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As discussed in Chapter 5, the full import of KRG oil and gas law (No. 22) article 54 cannot be accurately gauged without considering the limitations imposed on that provision by the overarching and superior provisions of the Iraqi Constitution. It is one thing to speculate about the significance of the article 54 references to “final[ity]” and “related to” or “in respect of,” and about the chances that the article's reach encompasses third-party contractual arrangements that assist the IOC in meeting its obligations with the KRG. It is entirely different, however, to begin to “wrap one's mind around” the exact scope of any KRG assertion of power under article 54 in light of the various limitations found in the terms of the Iraqi Constitution on all exercises of governmental power, whether at the central or subcentral level. The easiest way to conceptualize this entails recalling the article 54 claim to vest the Regional Council with the authority to review and alter all preexisting agreements related to PSCs entered into by the KRG prior to August 2007, and its pronouncement that authorizations and MOUs related to oil and gas entered in that period are deemed null and void. The obvious thrust of that article is to affect preexisting oil and gas legal arrangements in one way or another. Whether that objective is capable of unfettered effectuation, however, hinges on the presence of constitutional protections designed to preserve rights incident to contractual obligations.
In the preceding parts of this study, attention is focused on two distinct matters. First, describing the current factual situation regarding the $50 billion to $70 billion of potential outstanding claims against Iraq (as modified by the late 2009 Chinese debt-for-oil agreement, and any possible others not receiving extensive coverage by the new media) and assessing the argument that such claims remain beyond recovery under the theory of “odious debt.” And second, summarizing the controlling legal principles affirmed and extended in Security Council resolution 1905 (December 21, 2009), and its immediate predecessors, resolutions 1859 and 1790 as well as those set forth in article 141 of the Iraqi Constitution and article 54 of the KRG oil and gas law (No. 22) – all of which aim to establish on the international and domestic Iraqi level a measure of legal insulation from claims associated with oil and gas activity in that country. Part Three builds on the preceding chapters by mining more deeply and offering an examination and analysis of several specific legal issues that will certainly emerge and prove especially nettlesome in the context of pursuing claims for debt recovery related to oil and gas activities. The previous discussion about resolutions 1905, 1859, and 1790, and articles 141 and 54 illuminates the background concerning relevant legal considerations. However, only in sedulously critiquing what those relevant legal provisions decree in the context of specific factual situations can a more complete understanding of the precise dimensions and implications of the law be approached.
As discussed in Chapter 6, oil and gas contractual arrangements can be categorized according to whether they were entered into before or after 1992, whether before or after the removal of Saddam Hussein from power in Spring 2003, or before or after the transfer of governmental power in June 2004 by the CPA to indigenous Iraqi elements. It is clear from the language of article 141 of the Iraqi Constitution and article 54 of the 2007 KRG oil and gas law (No. 22) that the timing of any such arrangements can be consequential. When it comes to the oil and gas assets that a prosecuting claimant may seek in order to secure satisfaction for debts considered to be owed by Iraq, they also may fall into several distinct categories. Generally speaking, although not based on date, those categories include specific oil and gas properties subject to negotiated contract rights, in-kind oil and gas actually lifted from Iraqi fields and in the hands of Iraqis or third parties, and revenues generated by the sale of Iraqi oil and gas and held by Iraqi or third-party entities or institutions.
It is clear from the discussion in the preface that there is support in the basic notions of international law (e.g., ex injuria, postliminium, and the laws of war), and in that portion of national law regarding international transactions that become mixed up with military hostilities and occupation, generally preferring the claims of creditors to those of debtor states. As might be imagined regarding Iraqi debt, various theories and defenses can be advanced to blunt the attempts to work those notions so as to recover from Iraqi oil and gas – and revenues from their sale – what is owed to legal claimants. Almost immediately after the invasion of Iraq by coalition forces and the removal of Saddam Hussein from power, a particular defensive theory designed to insulate Iraq from creditors was voiced repeatedly: “odious debt.” Given that the theory extends only to debts incurred by a previous regime for unsavory purposes, relative to Iraq, it was limited in its applicability to Saddam-era debts. In raising “odious debt,” the idea was to shift the discussion dynamics and situate the claims for relief against Iraq in a legal milieu outside that which normally would expect creditors to have their claims fully satisfied.
The motivations associated with voicing the theory may be debated, but a number of different factors apparently contributed to that fact.
In addition to the terms of Security Council resolution 1905, and its predecessor, resolution 1859, two Iraqi domestic legal measures may raise questions about their effect on claimants seeking recovery for debts arising from the breach of oil and gas contracts negotiated and signed by Iraqi authorities. There are several instances in which the specifics of those measures require consideration. One instance draws on the fact that of the $50 billion to $70 billion in Saddam-era debts reportedly still owed by Iraq to foreign creditors (reduced by the late 2009 debt-for-oil field agreement with the Chinese, and any others not widely trumpeted in the media), a portion may be associated with the failure of Iraq to strictly honor the precise terms of earlier oil and gas contracts. Another instance is related to the fact that resolution 1905, by incorporating paragraph 27 of resolution 1546, opens up the possibility of claims against the DFI and revenues from the sale of Iraqi oil and gas whenever such claims are based on final judgments resulting from an Iraqi contractual obligation entered into after June 30, 2004. A final instance draws on the scheduled expiry at the end of 2010 of the UN-provided insulation from legal claims – barring another extension – and points out that with its termination, breaches of oil and gas development agreements would no longer benefit from immunity.
The complications associated with the odious debt theory were not only considerably avoided by the debt settlement arrangements fashioned in the context of the Paris Club, IDRO negotiations, and other bilateral and multilateral debt-relief efforts but also by the UN adoption of the Security Council resolutions that address the protection of Iraqi oil and gas and proceeds from their sale from claims by creditors. As previously mentioned, these represent an effort by the community of nations to exercise its authority under article 25 of the UN Charter to alter the thrust of general international law (e.g., ex injuria, postliminium, and the laws of war) and national law dealing with debts incident to international transactions, of holding Iraq's “feet to the fire” on its debts, and of moving in the distinct direction of providing protection from legal claims. At the outset of discussing the development and evolution of these Security Council resolutions, and before the chapters of Part Three discuss the specific legal issues presented by the terms of the resolutions, it is important to point out that the resolutions do not protect against claims arising after the restoration of Iraqi independence by the transfer of power from the Coalition Provisional Authority (CPA) in late June 2004. Restated, debts that date from the Saddam era – and that period elapsing between Saddam Hussein's removal from power and the transfer of governmental sovereignty from the CPA to the Iraqi people – are subject to the insulation provided by the current Security Council resolution 1905.
This volume presents the first comprehensive examination of the legal issues surrounding international debt recovery on claims against Iraqi oil and gas. In addition to presenting a snapshot view of Iraq's outstanding debt obligations and an analysis of the significance of the theory of odious debt in the context of the Iraqi situation, the list of legal issues examined includes relevant provisions of the Iraqi Constitution of 2005, controlling Security Council resolutions, pertinent articles of the KRG oil and gas law (No. 22) of 2007 and the many nuanced and technical questions raised thereby, legal pronouncements aimed at protecting Iraqi oil and gas and those adopted in selected other nations, and general problems associated with recognition and enforcement of awards or judgments that may involve such oil and gas or revenues from the sale thereof. Also discussed are the lessons learned by the handling of the Iraq debt experience and the transferability of those lessons to future situations.
It will be recalled that article 54 of the KRG oil and gas law (No. 22) has two paragraphs, which provide that: (1) PSC-related agreements entered into by the KRG prior to the law's adoption must undergo review by the Regional Council to ensure consistency with the provisions of the new law; and (2) similarly dated authorizations and MOUs related to oil and gas are to be regarded as null and void. The first paragraph of the article also provides that Regional Council decisions about consistency of reviewed agreements are considered final. It was discussed previously that article 141 of the Iraqi Constitution declares that the KRG is vested with the authority to amend or annul contracts that it had entered into since 1992, as long as it is done consistently with other provisions of the Constitution. That article also declares all such KRG contracts not amended or annulled to be valid and fully in force.
Imagine an enterprise that had negotiated and successfully concluded sometime after 1992 – and most probably after Saddam Hussein's ouster in 2003, when the KRG was at much greater liberty to assert a more extensive form of civic autonomy – a contractual arrangement with the KRG concerning oil and gas situated in the Kurdistan Region.
The $50 billion to $70 billion owed by Iraq to foreign creditors, as reduced by the late 2009 Chinese quid pro quo regarding access to Iraqi oil in return for debt relief, and any other reductions not widely reported, would not seem subject to repudiation under an international legal notion of “odious debt.” As discussed in Chapter 2, it is questionable whether customary international law even endorses the idea of debt repudiation because it was assumed under odious circumstances. Were creditors to endeavor to commence legal action to recover what they deem owed of Saddam-era debts, however, they would be sure to encounter a variety of defensive claims and strategies. In the discussion in this part, an effort is made to examine the content and the developmental background of defenses and strategies grounded in resolutions of the UN Security Council that purport to insulate Iraqi oil and gas from legal action on such debts, as well as the provisions of Iraqi domestic law – national and regional – that appear to provide Iraqi governing authorities with wide latitude to vary the terms of previously negotiated oil and gas contracts while suffering no particular legal consequences for doing so.
The basic Security Council resolution now in effect that insulates Iraqi oil and gas from legal claims, resolution 1905, was adopted at the end of December 2009. By its terms, it remains effective only until the end of December 2010.
The estimated $50 billion to $70 billion in debt currently owed by Iraq to foreign creditors, as reduced by the late 2009 Chinese deal of debt for oil, and other possible reductions not widely reported in the news media, eventually may be repaid, negotiated downward, entirely forgiven, or remain the subject of controversy and, ultimately, various legal actions. The objective of this study was to survey the background regarding the nature of that debt, the contentions that it is legally escapable under the theory of odious debt, and the provisions of Iraqi law – adopted by both the federal government and the KRG – that could precipitate additional claims as a consequence of Iraqi efforts to escape the strict terms of oil and gas contractual arrangements negotiated since 1992. The intricacies and complexities of the specific language of article 141 of the Iraqi Constitution and article 54 of the KRG oil and gas law (No. 22) were explored. In addition, those provisions of the Iraqi Constitution that serve to safeguard contractual rights and thereby constrain any Iraqi exercise of authority to walk away from commitments were examined. Surveyed as well were the details of apposite provisions of law designed to protect Iraqi oil and gas assets from creditor action. Especially relevant in that respect are the terms of paragraph 22 of Security Council resolution 1483 (as extended and reaffirmed by Security Council resolutions 1859 of December 2008 and 1905 of December 2009) and the language of various national implementing measures, such as U.S. Executive Order 13303 as extended by Presidential Notice of May 20, 2009.
The existence of Iraqi debt to foreign creditors, both governmental and private, seems beyond question; few developing countries, although blessed with substantial natural resources, could escape some degree of financial dependence on the developed countries of the world community. Apparently, the only debatable question in Iraq's case concerns the level of debt owed to foreign creditors. A purpose of Part One of this book on the legal considerations related to causes of action against Iraqi oil and oil revenues for debts owed by Iraq is to distill the information currently in the public domain regarding the extent of that nation's debt. Despite the fact that those estimates vary widely, it is clear that in all instances they fix total debt figures that are quite substantial, especially given the current economic needs faced by the Iraqi government. These needs reflect not only the years of infrastructure neglect witnessed during the Saddam Hussein regime but also the ravages of the Second Gulf War, as well as the civil unrest and ethnic and sectarian rivalry that followed it. The situation is further complicated by the fact that revenues resulting from oil and gas exports have yet to generate sufficient surplus national income to allow meaningful satisfaction of what is owed to creditors.
Part One also examines the early raised contention that much of what was owed by Iraq as a consequence of negotiations and dealings successfully undertaken during Saddam Hussein's regime with foreign governments and private parties should be characterized as “odious debt.”
As discussed in Chapter 8, there may be language in the provisions of national measures designed to insulate Iraqi oil and gas assets from claims by creditors that could be susceptible to the interpretation of providing protection only from court action and not from administrative, arbitral, or other nonjudicial action. To illustrate this point, recall that U.S. Executive Orders 13303 and 13364, as confirmed and extended by the presidential Notice of May 20, 2009, provide only for insulation from “judicial process.” As also indicated, however, even in situations in which the language of the relevant national measures is limited to court proceedings, determinations or decisions emerging from administrative, arbitral, or other nonjudicial proceedings are typically not self-enforcing and therefore require subsequent court action seeking recognition and enforcement to give them any real impact. A clear distinction exists between national measures insulating Iraqi oil and gas assets from any proceeding or process aimed at determining legal rights, and those written in such a way that they protect only against court proceedings. However, to the extent that the latter measure is involved, Iraqi assets are exposed to substantial inconvenience and problems by possibly having to be defended against nonjudicial proceedings. Ultimately, given the need for determinations from administrative or arbitral proceedings to be buttressed by recognition and enforcement in the judicial arena, the difference between both sorts of measures is minimal.
The general topic of legal claims against any foreign nation for debts owed to other nations raises an exceptionally long and involved list of intricate and complex issues from susceptibility to lawsuits, to jurisdiction, to potential defenses, to enforcement of judgments, and numerous associated matters. Similarly, the topic cannot avoid the possible significance related to distinguishing between claimants that are governments and those that are private individuals or legal entities, as well as the practical ramifications that emerge from the existence and location of assets from which any successfully sought judgment may be satisfied. Similarly, there are the questions of whether the relief desired is to proceed from an adjudicative- or arbitral-type process and whether such a process is to (or must) take place before an international or national tribunal.
Broadly speaking, whenever one foreign sovereign owes a form of debt to another sovereign, the traditional mechanism of diplomacy is most often employed to secure payment. When not completely efficacious, the creditor nation may resort to alternatives to seek satisfaction, including various types of internationally mediated, arbitrated, or adjudicated claim-resolution processes. Clearly, a substantial portion of the debts claimed by one foreign sovereign against another involve debts with their fundamental origins in obligations owed by the creditor sovereign to private individuals or private legal entities considered nationals of the foreign sovereign advancing the claim. This is because most often, the rules of international law are viewed as speaking not to nationals but rather to the nation-states that protect and represent them.
When determining the lessons learned from the experience of insulating Iraqi oil and gas assets from claims by creditors – and the extent to which those lessons are transferable to other instances of debt owed by resource-rich nations – it is imperative to be aware of the enormous diversity of situations and circumstances that may exist. There are basic lessons from the Iraqi case that are generally applicable to a host of other comparable cases. Comment will be made on many of these in the pages that follow in this chapter. At the same time, however, recall that the Iraqi situation is somewhat unique.
For starters, the resource with which Iraq is rich is essential to the functioning of the fundamental elements of modern society. At some point in the near future, there is likely to be a shift toward greater dependence on renewable sources of energy to power the wheels of commerce and transportation. At present, the world remains largely dependent on fossil fuels and, when it comes to assuring rapid personal mobility, the dependence on such is total. Additionally, Iraq is situated in one of the world's principal international political hotbeds. The Arab–Israeli crisis has confounded and bedeviled the world community for the past half-century.
Security Council resolution 1483 – and others that have provided protection to Iraqi oil and gas and related assets – mandates that the international protection established by the resolution be implemented by member states through the adoption of domestic legal enactments. As indicated in Chapter 7, paragraphs 2 and 3 of article 26 of the SOFA between the United States and Iraq stress the U.S. commitment to protecting Iraqi assets through domestic means, and its commitment to doing the same through the UN. Article 26(2) provides in relevant part that “[r]ecognizing and understanding Iraq's concerns with claims based on actions perpetrated by the former regime, the President of the United States has exercised his authority to protect from United States judicial process the Development Fund for Iraq and certain other property in which Iraq has an interest.” Article 26(3) provides, in part, that the “U.S. remains committed to assist Iraq in connection with its request that the United Nations Security Council extend its protections and other arrangements established in Resolution 1483 (2003) and Resolution 1546 (2003) for petroleum, petroleum products, and natural gas originating in Iraq, proceeds and obligations from sale thereof, and the Development Fund for Iraq.…”
The language of article 26(2) speaks in terms of the fact that the President of the United States “has exercised” his authority to protect from U.S. judicial process both the DFI and certain other property in which Iraq has an interest.
When considering the matter of debts owed by one sovereign nation-state to other entities, the inclusion of more than only payments contractually obligated for remittance to other autonomous states must be acknowledged. Indubitably, debts that are owed include these contractual commitments entered into with other states; however, they also encompass potential remittances associated with obligations that arise from the failure to meet the legal duties of commercial undertakings or general civil responsibilities – whether the contractual commitments, commercial obligations, or civil responsibilities involve governmental actors or private parties. That is, a nation-state may have borrowed money from a foreign nation and be contractually obligated to make payments of principal and interest to the lender; or it may have entered into a commercial arrangement with a foreign nation or private entity to purchase goods or secure certain services; or it may have faced and breached a specific duty or behavior owed to such nation or entity and thus be indebted to make payment for its commercial undertaking or civil infraction. The government of Iraq has debts owed to others that involve each of these forms of obligation.
This book, however, does not include an examination of Iraqi debts that may have arisen from civil infractions involving individuals subjected to mistreatment by Iraqis operating under color of governmental authority.
There may be a great deal of controversy and divisive posturing when it comes to the political acceptability in the Iraqi national parliament of the February 15, 2007, oil and gas framework law. And despite the criticism that the current actions of the Ministry of Oil in negotiating certain kinds of oil and gas development agreements on the basis of preexisting, Saddam-era laws evidences a disregard for some of the goals and objectives reflected in that February measure, the Ministry continues to move forward to fulfill its aim of boosting Iraqi oil production as rapidly as is consistent with sound practice, technical feasibility, and productive capacity. Against this backdrop, it is interesting to review the thinking of the federal government on model forms of exploration and production contracts, and the basic terms of production-sharing contracts (PSC) used by the KRG. Oil and gas field service providers and major international oil companies desirous of exploring development opportunities throughout Iraq, as well as those who study the contractual legal structure of resource-rich countries that host overseas extractive operations, would find such a review more than worthwhile. In that connection, it should be observed that, although the KRG has made its standard form of model PSC publicly available, indications are that at the time of this writing, the authorities in Baghdad continue to work on finalizing the precise structure and wording of their own model forms of exploration and production contracts.