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Regulation of natural gas pipeline transportation and storage

Describe in general the ownership of natural gas pipeline transportation, and storage infrastructure.

The natural gas pipelines, as well as the storage infrastructure, are considered part of the assets used in the natural resources of Iraq. As such, they are owned by the state of Iraq, where the government, represented by the Ministry of Oil, performs its role in managing and developing the network of pipelines and storage facilities. Since 1999, the Ministry of Oil has been managing the gas pipeline transportation through the Iraqi State Oil Pipelines Company (SOPC), established in 1999 pursuant to the Public Companies Law No. 22 of 1997, which also manages the oil pipelines network as its primary capacity. The SOPC has been active in pipeline projects, whether in rehabilitation or operation in coordination with the major oil and gas developers in Iraq including Basra Gas Company, which has its semi-independent pipeline network designated for its own operations and for export through the Iraqi southern port. It is worth noting that other state-owned oil companies in addition to the State Oil Marketing Organisation (SOMO) communicate and arrange for their portion of oil and gas transportation through the pipeline network that is managed by the SOPC National Grid based in Doura, Iraq, for both independent oil and gas pipelines respectively.

It is also to be noted that the pipelines network of natural gas has been subject to massive operations of rehabilitation since the main lines were built in the 1980s; however, no major pipelines network has been established or added in recent years despite the need for such an expansion in the pipelines network to meet the increase in production and transport activities.

Describe the statutory and regulatory framework and any relevant authorisations applicable to the construction, ownership, operation and interconnection of natural gas transportation pipelines, and storage.

Traditionally, Iraq's Ministry of Oil has had central control and oversight over gas exploration, production and development in Iraq and has operated through the following state companies (noting their responsibilities):

The following is a table showing the state companies of relevance to gas production under the Ministry of Oil:

Production of liquid gas (BSCF)

Production of associated gas (BSCF)

Thi Qar Oil Company 

In addition to the above, Basra Gas Company (BGC), which is a joint venture established between the Iraqi government (represented by South Gas Company), Shell and Mitsubishi are to invest in the gas sector in Iraq starting with the rehabilitation of natural gas gathering and the processing of existing infrastructure. The prime operation of the BGC is the refining and sale of recovered and refined flare gas from the three oil fields in southern Iraq (Rumaila, West Qurna 1 and Zubair). BGC’s output of gas is aimed to be used in power generation, liquefied petroleum gas and condensates both locally and internationally. 

Associated gas is captured by BGC, followed by transporting and processing the natural gas delivered to the South Gas Company in order to make dry gas and liquid products available to the local market, including power plants operated by the Ministry of Electricity.

How does a company obtain the land rights to construct a natural gas transportation or storage facility? Is the method for obtaining land rights to construct natural gas distribution network infrastructure broadly similar?

There are two types of land in terms of their ownership and category: private property land, which is owned by the citizens of Iraq, and state-owned land with certain sub-categories. State-owned land as an asset belongs to the state of Iraq, often represented by the Ministry of Finance, which holds the title and authority to dispose and utilise rights over the land. 

When a company is awarded a contract or an investment project, it is normally subject to certain studies and approved designs detailing the requirements for certain easement or access rights through certain lands in addition to positions of other lands for storage or operation facilities. Hence, when the project is established on state-owned land, assets and designation of title will normally be allocated to the project company or the investor whereby such designation is based on the project lifetime, so if there is a licence over the development of a gas field for 50 years, the right over land or lands required for such designation is normally granted for a similar period. 

If otherwise, and the matter is pertaining to the necessity of acquiring privately owned land to be used for certain projects, there are three options under Iraqi Expropriation Law No. 12 of 1981:

The first type is consensual, and this acquisition is based on the agreement of the two parties, who are the requester of acquisition and the owner of the property, and if the property is common then all partners must agree to this acquisition in return for a sum of money agreed upon by the two parties and as stipulated in the application procedures in articles 4, 5, 6, 7 and 8 of the Expropriation Law. 

As for the second type, administrative expropriation, if the real estate or the right in rem that must be acquired belongs to the state, compensation is determined by the agreement of the two parties. For example, if the landlord is a department of the state and the owner is also one of the state departments, compensation is determined according to the agreement between the two parties. If they do not agree, then the competent minister or the prime minister’s office decides. 

As for the third type, judicial expropriation takes place through the judiciary, whose legal procedures are drawn up in articles 12, 11, 10, 16, 15, 14 and 13, and is based on the application submitted by one of the state departments to the court of the place in which the property to be acquired in whole or in part is located, in which the area to be acquired is determined, as well as its location and the name of the owners or possessors.

Article 23 of the Constitution considers private property inviolable, and the landlord has the right to benefit from its property, exploit it and dispose of it within the limits of the law. However, the practical reality indicates that expropriation is a legal situation in which the power and the order of law enforcement appears to achieve public benefit in return for fair compensation for the landlord. The absolute expropriation of the private property of individuals except for purposes of public benefit is exchanged for fair compensation. Expropriation lawsuits have been recorded at their lowest levels due to the state of democratic transition and the accompanying negative projections that clearly affected the performance of multiple governments, as well as economic conditions with a clear deficiency in the culture of building the state and institutions. 

In addition, the Revolutionary Command Council Decision 273 of 2001 provides further regulations on the Rights of Disposal and its Regulations.

How is access to the natural gas transportation system and storage facilities arranged? How are tolls and tariffs established?

It is stated in the Resolution dated 1999 of the Establishment of the Iraqi State Oil Pipelines Company (SOPC) that it carries out the following activities in accordance with the provisions of the Ministry of Oil Organisation Law No. 101 of 1976 (as amended): 

On the other hand, and in accordance with the Law No. 84 of 1985 on the Conservation of Hydrocarbon Resources, distribution and storage operations must be carried out according to an annual plan approved by the Ministry of Oil based on a five-year plan that shows the need for products, their geographical distribution and future expansions required for storage. The appropriate technical specifications are subject to minitrial instructions in a manner consistent with the conditions of the country for the design, operation and maintenance of facilities for transport, storage, loading and distribution, if these specifications include the following: 

It is shown here that the natural gas transportation system and storage facilities are controlled and managed by the SOPC through the National Grid, arranging the transport of natural gas and other forms in conjunction with the duties of the transportation of crude oil and oil products throughout the country. Balance and adjustment due to differences in the quality of gas in terms of transport is subject to the specifications of loads and elements of the National Grid controls established for this purpose (further details are subject to regular updates that can be obtained on a monthly basis). There are standards that the Ministry of Oil applies so that the quality of natural gas is maintained through the transportation process. In this regard, article 49 of Law No. 84 of 1985 on the Conservation of Hydrocarbon Resources restricts the use of the pipeline network to transport material or materials other than that which the pipeline is designated to transport.

Can customers, other natural gas suppliers or an authority require a pipeline or storage facilities owner or operator to expand its facilities to accommodate new customers? If so, who bears the costs of interconnection or expansion?

There is a specific approval process in the case that there is a need for an expansion of facilities to accommodate new customers. Plans for expansion will first be brought to the attention of the Opinion Committee under the Minister of Oil so that such expansion is deferred to the competent department to become an approved plan for the following year or later, and this plan shall be referred to the Ministry of Finance to allocate funds for it. Once the funds have been allocated, the execution of the project is determined either to be carried out by the Ministry or by one of its specialised state companies, or it is referred to an announcement as a bidding opportunity, inviting local and foreign companies of relevance to participate. We have not witnessed a case where such an expansion took place in a very short period of time. As for the party that pays the cost for such expansion, it is the federal budget under the fiscal year to be enacted by the Iraqi parliament; the Ministry of Oil is the legal body to manage and control such a spending plan under the state supervisory body, the Federal Board of Supreme Audit. 

Pursuant to Cabinet Resolution No. (423) of 2017, a Joint Ministerial Committee is to be established, which is the ministerial committee that includes the ministers of oil, electricity and finance, and charged with the task of preparing an action plan to make use of gas to generate electric power. The Resolution sets out a mandate for the State Gas Pipelines Company or (Gas Transmission Lines Company) (SGPC). This company is to carry out the role of the Iraqi State Oil Pipelines Company (SOPC) and the complex in charge of converting gas into electrical energy (aggregator gas to power). The scope of activities of the SGPC will be expanded to replace the current operators of the gas pipelines network. It is expected that SOPC and the Basra Oil Company will transfer their activities related to the transportation of dry and liquified gas to the SGPC once fully functional. It should be noted that the application for registering the SGPC was submitted first to the Iraqi Companies Registrar back in 2013, but its operational phase is still not finalised. The role of managing the gas conversion system into electrical energy and the role of the network operator will be separated over time. The SGPC is expected to remain an exclusive network operator for a significant period of time, and it may enter into joint agreements to operate a network or obtain financing with operators or private sector users. Additional prospective operators may assume the responsibility associated with some network segments.

Describe any statutory and regulatory requirements applicable to the processing of natural gas to extract liquids and to prepare it for pipeline transportation.

Generally, the processing of natural gas to extract liquids and its preparation for pipeline transportation is subject to the governing terms of the contract executed between developers and the Ministry of Oil in terms of the rights and obligations of the parties and the approved methods or any changes thereto. This concept is based on the Engineering Codes and Standards applicable by the Technical Department in the Ministry of Oil headquarters. However, one of the featured items contained in Cabinet Resolution No. 423 of 2017 is that for natural gas separation, facilities should be described in each contract, whereby the contractor must submit to the gas owner (a state partner) a draft of a preliminary plan to develop infrastructure to design and build facilities for the purpose of:  

The initial plan may provide for additional capacities for gas processing or the possibility of expanding facilities in the future if this does not lead to a delay outside the reasonable framework in the design and construction of the facilities mentioned in the initial plan. The initial plan must also include a preliminary assessment of the environmental impact. Further, and more detailed, provisions are available under said Resolution, establishing a governing framework over the process.

There are also other aspects applicable from a legal standpoint that are similar to the governing provisions of other natural resources segments of development. These include, but are not limited to, the HSE governing provisions as well as technical standards that the Ministry of Oil applies to its operations, in addition to the standards that the Ministry of Planning circulates for certain aspects of petrochemical engineering of relevance to the gas industry. These standards must be adhered to with regard to the processing methodology and safety as well as in terms of quality. 

Describe the contractual regime for transportation and storage.

If the transportation and storage of natural gas was assigned to the private sector and not carried out by the state companies of the Ministry of Oil directly as is the case now, such a form of service would take place under one of the standard contractual templates used by the Ministry of Oil for similar purposes. In this regard, the Ministry of Oil uses a certain set of documentation for various projects in contracting international oil and gas companies as well as other service providers in the oil and gas sector. These templates include, for example, an engineering development procurement service contract as well as a technical service contract, and there are other forms of supply and service agreements that the Ministry of Oil modifies on a case-by-case basis and as needed. 

In general, the contractual framework for the transportation and storage of natural gas is based on a service agreement whereby the service provider either establishes a network of pipelines and storage facilities or is granted a concession over the existing state-owned pipelines and storage facilities. In the first scenario, the service provider would be deemed an investor and expected to be granted a different set of guarantees and contractual privileges in order to secure its investment value (we are not aware of any similar investment opportunity being executed by a private sector investor other than the infrastructure of the Basra Gas Company). The second scenario involves rehabilitating and operating an existing network of pipelines and storage facilities. It is unlikely that the Ministry of Oil would award such a contract to any private sector party in light of the existence of a state-owned company, such as the Petroleum Pipeline Company, and the plan to establish a specialised company in gas transmission pipelines. 

As regards fees, without any reference to existing cases, the Ministry of Oil has indicated on several occasions that it is open to feasible fee computing mechanisms in order to reimburse investors and service providers if a lump sum or cost-plus pricing was not elected. In our experience, the most ideal mechanism for similar cases would be a tolling fee.

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