On 17 February 2022, we reported that the Iraqi Federal Supreme Court ("Supreme Court") issued its decision in case 59/Federal/2012 and Unified 110/Federal/2019 ("Decision"). The Decision declared the Oil and Gas Law No. 22 of 2007 ("KRG Law"), giving the Kurdistan Regional Government ("KRG") the right to administer oil and gas operations in Kurdistan, unconstitutional.
The Supreme Court set out ten reasons why the KRG Law was unconstitutional and, further, instructed the KRG to hand-over all oil production in the Kurdistan region to the Iraqi Federal Government. To review our article on the Decision click here.
We noted that one of the key ramifications of the Decision was that Production Sharing Contracts ("PSCs") between the KRG and International Oil Companies ("IOCs") could be declared invalid by the Iraqi Federal Government.
On 7 June 2022, the Iraqi Ministry of Oil / Supreme Advisory Committee issued a letter to all National Oil Companies stating that they are required to:
- Submit a pledge not to work in contracts or projects in the Sector of oil and gas in Kurdistan region of Iraq, that are contrary to the [Decision].
- In the event of existing contracts or projects, the companies undertake to terminate them within three months from the date of the letter [i.e. by 7 September 2022].
- In case of non-commitment to [the above], the involved companies will be blacklisted.
The above requirements apply to any "contracts and projects in the technical, logistical, advisory, service and other fields in all oil fields and projects operating in Iraq".
On 12 June 2022, the Basra Oil Company ("BOC"), which oversees the majority of production in Iraq, issued a letter to all IOCs. This letter stated that the requirements issued by the Iraqi Ministry of Oil / Supreme Advisory Committee apply to NOCs, IOCs and (importantly) to all of the IOCs 'subcontractors'.
In effect, BOC has asked the entire oil and gas industry (including all technical, logistics, advisory and other service providers) in Federal Iraq to abandon all operations in the Kurdistan region or risk being blacklisted.
The legal basis for the Iraqi Ministry of Oil and BOC's letters is unclear and the move appears to be primarily aimed at increasing political pressure on the KRG.
Politics aside, the important question for any IOC operating in Federal Iraq will be whether BOC's instruction to terminate existing contracts amounts to BOC agreeing to provide compensation for any:
i) expenses arising because of contract termination;
ii) delays incurred because of a need to engage alternative suppliers. This will be relevant to IOCs that have deadlines to their Field Development Plans; and
iii) additional costs incurred by re-tendering and engaging alternative suppliers. This will be relevant to IOCs given the tightening of the rig market and correlating increase in contracting rates.
From our experience, BOC is unlikely to deem its instruction a 'blank cheque' for IOCs to re-tender for new contracts, nor will it assume any liability for early termination costs.
This will undoubtedly put IOCs in a position of tension over potentially non-recoverable costs. IOCs may have to choose whether they continue with incumbent service providers or re-tender contracts.
Suppliers working in Kurdistan may wish to reconsider their corporate structure and / or desire to continue operations. The risk of being 'blacklisted' by the Iraqi Federal Government appears to have increased and it may now be too significant for some companies to accept.