The Federal Supreme Court of Iraq hands down a landmark decision on the status of Kurdistan’s Oil & Gas Law of 2007 and the ownership of oil and gas located in the Kurdistan Region of Iraq

• United Kingdom
• UAE

• International arbitration
• Litigation - Middle East
• Litigation and dispute management
• Energy and infrastructure

17-02-2022

Executive summary

In a judgement issued on 15 February 2022 in The Federal Minister of Oil & Mr Ali Shadad Fares (member of the Council of the Basrah Governorate) v The Minister of Natural Resources of the Kurdistan Region & the President of the Parliament of Kurdistan, the Federal Supreme Court of Iraq (“Supreme Court”) ruled on: (i) the constitutionality of the Kurdistan Region Oil and Gas Law (“KROGL”) of 2007; (ii) the ownership of oil & gas located in the Kurdistan Region of Iraq (“KRI”); (iii) the status of contracts entered into between the Kurdistan Regional Government (“KRG”) and oil and gas companies, traders and foreign States; and (iv) the calculation of the KRG’s financial share of oil revenue resulting from these contracts.

In summary, the Supreme Court held that:

i.   The KROGL is unconstitutional and null and void;
ii.   The KRG is ordered to hand-over all petroleum production in the KRI and other regions from which the KRG extracted natural resources to the Federal Ministry of Oil;
iii.   The Federal Ministry of Oil has the right to "to monitor the termination of petroleum contracts entered into by the KRG with foreign parties (States and companies) relating to the exploration, production, export and sale of petroleum”; and
iv.   The KRG is ordered to allow the Federal Ministry of Oil and the National Audit Bureau to “review” all petroleum contracts for export and marketing signed by KRG, in order to determine the KRG’s related financial rights and its share of the public budget.

Key takeaways

i.   This decision puts an end to a decade long proceeding initiated before the Supreme Court in 2012 and has triggered strong reactions from the Kurdistan political leadership such as Masoud Barzani who described the decision as “political”.[1]

ii.   The most significant implication of this decision relates to the proper scope and interpretation of the “right of the Federal Ministry of Oil to monitor termination of petroleum contracts entered into by the KRG with foreign parties (States and companies) relating to the exploration, production, export and sale of petroleum”. The lack of elaboration from the Supreme Court on the precise meaning of this termination power granted to the Federal Ministry of Oil may result in arguments before national courts or arbitral tribunals.

iii.   Parties who entered into petroleum contracts with the KRG will need to carefully consider their contractual rights and obligations both under Iraqi and International laws by examining the governing law and dispute resolution clauses in their contracts.

iv.   The potential termination of the impacted petroleum contracts by the Iraqi Federal Ministry of Oil may constitute a breach of bilateral investment treaties (“BITs”) pursuant to which Iraq granted specific protections to foreign investors and offered to resolve disputes before arbitral tribunals constituted under the arbitration rules of either the International Centre for Settlement of Investment Disputes (“ICSID”) or the United Nations Commission on International Trade Law (“UNCITRAL”).  Iraq has BITs in force with France, Japan, Kuwait, Armenia.[2]  It is also a contracting party to the Organisation of the Islamic Conference Investment Agreement and the Arab Investment Agreement.  It is also worth noting that Iraq has ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which will facilitate the enforcement of foreign awards in the country.[3]

v.   The Supreme Court decision will also potentially have repercussions on oil & gas exports to Turkey, through which transit the vast majority of oil and gas extracted from the KRI,[4] and more particularly on the currently pending ICC arbitration between Iraq on one side and Turkey & BOTAŞ on the other side, in which Iraq seeks over USD 26 billion in damages, for Turkey’s alleged breach of the Iraq-Turkey Pipeline treaty by facilitating crude exports from the KRI, in spite of the Federal Government of Iraq’s objections.[5]

vi.   The declaration that KROGL is unconstitutional is likely to have significant implications since it underpinned the exploration and production in the entire KRI since 2007.  This may potentially create legal uncertainty since there is no oil and gas legislation at federal level and the Iraqi constitution, despite stating that the responsibility of developing oil and gas resources is the responsibility of both the Federal and regional governments (article 112), and that the oil and gas is the property of all the Iraqi people in all regions and governorates (article 111), falls short of providing the needed comprehensive framework that is provided by a dedicated oil & gas law.

Factual background of the parties' arguments

The Federal Minister of Oil’s arguments

In 2012, the Iraqi Minister of Oil (the “Claimant”) filed a claim before the Supreme Court seeking an order that the Kurdish Minister of Natural Resources complies with the Iraqi constitution and provides all the petroleum produced in the KRI to the Federal Ministry of Oil in accordance with the estimates enshrined in the national budget. 

In support of his claim, the Federal Minister of Oil argued that the Kurdish Minister of Natural Resources: (i) refrained from providing the crude oil produced in the KRI to the Federal Government; and (ii) exported crude oil outside Irak without the approval of the central government, in breach of articles 111 and 112 the Iraqi constitution which provide that:

Article 111
Oil and gas are owned by all the people of Iraq in all the regions and governorates.

Article 112
The federal government, with the producing governorates and regional governments, shall undertake the management of oil and gas extracted from present fields, provided that it distributes its revenues in a fair manner in proportion to the population distribution in all parts of the country, specifying an allotment for a specified period for the damaged regions which were unjustly deprived of them by the former regime, and the regions that were damaged afterwards in a way that ensures balanced development in different areas of the country, and this shall be regulated by a law.

The federal government, with the producing regional and governorate governments, shall together formulate the necessary strategic policies to develop the oil and gas wealth in a way that achieves the highest benefit to the Iraqi people using the most advanced techniques of the market principles and encouraging investment.

The Federal Minister of Oil also argued that the Kurdish Minister of Natural Resources breached article 5(1) of the Ministry of Oil Law No. 101 of 1976, which provides that the Federal Ministry of Oil manages the oil sector and is competent to carry out oil & gas exploration, digging, extraction, refinement, transportation and marketing activities.

Kurdistan’s Minister of Natural Resources’ arguments

The Kurdistan Minister of Natural Resources (the “Respondent”) rejected the Federal Ministry of Oil’s allegations and relied on the main following arguments:

• The management of oil and gas is no longer an exclusive jurisdiction of the Federal Authorities as it used to be the case under previous regimes (prior to the adoption of the 2005 Constitution).

• Article 111 of the constitution should be interpreted through a political lens as opposed to be given a legalistic reading.  This provision is not destined to regulate the management of oil and gas.  Interpreting this article otherwise will lead to a clear contradiction with articles 110, 112 and 115 of the constitution which allocate the responsibilities between Federal authority and the regions.

• By the time the Iraqi constitution was adopted in 2005, the KRG did not own any of what is described as “current fields” in the constitution.  Fields started producing oil and gas after the adoption of the constitution and the Claimant’s interpretation of “current fields” as encompassing “future fields” is wrong.

• The Oil Ministry Law of 1976 does not apply to the KRI because, inter alia, it was adopted under a centralised government regime and not the current federal system.

• The regional governments exercise their powers in accordance to the federal constitution and federal law save for the exclusive powers granted to the federal government as provided under Article 110 of the constitution.

• The powers shared between the federal and regional governments are managed through coordination between the federal and local governments in accordance with articles 112, 113 and 114 of the constitution.

The Supreme Court analysis

The Supreme Court has sided with the Claimant’s arguments and in doing so, it relied on the following findings:

• Pursuant to Article 116 of the constitution, the federal system in the Republic of Iraq is made up of a decentralized capital, regions, and governorates, as well as local administrations.

• Article 110(1) of the constitution sets pout the exclusive powers which belong to the federal government.  These include the formulation of policies relating to: foreign policy foreign policy and diplomatic representation; negotiating, signing, and ratifying international treaties and agreements, and formulating foreign sovereign economic and trade policy.  As a result, the Federal authorities are constitutionally empowered to set out the external sovereign economic and trade policies.  This means that regions are not entitled to exercise that exclusive powers in lieu of the federal government.

• Pursuant to Article 110(3) of the constitution the federal authorities have exclusive powers to formulate fiscal and customs policy; issuing currency; regulating commercial policy across regional and governorate boundaries in Iraq; drawing up the national budget of the State; formulating monetary policy; and establishing and administering a central bank. As a result, regional authorities do not have the jurisdiction to exercise such powers.

• Article 111 of the constitution provides that oil and gas are owned by all the people of Iraq in all the regions and governorates.  The expression “people of Irak” includes all the Iraqi people without exception from North to South and from East to West, irrespective of their ethnicity or faith.  Regional authorities are not entitled to breach that principle and oil and gas revenues shall be distributed amongst all of the Iraqi people in a fair and equitable manner irrespective of the production location.

• Article 112(1) of the constitution provides that the federal government, with the producing governorates and regional governments, shall undertake the management of oil and gas extracted from present fields, provided that it distributes its revenues in a fair manner in proportion to the population distribution in all parts of the country, specifying an allotment for a specified period for the damaged regions which were unjustly deprived of them by the former regime, and the regions that were damaged afterwards in a way that ensures balanced development in different areas of the country.

• Article 112(2) of the constitution provides that the federal government, with the producing regional and governorate governments, shall together formulate the necessary strategic policies to develop the oil and gas wealth in a way that achieves the highest benefit to the Iraqi people using the most advanced techniques of the market principles and encouraging investment.

• Article 115 provides that All powers not stipulated in the exclusive powers of the federal government belong to the authorities of the regions and governorates that are not organized in a region.  With regard to other powers shared between the federal government and the regional government, priority shall be given to the law of the regions and governorates not organized in a region in case of dispute.

• Pursuant to article 130 of the constitution, the following laws are still in force and valid: Ministry of Oil Law of 1976 and the Preservation of Hydrocarbon Wealth Law of 1985, the National Oil Company Law of 2018, the Income Tax on Foreign Petroleum Companies Law of 2010, and the Law on import and sale of petroleum products of 2006.

• In a dispute between the Federal Ministry of Oil (claimant) and the KRG’s Ministry of Natural Resources (respondent), a “US court has already ruled that: (i) the claimant has a legal personality and is entitled to own property; (ii) the respondent administered and exercised its control over property in an unlawful way and by ignoring the claimant’s rights; (iii) the respondent refused the claimant’s request to be given the property back and that the Federal Ministry of Oil has sufficiently clarified that the Iraqi constitution can be interpreted so as it is empowered to manage the oil sector as opposed to the KRG; and (iv) the KRG took the oil for export despite being the property of the Federal Ministry of Oil”.

• The federal authorities have the exclusive power to formulate the federal State’s budget.  The ignorance of such exclusive power by the KRG led to the complication in the relationship between the federal government and the KRG and resulted in the fact that the Kurdistan share in the national budget did not reach the people of Kurdistan so as salaries were not paid in full for a number of years. 

As a result, the Supreme Court held that the production and export of petroleum by the KRG, its entry into contracts with foreign states and companies, and its enactment of KROGL, is in breach of articles 110; 111; 112; 115 and 121(1) of the Iraqi constitution.

If you have any questions about the issues addressed in this Client Alert, or if you would like a copy of any of the materials referenced above, please do not hesitate to contact us.  In addition to having a global arbitration team across its offices in London and the Middle East, Eversheds Sutherland has offices in Baghdad and Erbil in the Republic of Iraq.

[1] https://www.reuters.com/world/middle-east/iraqi-federal-court-deems-kurdish-oil-gas-law-unconstitutional-2022-02-15/

[2] https://investmentpolicy.unctad.org/international-investment-agreements/countries/99/iraq

[3] https://www.newyorkconvention.org/news/iraq+accedes+to+the+new+york+convention

[4] According to an audit report produced by Deloitte and available on the KRG’s website: “During the first half of 2021, the KRG exported 77.35 million barrels through Kurdistan Export Pipeline. In addition, 3.95 million barrels were allocated to local refineries. Of the exported crude oil, 76.869 million barrels were lifted by the buyers from Ceyhan Export Terminal, at an average price of 53.446 $/bbl. The KRG has generated revenues of USD 4.1 billion from crude oil export sales during the first half of 2021. After making payments to oil producers, pipeline operators, and repayments to the buyers, the KRG retained net revenues from crude oil sales of US$ 1.737 billion.”

[5] The Republic of Iraq v. (1) The Republic of Turkey and (2) BOTAŞ Petroleum Pipeline Corporation, ICC Case No. 20273/AGF/ZF. https://gov.krd/english/information-and-services/open-data/deloitte-reports/deloitte-report-2021/