimated current output revolves around the 200,000 barrels/day mark483. We can see that crude oil exports from the KRG could rise to 1 million barrels/day in 2015 and to 2 million barrels/day by

2019. Critical investments needed to sustain such ambitious plans are still lacking, as investors remain wary. Nonetheless, the opening of a pipeline linking the Kurdish fields

481 Ekaterina Pokrovskaya, Dispute Between Baghdad and Kurdistan Holds Back Iraqi Oil Potential July 2015, http://oilprice.com/Energy/Crude-Oil/Dispute-Between-Baghdad-and-Kurdistan-Holds-Back-Iraqi- Oil-Potential9153.html 482 Iraq's Kurds bypass state for oil exports on way to more control, http://www.dinarupdates.com/showthread.php?15752-The-Dinar-Daily-Friday-July-17-2015/page4 483 EUCRS Department of war studies, Iraq Kurdistan capital of oil and gas exploration what does mean for Europe, London http://www.leadingtowar.com/watch_online.php?gclid=COKeh_a699ECFWsW0woduywLRQ#/playlist1/l ocal1

217 with the Turkish port of Ceyhan in December, 2013, provided the general capacity for increased exports. The KRG will receive from Turkey a number of products in exchange for exported oil instead of direct payments.

KRG planned to increase oil exports through the Kurdistan crude oil pipeline to Turkey to 400,000 to 500,000 b/d by the end of 2015484. The net cash received by KRG during this period could total $1.7 billion. The KRG has also received an additional $500 million in prepayment from committed purchasers of oil crude for deliveries to Ceyhan. Under the terms of the 2005 Iraqi constitution, KRG cannot sell the oil itself, but must hand it to the Iraqi State Oil Marketing Organization (SOMO)485. Baghdad in turn gives KRG 17 per cent of total Iraqi oil revenues as a budget payment486. The KRG has started selling its oil directly through Turkey, aided by a new pipeline that linked the Kurdish oil fields directly to its northern neighbor, allowing exports to proceed despite Baghdad’s opposition. That is leading to a breakdown of the agreement between KRG and Baghdad.

When Baghdad claimed in 2014 that KRG was selling oil independently of SOMO, it stopped the province’s budget payment. This caused a budget crisis for KRG Although

Turkey initially pledged to await a solution between the KRG and Baghdad before allowing exports from its port, by the end 2015, 1 million barrels of Kurdish oil may loaded at Ceyhan, with another 2.5 million barrels waiting in storage tanks487. Norway’s

DNO and the UK’s Gulf Keystone were also caught in the standoff between the Iraq’s

484 Kurdistan oil exports ramping up, says MNR, Nov 2014, http://projects.zawya.com/Kurdistan_oil_exports_ramping_up_says_MNR/story/ZAWYA20141124124850 485 State Oil Marketing Organization (SOMO), http://www.oilvoice.com/Description/State-Oil-Marketing- Organization-SOMO/77b48adb.aspx accessed 28 August 2015 486 Rex J. Zedalis, foundations of Baghdad Argument that regions lack constitutional authority over oil and gas development, journal of energy and natural resources Vol.26 No.303, 2008,26. 487 International crisis group, Iraq and the Kurds, the high stakes hydrocarbons gambit, middle east report, April 2012, p.28.

218 central administration in Baghdad and the Kurdish Regional Government (KRG) over how the spoils of Kurdistan’s oil reserves should be shared.

The KRG oil reserves are huge, amounting to roughly a third of those in Iraq, where one in ten of the world’s accessible barrels are to be found. Kurdistan is among the cheapest places to drill for oil on earth. The total cost per barrel – a measure that includes exploration and extraction spending – is around $12, compared with about $50 for US shale,

C.2. Oil and gas dispute between Baghdad and Erbil

The center government has been far from thrilled about the fact the Kurds have over the past several years’ negotiated oil and gas development contracts with numerous small and midsize IOCs488. Also, KRG Passed its own hydrocarbons law in 2007 in the absence of a national Iraqi law governing investment in hydrocarbons. That proves the Kurdistan

Regional Government can management its oil wealth. The fact that the KRG is delivering oil by truck instead of using the Kirkuk-Yumurtalik oil pipeline (which is controlled by

Baghdad), has prompted new concerns about the KRG intention to bypass Baghdad in its energy trade with Turkey. To justify its actions, the KRG refers at first to the Iraqi constitution, ratified in 2005. Article 111 States that oil and gas belong to “all the people of Iraq in all the regions and governments”489. The KRG's January 17 Statement noted that the constitution "does not state that the oil and gas belongs either to the federal

Ministry of Oil or the illegal and unaccountable monopoly of the State oil marketing organization (SOMO), The KRG constitution gives primacy to regional law over federal

488 Bilal A. Wahab, Iraq and KRG Energy policies, Actors, Challenges and opportunities, the American University of Iraq Sulamiani, 2014.p,33. 489 Constitution of the Republic of Iraq of 2005 published in the Official Gazette, issue 4012 of 28/12/2005

219 law, except in areas listed under the exclusive powers of the federal authorities – pointing out that oil and gas are not listed under the exclusive powers of the federal government.

Besides this constitutional justification, Erbil also insists the Production Sharing

Agreements in the Kurdistan Region are a great success for Iraq490. International Energy signed a deal with Iraq's central government for development of the Kirkuk oil field, located on the KRG's border. BP accepted work on the Baghdad-administrated side of the border, not on the Khurmala side which is controlled by the KRG. The project's first objective is to take relevant measures against the decline of oil production at Kirkuk, followed by improving overall oil production capacities at the site. Furthermore, the KRG objected to plans by Iraq's North Oil Company to boost production at the Kirkuk field bordering the KRG, insisting any development plans required KRG cooperation and approval491. The KRG rejected the deal between BP and Baghdad, calling it an "illegal" step in the autonomous region's feud with the central government492. Erbil cited article

140 of the Iraqi constitution: “The federal government, with the producing governments and regional governments, shall undertake the management of oil and gas extracted from present fields, provided that it distributes its revenues in a fair manner and this shall be regulated by a law”493. From the KRG's point of view the term “present fields” refers to fields already under production at the time of the constitution's ratification (October

2005). The Kirkuk oil field is part of one such field. Kurdish authorities therefore argue that the management of the Kirkuk field must be undertaken not by the federal authorities

490 Statement on oil and gas police by the KRG,2013 http://thesharehub.com/?cat=8&paged=24 accessed 7 Sep.2015. 491 Rex J. Zedalis, The Legal Dimensions of Oil and Gas in Iraq: Current Reality and future prospects, Cambridge university, press, 2009, 298. 492 Patrick Markey, Iraq Kurds defend oil policy, reject BP Kirkuk dealwww.reuters.com/article/2013/01/18/energy-iraq-kurdistan-idUSL6N0AN19020130118 493 Iraqi Constitution 2005 published in the Official Gazette issue 4012, 28 May 2005.

220 but by the regional governorate, because it is part of the process outlined under the relevant constitutional clauses.

By October 2008, indications were that more than 20 domestic and IOCs had contracted with the KRG to pursue activities in over 30 separate development blocks. The crisis started when the KRG announced it was exporting its own very light oil or condensate independently to world markets in October, 2012, via truck to Turkey’s Ceyhan port, where it was then sold via an intermediary494. This prompted negative reactions from

Baghdad. On January 8, 2013, the KRG told Reuters it had begun exporting crude oil directly to world oil markets via Turkey. The Turkish-British joint venture Genel Energy delivered via truck the first crude oil from the KRG's495 Taq Taq oil field to Turkey’s

Ceyhan port on the Mediterranean Sea, where it was shipped to be sold on international markets. In early 2013, overall Iraqi reserves of oil had been estimated at 141 billion barrels, 45 of which could potentially be situated in Iraq's northern region of Kurdistan.

Iraq's natural gas reserves are said to amount to 112 trillion cubic feet, mostly in form of associated gas from oil fields, while the majority of non-associated natural gas fields are located in the country's north. The production of Iraqi oil and gas has experienced severe setbacks over the past decades due to international sanction, the 2003 Iraqi War, and consequent sectarian violence. Although oil exports in the country's south are currently running at near full capacity, output in the north has been restricted by sabotage, deteriorating pipelines, and political disputes between the Kurdistan Regional

494 Iraqi Kurdistan Starts Independent Crude Oil Exports, http://www.newsmax.com/world/MiddleEast/iraq-oil-kurdistan-esports/2013/01/08/id/470429/ 495 Olgu Okumuş, Erbil Sends Oil, Ankara Gets Trouble, Institute Affair international Turkish, 2014, p.7

221

Government (KRG) and Baghdad496. Generally, the KRG is the official ruling body of the predominantly Kurdish, federated region in northern Iraq, and has been developing its oil industry in contractual dispute with the central government in Baghdad for over a decade.

Continuous disputes arise concerning the authority over resource production and exports in the region in late 2011, the KRG further challenged the authority of the national government by signing agreements with ExxonMobil497, followed by additional contracts with major companies such as Chevron, Gazprom, and Total. Other majors such as BP and Royal Dutch Shell follow the ExxonMobil lead. Lately the conflict continues over the sharing of oil revenues between Iraq’s largely autonomous Kurdish region and the central authorities in Baghdad over the Kurdistan Regional Government’s unilateral agreement signed with U.S. oil giant. A recent oil dispute between the Kurdistan

Regional Governate of Iraq (also referred to as KRG) and the Ministry of Oil of the

Republic of Iraq (also referred to as Iraq) began in the courtrooms of Houston, Texas in the summer of 2014. This case was known as the Ministry of Oil of the Republic of Iraq v. Kurdistan Region of Iraq. On July 26th 2014, a ship known as the United Kalavrvta arrived in the Gulf of Mexico, offshore Galveston, Texas with a cargo of 1,032,212 barrels of crude oil weighed at 143,238,909 metric tons. Both the KRG and Iraq

Government claimed rightful ownership to the nearly 1 million barrels of crude oil parked off the shores of Galveston, Texas. The plaintiff in this case was the Ministry of

Oil of the Republic of Iraq with its principle office located in Baghdad, and the defendant

496 Robert W. Olson, Relations among turkey -Iraq, Kurdistan -Iraq the wider middle east and Iran, Mediterranean Quarterly, Vol. 17, No. 4, 2006 497 Rhiamon Meyers, Iraq Kurdistan lawyer face off in US, court over stander tankers oil,, http://fuelfix.com/blog/2014/08/22/kurdish-crude-oil-tanker-dispute-plays-out-in-u-s-court-friday/

222 was the Kurdistan Regional Governate of Iraq with its principle office located in the city of Erbil. According to case documents, 1,032,212 net barrels of crude oil valued at over

$100,000,000 was loaded onto The United Kalavrvta in Ceyhan, Turkey. The Ministry of

Oil of Iraq had claimed that this crude oil had been illegally produced from wells drilled in the Kurdistan region of Iraq. During the month of December 2013, the crude oil was pumped via the Iraq-Turkey Pipeline or ITP from Iraq to Ceyhan, Turkey.

Although Iraq instructed the Government of Turkey to put a hold on the crude oil, Botas, the Turkish pipeline operator, transferred the crude oil onto the United Kalavrvta designated by the KRG. The ship left the port city of Ceyhan, Turkey on June 23rd, 2014 and after several changed destinations, landed in the Gulf of Mexico offshore Galveston,

Texas. Iraq claimed that the people of the Republic of Iraq’s regions and governates, held legal title to the cargo of crude oil, pursuant to Article 111 of the Constitution of the

Republic of Iraq. The plaintiff also noted that the United States recognized the

Government of the Republic of Iraq as the sole legitimate government of the entire territory of the Republic of Iraq. Therefore, Iraq concluded that they must have final say with regards to the storage, transport, export, or sales of any oil products that belong to the people of the Republic of Iraq.

On July 28th, 2014, Iraq began legal proceedings in the Southern District of Texas, with an amended complaint filed on September 19th, 2014. The complaint requested that the district court declare and award the Ministry of Oil of the Republic of Iraq legal ownership and permanent possession of the crude oil cargo aboard the United Kalavrvta, in addition to any other relief deemed proper. Iraq claimed that this was a case of admiralty and maritime jurisdiction within the meaning of Federal Rule of Civil

223

Procedure 9(h) pursuant to the Supplemental Rules for Certain Admiralty and Maritime

Claims. The Kurdish Regional Governate of Iraq on the other hand moved to dismiss this complaint.

The Case was dismissed as moot on October 28th, 2015 in Houston, Texas by Gray H.

Miller, the United States District Judge of the Southern District of Texas. The District

Judge concluded that although Kurdistan may have violated Iraqi Law with regards to unauthorized exportation of oil over land and seas, they did not violate U.S. Maritime law.

224

CONCLUSION

The Iraqi economy is dominated by the oil sector, which has traditionally provided about

95 percent of foreign exchange earnings in the 1980’s. Iraq has suffered financial problems and economic losses due to massive expenditures and foreign debt, more specifically the first Desert Storm War which cost Iraq at least $100 billion. Oil exports increased with the construction of new pipeline and the restoration of damaged facilities.

Iraq needs to make wise choices concerning future contracting decisions for development of its petroleum resources. For being one of the biggest oil-producing countries, the proper balance is needed between the interests of Iraq and the interests of international oil companies. This would result in the encouragement of companies to invest more and thus increase national income. Iraq’s oil sector today needs investors – but they should be cautious about what form it takes, and on what terms. It would be a mistake to negotiate long-term commitments at a time of weakness.

Long-term contracts should not be considered until Iraqi’s oil industry capacity has been rebuilt. The priorities should be security, fighting corruption, and rehabilitation and development of known oil fields, using Iraq’s own resources. The Iraqi Ministry of Oil should publish on its website all the oilfield contracts, in their final form or redacted for legal reasons, and as signed. This includes the eleven contracts awarded from the two latest oilfield licensing rounds. The use of natural resources as an effective instrument to increase the economic power and living standards of the Iraqi population should be the country’s main focus.

The oil licensing offered by the Ministry of Oil has been contested by the Iraqi public

225 opinion. Some specialists believe that Iraq should postpone licensing contracts, because this process may turn out to be unfair for the interests of Iraq and detrimental of the rights and sovereignty of Iraq. These Iraqi experts believe that foreign companies under these contracts will dominate oil reserves for decades because they will mostly export crude oil and they will neglect local needs. Ultimately, Iraq will have to import its own oil! This will damage the Iraqi economy over the coming decades.

The issuance of these licenses will lead to the gradual elimination of the competent national companies from providing basic services to producing companies as a consequence Iraq could then go back to the time when they were contracting with foreign companies. It would also lead to the loss of effort for many years after the nationalization of Iraq to the wealth of oil and thus break the oil companies to withdraw oil operations, including (extraction, refining and distribution in local markets and national as well as note large numbers of engineers working in the local oil companies to leave work and join to work in foreign companies, lured by contracts and jobs cannot be offered by national companies, ironically Iraq currently has imported petroleum products to meet the local market needs.

In addition, statistical studies take a realistic look at the fact that the majority of the oil- rich countries of the world are usually politically confused and lacking economic stability. That could be due to political tension caused by the civil wars between the populations and internal conflicts tearing a country apart. Loss of much of the oil wealth comes also from theft, wasteful use, and the lack of job opportunities. These can lead to poverty, ignorance and disease. Many examples can be given showing a negative

226 relationship between oil wealth and the poor political, security and economic conditions.

This is the case in Iraq, Yemen, Libya, Nigeria and many countries in the Middle East,

Africa and Latin America. Oil should be used as tool to achieve prosperity and welfare for citizens. If not used for those purposes, oil wealth becomes a curse on oil-rich countries instead of being a blessing498. This harsh reality must be forced on the Iraqi people in order to be accepted and changed.

Finally, if Iraq funds were looted during the economic blockade of the international 1991-

2003 war under the "oil for food" program, looting may continue today under the banner of “oil for oil". This is the foundation on which to open the floodgates to disperse structured and unstructured local and regional Iraqi oil wealth. So Upstream applies to the operation of exploration, drilling, hydrocarbon production, and transmission via truck, rail or ship or pipe line to the refinery intake valve.

498 Ross Michael L. the oil curse : how petroleum wealth shapes the development https://academic.oup.com/afraf/article/112/449/688/100760/The-Oil-Curse-How-petroleum-wealth-shapes- the

227

228

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 Robert Hamill and Jonathan Musker, Iraq’s Fourth Oil and Gas Licensing Round http://www.mondaq.com/x/197818/Oil+Gas+Electricity/Iraqs+Fourth+Oil+and+Gas+Lic ensing

 Saleh Majid is a member of the Chartered Institute of Arbitrator and listed as an arbitrator by the Euro-Arab Arbitration System. And he is licensed as a Middle East Legal Consultant in Germany and in the UK; He speaks Arabic English, German and Persian languages. http://www.iraqilawconsultant.com/majid.html

 Serial contract: http://www.iamcivilengineer.com/2014/09/civil-engineering-contracts- and.html

 Shell Global Solutions, Slug Suppression System (S3), Slug Control using National Instruments Hardware and Software, [email protected]

 Shell and South Gas at design phase on first Iraq LNG Plant, http://www.2b1stconsulting.com/shell-and-south-gas-at-design-phase-on-first-iraq-lng- plant/

 Sharon Otterman, IRAQ: Oil for Food Scandal, http://www.cfr.org/iraq/iraq-oil-food- scandal/p7631, https://www.globalpolicy.org/security-council/42265-oil-for-food- programme.html

 Single Stage Tender https://www.designingbuildings.co.uk/wiki/Single-stage_tender

 SRC Oil & Fuel, http://www.srcoilandfuel.com/index.html

 State Company for Oil Projects, SCOP http://www.scop.gov.iq/english_email.htm .

 Statoil lets FEED contract for Trestakk subsea tieback, http://www.ogj.com/articles/2016/02/statoil-lets-feed-contract-for-trestakk-subsea- tieback.html,

 State Oil Marketing Organization (SOMO), http://www.oilvoice.com/Description/State- Oil-Marketing-Organization-SOMO/77b48adb.aspx

 Statement on oil &gas policy by the Kurdistan regional government, January 2013, http://thesharehub.com/?cat=8&paged=24

 Technical Service Contract For The Rumaila Oil Field, Between South Oil Company of

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the Republic of Iraq (SOC), And BP Petr china Company Limited And Oil Marketing Company Of The Republic Of Iraq (SOMO), www.fuelonthefire.com,

 Terms and Conditions of Master Services Agreement, http://www.figmints.com/terms- and-conditions/

 The Bechtel Corporation, https://www.indybay.org/newsitems/2003/04/24/16037711.php

 The concept of production sharing http://www.rulg.com/documents/the_concept_of_production_sharing.htm,

 The Iraqi federal oil and gas law 2011 exploration and expropriation http://iraqieconomists.net/en/2013/02/15/a-critical-look-at-iraqs-oil-contracts-by-munir- chalabi/

 The judgment issued by supreme court of Texas, 1948 in case Elliff v. Texas drilling company, https://casetext.com/case/elliff-v-texon-drilling-co,

 The Middle East, http://www.cotf.edu/earthinfo/meast/mepeo.html- accessed 12 July 2014.

 Total Iraq foreign debt of $ 39 billion, http://iraqidinarfacts.net/total-iraq-foreign-debt-of- 39-billion/

 Middle East Iraq https://www.cia.gov/library/publications/the-world- factbook/geos/iz.html

 Thomas C. Hayes, confrontation, in the gulf, the oilfield lying below the Iraq-Kuwait dispute 1990, , http://www.nytimes.com/1990/09/03/world/confrontation-in-the-gulf-the- oilfield-lying-below-the-iraq-kuwait-dispute.html

 The Oil Services Industry, http://www.investopedia.com/features/industryhandbook/oil_services.asp

 the Petroleum Services Association of Canada (PSAC), http://www.psac.ca/business/industry-overview/#upstream .

 The Turkish petroleum company, us library of congress http://countrystudies.us/iraq/53.htm.

 Tow stage tender, https://www.designingbuildings.co.uk/wiki/Two-stage_tender

 United Nation Conference On Trade And Development (UNCTAD) https://unngls.org/index.php/engage-with-the-un/un-civil-society-contact-points/127- united-nations-conference-on-trade-and-development-,

 United Nations Industrial Development Organization, www.unido.org

 Upheaval Threaten oil development plans, http://www.dailymail.co.uk/wires/ap/article- 2666140/Iraq-upheaval-threatens-oil-development-plans.html,

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 U.S. Energy information Administration Country Analysis Brief: Iraq, http://www.eia.gov/beta/international/analysis.cfm?iso=IRQ

 U.S. Energy Information Administration. Refinery Receipts of Crude Oil by Method of Transportation. http://www.eia.gov/dnav/pet/pet_pnp_caprec_dcu_nus_a.htm

 U.S. Energy Information Administration, Energy profile of Iraq, 2007, http://www.eoearth.org/view/article/152503/

 Wong E, china open oil field in Iraq The New York Times (New York, 28 June 2011) http://www.nytimes.com/2011/06/29/world/asia /29chinairaq.html? _r=0 >

 Washington's Blog, The Roots of the Iraq and Syria Wars Go Back More than 60 Years, 2014, http://www.globalresearch.ca/the-roots-of-the-iraq-and-syria-wars,

 What are natural gas liquids and how are they used, April, 2012, http://www.eia.gov/todayinenergy/detail.cfm?id=5930,

 What is the upstream oil & gas industry, http://www.psac.ca/business/industry-overview/

 World Energy Resources: Oil World Energy Council 2013, https://www.worldenergy.org/wp-content/uploads/2013/10/WER_2013_2_Oil.pdf,

 Zeyno Baran, The Baku-Tbilisi-Ceyhan Pipeline Implications for Turkey, Central Asia Caucasus Institute www.silkroadstudies.org/.../pdf/.../2013_0

5- News & Newspaper

 Wong E, China open oil field in Iraq, New York Times, 28.6.2011.

 Shahristani, Iraq’s oil future, Iraq energy news, 17.1.2011.

 Exxon, Shell Sign Final Deal for Iraq’s West Qurna 1 Oil Field', Royal Dutch Shell,

25.1.2010. & Shell to Replace Exxon at West Qurna 1, Iraq Business News, 21.11.2011.

 Iraqi Drilling Company - 140 Wells in 2011, Iraq Business News, 18.1.2011.

 Iraq Starts Drilling for Oil in Hamrin Mountains, Iraq Business News, 5.6.2011.

 New Iraq oil firm aims to triple production in Maysan, Iraq Business news, 28.6.2008.

 Foreign Companies Keen to Work for Missan Oil, Iraq Business News, 1.12.2011.

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