Debate Continues on Legality of Kurdistan’s Petroleum Contracts

Iraq Business News, June 7, 2011 – By Thomas W. Donovan, Managing Partner at Iraq Law Alliance, PLLC.

Several recent events have prompted a return to the lingering debate over the legality of the production sharing contracts entered into by and between the semi-autonomous Kurdistan Regional Government (KRG) and around 35 private international companies over the past few years. The KRG, through its own Ministry of Natural Resources, is adamant that the signing and negotiation of contracts for any ‘new’ petroleum developments (ie, those taking place under the 2005 Iraqi Constitution) remains its sole responsibility, and not that of the federal Iraqi government.

The current federal government in Baghdad, under the new minister of oil, Abdul Karim Al Luabi, has signaled a significant departure from previous policy, which was insistent that all petroleum policy be derived and managed by the federal Iraqi Ministry of Oil. Since assuming power in the new Iraqi government on December 21 2010, Al Luabi has made public statements confirming the legality of the production sharing contracts under Iraqi law, allowed Kurdish petroleum to be exported through Iraqi national pipelines and remitted payment to international oil companies operating in Kurdish fields under the contracts.

Many commentators have argued that Al Luabi’s recent acts are conciliatory in nature and a realisation of the authorities that numerous international oil companies are already operating in Kurdistan despite Baghdad’s attempts to derail the process. Other commentators assert that provoking the Kurdish bloc with a significant legal dispute will lead to further domestic political instability and increased calls for independence by the KRG.

Notwithstanding these considerations, the debate over the legality of the Kurdish production sharing contracts is grounded in an analysis of the division between federal and regional authorities in Iraq. The division is apparent in the notions underlying both the 2005 Iraqi Constitution and Iraqi law as applicable in the Kurdistan region. Previous pronouncements by the Ministry of Oil in Baghdad to the effect that the majority of the contracts were illegal or unconstitutional under Iraqi law appear difficult to support under close scrutiny. Instead, there appears at least a modicum of justification to the position that the future development and application of petroleum policy in Kurdistan remains under the sole jurisdiction of the KRG.

‘Present field’ v ‘future field’ distinction
The constitution allocates any power that is not reserved exclusively for the federal government to the regional or governorate governments and gives priority to regional or governorate laws where there are disputes over power-sharing.(1) Federalist notions were enshrined to the effect that no law may be enacted that contradicts the Iraqi Constitution or a part of any regional constitution, or any other legal text that contradicts the Iraqi Constitution.