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Iraq Update

 

December 2008

We are now resuming our practice of providing periodical updates on the situation in Iraq to appraise visitors of this site of important political, legal, administrative and economic developments that have an impact and effect on business potential which was deferred for a while mainly due to the stagnant security situation. This update will briefly report on the political developments, the relative calm and the gradually improving security situation which, in time, will hopefully create a slightly healthier business environment.

1.      General

1.1.In spite of the political developments, referred to below, and the improving but still fragile security situation, essential living conditions and amenities remain lacking with persisting major problems such as security, lack of services and ethnic cleansing. But, the overall situation seems to be improving. Obviously permanent continued stability remains a critical obstacle to achieving economic progress and development in the different sectors. Unemployment and shortages of fundamental daily requirements of life such as health and medical care, water treatment and purification and power supply remain and continue as a destabilizing factor. Oil revenue has increased due to international price rises, but such revenue is yet to filter through to the economy and be utilized in ways and means of improving local living standards. Furthermore, oil production and exports remain at the previous minimal levels compared to reserves potential. Shortages of refined products also persist. It is hoped that the progress in essential elements of improved security, political stability, elimination or at least reduction of corruption, reduction of unemployment levels and the gradual increase of services will lead to creating a safer and healthier business environment.

2.      Transfer of Sovereignty

2.1.The years 2005/6 witnessed important political changes in Iraq. The process started with the transfer of sovereignty from the Coalition Provisional Authority (CPA) to the Iraqi Interim Government on 28 June 2004. Election were held in January 2005 for a National Assembly to draft the Iraqi Constitution ("IC"). After the elections, on 3 May 2005, the Interim Government was replaced by the Iraqi Transitional Government selected from amongst the political Parties in the Assembly. The National Assembly then embarked on the drafting of the IC of 2005 which was presented and approved in a referendum in October 2005. In accordance with IC provisions, Parliamentary general elections were then held in December 2005. These led to the formation in May 2006 of the permanent Iraqi Government, called the National Unity Government. Even though the above mentioned Governments were led by different Prime Ministers, they were generally formed on similar lines.

2.2.Unfortunately, the predominant sectarian and ethnic trend began with formation of the Governing Council by the CPA in 2003 seems to continue with the formation of Governments in the same pattern. This is believed not only to have a negative effect on the quality of ministers selected and consequently on the performance of the different Governments mentioned above but also provided an opportunity for neighboring countries that have specific interests to influence the decision making process. It is further believed that accentuation of these sectarian and ethnic divisions coupled with the lack of overall Iraqi national unity has had a major general detrimental effect on all aspects of life in Iraq including the improvement of essential security, stability and political and economic normalization and progress.

2.3. Furthermore, the above mentioned trend created conflicting and divergent fundamental opinions and positions that generally, in addition to the above mentioned problems, leads to delay in the normalization process as well as the promulgation of important laws that could have a major effect on the country such as the Oil Law, that will be referred to below. Another example of delay is agreeing, approving and ratification of the Status of Forces Agreement (SOFA) between the US and Iraq, also locally referred to as the ("Security Agreement" or as Iraq refers to it as "the Withdrawal of Forces Agreement"), that is intended to provide a new legal framework for forces in Iraq ("the Agreement"). Negotiation of the Agreement began in early 2008 that continued until the November 2008 when the Agreement was finally approved and signed by the Iraqi Government and the US on 17 November 2008. This approval was generally accepted but was coupled with public objections, demonstrations, heated discussions and intense Parliamentary debate that followed. However, Parliament ratified the Agreement at the end of November subject to a compromise reached that the Agreement will be presented to the Iraqi people in a referendum within a period not later than 30 July 2009. Upon obtaining the expected Presidential approval a ratification law will be issued.

3. Investment

3.1.The trend for economic liberalization and free market policies adopted by the CPA continued. An important new Investment Law No. (13) of 2006 ("the Investment Law") was promulgated and published in January 2007. This Law provided provisions to encourage economic and social development as well as helping to create employment opportunities for Iraqi nationals, transfer of technology and other benefits. The Investment Law revoked CPA Order (39) of 2003 and the Arab Investment Law No. (62) of 2002.

3.2. The Government of the semi autonomous Region of Kurdistan (RGK) also promulgated the Investment Law for the Region of Kurdistan ("the Region") No. (4) of 2006 which provided for encouragement of investment in practically all sectors including the oil and gas that was restricted in the Investment Law.

4.    Oil and Gas

4.1.A controversial but important law to regulate the oil industry in Iraq was drafted by the Oil Ministry called the Iraqi Oil and Gas law (also known as the National Hydrocarbon Law) was approved by the Iraqi Counsel of Ministers in March 2007. However, this law was presented to Parliament for approval in accordance with IC promulgation procedures, but is still in draft form that needs to be approved and promulgated after nearly two years from the date of the Council of Ministers approval.

4.2.   In 2007, the RGK awarded oil and gas concessions in the Region to 22 international companies in spite of objections raised by the Oil Ministry arguing that the Oil Law has to be passed to allow the grant of oil and gas concession which will be the prerogative of the Central Government. The RGK argues that the IC provides that oil in Iraq is the property of the Iraqi people regardless of where they live and reside whether in the North, Middle or South because oil revenue will ultimately be part of the State Treasury. It was also reported that the Region intends to export 100,000 B/d. However, in spite of the controversy between RGK and the Ministry of Oil concerning the grant of concessions the transportation of oil produced in the Region to export terminals remains was recently discussed between the Oil Minister and officials in the Region to resolve this difficulty.

4.3.   It was also recently reported that, at the end of September 2008, the Oil Ministry has signed an agreement with one of the major international oil companies to be a 49% owner of a joint venture to develop, utilize and export associated gas of the Southern oilfields.

4.4.   In other important developments in the oil sector the Oil Ministry was reported to have agreed with a Chinese oil company to develop the Ahdab oil field in Southern Iraq reinstating a cancelled with China National Petroleum Corporation. The Oil Ministry had also announced in late 2008 that invitations were issued to 35 pre-qualified oil companies to attend meetings in London to present offers for contracts to develop 6 producing fields and 2 gas fields with agreements to be signed before June 2009.

5.     Banking

5.1.To further liberalize the banking, the Government decided to end the exclusivity granted to the Iraqi Commercial Bank to open Letters of Credit for governmental imports allowing commercial banks a minor share in this lucrative market.

6.    Health

6.1.To improve the problematic medical services and health care, it was reported that a contract was awarded to a German company to build 5 hospitals of 400 beds each at a cost $140 million each. This will be good start but will not solve the medical and health situation particularly when many more hospitals are required and qualified experienced physicians are leaving Iraq.

7.     Electricity

7.1. Lack of electricity and severe shortages is one of the major practical challenges to the Government. It was recently announced that the Ministry of Electricity has adopted a 4 stage plan to expand the national grid to reach an output of 12 thousand megawatts and has pre-qualified 35 known companies to bid for contracts of the first stage. Some of the steps taken to improve this sector were also reported namely an agreement with a Russian company to return to Iraq to restructure and expand the Yousifiah power station, to provide 1,300 megawatts, that they had left uncompleted for security reasons. It was further reported that well known German and Japanese companies signed several contracts to provide smaller power units of varying capacities. Hopefully this again will be a good start to resolve this problem.

CAVEAT

The above update is a guideline not intended to be a legal opinion or advice. For opinions and/or advice on developments or specific legal matters in Iraq, kindly contact us by e-mail to sm@gulf-law.com for the advice required.

Other Updates:

Iraq Update: December 2008

Iraq Update: August 2004

Iraq Update: October 2003

Iraq Update: Agency Law

Iraq Update: July 2003

Iraq Update: April 2003

Iraq Update on Agency Law: March 2001

Iraq Law latest update from Gulf Law December 2008

 

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