9 November 2008
In response to the controversy over whether the Iraqi oil ministry has the right to award oil field development contracts under its first bid round, former Oil Minister Thamir Ghadhban argued that the ministry relies on a 1987 law that placed the powers to sign contracts into the hands of the oil minister and on the fact that the 2005 Iraqi constitution does not require the legislature’s vote on the signed contracts. The question is whether this legal and constitutional foundation provides international oil companies with sufficient guarantees that a contract signed by the oil ministry in the absence of a hydrocarbon law, even with the endorsement of the Iraqi cabinet, will have the long term validity and durability to sustain the long term investments needed over the contracts’ 20 years. Royal Dutch Shell’s head of upstream Malcolm Brinded argued that it’s the structure of the contract that will determine its long term robustness especially if supported by a transparent award process. One CEO of a European major is more adamant that only contracts backed by a hydrocarbon law have the long term legal standing international oil companies need, especially were the contracts to be disputed in the future by subsequent governments.
Under the previous regime, production sharing contracts awarded to China’s CNPC for the development of Al Ahdab field and to Russia’s Lukoil for West Qurna-phase 2, before its cancellation later by Saddam Hussein — as well as three other contracts with India’s ONGC, Indonesia’s Pertamina, and Vietnam;s Petrovietnam — were approved by decree and had the power of law after endorsement by the Iraqi parliament. Under international law, a change of government has no impact on the enforceability of deals done with an ousted regime. That’s one of the reasons why CNPC’s 1997 deal could be revived and renegotiated or “re-adapted” under the new regime, even though lawyers can argue that countries have a sovereign right to terminate contracts regardless of enforceability.
Iraq’s contract award process as defined by the Iraqi oil ministry in the initial tender protocols sent to international oil companies in late October, is complicated and lacks clarity. But assuming the ministry was able to conclude the process by June as it has announced, it might still find itself, together with the oil companies involved, in legal limbo when it comes to the validation of the deals.
Ruba Husari, Dubai