Remarks On The Proposed INOC Law

Remarks On The Proposed INOC Law

By Ahmed Mousa Jiyad

Mr Jiyad is an independent development consultant and scholar. He was formerly a senior economist with the Iraq National Oil Company and Iraq’s Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya@online.no). He wrote this paper for ‘MENA 2009 – The 7^th Middle East and North Africa Oil and Gas Conference – Aspects of the New Discovery and Production Cycle of MENA,’ organized by Target Exploration, 28-29 September 2009, Imperial College, University of London.

Introduction

The Iraqi Council of Ministers (COM) in its ordinary meeting No 28, dated 28 July 2009, approved the draft law reinstating the Iraq National Oil Company (INOC), and decided to pass it on to the parliament for enactment. Earlier, in February 2009, a Symposium for Reviewing Iraq Oil Policy was held in Baghdad. One of the basic documents was a thorough report prepared by a team of nine senior oil officials, including two former oil ministers, on the state of the upstream petroleum industry. Among the recommendations of the report is the urgent need to establish a “National Oil Company.” Copies of the said report and a draft law re-establishing INOC were included in the symposium folder. Both texts of the law (of February and July 2009) still have the date 2007 written on them!

A brief background review shows that INOC was subjected to a series of laws that kept changing. It was established by Law 11 of 1964 and three years later that law was replaced by Law 123 of 1967, and this one was soon to be amended by Law 130 of 1967. Law 97 of 1967 entrusted INOC with wider powers and exclusive rights to develop petroleum fields in the areas specified by the said law, and thus this law became one of the pillars of INOC and the upstream petroleum sub-sector development. Oil nationalization of the 1970s enhanced further the role of INOC, which gradually managed to increase the country’s production capacity to 4mn b/d and augment proven oil reserves to 115bn barrels.

The role of INOC, and that of the Ministry of Oil, was consolidated by the enactment of Law 229 of 1970, which was amended by Law 84 of 1985 relating to the preservation of the hydrocarbon resources of the country.  However, in April 1987 and by decision 267 of the deposed former regime, INOC was merged with and thus became part of the ministry. The recently proposed INOC law revokes both Law 123 of 1967 and Decision 267 of 1987.

It should be stated at the beginning that the call for reinstating INOC has been persistent among most of the Iraqi oil professionals inside and outside the country, though with different views to reflect the change of time and circumstances. Therefore, in the opinion of this author, re-establishing INOC is an important and needed course of action that deserves full support and attention to establish the company on solid grounds and correct premises, and to assign it the role it should have to play in the effective development of the nation’s petroleum resources. Furthermore, the INOC law is among the envisaged legislations that are part and parcel of the proposed Federal Oil and Gas Law (FOGL), still under consideration by both the ‘legislative’ body – the Parliament – and the ‘executive’ branch – the Government.

The purpose of these brief remarks is to provide quick review of the latest version of the law and to highlight major differences with the earlier text, and attempt to analyze its significance, identify flaws and cohesion and questions about its timing.

INOC And Public Company Law

Article 2 (first), refers to INOC as a “holding company.” This is rather different from what was proposed in the earlier text, which refers to INOC as a “public company.” Furthermore, the term ‘holding company’ has not been used in Iraq for any state company inside the petroleum sector and outside it. Also, Public Company Law (PCL) 22 of 1997 makes no reference to public holding companies. This implies the need to amend the PCL to incorporate ‘holding company’ as ‘public company’, otherwise the term holding company remains legally ambiguous and could be contested on grounds of illegality. 

International corporate law defines a holding company as “a corporation that owns a majority of shares of one or more other corporations. Usually a holding company is not engaged in any business other than the ownership of such majority shares.” This also means a holding company is “a company that confines its activities to owning stock in, and supervising management of, other companies, which it holds a controlling interest in them.”  

It is not clear why the term “public company” was replaced by “holding company”,¹  since the latter term contravenes clearly both the “purpose” of INOC and the “means” by which it attains them, as stipulated in Articles 3 and 4 respectively of the present text itself, as discussed next. On the other hand there is apparent ambiguity, by will or negligence, when the law refers to INOC as “holding company” in Article 2, while it refers to it as “public company” in the raison d´être justifying the law.

Furthermore, Article 25 (two) clearly states that provisions of PCL apply to INOC except what contravenes this proposed law. However, disparities between the two laws are so many, so substantive and so effective that it makes no sense nor serves any purpose to have INOC governed by the PCL. This adds even more ambiguities and creates further legal complexities that could affect the functions of INOC and its legality.

What is mystifying is that, while PCL provides the possibility of excluding any “extractive company” belonging to the Ministry of Oil from the provisions of the law (Article 41), the proposed INOC law brings such companies under the umbrella of the PCL despite all the identified serious disparities between the two laws. This, once again, testifies that quick fixes and hasty proposals seem to dominate policy making, an attitude that could only result in more confusion and further procrastination. 

Objectives Of INOC And Its Means To Achieve Them

According to Article 3, INOC aims to attain the maximum level of development and production of petroleum (oil and gas) and activities related to them by means of appropriate technical principles, in a way that is economically rewarding and involves the use of modern technologies. Through its activities and the activities of the companies it owns fully or partially, INOC can use many ways and means to achieve these objectives, as stated in Articles 4 and 15.

Having been characterized legally as a “holding company”, INOC might find itself legally restricted with regard to entering into international contracts “directly related to or involving gas and or oil fields development”, thus defeating its own objectives and unnecessarily placing legal obstacles in its way. In specific terms INOC might not be able to realize these nationally critical objectives through its activities and thus must use its operating companies instead.

From the above there is apparent contradiction and incompatibility between the nature of INOC as a holding company and its direct involvement in achieving the objectives of developing the country’s upstream petroleum sector.

To resolve this impasse there are two options: either define INOC as “public [state] company” by modifying Article 2 (first), or by deleting the words “its activities and” from the start of Article 4. The first option could lead to strengthening INOC as a petroleum company directly involved in the upstream activities; it gives INOC flexibility to develop petroleum resources economically and it helps to realize the objectives of petroleum policy within the national sustainable development framework. The second option, on the other hand, reduces the role of INOC into managerial and coordination functions supervising, at best, much stronger regional or provincial oil companies. 

At this stage, and considering the state of oil sector, the prevailing political conditions, the embryonic capacities of the proposed provincial oil producing companies outside South oil Company (SOC) and North Oil Company (NOC), and the alarming corruption incidents it might be preferable to adopt option one. 

INOC And The Council Of Ministers

According to Article 2, INOC will be “attached to the Council of Ministers.” This could cause many problems. First, PCL No 22 dated 1997 does not envisage a public company being attached to COM but to a sectoral ministry. This implies the necessity for amending the PCL to accommodate this new situation, and address the resulting complexities due to the significant mismatching between the proposed INOC law and the PCL. Second, the COM is more ‘political’ than the Ministry of Oil, and this could lead to INOC becoming more politicized, though it has an independent legal entity status with its own “Management Council/Board of Directors” (Articles 10, 11 and 12). If INOC becomes embroiled in the Muhasasa [party quota] politics, being a holding company, then things could go sour, and INOC and the oil sector could be affected negatively. Third, from an operational angle, will the COM or an entity within the COM structure have the direct supervisory link to INOC? And, considering the significant role of the Federal Oil and Gas Council (FOGC), as discussed next, will this generate a conflict and an overlapping of authority over INOC?

On the other hand having INOC attached to the COM might relive it from the exclusive dominance of the Ministry of Oil, and could provide the company with wider official and political audience, and with this INOC could have more flexibility and power. But this remains to be seen.

Undoubtedly, removing INOC from the umbrella of the oil ministry could weaken the latter, and confine the ministry’s role to the midstream sector of petroleum industry. The formal relationship between the two would be confined to the “two oil and gas experts” nominated by the Minster of Oil as members in the INOC Board of Directors (Article 10 – fifth), and Ministry of Oil membership of the FOGC. 

Again, that will depend on the pending law pertinent to the organization of the ministry itself, and the position of other related state companies and organizations that are currently under its domain such as Oil Exploration Company (OEC), Iraqi Drilling Company (IDC), and State Oil Marketing Organization (SOMO).   

FOGC and FOGL

Article 4 gives the FOGC a significant role in the functioning of INOC. Obviously, the law assumes the existence of this council. However, since this has not been created so far and FOGC is an integral part of the still pending “Federal Oil and Gas Law”, then who could establish FOGC and by what legal mean? Will it be by an executive order or by a constitutional law? Again, at the February symposium referred to above a suggestion was made to create FOGC by an “executive order”, but obviously this did not get off the ground.

The same also applies to FOGL. The current draft of the INOC law refers to “Law” (Article 2 (second), Article 4 (third, B)) and “Oil and Gas Law” (Article 4 (third, C and fourth), Article 12 (fifth, A) and Article 25 8 (first). The question then, which “Law” and “Oil and Gas Law”? Is it the “Federal Oil and Gas Law (FOGL)” that has been with the Parliament since February 2007, and if yes, then which version of it, since there are four different versions? Or was the reference to the pre-2003 oil “laws”? But again which one? Are we then back to the parliament?

The above indicates that unless FOGC is established and FOGL is enacted by the parliament, the INOC law has no chance to see the light and thus remains invalid. Critical provisions that deserve particular attention and which are directly linked to FOGL and FOGC are those related in Articles 4 and 15 of the INOC law.

The Board Of Directors/Management Council

Article 10 of the Law shows the members and composition of INOC board of directors. The following observations are made on this council: first, the members of INOC management council represent the same entities that are represented in FOGC (if and when this is established). Since FOGC has the supervisory role over INOC then there is a serious problem related to possible infringement on the “good governance” principle and a potential absence of “checks and balances” modalities. Second, the council has no member representing the “employees” of INOC ²  and its associated companies (SOC, NOC, Misan Oil Company and others), and has no member representing the oil “Trade Union.” The absence of employee and worker representations in the management of INOC violates the principle of “participatory development” and could have negative consequences on the relationship between the management and real workforce. Third, the heads of all “fully owned companies” are members in the council but the “partially owned companies” have no representation in the council. Yet, these “partially owned companies” could play a significant role in the operations of INOC.

Oil Marketing

INOC, according to Articles 4 (third, A and B) and Article 15 (third), has the responsibility for the “marketing” and conclusion of “export” and “oil and gas shipping contracts.” Unless SOMO becomes part of INOC this represents taking over the functions and assuming the role of SOMO, which in other words makes SOMO a redundant entity, or generates a conflict between INOC and SOMO on these matters (Article 15 (sixth, A).

Exploration, Development And Production Contracts

This law authorizes INOC to “conclude exploration, development and production contracts” (Article 15 (third), with the approval of FOGC (Article 4 (third, A)). If the INOC board of directors “decides” to endorse these contracts and send them to FOGC for its “approval”, FOGC has 15 days to give its consent, and it is deemed given after another 15 days (Article 12 (fifth, B)).

There are a few very serious problems with these provisions: first, the approval of FOGC of such important contracts can be obtained by default through elapse of time; and second, these contracts should be conditional upon the approval of the parliament. But these provisions circumvent the parliament from having its constitutional say on these contracts. The parliament should, therefore, review this INOC law very carefully.

Other Oil And Gas Companies

The proposed INOC law refers to SOC and NOC (Articles 14, 23 and 26) but does not refer to Misan Oil Company (MOC) though it has been established for a while, post-2007. The same also applies to South Gas Company (SGC) and North Gas Company (NGC).

Probably those who revised the law (draft version 2007) were focusing their attention on specific articles in the law instead of a complete revision of the entire law. Or, more alarmingly, the law was intended to have INOC confined to these two oil producing companies. If that is the case then this law could contribute to having a fragmented oil and gas production structure.   

Miscellaneous

In addition to the above the text of the law suffers from the following shortcomings:

• The definition of “The Company [INOC]” should be added to Article 1.

• The word “development” was missing from Article 4 (third, A), and should be added.

• The Arabic word of “capital” in Article 6 (first) was not correct.

• The Arabic word of “each of the” in Article 13 (fifth) was not correct.

• The position referred to in Article 14 (fourth, B) has a different name to that referred to in the same article (first, E).

Timing Questions

As mentioned earlier, the INOC law was referred to as one of the package of laws envisaged by FOGL approved by the Cabinet in February 2007. Then it was mentioned forcefully during the February 2009 symposium, but until recently nothing was done about it. Therefore, one would wonder what had prompted the cabinet to take this move by approving the draft of the law by end of July and sending it to the House of Representatives a few days before the latter’ summer recess, which coincided with the holy month of Ramadan.

The proposal came days after the Prime Minister returned from an official visit to the US and held discussions with both the American administration and the UN. Was the timing of the INOC law linked to these discussions during the visit?

Also, the law was approved a few days before the visit by the PM to the Kurdistan Region, where he held a meeting with the President of the Kurdistan Regional Government (KRG), Masoud Barzani, in the presence and through the mediation of the President of the Iraqi Republic, Jalal Talabani. Has the approval of the law by the Cabinet anything to do with this visit?

The general election is looming, being scheduled for January 2010, and all political parties began their efforts to form new coalitions or renovate and mend the existing ones in preparation for the election. The election could lead to a new parliament and new government with, most likely, a different political composition. Was INOC used by the PM and his political alliance for election purposes?

Finally, recent developments and deliberations regarding FOGL inside the parliament indicate that the latter is throwing the issue back to the government. The Speaker of the House, Iyad al-Samarrai, met on 13 May with the members of the Oil, Gas and Natural Resources Committee (OGNRC) in the Parliament and senior officials from the Ministry of Oil, and he suggested setting a deadline for the government to present before the parliament a final version of the law with approved annexes. To this end the OGNRC decided on 15th July to send an official request to both the federal Ministry of Oil and the KRG, asking both if they have any remarks on the 15 February draft of the FOGL.

The head of the OGNRC, Ali Balo, announced that a “high” committee be formed to discuss FOGL. However, no further information was provided to indicate whether this high committee would be  composed of parliamentarians only or include members from the “executive” or even from outside both the government and the House.  So far no action has been taken regarding this high committee. Therefore, who is circumventing whom by taking a “pre-emptive” action?

Conclusion

The draft of the INOC Law requires serious and comprehensive revision as outlined above. What is needed is a well-organized, strong and independent INOC that constitutes the backbone of the oil sector development. The disparities between the proposed INOC law and the PCL are so serious that it is imperative to harmonize the two, and this could call for serious revision and redrafting and amendments to both laws.

Fundamentally, unless an appropriate, sound and coherent Federal Oil and Gas Law is approved by the parliament and enacted in a constitutional way, this INOC law has no chance of been enacted. Furthermore, the demarcation of the lines between INOC and its relationship with the Ministry of Oil requires the promulgation of the law for the latter. Hence we are back to square one – February 2007!

Notes:

1. According to Thamir A Ghadhban the reason behind that was to keep South Oil Company, North Oil Company and Misan Oil Company as companies, otherwise they would lose their status and become branches or divisions, or “organizations” as they used to be called before the introduction of Law 22 of 1997. T A Ghadhban, (2009), ‘Clarification about INOC draft law’. Comment posted on Iraq Oil Forum (http://www.iraqoilforum.com/?p=1034&cpage=1#comment-25) and accessed 10 August 2009).

2. It should be mentioned that according to Public Company Law 22 of 1997 the “employees” of a public company have two representatives in the board of directors and another one among the alternates (Article 20, second and  fourth). This makes it mandatory to have the employees representation if INOC and any of its companies are governed by the Public Company Law.

Copyright MEES 2009.