KRG Ministry of Natural Resources

Office of KRG Spokesman, 22 August 2006

Erbil, Kurdistan – Iraq, 22 August 2006 - The initial Kurdistan Regional Government (KRG) Draft Petroleum Act was produced for internal discussions in early July 2006. At the same time, a similar compatible Draft Law was also prepared by the KRG for the whole of Iraq, which was presented to the Federal Authorities. Over the last several weeks, it became apparent that the priorities of the Federal Authorities remained focused on other pressing matters, hence the KRG decided to publish our Draft Petroleum Act for the Kurdistan Region for public consultation on 7 August. This was intended to generate some feedback internally as well as from the wider international investment community regarding the fairness and the clarity of the proposed Act. 

Since its announcement on the KRG website, the Draft Petroleum Act had over 1,830 hits. We have also received a number of calls, as well as written enquiries on the subject, which have been compiled by the KRG Spokesman Khaled Salih. Dr. Salih referred these questions and enquiries to Dr. Ashti A. Hawrami, the KRG Minister for Natural Resources, who responds to them and other questions here. 

Q: Are you pleased with the level of response so far and has this exercise helped you to confidently proceed with the Act and seek the approval of the Kurdistan Region’s parliament (the Kurdistan National Assembly) on it?

Dr. Hawrami: Indeed, I am very pleased with the responses and comments, as they indicate support and serious interest in the Act and in the accompanying production sharing contract (PSC) model. Therefore, I am now confident that the Draft Act will be seen as being fair, clear and investor friendly, hence in due course I will proceed to the next step to get it approved by the Kurdistan Region’s parliament. We will then be able to expedite inward investment to Kurdistan, which should provide significant benefits to the people in Kurdistan as well as to the rest of our people in the Federal Iraq. 

Q: What is the process now and are you still aiming for September? 

Dr. Hawrami: Firstly, we need to deal with the comments received (work on that has already started), then we need to get the Arabic and Kurdish versions updated and reviewed. These matters may take another two or three weeks, so by around mid-September the Draft Act should be ready for presentation to the Parliament. The Draft Act is expected by the Kurdistan Region’s parliament, so it should not take too long to be formally approved. 

Q: Are you going to wait for the approval of the Kurdistan Region’s parliament before inviting companies for potential contracts? 

Dr. Hawrami: No, we have already started the process. We need to have discussions and time for negotiations with the interested companies, so by the time the Act is approved we should be in the position to sign a number of new contracts. 

Q: Are these the usual “small” size companies that the KRG opponents keep attacking at every conceivable opportunity, or do you expect some larger companies to come as well? 

Dr. Hawrami: Firstly, nothing is wrong with these small companies. Each of the four groups that presently has contracts in Kurdistan, has its market capitalization well in access of $2 billion. So, they are not that small and for sure they are capable of undertaking the contracts assigned to them. The critics should remember that all the present day majors also started from a very small base, and they only grew by taking risks on the opportunities that came their way. People should also remember that, at the time we had these companies, Kurdistan was in a difficult situation: there was no constitution, no investment law, no petroleum law to encourage the larger companies to invest in Kurdistan, and two regional administrations to deal with. Over the last 18 months all of that has changed very rapidly and favourably. Kurdistan is now open for business and offers real opportunities to all types of companies, including the majors. Our primary criteria for selecting companies would be their overall technical capability and financial strength to perform the contracts in question. Indeed, over the last few months, in particular as the result of our recent Investment Law and our Draft Petroleum Act, I had been approached by over 10 medium to major size companies who have indicated a readiness to do business in Kurdistan. 

Q: Several press reports claim that the some people in Baghdad regard the previous agreements to be illegal. How do you react to that? 

Dr. Hawrami: I think these comments might just be the rehash of all the old stories or they are coming from people who may not have a full understanding of Iraq’s Constitution, or perhaps they just simply do not respect it. As I said earlier, we only have four signed contracts, but I am unaware of any official objections from Baghdad on them. For the record, everyone should be aware of the good standing of all these contracts, as their legality is clearly reaffirmed by Article 141 of the Iraq Constitution, which states that “Legislation enacted in the region of Kurdistan since 1992 shall remain in force, and decisions issued by the government of the region of Kurdistan, including court decisions and contracts, shall be considered valid unless they are amended or annulled pursuant to the laws of the region of Kurdistan by the competent entity in the region, provided that they do not contradict the Constitution.” 

Q: As you said, the legality of the contracts is clear but how about their commercial terms, particularly the DNO contract which is often criticised? 

Dr. Hawrami: Again, these criticisms are coming from the same sort of anti-Kurdish, anti-federalist people and their friends who appear to be very selective in their analysis. In the case of DNO, the Contractor consists of two parties (DNO and the KRG), each contracting party has 50% interest in the projects, the other party to the contract is the Government of Kurdistan (the KRG). The contract allows for 40% oil profit to go to the contractor (which means 20% to DNO and 20% to KRG). I’m sure anyone can work easily out that this is 20% overall profit to DNO as a foreign investor, and not 40% as the critics keep saying. I believe that a 20% margin is reasonable, considering that DNO took an exploration, as well as a political risk, by working in Kurdistan. We are proud of our partnership with them. Likewise, we are happy with all the commercial terms of the other three contracts. Therefore, my message to everyone is to get real, find something constructive to do or to talk about, because Federal Iraq is here to stay. The KRG will not waiver from any of its constitutional rights, and for sure we shall also continue to support the rights of all the governorates as defined in the constitution. 

Q: Can you cite some of the specific comments received on the Draft Act? 

Dr. Hawrami: As I mentioned in the beginning, the comments are all positive and there are a few constructive recommendations from a number of oil companies which relate to major integrated projects, contractual rights to “associated and non-associated gas”, and the royalty and the cost recovery limits in the cases for high risk frontier exploration, or for projects involving major upfront capital investment. Other comments were of a minor nature, but will nevertheless be addressed in the final Draft Act. A couple of general messages of support are worth mentioning just to illustrate how well the Draft has been seen. An e-mail message from a major oil company started by saying: “It took some time for us to digest the documents. Congratulations and our compliments, this is a modern petroleum law that covers all relevant points”; another message said “Well you have made excellent progress in a very short time, here in the USA the documents are seen to be fair, modern and thorough in all aspects”. 

Q: People have asked if we had any responses from Baghdad. Are you aware of any? 

Dr. Hawrami: To be fair I did not expect any from Baghdad. They already saw our proposed Iraq Act some six weeks ago, which is similar to the Kurdistan Act. However, I understand that our proposed Act for Iraq has been circulated in Baghdad for comments. This is excellent news. I had a couple of indirect messages from senior people at the Oil Ministry who seem to like it because of its inclusiveness and its special concern for the whole country. So, we hope that the Iraq Act also progresses soon. 

Q: There were comments on selecting PSC (production sharing contract) as a model, versus a buy-back type model. How do you respond to these? 

Dr. Hawrami: Due to my international work for over the last 30 years and in looking closely at many oil producing provinces around the world, I have came to the conclusion that PSC is the most realistic model that Iraq (or at least Kurdistan) should consider to create the right climate for inward investment. The buy-back model is not widely understood, in fact it has not been implemented anywhere except in one country where it failed badly to attract any serious inward investment. Therefore we must not blindly copy this type of model and make similar mistakes, as this will cost us dearly for sure. 

Q: How do you respond to those who discourage oil companies from coming to Kurdistan? 

Dr. Hawrami: Again, I am not surprised as this, which is coming from the similar anti-Kurdish and anti-federalism sources. However, I strongly object to those who are in senior government employment positions, who abuse their roles by discouraging investment into Kurdistan. I feel they are clearly undermining the constitution and their actions will not do any good for Federal Iraq. If they continue with their hostility towards Kurdistan, we will name and shame them by taking them to the Federal Parliament. 

Q: Finally, when do you expect to produce oil from the previous contracts? 

Dr. Hawrami: The DNO discovery and the Taq Taq field should come into production during the first and second quarter (Q1 and Q2) of 2007, respectively. Export pipeline connections are under consideration, the initial production levels should start at around 40,000 barrels of oil per day, increasing by the end of 2007 to over 100,000 barrels of oil per day. In 2008 we should go to over 200,000 barrels of oil per day. Surely this is an excellent start to bring early new revenues for the benefit of the entire population of Iraq. Considering this positive contribution from the KRG, I wonder who in their right mind could justify discouraging new investments in Kurdistan, which in due course and with our fullest support will certainly extend to the rest of the country. 

The proposed draft Petroleum Law for the Kurdistan Region and related documents