Global Policy Forum

The Legality of Iraqi Oil Contracts Remains Questionable

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By Ahmed Mousa Jiyad

Middle East Economic Survey
January 11, 2009

 

Two recent developments have brought to the forefront of our attention the legality issue pertaining to the oil contracts concluded or to be concluded as results of the two Iraqi bid rounds, and also in my view the contract for the al-Ahdab oilfield, signed with CNPC. The first development is related to the modus operandi of the Executive Branch in 'approving' these important and vital deals, and the second is related to an action by the Legislature contesting the persistent efforts by the executive in circumventing the role and duties of the Parliament in debating the contents and consequences of these contracts and the enactment process of such contracts by relevant laws.

The purpose of this article is to shed light on these two important developments, review what has taken place and assess possible implications, and it concludes that such an approval process by the government not only put the legality of such contracts into very serious doubt and jeopardy, but also contravenes the minimum standard of good transparent participatory governance and accountability requirements.

The Executive Branch's Approval Process

Husain al-Shahristani, the Iraqi Minister of Oil, has frequently affirmed that the Ministry of Oil has the right to sign and concludes these contracts, and once the Council of Ministers (COM) approves them they become legal and binding for Iraq. Prime Minister Nuri al-Maliki has confirmed this proposition in his statement at the opening of the second bid round that took place in Baghdad on 11 December (MEES, 21/28 December 2009).

A growing body of legal and professional opinion has been put forward to contest such a claim, suggesting the unconstitutionality of actions by the executive in this matter. Also, most if not all international oil companies (IOCs) had expressed serious concerns regarding the "legal frameworks" governing such long-term contractual relationships.

Neither time nor space permit me to dwell on this complex matter. However, I will examine how the COM has actually approved the contract for Rumaila oilfield concluded with BP/CNPC.

In an 'indirect' debate on al-Jazeera International (the 'Inside Iraq' program on 18 December 2009) between the current Iraqi oil minister Dr Hussain Shahristani and former oil minister Issam al-Chalabi, a reference was made to a memorandum prepared by the legal advisor to the prime minister regarding the Rumaila contract. While Dr Shahristani undermined the seriousness of the issues raised by the said memo, Mr Chalabi disagreed and emphasized the seriousness of many matters raised therein. A few days before that another former oil minister, Ibrahim Bahr al-'Ulum gave a very interesting interview to the Iraqi government newspaper al-Sabah (14 December 2009) in which he also made reference to the same memo.

Immediately after the debate I asked a colleague if he could provide me with copy of that memo. Shortly afterward I received a scanned, signed copy of the document. The five-page memo was signed on 15 October 2009 by Fadhil Muhammad Jawad, Legal Advisor to the Prime Minister for Legal Affairs and Head of the Legal Committee. The memo mentions 65 observations regarding the Rumaila contract.

At the outset I must say that most of, if not all, of the 65 observations are very serious indeed. Previously, as early as 20 June 2009, I had covered most of the issues in my assessments of the Model Contracts, and many other colleagues did so too. My assessments were published and made public in many journals (MEES, 27 July 2009) and websites, and I personally e-mailed copies to senior members of the COM, the Ministry of Oil and the Parliament.

However, what is even more alarming and causes serious concern are the implications of what was mentioned in the introduction of the said memo. It refers to the instruction by COM on 13 October 2009 to assess the Rumaila contract, and the Legal Committee had met on 14 October 2009 for that purpose and "without having previous information on the matter", "not having enough time" and after "preliminary reading" the Legal Advisor, upon authorization by the Legal Committee, made his 65 remarks on the contract.

This has generated the followings questions, worries and concerns:

  • Why and how is it possible that the Legal Advisor to the Prime Minister for Legal Affairs and Head of the Legal Committee, and all members of the said committee had no previous information on the Rumaila contract? It is worth recalling that the cabinet had approved the award of Rumaila in its meeting No 24 dated 1 July 2009 (a day after the auction). A time span of 105 days could have been enough to seriously and thoroughly review the contract and suggest improvements!
  • This suggests that: either the Ministry of Oil did not provide the Cabinet (the Legal Advisor to the PM or the Oil and Gas Committee of the COM) with the draft of the model contract, on which the award was based; or the ministry did provide the Cabinet with the model contract but the Legal Advisor to the Prime Minister, and other members of the said committee either did not actually receive the model contract or did not pay any attention to it!
  • If the Ministry of Oil did not send the model contract to the COM in spite of the fact that the contract was given to IOCs between 23 April 2009 (the date of the last version of the contract) and 29 June 2009 (one day before the first bid round), the question then is why the ministry did not give the model contract to the COM? Furthermore, the ministry did not share or officially involve the parliament or its Oil, Gas and Natural Resources Committee in any phase of preparing or finalizing the drafts of such model contracts.
  • Furthermore, the information on the COM website regarding COM meeting No 38 dated 13 October 2009 indicates in item (1) that the Committee (which Committee?) had agreed on Rumaila. This date of approval is the same date on which the Legal Advisor was requested to give an opinion, which he delivered on 15 October 2009! Obviously there must be a question over this apparent request for a legal opinion on a matter that has been approved!
  • The Rumaila contract was signed on 3 November 2009 without any confirmed indications that the 65 observations by the Legal Advisor had been accommodated or the contract was redrafted accordingly before signing. The seriousness of the 65 observations requires a good deal of tough negotiation to reach agreement, and my experience in contracts negotiation would lead me to suspect whether such negotiation took place. Furthermore, I suspect that the Ministry of Oil had not succeeded in amending the Rumaila contract as it should be.
  • The above would indicate that even the authorization by the COM was not granted clearly, and the due process in approving this important deal has not been adhered to. And since the Parliament did not give its approval, then the legality of signing the Rumaila contract was confined to the Ministry of Oil only, and this is neither permissible nor constitutional.

 

Based on the above I prepared on the same day a short assessment, which was posted through my mailing list, which includes senior members in the COM, the Ministry of Oil and the Parliament, and also posted on the Iraq Oil Report website. As a consequence of my assessment above, a 'text document' was sent to me and to others in one mailing list. This document was said to be the answer of the Ministry of Oil to the memo by the Legal Advisor referred to above.

This unsigned document, was allegedly prepared by four officials (names and positions were given) from the ministry while they were in Istanbul (at a 'road show' for the second round bidding -  MEES, 26 October 2009), indicating that they received the observations of the Legal Advisor through the email at "13.45 local time on 16 November 2009", prepared their response after only "three hours", and "sent it to the Deputy Minister for Extraction Affairs" (DMEA).

The document provides 'answers' to the 65 items raised by the Legal Advisor. Leaving aside the strength, accuracy and legality of the opinions expressed in the document, and assuming it is an 'official' position (though without reference number, seal, signatures, pdf copy etc) there remain the following concerns:

  • Was the document sent from DMEA to the Minister of Oil and then to the COM?
  • Did the Legal Advisor for the PM receive the 'official' document from the ministry, and if so did he accept the contents of the document in all or in part?
  • When the Rumaila contract was "agreed to" by COM on 13 October 2009, then the opinion of the Legal Advisor becomes "redundant" even if it is correct, justifiable and legitimate. He must have known that a post-approval opinion had less likelihood of reversing the taken decision. Was he still hoping for that reversal, or did he want it for the record to protect himself, his legal credentials and professionalism? This remains to be seen in the future.
  • By the same token, the three hours Istanbul answer was also unnecessary and redundant as far as the decision-making process is concerned. The question is, again, why they have done it? Probably for the record!

 

I should mention at this juncture that I have received recent information indicating that the Legal Advisor has submitted two additional memos - one related to West Qurna-1 oil field and the other to Zubair oil field - and both memos are, as my source puts it, "much stronger than the first one." However, until I have scanned/signed copies of these two memos, I cannot at this moment confirm or deny the existence and contents of these two memos.

 

Legal Case Before The Federal Court

The second significant development is related to a legal case currently before the Federal/Constitutional Court in Baghdad. The case was filed by the parliamentarian Shatha al-Musawi. Media sources describe her as independent and she is not running for re-election in March 2010. She, as plaintiff, is suing both the prime minister and the oil minister on the grounds of unconstitutionality regarding these oil contracts. The Federal Court was set for a hearing on 22 December 2009, but this was postponed to 11 January 2010.

If and when both Mr Maliki and Dr Shahristani, as defendants in legal terms, present before the Federal Court, they might encounter an impossible task in substantiating their claim that the approval of contracts by the COM, as outlined above, fulfils proper, trustworthy and credible deal-making requirements. With the known parliamentary stand on these contracts being more convincing than what the executive branch claims and demonstrates, the Federal Court ruling will have historical significance.

 

Implications

Let us put the above discussion in its right context and proper perspective. The 10 oilfields awarded during the first and second bid rounds cover in total 62.7bn barrels of proven reserves, representing 54.5% of Iraq's 115bn barrels of proven reserves. The said oil fields have a combined current production capacity of 1.603mn b/d. If they are developed as was stipulated in the bid offers they would have a total production capacity of 11.065mn b/d, meaning an incremental production capacity of 9.462mn b/d. Each oil field has a contract with duration of 20 years at least, and each contract has 43 Articles, 6 Annexes and 4 Addendums. The capital investment and operating cost, which are eventually payable by Iraq, could very well exceed $100bn and possible revenues would be in trillions of dollars. Simply put, there is much too much money and too many interests involved here!

Now, a matter of such magnitude, in a country that depends on oil for its development and the welfare of its current and future generations, surely deserves serious consideration, thorough assessment and good transparent participatory functional governance with full accountability and an open term of limitation.

Yet, as the course of events narrated above shows, it took the COM only one meeting (on 13 October 2009) to agree on the Rumaila contract without even waiting for the opinion of their Legal Advisor, and three hours only for four officials from the Ministry of Oil, while abroad in Istanbul, to restate the position of their ministry.

If what has taken place for Rumaila oil field is any indication, it would only suggest that COM approval for the remaining nine contracts will be a matter of a 'rubber stamp' approval process - a process that contravenes the minimum standard of good transparent participatory governance and accountability requirements, which the current government had committed itself to through the International Compact with Iraq (ICI).

The Parliament and the Federal Court should take a firm stand, since the legality of such an approval process is very questionable and stands on very thin ice even on procedural matters and due diligence considerations in addition to its unconstitutionality. It is too risky to leave the wealth of the nation and the rights of future generations to be handled in such a dubious way.

 

 

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