Iraq's contracting policies await state succession

June 30, 2003
The end of Saddam Hussein's presidency in Iraq marks a new beginning for oil and natural gas companies previously barred by US or United Nations sanctions from doing business in this resource-rich country.

The end of Saddam Hussein's presidency in Iraq marks a new beginning for oil and natural gas companies previously barred by US or United Nations sanctions from doing business in this resource-rich country.

But so far, Iraqi political and legal issues remain intertwined, creating more questions than answers for potential outside investors.

Attorneys specializing in energy and trade law from three law firms told OGJ that it's impossible to predict the timing of a transparent legal framework for doing business in Iraq.

James L. Loftis,
Vinson & Elkins LLP

"If you are an Iraqi, you are thinking about who has the most capital and the most expertise—and American and British companies are high on that list. Iraqis want them. Unot to reward them so much as that they are needed for long-term development."
Click here to enlarge image

Meanwhile, they advise clients to evaluate corporate business objectives for the entire Middle East, suggesting that Iraq's emerging policies could prompt neighboring countries to revamp their own foreign investment policies regarding the oil and gas sector.

Unknowns abound

"It's a big task to rebuild a government and an industry," said David Asmus, who directs Baker Botts LLP's oil and gas practice from Houston. "What is the government going to look like? We've heard everything: from suggestions of privatization, which I think is unlikely, to suggestions that Iraq will revert to a regime similar to the regime used in the pre-1991 period."

S. Douglas Stinemetz of Haynes & Boone LLP's Houston office noted that "to say that there is a feeding frenzy in the works in an understatement." Iraqi fields are underdeveloped, in part largely because of the UN's 13-year-old sanctions, which were lifted on May 22. The sanctions stemmed from Iraq's invasion of Kuwait in 1990.

"It's a once-or-twice-a-century opportunity—and the interest is just enormous. We've had numerous inquiries," from oil companies and service companies, Stinemetz said.

Reconstruction and restoration of Iraqi oil production and exports must come before Iraq realistically turns its attention to any new development or enhanced development projects, said James L. Loftis of Vinson & Elkins LLP's Houston office.

Claims against Iraq

Iraq faces a host of both pending and potential legal claims. The United Nations Compensation Commission (UNCC) still is resolving claims stemming from the 1991 Persian Gulf war. The UNCC is nearing completion of processing the 2.8 million claims against Iraq for direct losses resulting from the invasion and occupation of Kuwait.

Some $18 billion in awards already was paid, and another $17 billion has been awarded but not yet paid. These amounts include all types of claims, not just oil-related claims. Environmental claims remained outstanding at the time this article was written.

The recent UN Security Council Resolution 1483 directs that oil proceeds be deposited in a development fund for Iraq and used for Iraqi humanitarian needs as well as reconstruction and civil administration. It calls for the UN oil-for-aid program to be phased out over 6 months (OGJ, June 2, 2003, p. 32).

Resolution 1483 provides that 5% of Iraqi oil sale revenues will continue to be put into the fund to pay the remaining UNCC awards. That compares with 25% of Iraqi oil sale revenues under previous UN resolutions.

"It might take a little longer to compensate them, but they are going to continue to receive payments on their successful claims," Loftis said of the claimants from the 1991 conflict. He worked in Geneva during 1997-2000 as senior legal officer for the energy panel of the UNCC.

Regarding future claims and court-ordered damage awards, Resolution 1483 also suspends claims against petroleum and petroleum products through 2007.

"Even if you were to bring arbitration and be successful, it would be difficult for some time to execute that award—not impossible, but difficult," Loftis said. "Otherwise, Iraq will spend millions and millions in legal fees. At least this allows Iraq some breathing room in trying to deal with those. I think that most of them will ultimately be dealt with through negotiation rather than arbitration, although a number of larger claims will certainly go to some form of dispute resolution."

Some have suggested that the UNCC handle claims from the 2003 conflict, including contract cancellations and renegotiation claims. The UN would have to authorize such a move by issuing a new mandate to enable the UNCC to handle anticipated new claims, Loftis said.

Another option would be for the coalition and the transitional Iraqi government to create a special-purpose tribunal to address contract claims stemming from the change in government.

Kenneth B. Reisenfeld, who heads Haynes & Boone's international trade and arbitration practice from its Washington, DC, office, said potential claimants against Iraq are now evaluating their rights.

"At some point, we are going to start seeing a number of claims brought in US and foreign courts," in addition to whatever international forum might be established, he said.

E&P contracts

The legal status of exploration and production contracts signed under the Saddam regime is contentious. Existing contracts involve companies from China and Russia.

Russia's OAO Lukoil has threatened legal action regarding its rights to a longstanding contract to develop West Qurna oil field (OGJ Online, May 28, 2003.) Russian Foreign Minister Igor Ivanov has said contracts with Russian companies that were arranged by the previous Iraqi government should be "fulfilled in full."

China National Oil & Gas Exploration & Development Corp. (CNODC) has said it has received no official notification over the status of its contract with the former regime.

David Asmus,
Baker Botts LLP

"It's a big task to rebuild a government and an industry. What is the government going to look like? We've heard everything: from suggestions of privatization, which I think is unlikely, to suggestions that Iraq will revert to a regime similar to the regime used in the pre-1991 period."
Click here to enlarge image

Thamir Ghadhban, the US-appointed de facto Iraqi oil minister, has said he welcomes foreign investment in Iraq. But he also has said the Lukoil contract has been terminated while the CNODC contract for Al-Ahdbad field was frozen by "mutual agreement" (OGJ Online, May 27, 2003).

Under the 1949 Geneva Conventions, the US and UK occupying powers are not to make any long-range commitments. This would leave the jurisdiction of oil and gas development contracts up to a pending permanent, internationally recognized Iraqi government.

Loftis said Iraq could decide to open up all the contracts to new bidding, or it could renegotiate the existing contracts. "They can either renegotiate the contracts on price and terms, or they can say, 'We want you to bring others to the table with you,'" he noted.

Iraq already has indicated an interest in creating opportunities in development projects for companies previously excluded by the sanctions.

"The angle everyone takes on this is: We want to award America, Britain, and Australia. But that's not really all that is going on. If you are an Iraqi, you are thinking about who has the most capital and the most expertise—and American and British companies are high on that list. Iraqis want them. It's not to reward them so much as that they are needed for long-term development," Loftis said.

Stinemetz said many production-sharing agreements or service contracts were signed by the previous Iraqi regime in efforts to get around sanctions. These contracts' legal status now is unclear while the Iraqi government tries to figure out what to do next.

Douglas Stinemetz,
Haynes & Boone LLP

"To say that there is a feeding frenzy in the works is an understatement. UIt's a once-or-twice-a-century opportunity—and the interest [from potential outside investors] is just enormous."
Click here to enlarge image

"The oddity is the international oil community would like to renegotiate a lot of project terms directly rather than having to be pinned down by prior contracts," he said. If the contracts are revoked, then the parties previously involved might be assured a seat at the table in negotiating a new contract.

"This is, of course, subject to many political factors, many contingencies, and we'll just have to see what happens," Stinemetz said.

Service contracts

"There are virtually no regulatory restrictions on doing business in Iraq, with a few critical exceptions, and we are working with clients on ensuring that they continue to respect those and understand them," Reisenfeld said.

Export control law restrictions are at the top of the list, he said, adding that companies interested in doing business in Iraq should determine if they must obtain export control authorization before exporting US-origin goods, software, or technology to Iraq.

This could pertain to certain types of oil service equipment such as geophones or other seismic equipment that is deemed "dual purpose"—meaning that it also could possibly be used for military purposes.

Evan Berlack, an attorney in Baker Botts' Washington office, said the remaining Department of the Treasury's Office of Foreign Assets Control (OFAC) rules on doing business with Iraq are fairly standard when compared with controls in dealing with most countries.

"Except there is a list of names in Iraq that you can't deal with, such as the 55 names on the famous deck of cards [created by the US military to target the most-wanted officials of the deposed regime]," he said. OFAC also maintains a national terrorist list of individuals that US companies are not to do business with, but the list pertains to any country, not just Iraq, he said.

"If oil service companies have to bring high-end computer equipment, or other highly technical equipment into Iraq, for example, that might be subject to the need for an export license," Berlack said.

At this writing, OFAC was administering the US Department of Commerce's export control list, applicable to Iraq. But the department is in the process of revising this list and will take charge of Iraq licensing once interagency approval is obtained and the new control list for Iraq is published.

"Oil companies and oil field service companies will have to pay attention to that list, which you have to do when dealing with commerce controls applicable to just about any country in the Middle East. The Iraq list might be comparable to the Syria list; we'll have to see. Syria does have more restrictions than other countries, but it's not a total embargo either," Berlack said.

Halliburton Co. engineering and construction unit KBR and Bechtel Corp. both have interim restoration work contracts with the coalition occupying Iraq. Reisenfield said that companies interested in bidding as subcontractors to those contracts need to get involved now.

KBR has the mission of putting out oil fires, assessing damage, performing environmental cleanup, and making emergency repair (OGJ, June 2, 2003, p. 32). Bechtel has a contract to rebuild Iraq's infrastructure, including its power, water, and sewage systems and its airports.

Middle East

Starving for capital and expertise, Iraq could establish more attractive investment opportunities than its Middle Eastern neighbors, attorneys said, adding that each country's investment opportunities must be evaluated on an individual basis.

James L. Cuclis, the Houston-based Vincent & Elkins coordinator of international practice, said most, if not all, Middle Eastern governments recognize the need for attracting outside investors.

"They are striving to create a legal framework that would give foreign companies the level of protection that they need to make sizeable investments," Cuclis said.

Reisenfeld said Iraq is in the process of "transforming from a government collective welfare state." If a democracy materializes in Iraq, then a market-driven economy could emerge in a 5-10 year timeframe, he said.

Baker Botts's Asmus suggested Iraq could allow foreign investors to share production and exert some control over operations.

"As Saudi Arabia has shown, it's sometimes very hard to liberalize oil and gas markets when entrenched groups in the country benefit from the old system. What has happened in Iraq is that the old system has been thrown out, and they have an opportunity to start with a clean slate," Asmus said.