Opening up shop in a country like Iraq can bring up a lot of questions, finding good advice is vital to success. International law firm, CMS Cameron McKenna, delivers a primer on the main considerations that oil companies must take into account when operating in Iraq.
Navigating through Iraq’s complex and unique legal environment can be challenging. But companies that decide to take the risk of entering the country are often pleasantly surprised by the rewards, especially when they have solicited the right advice.
While certain issues may seem unusual to a company with a history of operating in Europe, the processes in Iraq could seem favourable to those companies previously operating in other challenging environments (e.g. Iran, Venezuela). Regardless, entering a new venture with the right information is critical.
London headquartered CMS Cameron McKenna’s (through its Dubai office) recently hosted an Iraq Oil & Gas Legal Briefing to discuss some of the issues that can arise when operating in Iraq.
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Top three challenges
– Taxation is one of the major issues which companies entering Iraq must consider. There are many ways in which a company can approach any problems it encounters in Iraq. “A consistent approach is that prevention is better than cure,” says Stephen Millar, partner and head of Energy, Projects and Constructions at CMS.
Some companies enter Iraq on the assumption that particular tax provisions do not apply or they may estimate their cash flow in a particular way, he explains. However, if the company encounters a tax liability for its operations in Iraq, and is also subject to a withholding which its client may keep or pay over to the tax authorities, this could have consequences for the company’s financial health, says Millar.
– Procurement is another issue that commonly arises in the oil and gas sector. The general rule is to check which regulations are applicable when dealing with a particular project, advises Millar.
“Whilst there is federal legislation applicable to government contracts, it is common for various Ministries, and their departments, to implement further regulations applicable to companies that they contract with,” he warns.
– Customs have also proven to be a recurring issue for companies working in Iraq. The best way to prepare for customs difficulties is finding as much relevant information as possible prior to getting goods to the Iraqi borders. “Despite the issues faced, the customs authorities have been slowly improving the processes to allow goods to enter Iraq,” says Millar. A number of customs issues are also more easily dealt with on-the-ground in Iraq rather than from abroad.
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Dealing with the Ministry of Oil
According to Hadeel Hassan, consultant at CMS, the Ministry of Oil does try to provide clarification or interpretations of various regulations applicable to oil and gas operators in Iraq.
“Whilst useful, such clarifications can only be taken as guidance and are rarely reduced to writing,” she warns. Although communication with the Legal Department of the Ministry may prove useful, the feedback from the Ministry is most commonly verbal and does not give the same comfort as a written document.
Hassan believes that there are four important facts that companies should consider when dealing with the Ministry of Oil of Iraq:
1) Iraq’s oil reserves are currently considered as the 3rd largest in the world. Bearing in mind that these are based on legacy data, some predict that Iraq’s reserves could be the largest when technology of international standard is deployed.
2) During the past 10 years the country was a zone of military conflict and it is possible to see how development of modern standards evaded the Ministry of Oil.
3) Even with best efforts, the ministry of Oil of Iraq has to educate its personnel to the change of attitude from Sadam-era to the current environment of working in collaboration with IOCs.
4) The first oil licensing round was held in 2008, which could be considered as the starting point for the import of knowledge and technology via the IOCs entering Iraq.
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Staying Green
Like anywhere else in the world, the need to protect the various stakeholders in a production operation along with the environment, is absolutely critical.
“The risk of pollution in Iraq is combated in a manner similar to other regions in that pollution from any activities must be minimized or the companies risk fines, closure of their facilities or imprisonment,” explains Malek Takieddine CMS Consultant in Beirut.
Furthermore, the environmental regime is underpinned by legislation which allows for ease of enforcement.
“The Federal Government of Iraq takes pride in the country’s attitude to the environment,” says Takieddine. Iraq has adopted international standards with the introduction of an updated Environmental Law in 2009. The law defined the Environmental Impact Assessment and detailed several criteria required.
“This adoption of and adherence to international standards showed an awareness of the negative impact of pollution associated with a lax environmental regime,” he adds.
In order to ensure that the environmental regime is enforced, the Federal Government employs an Environmental monitor, a member of judicial control, who is authorized to enter and observe facilities at any hour. Furthermore, the environmental police assist the environmental monitor in the performance of his duties.
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The Kurdistan Conundrum
Kurdistan’s oil and gas production industry continues to become more lucrative. Matthew Culver, Dubai office managing partner for CMS, points out that this is because companies working exclusively in Kurdistan tend to encounter less bureaucracy or time delay and enjoy a more stable and secure working environment.
“Historically, certain corporates’ policies have designated Iraq as high risk and refused employee travel to the country with the exception of Kurdistan where the level of security risks was deemed acceptable,” he adds.
At the same time, contracts awarded the oil companies in Kurdistan have proven to be more popular than those awarded to the companies working in the south. Technical Service Contracts are used in the South of Iraq, providing oil companies with a flat fee per barrel of oil produced.
Kurdistan uses Production Sharing Contracts which limit the NOC’s participation and offer IOC’s a share of the production revenue, potentially resulting in greater revenue.
“Despite the fact that the volume of oil is greater in the South of Iraq, the applicable contracts are considered less attractive than those available in Kurdistan as a result of the different contract form and regulating price structures which are used,” explains Slava Kiryushin, associate for CMS in Dubai.
The Kurdistan Regional Government has also continued to make the region more attractive to IOC’s, explains Kiryushin. “The plan to develop an independent pipeline to Turkey has given the region a practical alternative, dulling the need to reach a resolution or compromise with Baghdad,” he says.
There has also been little concern over the legality of the contracts in Kurdistan with roughly 50 contracts having been signed with the KRG. “Although the Federal Government is insisting on a blacklist for those companies which enter into a contractual relationship with the KRG, the incentive of better potential returns has led companies to consider this a risk worth taking,” he says.
It is unclear whether this increased pressure will indeed bring about any drastic changes to the contracts which the Federal Government is offering to IOC’s.
“So far, the Federal Government has taken a challenging stance to companies which choose to enter into PSCs with the Kurdistan Regional Government, declaring the contracts illegal and blacklisting those companies from participation in oil licensing rounds in the South of Iraq,” he adds.
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Clamp down on Corruption
Iraq was ranked 169th out of 174 countries on the Corruption Perceptions Index 2012, proided by Transparency International.
The scale of business and associated corruption in Iraq is acknowledged as a serious issue with internationally developed strategies to combat the problem in other jurisdictions, such as audits and fiscal budgets, failing to have an impact.
In order to best protect against corruption, companies need to ensure that their employees are both aware of and trained on the requirements of international standards, such as the Foreign Corrupt Practices Act or the UK Bribery Act, explains Sarah French, associate for CMS in Dubai.
“Companies should also ensure that effective practices are involved to prevent any unnecessary risk of falling foul of such legislation,” she says, adding that accurate record keeping is also prudent to guard against corruption.
Companies operating in commercial environments in which corruption is endemic continue to face the risk of large fines in the event they violate applicable legislation.
“As a result of highly publicized fines against companies found in breach of such legislation, more effort is being made to actively inform employees,” she says. In addition, FCPA and UK Bribery Act clauses have been inserted into contracts to ensure standards are maintained at a contractual level.
According to French, the Iraqi government is working against corruption, as is evident by the unveiling of its National anti-corruption strategy in 2010. Iraq has also joined the Extractive Industry Transparency Initiative (EITI), engaging with the international community in its efforts to combat the issue.
“However, it is arguable that these initiatives have had limited success,” she says. “Although government bodies have been created to investigate reports of corruption, its members often operate under the threat of violence, substantiated by the murder of several investigators.”
Ultimately, French is under the impression that, “corruption is still a significant issue in Iraq with a dearth of legislative and governmental support for tackling the problem.”
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Arbitration
Like anywhere else in the world, companies looking to settle a dispute through arbitration must consider the end goal: enforcement. Depending on the jurisdiction where an award will be enforced, the strategy (or even the decision to commence arbitration) will differ.
Rupert Choat, partner and head of construction disputes for CMS in London, gives the hypothetical example of a company in dispute with a non-state owned counterpart based in Iraq (having no assets outside of Iraq) needing to consider the conduct of the arbitration proceedings.
“This is because when trying to enforce the award in Iraq, the Iraqi courts will look at the way in which the arbitration was conducted,” he says.
“The Iraqi courts may set aside the award if the process was not in line with the rules governing arbitration in Iraq.”
Choat points out that the key consideration is to look at how a company can eliminate or minimize the potential for spending thousands (or millions) on arbitral proceedings resulting in an award which cannot be enforced.
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Erbil Energised
The 3rd Erbil International Oil & Gas Exhibition will open its doors in Erbil, Iraq on September 2-5, 2013.
The event, officially supported by the Ministry of Oil and approved by UFI will be held at the Erbil International Fairground, is one of the largest energy related events in Iraq.
2nd Erbil Oil & Gas Exhibition concluded on the 6th September 2012 with 51 exhibitors and 5000 visitor numbers.
This was one of the massive events of Northern Iraq region dealing with oil and gas sectors. 1782 people visited the event on the first day.
Government associates, engineers and decision makers from natural oil company, construction sector, engineering construction & contracting services, financial services, project consultancy, repair services, trade associations, transportation, storage & handling came to the show in large numbers.
For both regional and international companies, this exhibition provided a platform to assess the products and technologies available to local companies.
After the great success of 2nd Erbil Oil & Gas, 90% of the participants confirmed their willingness to participate in the 3rd edition of Erbil Oil & Gas. Represntatives from all levels of the industry are invited to join the 3rd Erbil Oil & Gas Exhibition 2013 in order to take advantage of the immense business opportunities that Kurdistan region offers.
