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Kurdish Regional Government's Production Sharing Contracts have been ruled unconstitutional by Iraq's highest court

17 February 2022

In this article, Slava Kiryushin and Joshua Coleman-Pecha review the latest decision by the Iraqi Federal Supreme Court, what the wider ramifications could be and what is next for the region.

In 2007 the Kurdistan Regional Government ("KRG") passed the Oil and Gas Law No. 22 of 2007 ("KRG Law"). This established that the KRG would administer oil and gas operations for the Kurdistan Region of Iraq. Since 2014, KRG's crude oil has been exported through a pipeline from Kirkuk to the Turkish port of Ceyhan.

There were multiple problems caused by this situation. First, the Federal Government was unable to control crude oil production in Kurdistan by political means. Second, the Federal Government was not able to benefit economically from crude oil production in Kurdistan. Finally, since OPEC does not consider Iraq and Kurdistan to be separate countries, Iraq was considered to be somewhat of a 'problem child' within OPEC, as the rest of Iraq and Kurdistan's combined crude oil production exceeded the country's production quota, as determined by OPEC.

KRG's oil and gas contracts are now unconstitutional

On 15 February 2022, the Iraqi Federal Supreme Court ("Supreme Court") issued its decision in case 59/Federal/2012 and Unified 110/Federal/2019. The Supreme Court outlined 10 reasons as to why the KRG Law is unconstitutional and decided that:

  • the KRG Law was repealed for violating Articles 110, 112, 115, 121 and 130 of the Republic of Iraq's Constitution of 2005.
  • the KRG must hand-over all oil production from the oil fields in the Kurdistan region, and other areas from which oil has been extracted by the KRG, to the Iraqi Federal Government (represented by the Iraqi Oil Ministry). The Iraqi Government will use its constitutional powers regarding the exploration, production and export of crude oil from the Kurdistan region to manage oil production in the region going forward.
  • the Iraqi Oil Ministry is permitted to pursue nullification of any contracts entered into by the KRG with foreign states and companies for the exploration, production, export and sale of crude oil from the Kurdistan region.
  • the KRG must allow the Ministry of Oil and the Federal Board of Supreme Audit to review all oil contracts entered into by the KRG concerning the export and sale of oil and gas for the purpose of determining the financial benefits incurred by the KRG on those contracts. In addition, the Kurdistan region's share of the national budget shall be determined in such a way as to ensure that the rights of Kurdistan citizens regarding the federal budget are delivered without further delays. This will be after the KRG’s implementation of all the provisions of the Court’s decision and the respective notifications are provided to the Iraqi Federal Government and the Federal Board of Supreme Audit.

KRG's Production Sharing Contracts

The key ramification of the Supreme Court's ruling is that any Production Sharing Contracts ("PSCs") entered into by International Oil Companies ("IOCs") could now be argued to be illegal and/or invalid. The exact consequences of the Supreme Court's decision are yet to be felt, as it is not clear whether the Federal government will pursue IOCs for profits already made, or attempt to invalidate the PSCs.

Further, whilst the Federal Government has always opted for Technical Service Contracts to govern their relationship with IOCs, the production sharing nature of the KRG's PSCs was always questioned by the Federal Government due to Article 111 of the Iraqi Constitution, which provides that hydrocarbons are owned by the Iraqi people.

Naturally, these developments will be of great concern to IOCs, and developments after the Supreme Court's decision will no doubt be watched by them with interest. 

Wider ramifications

One ramification, which may not be apparent at first glance, is the impact of the Supreme Court's decision on Turkey. Since 2014, the KRG and Turkey have benefited from a deal by which the KRG's crude oil was transported to Ceyhan and sold by Turkey.

The Iraqi Federal Government already has a US $24bn arbitration in front of the ICC against Turkey. If anecdotal evidence is to be believed, the claim may have merit, despite being stalled by the deaths of 2 of the members of the arbitral tribunal and other delays caused by COVID-19.

The Supreme Court's decision and the outcome of the ICC arbitration may also impact Israel. Israel has been the ultimate destination for much of the crude oil piped to Ceyhan, with the proceeds making their way back to the KRG and Turkey.

Whether the Federal Government's arbitration is successful and is subsequently enforced is almost a secondary issue. Most importantly, the Federal Government may now have sufficient leverage to cause Turkey to realign its support to it, rather than favouring the KRG.

What next?

The unfortunate answer is that no one knows what will happen next. Legal developments in Iraq have never been fast. If the Federal Government is intent on clawing back revenues from IOCs (as opposed to the KRG) it faces an uphill struggle.

The Supreme Court's decision clearly has political undertones and the provisions of the KRG's PSCs are generally governed by English law and international arbitration. There is no doubt that any decisions made by international arbitrators pursuant to the PSCs will be far more considered than acts of the Supreme Court.

By way of example, an arbitral tribunal will have to reconcile the terms of the PSCs dealing with the KRG's right to the hydrocarbons with the Supreme Court decision. For example, Article 2.1 of the KRG Model PSC unequivocally states:

"This Contract is a production-sharing arrangement with respect to the Contract Area, whereby the GOVERNMENT has the right, pursuant to the Constitution of Iraq, to regulate and oversee Petroleum Operations within the Contract Area."

There are many hurdles that the Federal Government will face in trying to implement the Supreme Court's decision. However, for the time being, it is entirely unclear whether the Supreme Court's decision is the Federal Government 'sabre-rattling', or, a genuine attempt to de-stabilise the oil and gas landscape in the Kurdistan region.  

Further Reading