MESOP MIDEAST WATCH: Iraq’s Ruling Against Kurdistan’s Oil Industry Could Trigger Investment Arbitration Claims: Gibson Dunn

17.7.22 ERBIL — The recent ruling by the Iraqi Federal Supreme Court against the Kurdistan Region’s oil industry could trigger investment arbitration claims, Gibson Dunn said on June 17.

“The international oil companies impacted by the Court Decision have numerous legal avenues for seeking redress as a result of the substantial harm they may suffer. It is therefore very possible that Iraq will find itself subject to numerous claims in the range of tens of billions of dollars (if not more) before international fora for years to come due to the Court Decision and the Government’s actions to implement that decision,” it said.

In February, the Iraqi court said that the Kurdistan Regional Government (KRG) should “hand over all oil production from oil fields in the Kurdistan Region and other areas from which the KRG’s Ministry of Natural Resources extracted oil” to the federal government. However, Kurdistan Region PM Masrour Barzani has repeatedly rejected the court’s decision, describing it as “unconstitutional”, and explaining that his government is ready to resolve the disputes on the basis of the Iraqi Constitution.

Gibson Dunn noted that Iraq could be held contractually liable for breaching the Production Sharing Contracts (PSCs) by taking any action to either terminate or modify these agreements.

“It could also be held liable for violating the stabilization clause (contained within the KRG Model PSC (“Model PSC”)) if it takes any measure altering the fiscal or economic conditions resulting from laws or regulations in force on the date of signature of these agreements,” Gibson Dunn added.

“Iraq could be contractually on the hook since, as a matter of Iraqi constitutional law, the KRG is a constituent subdivision of Iraq.”

“In the circumstances, international and/or English legal principles such as attribution or alter ego are likely to be relevant (English law being the applicable law stipulated in the Model PSC),” it continued. “In this regard, Claimants could in particular point to a recent decision by the High Court of Justice in England which found, in connection with breaches of two oil and gas PSCs, that acts by the KRG “were done in exercise of the sovereign authority of the state of Iraq”.”

Gibson Dunn further noted that investors are expected to initiate arbitrations seated in London, and governed by the London Court of International Arbitration (“LCIA”) Rules, as expressly provided for in the Model PSC.