explanatory memorandum for the draft petroleum act of the kurdistan region of iraq 22 october 2006

table of contents
introduction................................................................................................................................. ......
recent changes.................................................................................................. ...............................
disputed territories......................................................................................... ...............................
revenue management principles...................................................................................................
contract evaluation committee....................................................................................... ...............
unlicensed handling of information and data.................................................................................
the draft act – general principles......................................................................................................
the right of regions and governorates to regulate petroleum operations......................................
cooperation with a future iraqi petroleum framework....................................................................
revenues....................................................................................................................... .................
models for this act................................................................................................... ......................
the draft act – specific provisions............................................................................................... .......
preamble...................................................................................................................................... ..
chapter i – definitions and general provisions................................................................................
article 3 – territorial scope of the act..........................................................................................
article 4 – material scope of the act............................................................................................
article 5 – title to petroleum and government rights..................................................................
article 6: infrastructure and downstream activities:...................................................................
chapter ii – the ministry............................................................................................ .....................
articles 7, 8, 9 and 11: the minister................................................................................ ............
chapter iii – the public entities.......................................................................................... .............
articles 12 and 13: kepco and knoc............................................................................................
articles 14 and 15: komo and kodo.................................................................................. ...........
article 17: koto....................................................................................................................... .....
chapter iv – revenue management and special allocations...........................................................
article 18 – petroleum revenue management act.......................................................................
article 19 – special allocations................................................................................. ...................
chapter v – co-operation with federal authorities..........................................................................
article 20 – strategic policy formation........................................................................................ .
article 21 – revenue sharing.......................................................................................................
article 22 – restructuring of the industry in iraq.........................................................................
article 23 – regional role of federal institutions...........................................................................
article 24 – conditional cooperation................................................................................ ............
chapter vi – anti-corruption provisions................................................................................ ...........
 chapter vii – authorisations................................................................................................... .........
articles 29, 30, 31 - authorisations.............................................................................................
articles 30, exploration and development..................................................................................
article 33 – contract evaluation committee................................................................................
article 34 – invitations and awards.............................................................................................
chapter viii – conduct of petroleum operations..............................................................................
article 38, approvals............................................................................................. ......................
article 41, unlicensed handling of data............................................................................. ..........
chapter ix – contract terms............................................................................................. ...............
article 46, production sharing contract terms.............................................................................
article 47, natural gas.......................................................................................................... .......
article 49, taxation..................................................................................................................... .
article 51, disputed territories....................................................................................................
chapter x – local participation.............................................................................................. ..........
chapter xi – unitisation................................................................................................................. ..
article 58: unitisation of reservoirs within the kurdistan region..................................................
article 59: unitisation of reservoirs across a kurdistan region border, within iraq.......................
article 60: unitisation of reservoirs across international borders................................................
chapter xii – resolution of disputes................................................................................................
chapter xiii – public information............................................................................................ .........
chapter xiv – regulations and directions........................................................................................
chapter xv – penalty provisions.....................................................................................................
chapter xvi – final provisions......................................................................................................... .
article 79: transitional provisions: kurdistan region agreements................................................
article 80: transitional provisions: government of iraq agreements............................................
annex a: revenue sharing................................................................................ .................................
annex b: restructuring of the industry in iraq...................................................................................
annex c: regional role of federal institutions.....................................................................................

introduction
this is an explanatory memorandum and set of drafting notes to identify the main points of the draft of a petroleum act
for the kurdistan region of iraq (“the draft act”) which is now under consideration by the kurdistan region council of
ministers.

this explanatory memorandum is for information purposes only, and is not a legal document. it is published by the
kurdistan regional government (krg) without prejudice to the final form of the kurdistan region petroleum act, and
without prejudice to the position of the krg in relation to iraq constitutional and petroleum matters.

this memorandum updates an earlier explanatory memorandum published on the krg website on 7 august 2006, that
accompanied a draft petroleum law published on the same date. a revised, second draft law was published on the krg
website on 9 september.

the krg is grateful for the many individuals and organisations in the kurdistan region, iraq and abroad who commented on
the earlier drafts. many of those comments have been incorporated in this draft.

recent changes
the major changes between the earlier drafts and the current draft include the treatment of disputed territories; the
outline of revenue management principles; the creation of a parliamentary committee to advise the minister on
proposed production sharing contracts; and the creation of an offence of unlicensed handling information and data.

disputed territories
the current draft requires the minister’s approval for petroleum activities in the disputed territories to be recognised at
such time as disputed territories become part of the kurdistan region, but does not give the minister the power to
administer petroleum operations in the disputed territories except by agreement with the government of iraq.

revenue management principles

another change is the inclusion of a statement of general principles of kurdistan region petroleum revenue management.
those general principles include a commitment to transparency and the establishment of special revenue allocations for
citizen dividends, for a long-term investment fund, for those citizens of the kurdistan region who suffered as a result of
the previous regime in iraq, for the special needs of ethnic and religious minorities, and for the natural environment of
the kurdistan region.

contract evaluation committee

the new draft requires the minister to receive the report of a committee, appointed by parliament, to review any production
sharing contract that the minister proposes to conclude – the contract evaluation committee. the purpose of this provision
is to provide an additional safeguard on the probity of kurdistan region petroleum contracts. by agreement, the contract
evaluation committee may have a representative of the federal government as a member.

unlicensed handling of information and data

finally, the new draft creates an offence of holding, transferring or receiving data or information regarding petroleum in
the kurdistan region except pursuant to an authorisation from the minister. the same provision provides a means for those
holding historical data – meaning data produced prior to the entry into force of the act – to receive a licence to deal in
such data, provided that a copy of such data is provided to the minister.

the purpose of this provision is to prevent the rights of the people of the kurdistan region and iraq from being exploited
by those who may have received such information as a result of looting and other illegal activity. the intention of the
krg to bring civil and criminal legal proceedings only a last resort, and wherever possible, license such dealing.
the draft act – general principles
the act will establish a modern petroleum framework for the kurdistan region of iraq, to be administered by the krg and its
ministry of natural resources. the framework is intended to be simple and clear, in accordance with international
standards, and to provide appropriate returns to the people of the kurdistan region, and iraq, and to private investors.

that regime meets two imperatives.

1. first, it reflects and implements the extent of the kurdistan region’s constitutional right to regulate petroleum
development in its territory.

2. second, it is designed to function in a cooperative and complementary way under the iraq constitution with a
future petroleum regime for the whole of iraq, for the benefit of all the peoples of iraq. the act is designed so as
to anticipate cooperation with an iraq petroleum regime, but to be self-sufficient if such a regime, or
cooperation under that regime, is not forthcoming.

this act is designed deliberately to serve as also as a model for a future, investor-friendly iraq petroleum regime, and as a
model for other producing regions and governorates in iraq. the krg is a firm believer in the value and attractiveness of a
decentralised iraq petroleum sector which is characterised by mutual cooperation throughout iraq.

the act has a two-part structure.

1. the first part, incorporating the first 24 articles – and three annexes – deals with iraq constitutional and federal
matters, setting out regional rights and obligations. the first part also establishes a general framework for
kurdistan region petroleum revenue management, to be elaborated by the krg in subsequent legislation.

2. the second part of the draft act contains the provisions of modern standard petroleum legislation. there are final
transitional provisions (articles 79, 80, and 81) which touch on both areas.

the right of regions and governorates to regulate petroleum

operations
the right of iraq’s regions and governorates to regulate petroleum operations in their territory was agreed in the
constitutional negotiations of 2005 and is set out clearly in the iraq constitution. the right is implied by the combined
operation of article 110, which omits petroleum from the list of exclusive powers of the federal government, and article
115, which gives all other powers to regions. the right is qualified only by article 112, which requires a region to jointly
manage, with the iraq federal government, “extracted” petroleum from “current fields” and to formulate “strategic
policies” for petroleum development. thus, the regulation of post-extraction petroleum from current fields, and strategic
petroleum policies more generally, are powers that are shared between the federal government and any regional
government, in circumstances where, according to article 115, regional law takes priority in the case of dispute.

the krg believes that, if they can meet the krg’s standard of democracy, transparency and accountability, all of iraq’s
regions and governorates should be able to manage, and enjoy revenues from, their oil and gas resources, consistent with
the iraq constitution. for a more comprehensive statement of these policies, see the interview with minister for natural
resources, dr. ashti a. hawrami, “oil and gas rights of regions and governorates”, published by the kurdistan regional
government on 13 june 2006, available at www.krg.org.

cooperation with a future iraqi petroleum framework

the krg recognises the obligation of all regions and governorates to cooperate with any future petroleum framework for
iraq. no iraq-wide petroleum framework is yet in place.

that obligation is set out in article 112 of the constitution. in addition to that obligation, the krg believes that it is right and
proper, and in the interest of the kurdistan region and other parts of iraq, for all levels of government in iraq to cooperate
with each other on petroleum matters. all iraqis must benefit from iraq’s petroleum infrastructure, and iraq’s petroleum
markets.

revenues
the draft act elaborates on the distinction made in the iraq constitution between current fields and other fields, named in
the act as “future fields”. the kurdistan region has a constitutional right to directly receive the revenue from future fields.
the kurdistan region also has a constitutional right, implied by article 112, to directly receive revenue from “current fields”
and retain a share of that revenue, unless there is an agreement in place with the government of iraq under which the
kurdistan region receives a proportionate share of revenues and compensation for damage and denial of petroleum
revenues by the previous regime.

the draft act proposes the key terms of such an agreement, and requires that any such agreement secure the rights
of all of iraq’s regions and governorates.

models for this act

in preparing the act, the ministry has referred to a number of federal regimes around the world, and to the regimes of
petroleum producing countries that have recently prepared petroleum legislation, often on the advice of international
financial institutions. the ministry has referred closely to the general principles of petroleum management established by
the world bank.

the draft act – specific provisions

preamble
the second paragraph of the preamble recites the relevant principles from the iraq constitution, including a commitment
to “market principles” and the encouragement of investment. in the view of the krg, these principles require all iraqi
jurisdictions to maximise the benefits of private sector investment in iraq’s petroleum industry. it is an underlying
principle of the draft act for that the kurdistan region’s petroleum sector will be driven by private sector investment, with
the production sharing contract (psc) as the standard investment vehicle. the existence of two krg-owned petroleum
companies, kepco and knoc, is to permit limited government participation in petroleum development for future fields and
current fields respectively, and to ensure that there is reciprocity with iraqi state-owned petroleum companies. the krg
believes that heavy state participation in petroleum developments will not maximise returns for the people of the region
and other parts of iraq.

the third paragraph sets out the goal of the krg for the kurdistan region petroleum regime to be exemplary in its
transparency and accountability. the krg is well aware of the dangers that petroleum development in impoverished
countries poses to good governance and public probity. the overriding principle in the draft act, to be reflected in krg
policy more generally, is that the krg parliament must oversee all petroleum revenues. the elected representatives of the
people of the kurdistan region, always accountable to the people, are the best custodians of the kurdistan region’s
petroleum wealth.

the third paragraph also sets out the intention of this act, elaborated in chapter iv, that part of the kurdistan region’s
petroleum revenues – approximately twenty percent – be set aside for special purposes: an annual cash dividend for
citizens of the kurdistan region; a special fund for the future to ensure that the kurdistan region has income when the
petroleum resources of the kurdistan region and iraq are in decline; a dividend for citizens who suffered greatly under the
previous iraqi regime; funds to support the requirements of the kurdistan region’s ethnic and religious minorities to
provide their own social, cultural and governmental services; and funds to restore the natural environment of the kurdistan
region. these special allocations, to be overseen by parliament, will signal parliament’s recognition that the kurdistan
region has certain moral obligations that should be guaranteed by law, separately from the day-to-day business of
appropriating funds. approximately eighty percent of the kurdistan region’s petroleum revenues will be capable of
appropriation by parliament in the normal way.

the fourth and fifth paragraphs set out the twin imperatives of this draft act: the supremacy of kurdistan regional law by
virtue of article 115 of the constitution of iraq, and the obligation to cooperate with other parts of iraq, spelled out in
article 112.

chapter i – definitions and general provisions

article 3 – territorial scope of the act

the act applies to the territory of the kurdistan region, meaning, for the time being, the region recognized in article 117 of
the constitution of iraq and article 53 of the transitional administrative law, meaning the territories that were administered
by the krg on 19 march 2003 in the governorates of dohuk, arbil, sulaimaniya, kirkuk, diyala and neneveh.

the act will apply to the “disputed territories” where the kurdistan region is a party to the dispute, including kirkuk, at such
time as those territories become part of the kurdistan region following the referendum required by article 140 of the
constitution of iraq. the kurdistan region acknowledges that the extent of those disputed territories needs to be defined.
the fact that this act does not apply to the disputed territories is without prejudice to the historical and legal claim of the
kurdistan region to those territories.

the act does not apply to those disputed territories prior to the referendum. the krg expects that, in the regulation of
petroleum operations in the disputed territories, the federal government will recognize an obligation to consult with the
kurdistan region. the krg reserves the right in the disputed territories that become part of the kurdistan region to
invalidate any agreement related to petroleum that had not received prior approval from the minister.

the kurdistan region accepts that the kirkuk fields will remain ‘current fields’ within the terms of the iraq constitution,
and are therefore, if and when those fields become part of the kurdistan region after the referendum, subject to joint
regulation with the government of iraq after the point of extraction (“delivery point”) and subject to the constitutional
regime of revenue sharing.

article 4 – material scope of the act

the act applies to petroleum operations, a defined term that encompasses a wide range of upstream and downstream
activities related to petroleum. by definition, the term applies only to such activities in the kurdistan region.

section 1 of the article indicates that the act applies equally to private sector and public sector investors, without
favoritism. section 3 states that only kurdistan region law applies to petroleum operations, unless the kurdistan region
otherwise agrees.

section 4 of the article clarifies the fact that the kurdistan region law of investment does not apply to petroleum
operations. article 18 of that law states that investors under that law “shall not be allowed to own plots of land that
contain oil, gas, or any expensive or heavy mineral resources.”

article 5 – title to petroleum and government rights

section 1: ownership: article 111 of the constitution of iraq states that “oil and gas are owned by all the people of iraq in
all the regions and governorates.” this provision clearly implies that the people of a region have ownership rights as
citizens of that region to oil and gas resources. this is typical of the way in which federal states treat the question of
natural resource ownership. the draft constitution of the kurdistan region states this principle more generally in relation
to natural resources.

however, for the purposes of the respective petroleum administrative and revenue sharing responsibilities of the
kurdistan region and the federal government, the question of ownership does not need to be resolved. the krg does
not, in the draft act, advance ownership as an issue. the draft law simply states that, for petroleum in kurdistan, article
111 applies.

this section also states that the regional government shall share revenue according to the constitution of iraq and the
petroleum act. the purpose of this provision is to make clear that ownership by the people of the kurdistan region of
petroleum in the region does not affect the obligations of the kurdistan region to share petroleum with other parts of
iraq.

section 2: regulation of petroleum operations: this section states the general principle that the minister is the sole authority
for regulating petroleum operations in the kurdistan region, and that the minister has the power to authorize non-state
actors to engage in petroleum operations.

section 3: regulation of marketing: this section states that the minister is the sole authority for marketing the krg’s share of
petroleum – and that a contractor under a production sharing contract has responsibility for the marketing of their share of
petroleum. the krg acknowledges that the federal government, pursuant to article 112 of the constitution of iraq, has
authority, if revenue sharing agreements pursuant to article 112 of the constitution of iraq are in place, to regulate the
marketing of petroleum extracted from current fields in the kurdistan region.

section 4: receipt of revenue: this section states the general principle that the krg shall directly receive its share of all
revenue from petroleum operations. this is the case for revenue both from current fields and future fields. the krg will
then share surplus revenue with other parts of iraq pursuant to article 112 of the constitution of iraq. that revenue may,
alternatively, be received directly by the government of iraq under a revenue sharing agreement as part of an article 24
agreement and as set out in annex a to the act.

article 6: infrastructure and downstream activities:

the minister is the sole authority for the regulation of infrastructure used for petroleum operations in the kurdistan
region, and downstream activities.

this article also imposes an obligation on the krg to share infrastructure with the government of iraq and other
producing regions and governorates of iraq, and to make pipeline capacity available.

chapter ii – the ministry

articles 7, 8, 9 and 11: the minister

these articles identify the minister of natural resources as the competent krg official to oversee all aspects of petroleum
operations, including the negotiation of authorisations, including production sharing contracts.

the intention of the act is that the minister’s powers are exclusively regulatory in nature, and that the ministry will not
itself engage in petroleum operations. participation by the public sector in petroleum activities, where it is necessary,
will be carried out through the public entities.

chapter iii – the public entities

the purpose of this chapter is to establish, in law, public entities for specific purposes in relation to petroleum
operations.

for the time being, the krg envisages limited public sector involvement in petroleum operations. that involvement is
primarily driven by the need to maintain some consistency and correspondence with iraqi public petroleum institutions.

the krg will keep the size, and scale of involvement, of these institutions to a minimum. though the minister has
responsibility for determining the scope of activities of these institutions, their day-to-day functioning will be
independent of the ministry. the board members of these institutions are confirmed by parliament and independent of the
ministry.

articles 12 and 13: kepco and knoc

for upstream petroleum operations, kepco and knoc are the vehicles, for future fields and current fields respectively. the
provisions for kepco and knoc envisage that, by agreement, a representative of the government of iraq may sit on the
boards of the two institutions.

articles 14 and 15: komo and kodo

kodo is the vehicle for downstream activities, and komo is the marketing body, chaired by the minister. each of these
entities is subject to the same company law principles as private sector investors.

article 17: koto

koto is a public trustee for the petroleum revenues of the kurdistan region, to be supervised by the parliament and with
oversight from the minister. all petroleum revenues are subject to parliamentary and public scrutiny, and koto is required
to function in a matter consistent with the principles and criteria of the extractive industries transparency initiative (eiti).
the krg intends to establish a world-class, transparent revenue management framework for the kurdistan region. the
central principle of this revenue management framework is parliamentary sovereignty and accountability to an elected
parliament.

chapter iv – revenue management and special allocations

the purpose of this chapter is to establish the general parameters for petroleum revenue management and allocation for the
kurdistan region. in advance of the establishment, by law, of a petroleum revenue management law, the krg wishes to
confirm its commitment in the petroleum act to principles of transparency, social and environmental equity, and long-term
financial planning.

article 18 – petroleum revenue management act

this article requires the creation of a parliamentary committee to make recommendations for a petroleum revenue
management act. the krg recognizes that, with the rapid development of the kurdistan region’s petroleum sector, it will
need an appropriate regulatory and administrative framework for managing the revenues.

the krg envisages that the petroleum revenue management act may provide detail on the operation of koto, and the way
in which koto accounts to parliament, and the way in which koto interacts with the ministry of natural resources, the
ministry of finance, and with the public entities (kepco, komo, and kodo).

the krg also envisages that the petroleum revenue management act will address the need for appropriate decentralization
within the kurdistan region, and the possibility that some petroleum revenues should be allocated on a permanent basis,
by that act, to provincial and local government in the kurdistan region.
article 19 – special allocations
there are special moral obligations that the kurdistan region’s petroleum wealth places on the krg, and it is appropriate for
the krg, by law, to guarantee that a proportion of that wealth go directly to areas of special need. while the bulk of the
revenue will be appropriated each year by parliament in the usual manner, a certain proportion should, with parliament’s
agreement, be dedicated to certain “non-negotiable” areas of special obligation. for this reason the draft act requires that
approximately twenty percent (20%) of the kurdistan region’s petroleum revenues be allocated by law, on a permanent
basis, to the following:

(a) annual cash dividend: ten percent (10%) as an annual cash dividend to every citizen of the kurdistan region: the krg
believes that a proportion of the revenue should bypass the krg and go straight into the pocket of the citizen, so that they
can immediately enjoy the benefit of the petroleum economy of the kurdistan region and iraq. the krg believes that this
will be an effective way of boosting the spending power of the kurdistan region’s poorest citizens. this draws, in part, on
the alaskan model.
(b) future generations investment fund: seven percent (7%) for an investment fund, to be drawn on when the petroleum
revenues from iraq and the kurdistan region are in decline. while the kurdistan region will need the bulk of its petroleum
revenues for early spending and poverty alleviation, a proportion should be set aside for the point in time – two or three
decades away, perhaps – when petroleum reserves no longer exist. the model for this allocation can be found in the
kuwait fund and elsewhere.
(c) those who suffered from previous regime: one point five percent (1.5%) as an annual dividend for citizens who
suffered, or who suffer, extraordinary hardship at the hands of the previous regime in iraq. the krg wants to give special
recognition, on an enduring basis, to the many kurdistanis whose lives were unjustly damaged as a result of the genocide,
war and terrorism of the saddam regime.
(d) the environment: one point five percent (1.5%) for the environment fund. the natural environment of the kurdistan
region is among the most beautiful in the world, but has suffered tremendous damage as a result of warfare and poverty:
when fuel supplies are cut off to the kurdistan region, people in the villages are forced to cut down trees to burn for
heating and cooking. the environment must be restored as part of the heritage of present and future generations.
(e) ethnic and religious minorities: allocations for the special social, cultural and governmental needs of ethnic and
religious minorities. amounts to be recommended by parliament will be earmarked for the kurdistan region’s diversity of
ethnicities and faiths where those groups wish to deliver services to their people. some ethnic and religious minorities
already exercise a degree of autonomy within the kurdistan region, and others wish for a greater degree. funds will be
allocated following a request from the elected representatives of minority groups so that they can, if they wish, deliver
services such as education, health and policing to their own communities. it is, and must remain, a great strength of the
kurdistan region that its kurdish muslim majority is respectful of, celebrates, and supports the ancient and rich ethnic and
religious heritage of the kurdistan region.

the principle behind these special allocations is that parliament will oversee their operation but will not appropriate
those funds.

chapter v – co-operation with federal authorities

this chapter establishes the parameters for krg cooperation with the government of iraq on strategic policy, revenue
sharing, and petroleum regulation. at the center of this proposed system of co-operation is an agreement under article 24
of this act between the krg and the government of iraq. the krg is willing to take all necessary steps to reach that
agreement in the shortest possible time, and the annexes to this act represent the essential terms of such an agreement.

a first step towards reaching such an agreement would be for the government of iraq to promulgate petroleum legislation
in similar terms to the kurdistan petroleum act, and to restructure its petroleum sector so as to create a federal petroleum
committee and to begin to issue production sharing agreements to credible and experienced private investors.

article 20 – strategic policy formation

this article requires the krg to cooperate with iraq on “strategic policy” formulation, mirroring the language of the
constitution of iraq. the krg views this process as requiring agreement regarding opec quotas and, more broadly, a
commitment to an investor-friendly iraq-wide petroleum regime with the sharing of petroleum infrastructure.

article 21 – revenue sharing

this article makes co-operation by the krg on revenue-sharing dependent upon an article 24 agreement and annex a to
the act.

in short, the krg is prepared to share current and future fields revenues with other parts of iraq, but those funds may only
be received directly by the government of iraq (or governments of other regions and governorates) where there is an
equitable revenue sharing agreement in place, and where the petroleum industry in iraq has been restructured and
modernized under a federal petroleum committee with regional representation.

in particular, if the government of iraq is to take responsibility for receiving and sharing future fields revenues, it must
demonstrate a commitment to a legal and fiscal regime that encourages new exploration and development in parts of
iraq other than the kurdistan region. if the government of iraq does not so demonstrate, the krg reserves the right to
receive and share those revenues itself. the krg notes that the constitution of iraq does not require it to share future
fields revenues.

article 22 – restructuring of the industry in iraq

this article requires the krg to co-operate with the government of iraq in the restructuring of the petroleum industry in
iraq.

article 23 – regional role of federal institutions

this article makes co-operation by the krg in allowing federal upstream institutions an involvement in the krg’s
petroleum activities dependent upon an article 24 agreement.

if such an agreement is in place, the krg will permit representatives of two federal upstream institutions, one for current
fields and one for future fields, to appoint a member to the boards of kepco and knoc, and the contract evaluation
committee.

the krg notes that the constitution of iraq does not require it to invite federal institutions to play any role in regional pre-
extraction petroleum operations.

article 24 – conditional cooperation

this is the most important provision of the first part of the act, stating that the preparedness of the kurdistan region to set
aside its constitutional rights and cooperate in the manner described in articles 21, 22 and 23 is dependent on a fair and
equitable revenue sharing agreement and the restructuring of the industry in iraq.

chapter vi – anti-corruption provisions

kurdistan’s petroleum regime is, and will remain, free from corruption.

these articles are self-explanatory. the krg is reviewing its laws regarding anti-corruption and may, in due course, issue a
new act to revise and restate these laws.
chapter vii – authorisations
this chapter sets out general provisions for all authorizations. they are consistent with international petroleum
industry standards.

articles 29, 30, 31 - authorizations

there are three types of authorizations: a prospecting authorization, a petroleum contract, and an access authorization.

the most important of these is a petroleum contract, which deals with the exploration and development of a field. it
grants the exclusive right to conduct petroleum operations in the contract area, in exchange for obligations to develop.
a petroleum contract may be a production sharing contract. the krg practice and policy is to use production sharing
contracts wherever possible. the minister shall make public all invitations for authorizations, but may negotiate
directly if it is in the interest of the public of the kurdistan region to do so.

articles 30, exploration and development

this article establishes the principle that a petroleum contract may be based on a model production sharing contract. this
article rules out petroleum contracts which guarantee to the contractor a fixed rate of return. in the view of the krg, such
contracts – sometimes known as “buy-back” contracts – deter private investment and risk taking, and are therefore not in
the interests of the people of the kurdistan region or of iraq.

in order to be awarded a petroleum contract, a contractor must demonstrate capacity and experience, and must commit to
the ten principles of the global compact, launched by the united nations on 26 july 2000. the krg wishes to encourage
and enforce good corporate citizenship.

article 33 – contract evaluation committee

this article establishes the contract evaluation committee. the intention of this article is to provide a safeguard for large
petroleum contracts, which will usually be in the form of pscs. the committee is mandated to review proposed pscs for
transparency, anticorruption, the financial and technical abilities of a contractor, and the maximization of regional
government revenue. the report of the committee is not binding on the minister.

article 34 – invitations and awards

this article establishes that the usual method for awarding an authorization is by public invitation unless it is in the
public interest to do otherwise.

this article also requires that an application for an authorization address the social concerns of health, safety and welfare;
the training of locals; and the acquisition of local goods and services.

finally, this article also requires that the minister, before awarding any authorization that is a psc, receive the report of the
contract evaluation committee and also the approval of the council of ministers.

chapter viii – conduct of petroleum operations

this chapter sets out the general principles governing the conduct of petroleum operations. they are consistent with
international petroleum industry standards.
article 38, approvals
this article delegates to the terms of an authorization (including a production sharing contract) the requirement of
notification and approval regarding agreements concluded by an authorized person.

article 41, unlicensed handling of data

this article creates an offence of unlicensed handling of data regarding petroleum in the kurdistan region, and provides a
means for those who may hold such data that was received prior to the entry into force of the act to receive a license to
handle the data.

chapter ix – contract terms

article 46, production sharing contract terms

this article sets out some of the standard terms of a petroleum contract which is a production sharing contract. the
krg expects that most petroleum contracts will be production sharing contracts.

the terms are set out in the act to provide a clear and early indication to potential investors of the fiscal environment of
the kurdistan region for petroleum operations.

many of the terms of a production sharing contract do not appear in this article, including terms which, for instance,
identify cost recoverable items or which deal with gas pricing. sections 3 and 4 of the article specify that the standard
terms may be varied for particularly risky, or risk-free, exploration and development.

article 47, natural gas

this article delegates to a production sharing contract issues related to natural gas development, including pricing and
transportation. the kurdistan region is rich in gas and the krg wishes to establish a favourable environment for gas
development.

article 49, taxation

in the kurdistan region, the power to tax is a regional power. article 110 of the iraq constitution, which excludes
taxation from the list of exclusive powers of the federal government, and article 115, which gives all other powers to
regions, and gives priority to regional law in the case of dispute. in these circumstances, petroleum operations in the
kurdistan region are liable only to applicable kurdistan region taxes.

currently, there are no taxes generally payable for petroleum operations in the kurdistan region. the krg intends to make
the fiscal regime for petroleum investment attractive to investors, and may choose not to impose taxes, or to undertake
an obligation to pay krg taxes on behalf of a contractor.

at such time as the krg may choose to impose taxes, the krg will follow international best practice and describe all
applicable taxes in one piece of legislation, the petroleum operations taxation act.
article 51, disputed territories
this article permits the minister to enter into joint regulatory arrangements with the government of iraq in relation to
petroleum activity in the disputed territories in advance of the referendum. the krg believes that joint administration is the
correct legal and political way to manage this activity.

this article also states that unless the minister approves of an agreement for petroleum activities concluded by the
government of iraq in the disputed territories, such an agreement may be invalidated by the minister following the
referendum if the disputed territories in which those activities take place become part of the kurdistan region.

chapter x – local participation

the krg is committed to developing local skills and the local economy.

chapter xi – unitization
these articles provide internationally recognized means by which the unitization of a petroleum field can be handled
between contract areas, between the kurdistan region and another part of iraq, and between the kurdistan region and a
foreign country.

article 58: unitization of reservoirs within the kurdistan region

if a reservoir straddles two contract areas, and there is no agreement between the contractors, the minister may decide
the unitization, subject to arbitration if the contractors do not agree with the minister’s decision.

if a reservoir lies straddles a contract area and an area not part of a contract area, and there is no agreement between the
contractor and the minister, the minister may decide the unitization, subject to arbitration if the contractor does not agree
with the minister’s decision, or the matter may be resolved otherwise under the relevant terms of the petroleum contract.

article 59: unitization of reservoirs across a kurdistan region border,

within iraq
if the reservoir straddles a kurdistan region border with iraq, the minister shall attempt to conclude a unitization
agreement with the government of iraq or with the concerned region or governorate; and such an agreement may involve
joint administration.

article 60: unitization of reservoirs across international borders

if the reservoir straddles an international border, the minister shall attempt to conclude a unitisation agreement with
the neighbouring country, and may assign rights to the government of iraq to represent the kurdistan region in
concluding such an agreement.

chapter xii – resolution of disputes

these provisions give the ministry broad powers to resolve disputes between persons engaged in petroleum
operations. they provide for standard international arbitration procedures for a dispute between and person and
the minister himself or herself.
chapter xiii – public information
in the interests of transparency and anti-corruption, the minister is under an obligation to make all relevant documents,
and justification for certain decisions, available to the public.

the intention of the provisions in this chapter is to make the petroleum regime of the kurdistan region as transparent
as possible, and consistent with international standards.

chapter xiv – regulations and directions

the minister has a broad power, under this act, to make regulations and to direct persons. this power is consistent with
international best practice. regulations are to be published.

chapter xv – penalty provisions

these provisions are self-explanatory. the purpose of these provisions to protect life, health, property, and the natural
environment.

chapter xvi – final provisions

article 79: transitional provisions: kurdistan region agreements

this article states that all previous krg agreements, provided that they are approved by the minister, remain in force
following the passage of this act. all previous krg production sharing contracts have now been approved by the minister.

the validity of krg agreements prior to the entry into force of the constitution of iraq are supported by article 141 of the
iraq constitution, which states that all decisions issued by the krg since 1992 remain in force. those decisions include
petroleum agreements.

article 80: transitional provisions: government of iraq agreements

article 71 provides that the krg may, at its discretion, permit prior agreements of the iraq government in the kurdistan
region to remain in force.

annex a: revenue sharing

pursuant to the terms of the general agreement required by article 24 of the act, this annex spells out the minimum terms
of revenue sharing agreements between the kurdistan region and iraq in respect of current fields and future fields
revenue. those minimum terms include the receipt by the kurdistan region, and by other regions and governorates, of
their fair share of petroleum revenue under article 112 of the constitution. the agreements are to have duration of five
years, on a renewable basis.

if these terms are met, the krg can agree that the iraq government (represented by the “state oil trust organization”, soto)
may receive revenues from petroleum operations directly. if those terms are not met, kurdistan, represented by koto, will
receive those revenues and apportion a share to iraq according to the constitution of iraq.
these provisions are mirrored by similar provisions in the draft petroleum act for iraq which the ministry has proposed to
the government of iraq. the ministry will attempt to reach agreement with the federal government regarding the
undetermined percentages and figures in article 16 and 17 prior to the passage of the acts.

annex b: restructuring of the industry in iraq

pursuant to the terms of the general agreement required by article 24 of the act, this annex lists the minimum krg
requirements for the restructuring of the iraq petroleum industry into a modern, investor-friendly regime that is consistent
with the constitution of iraq and is likely to generate future fields revenue for iraq-wide sharing.

the key requirements include the establishment of a federal petroleum committee, agreements on free foreign exchange,
petroleum export, and data exchange, a more limited role for the iraq ministry of oil and the creation of dedicated federal
entities for future fields and current fields, with regional representation on those federal entities.

annex c: regional role of federal institutions

pursuant to the terms of the general agreement required by article 24 of the act, this annex lists the maximum role that
iraqi federal institutions may have in the petroleum sector of the kurdistan region.

that role is largely advisory, especially in relation to the preparation of model authorizations, reviewing field
development plans, reviewing proposed future fields petroleum contracts, and appointing members to regional
institutions including kepco, knoc and the contract evaluation committee.

in certain respects the role will be more robust, including the allocation of opec quotas and the power, under the terms of
five year renewable agreements, to jointly approve petroleum contracts for current fields.