The Republic of Iraq, including the Kurdistan Region of Iraq (KRI), is a country vested with many easily exploitable oilfields. The exploration and production of oil in Iraq started as early as the 1920s. The Iraqi oil sector was fully nationalised in 1975. After several years of war and sanctions, Iraq, against the backdrop of its post-conflict setting, besieged by competing political, ethnic and sectarian factions, corruption and turmoil, aims to replace the former state monopoly on oil and gas with private development.

The KRI has been particularly successful in this regard. Starting oil and gas activities only in 2006, the Kurdistan regional government (KRG) concluded more than 50 production-sharing contracts (PSCs) with international oil companies (IOCs). Initially the contracting partners were minor oil companies such as Gulf Keystone, Genel and Western Zagros. Gulf Keystone discovered the giant Shaikhan field with 14 billion barrels of oil in place (subsequently adjusted downwards). It was one of the world's largest onshore discoveries in more than 20 years. In 2012, ExxonMobil pioneered as the first major IOC, followed by Chevron, Total and Gazprom.

The Kurdistan Region Ministry of Natural Resources (MNR) estimates the reserves at 45 billion barrels of oil and at 25 trillion cubic feet (tcf) of proven gas reserves and up to 198 tcf of largely unproven gas. If the KRI were an independent country, the amount of oil and gas reserves would place it among the top 10 oil-rich countries in the world. However, the region is still an integral part of the Republic of Iraq even though it enjoys semi-autonomy.

Both the KRG and the central government in Baghdad remain at odds over the authority to administer and dispose of oil being produced in the KRI at a current estimated production level of 426,000 barrels per day (bpd). In the course of these quarrels, the central government has repeatedly withheld the payments of federal budget portions allocated to the KRI. In turn, the KRG continued and expanded its independent oil exports to Turkey. The low world market oil prices and the Kurdish peshmerga's and Iraqi army forces' fight against the terrorist group ISIS created a severe financial crisis in the KRI.

In 2016, owing to the strained financial situation of the KRI, the central government and the KRG again began to jointly export crude oil from the Kirkuk fields to Ceyhan in Turkey. The parties continued negotiations to finally reach a comprehensive revenue-sharing deal involving the entire oil and gas reserves of Iraq but with little success.

In 2017, and after three years of ISIS controlling huge swathes of land in northern Iraq, Mosul, the last major stronghold of ISIS in Iraq was liberated, and the existence of ISIS in northern Iraq has been substantially reduced. However, this has unfortunately not resulted in the desired stability to the region and Baghdad and the KRI remain at odds over the regions' oil reserves and the rights of the KRI to export crude oil independently of Baghdad and SOMO, the Iraqi oil marketing organisation.

Following a very rocky 2016, where the KRI was behind on payments to major IOCs, and involved in major military operations to liberate Mosul, in 2017 the KRI took major steps to remedy the situation and bolster confidence in the KRI from the IOCs and the international community. Most importantly, settlement agreements were reached with several IOCs. Further, agreements were entered into with Russian Rosneft, despite objections from Baghdad, to manage and develop the Turkey pipeline in addition to agreements for cooperation in the entire hydrocarbons production chain including exploration and development of five blocks, production and logistics. Rosneft further agreed to finance Kurdish crude oil. A new deal was signed in early 2018 focusing on developing the gas sector in the KRI, including a new gas pipeline. Furthermore, Rosneft will reportedly start geological explorations in the KRI later in 2019.

On the political front, the KRI, after its leading role in liberating both Kirkuk and Mosul and its apparent successes in the oil and gas sector, held a referendum for independence on 25 September 2017. The positive outcome was at the very least expected to give the KRI additional footing and leverage in any future negotiations with Baghdad regarding oil and gas in the Kurdish-controlled regions of northern Iraq, especially given the supportive stance of Kirkuk. However, soon after the referendum, Iraqi forces retook Kirkuk and control of the oilfields from the Kurds, cutting the KRI's revenues nearly by half. Losing control over the oilfields meant reliance on Baghdad for income once again.

Exports from Kirkuk were halted after the post-referendum military offensive by the central Iraq forces, which then diverted outputs to local refineries. On 16 November 2018, exports from Kirkuk to the Ceyhan pipeline resumed. The central government exported up to 105,000bpd in June 2019 from Kirkuk, most of which was transported via Ceyhan. There have been ongoing discussions for months regarding the security and military situation in Kirkuk, and although there has been some cooperation over the past year, the Kirkuk issue still remains to be resolved. Adding to the tensions is the KRG's failure to contribute 250,000bpd to the central government in exchange for its share of the federal budget as agreed in the 2019 budget. As of July 2019, there had been attempts by a faction of the Iraqi parliament to amend the 2019 budget and cut transfers to the KRG if the latter does not deliver the required amount of oil. However, this garnered few votes, and the KRG will receive a limited budget allocation regardless of whether it abides by its obligation or not, as the 2019 budget law appears to be more lenient than previous annual budgets in this regard.

In 2012, the central government filed a case against the KRG challenging the latter's independent oil exports. The case was continuously postponed owing to a procedural loophole that prevented the court from hearing the case without the attendance of a KRG representative. This finally changed in April 2018 when the KRG attended the court. Since then, proceedings have been slow and the ruling constantly delayed, with the most recent delay owing to a missing signature from the Iraqi Prime Minister Adil Abd al-Mahdi on revising filings submitted to court.

Amidst internal conflict between the different Kurdish political parties resulting from many factors, including the independence referendum, former KRI president Masoud Barzani's resignation on 29 October 2017, the financial difficulties and the disputes with central government amongst others, the KRI held its parliamentary elections in September 2018. No single party won the majority of the Kurdish parliamentary seats. At the same time Mr Barham Salih was elected the president of Iraq. More recently, the Kurdistan Parliament elected former KRI Prime Pinister and Masoud Barzani's nephew, Nechirvan Barzani, as President of the KRI on 28 May 2019, and Masoud Barzani's son, Masrour Barzani, as Prime Minister on 10 June 2019. Both have expressed their determination in helping to improve relations between the KRG and central government.


Iraq's legal framework for the petroleum industry is quite ambiguous. Pursuant to the Iraqi Constitution, 'oil and gas are owned by all the people of Iraq in all the regions and governorates'.2 However, the exploration and production of oil and gas are not governed by the Iraqi Constitution. It only states that 'the central government, with the producing governorates and regional governments, shall undertake the management of oil and gas extracted from present fields, provided that it distributes its revenues in a fair manner in proportion to the population distribution in all parts of the country . . . and this shall be regulated by a law.'3

The Iraqi Constitution only refers to 'present fields' where the management of present fields falls under the shared jurisdiction, while the management of other oil and gas resources that are not 'present fields' are not expressly addressed in the Constitution. Nonetheless, the term 'present fields' does not reflect common concepts of the oil industry such as 'proven – probable – possible', 'developed – undeveloped' or 'producing – non-producing'. That said, the KRG maintains that present fields within the meaning of the Iraqi Constitution refers only to the oil and gas fields that were producing at the time of enactment of the Iraqi Constitution in 2005. All other oil and gas resources (i.e., fields not producing or even not discovered in 2005) are not encompassed. The KRG takes the position that non-producing fields (as of August 2005) do not fall within the shared jurisdiction of the central government and the KRG, and, therefore, the KRG has exclusive jurisdiction over such fields. Hence, the KRG regards itself as the competent authority to regulate all oil and gas resources in the Kurdistan region other than 'present fields'. The central government in Baghdad rebuts this interpretation of the Iraqi Constitution and believes that the KRG lacks the requisite constitutional authority to sign contracts with foreign oil companies, which it deems illegal.

Pursuant to Article 112(1) of the Constitution, the foregoing varying interpretations should have been regulated by a law creating a comprehensive and fair framework for the management of the Iraqi oil and gas sector, including the rights and competencies of the governorates and regions to have an active role in the management and a share of the revenues. For years, the KRG and the central government failed to agree on a unified federal oil and gas law in implementation of the Iraqi Constitution. Finally, in 2018, a new Iraqi National Oil Company Law No. 4/2018 (the INOC Law) was passed by the Iraqi parliament and came into force in April 2018. While the INOC Law contains some provisions that appear to implement some of the requirements of the Constitution and to liberate the oil and gas sector, the INOC Law is far from a federal oil and gas law as envisioned by the constitution as it does not address in any detail the management and cooperation between the central government and the KRG with respect to oil and gas from present or future fields. The INOC Law was immediately challenged on the basis of the constitutionality of some of its provisions. In January 2019, the Federal Supreme Court found that a number of the INOC Law provisions were unconstitutional, effectively rendering the INOC Law impossible to implement without first amending or replacing the unconstitutional Articles.

A decision of the Federal Supreme Court is also pending in the proceedings initiated by the central government in 2012 challenging the KRG's right to independently export crude oil from the KRI. In 2014, the court refused to grant the Federal Ministry of Oil an injunction against the KRG prohibiting it from exporting crude oil independently on the basis 'that [granting such an injunction] would give an impression of a premature decision on the subject matter of the proceedings and the decision that shall be issued by the court' which would contravene the judicial “context/norms” '. The final decision of the Federal Supreme Court on the matter, whether positive or negative will have far reaching implications on the oil and gas landscape of the KRI and Iraq as a whole.

i Domestic oil and gas legislation

The Iraqi Constitution gives the regions the right to legislate on any matters that do not fall within the exclusive jurisdiction of the central government4 and, pursuant to the Kurdistan National Council (the predecessor to the current Kurdistan parliament) Decision No. 11/1992, federal laws passed after 1992 are not applicable in the KRI unless specifically adopted pursuant to a KRI law. The Constitution further provides that where a conflict exists between a federal law and a regional law, the regional law shall prevail.5

Premised on the foregoing, in 2007 the KRI legislator passed its own Kurdistan Oil and Gas Law – No. 22/2007 (KOGL). The KOGL applies to all petroleum operations in the KRI. No federal legislation, and no agreement, contract, memorandum of understanding or other federal instrument that relates to petroleum operations, applies in the KRI except with the express agreement of the relevant authority of the KRG.6 Hence, the federal Iraqi legislation and regulations with respect to petroleum operations is not applied in the KRI.

The MNR oversees all oil and gas matters in the KRI. The Minister of Natural Resources may license petroleum operations (i.e., activities including prospecting, exploration for, development, production, marketing, transportation, refining, storage, sale or export of petroleum; or construction, installation or operation of any structures, facilities or installations for the transportation, refining, storage, and export of petroleum, or decommissioning or removal of any such structure, facility or installation7) to third parties8 after approval of the Regional Council for the Oil and Gas Affairs of the Kurdistan Region – Iraq (the Regional Council) (which consists of all relevant ministers of the KRG's cabinet9 identified in Section II.ii). The MNR shall encourage public and private sector investment in petroleum operations.10

The central government in Baghdad asserts that the KOGL, as well as all petroleum contracts entered into by the KRG, including PSCs as well as the recent Rosneft agreements, are unconstitutional and, therefore, invalid. Based on this position, the central government has in the past repeatedly refused to pay the KRG the full share of the oil revenues generated by SOMO and stopped payments to the KRG altogether in April 2014. Negotiations to finally settle this ongoing dispute continue.

In April 2013, the KRI adopted the 'Law of identifying and obtaining financial dues to the Kurdistan Region – Iraq from federal revenue' (the Financial Rights Law). The Financial Rights Law grants the KRG the right to independently export crude oil produced in the KRI if the central government fails to pay the KRG its share of revenues (including oil revenues), budget items, other national allocations and reparations. However, the central government denounces independent Kurdish oil export as 'smuggling'. Prior to the enactment of the INOC Law, the central government took the view, based on its interpretation of the Iraqi Constitution and existing federal legislation, that SOMO has the sole authority to sell hydrocarbons internationally and all oil proceeds must be deposited with the Development Fund of Iraq (DFI) established pursuant to United Nations Security Council Resolutions (UNSCR), including UNSCR No. 1483 and in accordance with Section 5(1) of the Financial Management Law (CPA Order 95). The DFI was originally administered by the CPA but has since transferred to the federal Minister of Finance, reporting to the Council of Ministers, which shall take advice from the governor of the Central Bank.11 Article 3 of the INOC law, which permitted the INOC to sell hydrocarbons and to remit profits to the state treasury, not the DFI, has been found to be among the provisions of the INOC Law that the Supreme Court has held to be unconstitutional. Furthermore, based on the 1992 KRG Decree and the fact that oil and gas management and revenues are not captured by the exclusive authorities of the central government as provided in the Constitution, the KRI does not recognise the INOC Law as applicable to the KRI.

In the meantime and notwithstanding the constitutionality or lack thereof of the INOC Law, the central government had initiated several legal proceedings prior to the enactment of the INOC Law against entities involved in the independent export and sale of oil produced in the KRI, including the government of Turkey and its state-owned pipeline operator BOTAS, and several shipping companies. These actions by the central government have severely raised the risk assessments by many players in the market and scuttled many other intended oil sales by the KRG.

Based on the foregoing and the KRG's continued autonomous sales of hydrocarbons despite objections from the central government, the KRI's parliament passed the Kurdistan Oil and Gas Fund Law No. 2/2015 (KOGFL) pursuant to the KOGL. The KOGFL provides for the establishment of a monetary fund (the KOG Fund) to be managed by a board appointed by the KRG Council of Ministers after an absolute majority approval of the parliament.12 All proceeds from any hydrocarbon activity in the KRI or related to that activity, including allocations from the federal budget that are directly attributable to hydrocarbons, are to be deposited with the KOG Fund. Monies accounted for in the KOG Fund are to be remitted to the KRG Ministry of Finance to be spent in accordance with the KRG Budget. In addition, under the KOGFL monies in the fund shall be distributed according to the KOGL and with specific allocations to a 'future generation fund' to be established, to the KRG budget, the social security fund, the agricultural infrastructure fund and the environment fund, as well as a US$2 per barrel allocation for each province from which the revenues were derived.

ii Regulation

The regulatory agencies competent for overseeing upstream oil and gas activities in the Kurdistan region are:

  1. the Iraqi Kurdistan parliament: the Kurdistan parliament is the legislative body of the KRI and passes its laws;
  2. the KRG: the KRG governs the KRI in accordance with the laws enacted by the Kurdistan parliament;
  3. the Regional Council: the Regional Council consists of the Prime Minister, the Deputy Prime Minister, the Minister of Natural Resources, the Minister of Finance and Economy and the Planning Minister;13 it mainly formulates the general principles of petroleum policy, prospect planning and field development and approves petroleum contracts;14 and
  4. the Ministry of Natural Resources of the Kurdistan Region: the MNR oversees and regulates all petroleum operations in the KRI15 and it negotiates and signs PSCs on behalf of the KRG jointly with the Prime Minister representing the Regional Council.

Other agencies and ministries such as the Social Security Directorate, the Residency Directorate and the Ministry of Agriculture and Water and Irrigation have regulatory oversight for their areas of competence that fall within the activities of IOCs operating in the KRI.

iii Treaties

Pursuant to the Iraqi Constitution, the central government in Baghdad has the sole authority to sign and ratify international treaties and agreements.16

Iraq has signed several investment and other bilateral agreements with India, Iran, Japan, Jordan, Kuwait, Mauritania, South Korea, Sri Lanka, Syria, Tunisia, Turkey, the United Kingdom, Vietnam and Yemen, among others, some of which have not yet come into force as they are pending ratification by the Iraqi Council of Representatives. In addition, Iraq has entered into bilateral free trade agreements with the United Arab Emirates, Oman, Qatar, Algeria, Egypt, Jordan, Lebanon, Syria, Tunisia, Yemen and Sudan. In 2010, Iraq concluded bilateral investment treaties with France, Germany, and Italy. The bilateral investment treaties with France and Germany were ratified by the Iraqi Council of Representatives in 2012. As far as we are aware, the treaty with Italy has not yet been ratified.

On 11 July 2005, Iraq and the United States penned a Trade and Investment Framework Agreement. The Iraqi government ratified the agreement in December 2012. The aim of this agreement is to promote and facilitate investment and trade between the two countries. At present, the United States does not have a bilateral investment treaty with Iraq.

With regard to judicial cooperation and dispute resolution, Iraq, including the KRI, is a signatory state of the Riyadh Arab Agreement for Judicial Cooperation of 1983 (the Riyadh Convention). According to the Riyadh Convention, each contracting party shall recognise the judgments made by the courts of any other contracting party in civil cases having the force of res judicata and shall enforce them in its territory.17 Nonetheless, judgments made against the government or against any of its employees in respect of acts undertaken in the course of duty or exclusively on account thereof are exempted.18 The same applies to awards of arbitrators.19

In December 2012, the website of the Iraqi Council of Representatives announced that the Council of Representatives had ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention). The ICSID Convention entered into force in Iraq on 17 December 2015.

On 6 February 2018, Iraq officially voted in favour of accession to the 1958 New York Convention, which applies to the recognition and enforcement of foreign arbitral awards. However, it has yet to be approved by the Iraqi parliament.


To date, the KRG has signed more than 50 PSCs with IOCs. Not only did the region until very recently offer security and stability (and remarkably continues to, post ISIS and the subsequent economic crisis), the terms and conditions of the PSCs are more favourable to private investors than the technical services contracts (TSCs) and development and production services contracts (DPSCs) signed by the Federal Iraqi Ministry of Oil.

The MNR has the discretion over whether to invite applicants for licensing or to award licences based on direct negotiation.20 In all cases, an applicant or invitee must demonstrate technical and financial capability. It also needs to have a record of compliance with the principles of good corporate citizenship, and a commitment to the Ten Principles of the United Nations Global Compact.21

Key features of the PSC are to be negotiated with the MNR based on the Model PSC published by the KRG,22 which includes that:

  1. a signature bonus23 and a capacity-building bonus24 are payable by the contractor once the PSC becomes effective;
  2. the KRG has the right to participate in the PSC through one of its public companies with a stake of up to 25 per cent after commercial discovery.25 The contracting partner is usually a consortium consisting of an IOC and a carried Kurdish national company with an undivided interest of between 20 and 25 per cent in the PSC. The Kurdish public company may, at its discretion, assign part or all of its government interest to a third party;26
  3. the term of the PSC varies in accordance with advancement. The exploration period lasts for five years (comprising an initial sub-period of three years and a second sub-period of two years) and may be extended for a further two years.27 Upon commercial discovery, the development period extends to 20 years with two possible extension periods of five years each;28
  4. preference is to be given by the IOC to local employment,29 subcontractors30 and materials;
  5. capacity building of local employment including training, funding, education and secondment of government employees is required. All reasonable training costs for Iraqi personnel are recoverable petroleum costs;31
  6. during the exploration period, an annual surface rent of US$10 per square kilometre is payable. However, this exploration rental is, as it constitutes petroleum costs, recoverable.32 Twenty-five per cent of the initial contract area, excluding production areas, shall be relinquished at the end of the initial term next to an additional 25 per cent of the remaining contract area, excluding production areas, at the end of each extension period;33
  7. in the event of a commercial discovery, a production bonus is payable34 in addition to a recurring royalty (i.e., a portion of petroleum produced).35 Usually, the royalty rate for export crude oil and natural gas is set at 10 per cent;
  8. once commercial production commences, the contractor is entitled to recover all petroleum costs (e.g., production costs, exploration costs, development costs and decommissioning costs) incurred from the hydrocarbons produced.36 The remaining 'profit petroleum' is split between the KRG (through its public company) and the contractor pursuant to the quotas stipulated in the PSC;37 and
  9. during the exploration period, the contractor may terminate the PSC at the end of each contract year.38 Once the development period has been entered into, the contractor has the right to terminate the PSC at any time.39

Unlike the TSCs and DPSCs offered by the central Iraqi Ministry of Oil, the PSC provides the contractor with a share in the petroleum discovered and, therefore, an interest in the value of the petroleum produced. PSCs concluded by the KRG have not been approved by the central Iraqi Ministry of Oil and are disputed by the central government in Baghdad.


At present, the MNR does not impose any restrictions on the exploration, development and production of hydrocarbons (cost and profit oil) in the KRI. As per the PSC, the contractor shall be entitled to receive and export freely any available petroleum (cost and profit oil) to which it is entitled under the agreement.

Through the PSC, the KRG reserves oil for local markets. Upon written request of the MNR, any amounts of crude oil produced that the KRG deems necessary to meet the KRI's internal consumption requirements must be sold and transferred to the KRG at the international market price. All contractors active in the KRI must be treated equally in this regard.40

With the Financial Rights Law (mentioned in Section II), the KRI lawmaker has again confirmed the right to export crude oil independently of the central government if and to the extent the latter fails to pay the KRG its share of oil revenues and exploration costs.

The central government in Baghdad strongly objects to all such efforts by the KRI to explore and produce crude oil independently of the Federal Ministry of Oil in Baghdad.

Moreover, there are still severe practical limitations on the export of oil produced in the KRI. Although the pipeline capacity has been greatly increased and should nominally be sufficient to transport the current production output, a steady flow of export oil is not guaranteed, as the pipelines are often subject to sabotage or illegal drainage.


The KOGL provides that the relevant contract relating to petroleum operations shall specify the rights of the MNR to approve, or be notified of any assignment (in any form, whether by transfer, conveyance novation, merger, etc.) and changes in control of any contracting entity.41

In practice, and based on the Model PSC published by the MNR, PSCs normally give the KRG the right to approve any assignment, whether to an affiliate, another contracting entity or to a third party. In the case of a transfer or assignment to a third party, however, the contractor must present reasonable evidence of the assignee's technical and financial capability.42 This requirement is not applicable to an assignment to an affiliate or to another contracting entity.

Neither the KOGL nor the Model PSC provide for a right of first refusal or any other pre-emptive rights of the KRG.

The change of control provisions contained in the Model PSC apply to any direct or indirect change of control of a contracting entity, in which the market value of such entity's participating interest in this contract represents more than 75 per cent of the aggregate market value of the assets of such entity and its affiliates that are subject to the change in control.43

An entity that is subject to a change of control as defined above must obtain the prior written consent of the KRG. This consent is not required if the change of control is to an affiliate or another contracting entity. Under the PSC it is not required to provide evidence of the new controlling entity's financial or technical capability.

Typically, the KRG does not expect nor does it receive any consideration as a condition to granting approvals for an assignment or a change of control. On the contrary, the Model PSC specifically provides that any assignment or change of control 'will not give rise to any tax, imposition or payment whatsoever in the Kurdistan Region, whether currently existing or which may become applicable in future'.44

The Model PSC provides that an assignee must enter into an agreement whereby the assignee undertakes to be bound by the terms of the PSC in the then-current form.


According to the KOGL all persons associated with 'petroleum operations' are liable for all applicable taxes of the KRG, including: (1) surface tax; (2) personal income tax; (3) corporate income tax; (4) customs duties and other similar taxes; (5) windfall profits or additional profits tax; and (6) any other tax, levy or charge expressly included in its petroleum contract.46

Based on the above, upstream oil and gas operations would be subject to the tax laws and regulations applicable to all commercial activities in the KRI, in particular the Federal Income Tax Law No. 113/1982 as adopted and amended in Kurdistan pursuant to the KRG Law No. 26/2007 as amended from time to time (KRG ITL). According to the KRG ITL, all commercial activities are subject to a flat corporate income tax rate of 15 per cent on profits.

The current KOGL does not contain any tax exemption for IOCs and other upstream operators active in the KRI. It does, however, provide that a petroleum contract may exempt a contractor from tax by law. No such law has been enacted to date. A draft oil and gas tax law has been under discussion, which aims to exempt all IOCs, their subcontractors and foreign personnel from any income tax and social security contributions for several years.

In the absence of an oil and gas tax law and as an incentive for major IOCs to invest in the KRI, the Model PSC is structured to provide the IOCs, their affiliates and subcontractors involved in petroleum operations with a de facto tax exemption. In this regard, Articles 31.1 and 31.2 of the Model PSC provide for several rights and obligations related to taxes in connection with the PSC as follows.

i Rights and obligations of the contractor entities

These include the following.

  1. The IOC, each contracting entity, its affiliates and any subcontractor are exempt from all taxes as a result of their income, assets, and activities under the PSC effectively for the entire duration of the PSC, including but not limited to taxes on income from movable capital, any taxes on capital gains, and any fixed taxes on transfers.47
  2. The IOC is exempt from any withholding tax, surface tax, windfall tax and additional profits tax as provided in Article 44 KOGL.48
  3. The IOC is subject to corporate income tax on its income from petroleum operations.49 Payment of such income tax shall be made by the KRG throughout the entire duration of the contract.
  4. The IOC must provide appropriate tax returns in accordance with applicable law together with a calculation of the amount of income tax due.50
  5. Each contracting entity shall pay or withhold the personal income tax and social security contributions with respect to its employees.51

Notwithstanding that the model and all signed PSCs exempt a subcontractor from taxes, in practice these exemptions have not been implemented with regard to subcontractors that remain subject to all applicable taxes in the KRI. While the foregoing is not consistent with the terms of the PSC, it is consistent with applicable laws.

Furthermore, in July 2017, the MNR issued decree 3773 which exempts all foreign employees from income tax on the wage they earn in the KRI.

ii Obligations of the government

  1. The government shall indemnify each contracting entity against any liability to pay any taxes assessed or imposed upon such contracting entity that relate to the tax exemptions granted by the PSC.52
  2. The government shall pay all income tax on behalf of the contracting entity directly to the KRG tax authorities from the government's share of profit petroleum and provide the contracting entity with a tax clearance certificate.53

According to the Iraqi Constitution no tax may be imposed nor an exemption made except pursuant to a law.54 Therefore, in our assessment the exemption provided under the PSC may not legally bind the KRI tax authorities; a view widely shared by the Ministry of Finance. In order to effect the tax exemption, the PSC provides for a contractual assumption of the IOC's income tax liability by the KRG, which is obliged to pay taxes on behalf of the IOC from its share of profit petroleum, and to indemnify the IOC against a tax liability from which the IOC is exempt pursuant to the terms of the PSC. This results in a de facto exemption for income tax arising under the PSC.

In addition, the PSC further provides for an exemption from customs duties and any other import duties, fees or taxes and an obligation on the government to indemnify the IOC in the event any such duties, fees or taxes are imposed on the IOC.

The PSC also provides that the IOC is obliged to withhold and pay personal income tax and social security contributions on behalf of its employees pursuant to applicable law. Several IOCs negotiated the inclusion of the phrase 'in respect of its employees who are Iraqi nationals'. While initially the competent authorities did not pursue IOCs in connection with their foreign employees, during the past few years, a number of IOCs have been required to pay all labour-related taxes and social security contributions for both local and foreign employees active in the KRI. One of the contentious issues in passing the KRG draft oil and gas tax law is whether to exempt foreign employees from personal income tax and social security contributions.


Both the KOGL and the Model PSC contain similar provisions pertaining to health, safety and environment. In addition to the requirement for all applicants for a PSC to include conditions for protecting the environment, preventing, minimising and remedying pollution, an IOC is required under the PSC to adhere to prudent international petroleum industry practice with regard to environmental protection as well as applicable laws.55 IOCs are also required to make payments towards an Environment Fund.56

The KRG Law of Environmental Protection and Improvement No. 8/2008 regulates environmental matters such as the protection of water, soil, air and biodiversity, and is applicable to oil and gas operations. In accordance with Articles 4 to 6 of the Law, the Ministry of Environment in the KRI established an Environmental Protection and Improvement Council to oversee and supervise all environmental matters. In 2010, an independent Environmental Protection and Improvement Board was established in the KRI by Law No. 3/2010, which replaced the Environmental Protection and Improvement Council and the Ministry of Environment and has assumed the oversight and supervisory role for the enforcement of Law No. 8/2008.

In addition to specific obligations related to standards for the protection of water, soil, air and biodiversity, any person conducting any activity that has an environmental impact must obtain prior approval from the Environmental Protection and Improvement Board.

Non-compliance with the obligations of the Environment Law may result in no less than one month of imprisonment or fines of between 150,000 and 200 million Iraqi dinars, or both.57 In addition to the specific penalties provided for in the Law, anyone who causes environmental damage shall be subject to civil compensation and responsibility for removing or correcting the damage.

As regards environmental requirements in connection with decommissioning, the IOC must present a decommissioning plan to the management committee at least 24 months before the estimated date of the end of commercial production including environmental considerations. The IOC has the right, but not the obligation, to create a 'decommission reserve fund' during the last 10 years of the PSC's term. Amounts paid towards the fund shall be recoverable by the IOC as petroleum costs in accordance with the terms of the PSC.58


i Establishment

The KOGL requires that any IOC operating in the KRI pursuant to a PSC shall establish an office in Kurdistan.59 The term 'office' as used does not specify whether the 'office' must be a branch office or a separate local legal entity such as a subsidiary LLC. In practice, however, the MNR gives preference to the registration of branch offices.

The procedure for registering a branch entails submission by the parent company of the following documents legalised up to the level of the Iraqi consulate in the country of issuance:

  1. corporate documents of the IOC (certificate of establishment, commercial register extract, statutes, etc.);
  2. letter of intent or shareholders' resolution approving the establishment of the branch and an undertaking that the IOC shall assume all liabilities and obligations of the branch;
  3. power of attorney granted to the person to be appointed manager of the branch plus a copy of his or her passport;
  4. evidence of the business premises in KRI; and
  5. last audited financial statements of the IOC.

The above documents are to be submitted to the Register of Companies along with evidence of registration on the MNR Approved Vendor List (an online registration platform)60 or a decision by the MNR approving this registration. In addition to the foregoing, the branch must appoint a local accountant and lawyer admitted to the relevant Kurdish accountant syndicate and bar association respectively.

The approval and certificate of registration of the branch is usually issued within two to three weeks of the date of submission of the completed set of documents to the Register of Companies.

ii Repatriation of foreign currency

At present there are no foreign currency exchange restrictions applicable in the KRI and foreign companies are free to repatriate funds without restriction. Notwithstanding the foregoing, anti-money laundering requirements imposed by the Iraqi Central Bank and applied by private and public banks may result in delays in receiving and transferring funds into and out of the KRI.

The PSC further confirms that the IOC is entitled to convert into dollars or any other foreign currency any Iraqi dinars received from petroleum operations and to freely transfer the same abroad61 and to pay any subcontractor and its expatriate personnel in foreign currency.62

iii Preference to local resources

In addition to the KOGL requiring that IOCs give preference to local manpower from the KRI and other parts of Iraq provided that they have the necessary qualifications, the same obligation also applies to subcontractors.63 This is also mirrored in both the Iraqi Labour Law applicable in the KRI and the Model PSC. The IOC is required to provide training to local employees and, where possible, 'to maximise knowledge transfer to the people of the region'.64 Training may include scholarships, funding for education65 and secondment of government employees to the IOC.66 The IOC must provide a training plan and advance funding to the government for recruitment and secondment of government-selected local personnel. Costs for training contained in the training plan and advance funding are recoverable as petroleum costs under the PSC.67

The Model PSC entitles the IOC to hire foreign personnel whenever the personnel from the KRI and other parts of Iraq do not have the requisite technical capability, qualifications or experience.68 However, it does not specify whether the IOC or the KRG shall have the discretion to determine whether local manpower is sufficiently qualified. Therefore, to a large extent, the discretion is left to the IOC. The IOC is required to obtain residency permits from the KRG Ministry of the Interior for all foreign personnel. The permit is only granted based on the approval of the MNR.

As with employment, IOCs and their subcontractors are required to give preference to partnering with local companies and using local products and materials. It is noteworthy that in selecting IOCs the government is entitled to give preference to IOCs that partner with local companies.69 The training programme submitted by the IOC is also one of the considerations in selecting IOCs.

iv Anti-corruption

The Republic of Iraq is frequently listed among the 10 most corrupt countries in the world by Transparency International. Kurdish officials, worried that this ranking in the corruption index could reflect badly on the KRI, launched a strategic good governance and transparency campaign as early as 2009 in cooperation with the international consulting firm PricewaterhouseCoopers.

Since then, the Kurdistan Region Presidential Anti-Corruption Committee has frequently investigated government actions and government projects, in particular in the construction and contracting sector. Consequently, the PSCs provide that any reasonably proven violation of the anti-corruption laws applicable in the KRI shall render the PSC void ab initio.

While certain compliance issues regarding doing business in Kurdistan remain, based on the above it seems reasonable to exempt the KRI from the general corruption ranking of Iraq.


In particular, two factors have characterised the development of the KRI hydrocarbons industry.

On the one hand, the relative security of the region (following the removal of IS) has been outstanding in comparison with central Iraq and had a vastly positive effect on commercial development. Large oil companies and the commercial sector were drawn to the KRI by the economic prospects of the region and were reassured by the absence of terrorist or military attacks. The success of the Peshmerga and Iraqi forces against ISIS in northern Iraq has returned confidence to the region as more companies have started investing once again. For example, UAE-based independent gas company Dana Gas announced a new oil discovery in its KRI fields and a 74 per cent increase in revenue through the consortium Pearl Petroleum (majority owned by Dana Gas) in the first half of 2019. Pearl Petroleum also signed a 20-year gas sale agreement with the KRG earlier this year that would facilitate increased gas production, evidencing its flourishing relations with the KRG.

On the other hand, the lack of a working infrastructure to independently transport hydrocarbons out of the KRI has left many players questioning the sustainability of the KRI's efforts to establish a prosperous oil industry.

The lack of technical midstream capabilities has been largely rectified. The new pipeline designed to transport oil directly from the Taq Taq oilfield in the KRI to Turkey was finished in December 2013. In July 2014, amid the turmoil created by terrorist attacks of the ISIS terrorist group in northern Iraq, the KRG connected the Khurmala Dome southwards to the oilfields in the disputed territories near Kirkuk by a new pipeline. This allowed the KRG to exploit the vast oil resources of Kirkuk and enabled it to transport oil through the central Iraqi pipeline network to Iraq's south. Talks between the KRI and Iran for a pipeline capable of transporting up to 250,000bpd of oil from KRI to Iran failed, with Iran reaching agreements with Baghdad instead to transport oil from Kirkuk to Iran.

Despite the development of the above technical capabilities to transport crude oil from the territory of the KRI, the efforts of the central government to prevent independent oil exports from the KRI through widespread legal action against parties involved in these export and sales activities have had serious consequences on the financial situation of the KRI. Kurdish oil is currently regarded as toxic by many oil traders, and it remains difficult for the KRG to find off takers for its oil.

To enable the KRI to continue to develop despite the extreme financial constraints, the KRI parliament passed a law permitting the KRG to raise funds through sovereign borrowing. The Law to Raise Funds Through Borrowing by the Kurdistan Region (Debt Law) was enacted in June 2015. The law allows the KRG to raise funds through the incurrence of debt or issuing guarantees up to an aggregate amount of US$5 billion for the purpose of financing investment projects approved by the KRI's parliament. Owing to low oil prices and the central government raising doubts as to the competence of the KRI raising independent sovereign debt, the KRI has to date not been successful in placing any bonds on the basis of the Debt Law.

Kirkuk oil exports have resumed through Ceyhan. The KRG has steadily been paying off its debts. The central government took some steps to ease tensions last year, such as lifting a month-long international flight ban imposed on the KRI after the independence referendum and paying a percentage of the overdue salaries of KRG employees. However, the 2018 budget law's decrease of KRG's allocation to 12.67 per cent and criticism of KRG's non-fulfilment of its oil transfer obligations in the 2019 budget law have continued the bitter dispute over the KRG's share in revenues. Although there have been efforts to strengthen relations, including Prime Minister Abd al-Mahdi's more cooperative stance towards the KRG, it remains to be seen what actions the new KRG and central government administrations will take to finally settle remaining disputes.


1 Florian Amereller is a partner at Amereller Legal Consultants and Dahlia Zamel is a senior associate at Mena Associates in Association with Amereller Legal Consultants.

2 Article 111 Iraqi Constitution.

3 Article 112(1) Iraqi Constitution.

4 Article 115 Iraqi Constitution.

5 Article 121(2) Iraqi Constitution.

6 Article 2 KOGL.

7 Article 1 No. 18 KOGL.

8 Article 3(4) KOGL.

9 Article 4 KOGL.

10 Article 9(1) KOGL.

11 Section 5(4)(a) CPA 95.

12 Article 15 KOGL.

13 Article 4 KOGL.

14 Article 24(1) KOGL.

15 Article 6(1) KOGL.

16 Article 107(1) Iraqi Constitution.

17 Article 25(b) Riyadh Convention.

18 Article 25(c) Riyadh Convention.

19 Article 37 Riyadh Convention.

20 Article 26 KOGL.

21 Article 24 KOGL.

22 The Model PSC is available at www.krg.org/pdf/3_krg_model_psc.pdf.

23 Article 32.1 Model PSC.

24 Article 32.2 Model PSC.

25 Article 4.1 Model PSC.

26 Article 4.3 Model PSC.

27 Article 6.2 Model PSC.

28 Article 6.10 and 6.12 Model PSC.

29 Article 23.1 Model PSC.

30 Article 22.2 Model PSC.

31 Article 23.7 Model PSC.

32 Article 6.3 Model PSC.

33 Article 7.1 Model PSC.

34 Article 32.3 and 32.4 Model PSC.

35 Article 24.1 Model PSC.

36 Article 25.3 and 25.4 Model PSC.

37 Article 26 Model PSC.

38 Article 45.3 and 7.4 Model PSC.

39 Article 45.4 Model PSC.

40 Article 16.15 Model PSC.

41 Article 30 KOGL.

42 Article 39.2 Model PSC.

43 Article 39.6 Model PSC.

44 Article 39.4 and 39.6 Model PSC.

45 There is considerable controversy as regards the KRG's constitutional right to legislate on matters relating to taxation. According to Article 110(3) of the Iraqi Constitution, 'formulating fiscal policy' falls within the exclusive jurisdiction of the federal government. The KRG's interpretation of this article distinguished between 'formulating policy' and 'regulating taxes' where the latter falls within the competencies of the regional government. In practice, this question has not been subject to judicial review and the federal government has not imposed nor collected any taxes in the KRI since 1992.

46 Article 40 KOGL.

47 Article 31.1 Model PSC.

48 Article 31.4 to 31.7 Model PSC.

49 Article 31.2 Model PSC.

50 Article 31.2 Model PSC.

51 Article 31.8 Model PSC.

52 Article 31.1 Model PSC.

53 Article 31.2 Model PSC.

54 Article 28(1) Iraqi Constitution.

55 Article 37.1 Model PSC.

56 Article 37(1)(10) KOGL and Article 23.8 Model PSC.

57 Article 42 KRG Environment Law No. 2/2008.

58 Article 38.1 Model PSC.

59 Article 46 KOGL.

61 Article 29.4 Model PSC.

62 Article 29.9 Model PSC.

63 Article 44(1) KOGL and 23.1 Model PSC.

64 Article 45 KOGL and 23.4 Model PSC.

65 Article 45 KOGL.

66 Article 23.2 Model PSC.

67 Article 23.3.1 Model PSC.

68 Article 23.3 Model PSC.

69 Article 44(2) KOGL.