Who holds title over oil reservoirs? To what extent are mineral rights on private and public lands involved? Is there a legal distinction between surface rights and subsurface mineral rights? At what stage does title to extracted oil transfer to the licensee, lessee or contractor?
Under the Iraqi Constitution, title to oil vests with the people, regions and governorates of Iraq. The legal framework is based on the Iraqi Constitution and existing oil and gas legislation. Specifically, this requires an approval of the contracts that deal with Iraqi oil by the Council of Representatives. It is still debated whether service contracts entered into by the Ministry of Oil of Iraq (MOO) in the first and second licensing rounds require the approval by the Council of Representatives, as such service contracts are tendered and do not pass ownership in the oil to international oil companies (IOCs). The Iraq National Oil Company Law (INOC Law[AA1]) grants the authority to sign exploration and production agreements to the national oil company.
Under the models of service contract utilised by federal Iraq, the contractor receives a fee, either in cash or in kind, as recovery for its costs. Title to production will pass in respect of any payment in kind at the point where the contractor is physically able and entitled to lift production, normally at a terminal.
While the Kurdistan Region’s constitutional right to exploit its natural resources remains disputed, title to oil under its product-sharing agreements is stated to pass after extraction at a delivery point agreed in the relevant development plan for the production area.
Exploration and production – general
What is the general character of oil exploration and production activity conducted in your country? Are areas off-limits to exploration and production?
Ministry of Oil
In Iraq, oil production is focused on onshore production through technical service contracts (TSCs) with potential future exploration possibilities available in the western regions of the country. A number of development and exploration service contracts were granted during the second licensing round. This is largely due to the quality of data used to delineate the country’s oilfields geographically, some of which is more than 25 years old and based on two-dimensional seismic studies.
Generally, there are no restrictions or limits on production activity imposed by the MOO. The activities may be limited only by the individual considerations of IOCs in respect to the contracted field area owing to knowing the present locations of Iraq’s existing oil reservoirs.
The IOCs’ rights are awarded in relation to specific areas, and such areas are determined on a case-by-case basis subject to any relevant restrictions based on environmental, cultural, security or other considerations.
Kurdistan Regional Government's Ministry of Natural Resources
Although the Kurdistan Regional Government (KRG)’s Ministry of Natural Resources (MNR) is considered to be the party responsible for the exploration, development and production activities in the Kurdistan Region of Iraq, the 2017 events following the independence referendum have caused the KRG authorities to be subject to local and international questioning in terms of the extent of legality and source of authority over the oil sector contracts concluded in the Kurdistan Region without the approval of the federal government. Nevertheless, tensions between the Iraqi federal government and the KRG have not adversely affected numerous onshore explorations, development and production projects across the Kurdish region.
Exploration and production – rights
How are rights to explore and produce granted? What is the procedure for applying to the government for such rights? To what extent are the terms of licences or contracts negotiable?
Oil exploration and production in Iraq have been governed by the MOO, but have been transferred to the national oil company by virtue of the INOC Law. No rights to explore and produce have been granted by the national oil company to date.
With respect to Kurdistan, despite the KRG exerting control through the MNR, the MOO is adopting measures to monitor such activities.
As a matter of practice, the rights to explore and produce oil are granted on the basis of licensing round contracts setting out the parties’ agreement not to contradict the law or public order.
Ministry of Oil
Since 2009, the MOO has held four licensing rounds. A number of technical service contracts (TSCs) for producing fields and development production service contracts (DPSCs) for development and producing fields were granted to the winning bidders in the first and second rounds respectively. The third round focused only on gas fields, while the fourth round encompassed both oil and natural gas contracts.
In its regular session dated 21 January 2020, the Council of Ministers approved the recommendation of the Council for Energy Resolution No. 8 of 2020 concerning the approval of contracts for the round of 11 border fields and border patches (AKA the fifth round). The validity of the fifth round has been questioned as the government council that approved this round lacked full capacity due to being under resignation at the time of deciding. Additionally, the said approval refers to the revision of the Federal Financial Supervision Bureau in amending the legal and regulatory aspect, as well as the contractual clauses with an economic and financial impact. In any case, the fifth round came within the framework of the government's efforts to promote self-sufficiency in energy and reduce dependence on imported gas, and it is related to developing fields, border patches, and gas fields in Diyala governorate, which would produce more than 750 million standard cubic feet of gas over 36 months.
Under the terms of the TSCs, the IOCs work with the INOC as unincorporated joint ventures, where the INOC maintains a participating interest percentage in each project as the state partner. The TSCs further provide that Iraq will compensate the IOCs at an agreed rate per barrel, which currently varies from US$1.4 to US$6, subject to meeting of certain conditions such as the attainment and maintenance of target production levels over set periods of time. Iraq will receive initial revenue from the contract signing fees paid by the IOCs and subsequent revenue from joint venture fees paid to Iraqi national oil companies by way of taxes on the per-barrel fee, as well as revenues from the sale of oil.
The terms of the DPSCs vary because IOCs can form incorporated joint ventures with Iraqi national oil companies at their discretion. The only other variant of the DPSCs is the timing of remuneration of IOCs.
Production levels may be subject to adjustment if Iraq has to comply with OPEC quota limits.
KRG’s Ministry of Natural Resources
The MNR has to date signed more than 49 production-sharing agreements (PSAs) with different IOCs. The terms of such PSAs are generally more lucrative than the terms of the service contracts in federal Iraq, as the IOCs receive remuneration based on the level of risk associated with each area (high, medium or low). Similar to the TSCs and DPSCs, the stake maintained by the KRG in each PSA ranges between 20 and 25 per cent.
Based on past practice, both the federal government and the KRG have been open to the principle of negotiating certain terms of the relevant contracts, whether prior to the execution of such contracts or thereafter.
Does the government have any right to participate in a licence? If so, is there a maximum participating interest it can obtain and are there any mandatory carry requirements for its interest? What cost-recovery mechanism is in place to recover such carry? Does the government have any right to participate in the operatorship of a licence?
Under the laws of Iraq, the federal government has the right to participate in the technical service contracts (TSCs) through state companies. Under the State Companies Law No. 22 of 1997, there are no statutory restrictions on state companies participating in exploration and production agreements such as the TSCs.
In practice, this has been seen in numerous TSCs where a specific percentage-carried interest in contractor consortiums is awarded to Iraqi state entities. The PSAs entered into by the KRG generally provide for KRG participation through a carried interest.
Royalties and tax stabilisation
If royalties are paid, what are the royalty rates? Are they fixed? Do they differ between onshore and offshore production? Aside from tax, are there any other payments due to the government? Are any tax stabilisation measures in place?
There is no royalty provision under present Iraqi legislation or the MOO’s service contracts (TSCs and DPSCs).
The draft Hydrocarbon Law provides for a 12.5 per cent royalty at a federal level. However, this has not yet been approved by Iraq’s Council of Representatives.
TSCs granted by the Iraqi federal government contained a tax stabilisation provision ensuring that taxes are capped at 35 per cent pursuant to the International Oil Companies Income Tax Law No. 19 of 2010.
The royalty provisions under the KRG’s model PSA are set at 10 per cent for export of crude oil and natural gas. However, it is possible for individual PSAs to provide for different terms.
What is the customary duration of oil leases, concessions or licences?
It is customary for the MOO’s technical service contracts and development production service contracts to have a 20-year term. However, a 50-year licence is allowed under the Crude Oil Refining Investment Law No. 64 of 2007.
The model production sharing agreements of the KRG’s MNR have terms ranging from five to 37 years, depending on the stage of the field and the number of extensions sought. Generally, a field’s exploration stage will have a term of five years, which may be extended by a maximum of an additional two years. At the production stage, the term is 20 years, with a five-year extension as an automatic right and a further discretionary five-year extension.
Extent of offshore regulation
For offshore production, how far seaward does the regulatory regime extend?
There is no known offshore production in Iraq, but the Oil Minister has recently announced an intention to start offshore exploration in a bid to expand production. Consequently, Iraq’s fifth licensing round includes blocks located offshore.
Onshore offshore regimes
Is there a difference between the onshore and offshore regimes? Is there a difference between the regimes governing rights to explore for or produce different hydrocarbons?
As there is no known offshore production in Iraq, the law does not distinguish between onshore and offshore production and does not provide a separate regime for offshore production. However, there are some differences in the responsibility and scope of work between inside the battery limit, where responsibility extends to production facilities only, and outside the battery limit, where responsibility extends to utilities and piping, depots, power generation, water treatment and so on.
Furthermore, there are some differences in applicable provisions relating to the exploration and production of oil as opposed to gas. Thus, the service contracts awarded to IOCs in recent years set out different contractual obligations.
Authorised E&P entities
Which entities may perform exploration and production activities? Describe any registration requirements. What criteria and procedures apply in selecting such entities?
Exploration and production activities may be performed by Iraqi national oil companies, IOCs and other state oil companies on behalf of the MOO. Foreign entities are commonly contractually required to establish a presence in Iraq within a short period from the effective date of their relevant contract with the government. Common establishment options for IOCs include registration of a local branch.
The amended Companies Law of 2019 introduces a penalty fee for companies that fail to obtain a registration certificate for carrying out business (article 17).
Companies need to prequalify to bid in the oil licensing rounds. Although the bidding processes for the first four rounds were conducted transparently through tender protocols available to all bidders, the final details of the contracts were made publicly available on an ad hoc basis.
In the Kurdistan Region of Iraq, IOCs have conducted exploration and production activities with approval from the KRG’s MNR. However, political tensions between the Iraqi national government and the KRG in relation to oil in the Kurdistan Region have led to blacklisting and bar from bidding for any MOO licence of the IOCs operating in the territory of Kurdistan without approval or coordination of the MOO.
Regulatory powers over operators
What controls does the regulatory body have over operators? Can operatorship be revoked?
Traditionally, Iraqi regulations lacked a detailed description of the controls granted to the MOO with respect to the service agreements and the power that the MOO or the relevant national oil company has over the operator under it. Any such controls remain subject to each contract.
Similarly, the INOC Law does not set out the detailed description of the authorities and power granted to the NOC over the operator.
What is the legal regime for joint ventures?
The legal regime for joint ventures varies under the terms of each specific licensing round.
First licensing round
Under the TSCs granted in the first round, the parties were required to establish an unincorporated joint venture between the successful bidders and their state partner. The unincorporated joint venture would be the operator, with a lead contractor designated for supervision and management of the operating entity. The unincorporated joint venture is in turn governed by a joint management committee (JMC).
Second licensing round
The DPSCs awarded in the second licensing round followed a staged structure. During the first seven years of the DPSC, the structure of the TSC model is followed. However, once the applicable rate of return factor is achieved, the national oil company has the discretion to reorganise the structure of the joint venture and convert it to an incorporated limited liability company established pursuant to Iraqi law. The supervisory function will in such a case be transferred from the JMC to the board of directors of the incorporated entity. However, it is highly likely that the effective control of the entity will follow the JMC structure, where control of operations is maintained by the MOO through its state oil entities.
Third licensing round
Iraq held its third licensing round on 20 October 2010 for three gas fields: Akkas, Mansuriya and Siba. As a result, contracts were awarded to Korea's Kogas, Turkey’s TPAO and the Kuwait Energy Company.
Fourth licensing round
Iraq’s fourth licensing round was held in May 2012 and offered 12 areas. Seven of the 12 blocks were gas prone, while the rest had oil potential. The blocks lie in the provinces of Nineveh, Diyala, Wasit, Basra, Muthanna, Qadisiya and Babil, as well Najaf, Karbala, Samawa, Diwaniya and Anbar, which were not included in the previous rounds. The fourth licensing round was the first one to offer exploration contracts as opposed to the technical contracts offered in the first three rounds. The fourth bid round included 47 IOCs but offers for only four blocks were submitted.
Fifth licensing round
Interestingly, the fifth licensing round opened up new blocks located offshore in the Gulf waters in the area sharing the border with Iran and Kuwait. Although Iraq introduced a new model of petroleum contract, several companies, that initially expressed interest in bidding, decided not to participate. An important change in the new model is the introduction of a royalty element.
The structure of joint ventures under the PSAs signed with the KRG does not provide a set structure to be adopted by licensees. Accordingly, licensees decide on the structure that will most appropriately align with their interests in terms of risk and other commercial factors. The most notable incorporated joint venture is TTOPCO between GenelEnerji and Addax Petroleum in the producing TaqTaq field.
Any incorporation option exercised by joint ventures in Iraq falls under the Iraqi Companies Law No. 21 of 1997, as amended by CPA Order No. 64 of 2004.
Joint ventures between IOCs can be governed by non-Iraqi law. However, the Iraqi Civil Law No. 40 of 1951 (Civil Code) states that Iraqi law will apply to any contract concluded or implemented in Iraq.
How does reservoir unitisation apply to domestic and cross-border reservoirs?
Unitisation is governed by the draft Hydrocarbon Law (not yet finalised) and the KRG Oil and Gas Law of 2007. Unitisation can apply to domestic (including Kurdistan), cross-border and cross-regional (ie, between Iraq and Kurdistan) reservoirs.
Article 16 of the draft Hydrocarbon Law proposed the requirement of approval from the Federal Oil and Gas Council for any proposed unitisation measures sought in respect of domestic and cross-regional unitisations.
Cross-border unitisations are to be dealt with by the Council of Ministers of Iraq to ensure that the country’s interests are adequately protected.
Article 47 of the KRG Oil and Gas Law of 2007 also provides a legal position in relation to unitisation that is relevant to the PSAs awarded by the KRG.
The KRG’s involvement varies depending on the situation and the proposed unitisation. The KRG minister may be solely responsible for domestic unitisation, whereas the minister will need KRG's approval for cross-regional unitisation, and the KRG and the federal government will be required to agree on cross-border unitisations.
Is there any limit on a party’s liability under a licence, contract or concession?
The limitation of a party’s liability is generally subject to a mutual agreement of both parties, which is normally stipulated in the relevant contract. Under the Civil Law, parties to a contract shall be held liable to the extent described in their contract.
Generally, the parties are solely liable. For the liability of the parties to be joint and several, an explicit provision in the contract stipulating that the parties are jointly and severally liable is required (article 315 of the Civil Law). Furthermore, as a subcontractor is not a party to the original contract, the project owner (ie, the state) may not make demands directly to the subcontractor for project implementation and must make them through an indirect claim against the primary contractor.
Under Iraqi commercial law, whenever the act is classified as commercial, any liability resulting from such an act is deemed joint and several even in the absence of any explicit provision in the contract. Importantly, TSCs and DPSCs generally stipulate that the ‘contractor’ (ie, IOCs and the state partner) shall be jointly and severally liable for all obligations of the contractor under the respective TSC or DPSC.
Following the covid-19 pandemic, the question of force majeure provisions in the service contracts has become more relevant. Force majeure is recognised under the Iraqi legal system under a different doctrine, the theory of Emergency Circumstances. The theory is set out in article 146, paragraph 2 of the Civil Code, which states: ‘If public exceptional and unpredictable circumstances arise, and their occurrence renders the contracted obligation burdensome, if not impossible, to perform by the debtor and in such a manner as to threaten him with heavy loss, the court may, by comparing the interests of both parties, reduce the burdensome obligation to reasonable limits, if justice so requires. Any agreement to the contrary is void.’
The outcome of an occurrence of such Emergency Circumstances is that the court after balancing the interests of the parties may, if it would be equitable to do so, reduce the onerous obligation to a reasonable limit. However, if the performance of the obligation becomes specifically impossible (in full or in part), the contract shall be subject to termination.
Guarantees and security deposits
Are parental guarantees or other forms of economic support common practice or a regulatory requirement? Are security deposits required in respect of any work commitment or otherwise?
Parent company guarantees are commonly required under TSCs and PSCs. Publicly available templates and procedures of the MOO indicate that the parent company shall unconditionally and irrevocably guarantee the performance and fulfilment of obligations under the contract by its relevant affiliate.
The common practice is that parent guarantees are immediate and unlimited unless otherwise agreed. The amount of security deposit payable by the parent company or the affiliate is usually defined in the contract.
Law stated date
Give the date on which the information above is accurate.
