The Iraqi Federal Supreme Court in Case 59/Federal/2012 Rules that the Kurdistan Regional Government (KRG)’s 2007 Oil and Gas Law Is Unconstitutional
In 2007, the Kurdistan Regional Government (the “KRG”) enacted Oil and Gas Law No. 22 of 2007 (the “KRG Oil and Gas Law”). The Federal Government of Iraq (the “FGI”) had initially rejected the draft law, but the regional parliament within Kurdistan approved it on the basis of its view that the draft law was within the KRG’s competencies under the 2005 Constitution of the Republic of Iraq (the “Iraqi Constitution”).
The KRG Oil and Gas Law established that the KRG would autonomously administer oil and gas operations for the Kurdistan Region of Iraq. Since the passing of the KRG Oil and Gas Law, the KRG has relied on it as the legal basis for entering into Production Sharing Contracts (“PSCs”) with International Oil Companies (“IOCs”), crude oil export agreements with the Republic of Turkey, as well as oil purchase agreements.
Since its passage, the KRG Oil and Gas Law has raised a number of important issues regarding the administration and production of crude oil within the Kurdistan Region of Iraq, including the respective rights of the FGI and KRG, where proceeds from crude oil sales exported from Iraqi Kurdistan would be deposited, and how such proceeds would be accounted for in the Iraqi Federal Budget Laws. But on 15 February 2022, the Iraqi Federal Supreme Court issued its decision in Case 59/Federal/2012 (“Case 59”) and Unified 110/Federal/2019. In summary, the Iraqi Federal Supreme Court decided that:1
- The KRG Oil and Gas Law violates Articles 110, 112, 115, 121 and 130 of the Iraqi Constitution, and is therefore unconstitutional;
- The KRG is required to hand over to the FGI the totality of the oil production from the present oil fields in Iraqi Kurdistan region (as well as any other areas from which oil has been extracted by the KRG);
- Going forward, the FGI will be entitled to use its constitutional powers regarding the exploration, production and exportation of crude oil in order to manage the oil production in Iraqi Kurdistan;
- The Ministry of Oil of the Republic of Iraq is entitled to pursue the nullification of any contracts entered into by the KRG with foreign states and other companies (including IOCs, and oil traders) for the exploration, production, exportation and/or sale of crude oil from the Kurdistan region;
- The Ministry of Oil and the Federal Board of Supreme Audit are entitled to review all oil contracts entered into by the KRG concerning the export and sale of oil and gas, for the purpose of determining the financial benefits incurred by the KRG on those contracts; and
- The Ministry of Oil and the Federal Board of Supreme Audit shall determine the Kurdistan region’s share of the national budget in a way as to ensure that the rights of Kurdistan citizens regarding the federal budget are delivered without delay. This will follow the KRG’s implementation of all the provisions of the Iraqi Federal Supreme Court’s decision and the respective notifications to the FGI and the Federal Board of Supreme Audit.
The Iraqi Federal Supreme Court’s ruling will have important ramifications for the Iraqi oil and gas sector. The ruling does not automatically nullify the KRG’s oil purchase agreements or contracts with IOCs, although it does appear to give the Ministry of Oil of the Republic of Iraq a basis on which to attempt to do so. There have as yet been no official actions by the FGI in this respect. In addition, the KRG has stated (in recent communications to IOCs and other international investors in the Kurdistan Region) that it will continue its joint work with the FGI to reach an agreement on how to resolve this matter.
It remains to be seen what steps the Iraqi Ministry of Oil will take to implement the Iraqi Federal Supreme Court’s ruling in Case 59, which comes ten years after the Ministry of Oil of the Republic of Iraq first filed its case challenging the legality of the KRG’s oil exports.
1 “Federal Supreme Court judges that the Kurdistan Regional Government’s oil and gas law is unconstitutional and annulled,” The Republic of Iraq Federal Supreme Court Website, 16 February 2022 (available at https://www.iraqfsc.iq/ennews.4807/)
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.