Technical assessment of the INOC Law
Submitted by Ben Lando on Sunday, 9 August 20093 Comments.ShareThis
By AHMED MOUSA JIYAD
http://www.iraqoilreport.com/the-biz/technical-assessment-of-the-inoc-law-2121/The Council of Ministers 28th July approved a draft law reinstating the Iraq National Oil Company (INOC), and decided to pass it on to the Parliament for enactment. Earlier, and during the February 2009 Symposium for Reviewing Iraq Oil Policy, held in Baghdad, a copy of a draft law re-establishing INOC was included in the Symposium folder. Both texts of the law still have the date 2007 written on them.
It should be stated at the beginning that the call for reinstating INOC has been persistent demand among most of the Iraqi oil professionals inside and outside the country, though with different views to reflect the change of time and circumstance. It is 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 and play in the effective development of the nations’ 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 this brief remarks is to provide quick review of the latest version of the law and highlighting the significant differences with the earlier text, and make an attempt to analyse its significance.
INOC as “holding company”
Article 2 (first), refers to INOC as “holding company”. This is rather different from what was mentioned in the earlier text, which refers to INOC as “public company”. Furthermore, the term “holding company” has not been used for any State company inside the petroleum sector and outside it in Iraq. Also Public Company Law nr, 22 of 1997 makes no reference to public holding companies.
International “law of corporations” defines 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” since the later 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.
Objectives of INOC and its means to achieve them
According to Article 3, INOC aims to attain maximum level of development and production of petroleum (oil and gas) and activities related to them on technical principles, economically rewarding and modern technologies. Through its activities and the activities of the companies it owns fully or partially, INOC uses many ways and means to achieve these objective, as stated in Articles 4 and 15.
Having a legal character as “holding company” INOC might find itself legally restricted to enter into international contracts “directly related to or involving gas and or oilfields development”, thus defeating its own objectives and creating, unnecessarily legal obstacles in its way. In specific terms INOC might not be able to realise 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.
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 help to realise 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, a 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 companies (outside SOC and 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 have many problems and encounter difficulties. First, CoM is more “political” than the Ministry of Oil-MoO, and this could lead to INOC becomes more “politicised”, 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 politics and being a holding company, then things could go sour, and INOC and oil sector could be affected negatively. Second, from an operational angle will it CoM or an entity within CoM structure has the direct supervisory link to INOC? And considering the significant role of FOGC- as discussed next, will this generate a conflict and overlapping of authority over INOC?
But on the other hand having INOC attached to CoM might relive it from the exclusive dominance of MoO. But this remains to be seen. Undoubtedly, removing INOC from the umbrella of MoO could weaken the later, and confines the ministry’s role to midstream sector of petroleum industry.
FOGC and FOGL
Article 4 gives Federal Oil and Gas Council-FOGC significant role in the functioning of INOC. Obviously, the law assumes the existence of this council. However, since this has not been done so far and FOGC is an integral part of the still bending “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, in February Symposium referred to above a suggestion was made to create FOGC by an “executive order”, but obviously this did not take off the ground.
(For problems related to FOGC see my article “Federal Oil and Gas Council: Basic Issues for Consideration”, in Iraq Energy Institute. Earlier version was posted also in Iraq Oil Forum/IOF.
The same also applies to FOGL. The current draft of INOC law refers to “Law” (Article 2 (second), Article 4 8third, B)) and “Oil and Gas Law”(Articles 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 the reference was 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, INOC law has no chance to see the light and thus invalid. Critical provisions that deserve particular attention and which are directly linked to FOGL and FOGC are those related Articles 4 and 15 of 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 the high possible infringement on “good governance” principle and cause the absence of “checks and balances” modalities. Second, the council has no member representing the “employees” of INOC and its associated companies (SOC, NOC, MOC and others), and has no member representing the oil “Trade Union”. The absence of employees and workers 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 working force. Third, the heads of all “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 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 assumes 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 authorises INOC to “conclude exploration, development and production contracts” (Article 15 (third), with the approval of FOGC (Article 4 (third, A). If 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 give after another 15 days (Article 12 (fifth, B))
There are 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. 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.
Missan Oil Company- MOC
The Proposed INOC Law refers to South Oil Company-SOC and North Oil Company-NOC (Articles 14, 23 and 26) but does not refer to MOC though it has been established for a while, post- 2007. 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 law.
Miscellaneous
1- The definition of “The Company” should be added to Article 1;
2- The word “development” was missing from Article 4 (third, A), and should be added;
3- The Arabic word of “capital” in Article 6 (first) was not correct;
4- The Arabic word of “each of the” in Article 13 (fifth) was not correct;
Conclusion:
The draft of INOC Law requires serious and comprehensive revision as outlined above. What is needed is a strong INOC that constitute the backbone of the oil sector development. But 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.
Jue Ago 13, 2009 1:39 am