By Hossein Askari
The discovery of commercial oil deposits in the region began with William D'Arcy in Iran. In 1901, D'Arcy negotiated a 60-year exclusive contract for oil exploration and production covering most of Iran.The Shah received 20,000 pounds sterling, shares in D'Arcy's company and 16% of all future profits. After some setbacks and partial sale of his Iranian venture to a syndicate named Burmah Oil, D'Arcy and his partners discovered commercial oil in a major field in Masjed-e-Soleiman in May 1908.
Later in 1908, the venture sold shares in the Iranian oil find and created the Anglo-Persian Oil Company (APOC, also named the Anglo-Iranian Oil Company, or AIOC). In 1913, the huge Abadan refinery came on line, the largest "single" refinery of its the time, and Iranian oil was flowing. The British government injected more cash into APOC and became a major shareholder. APOC invested in other ventures in Iraq (more on Iraqi oil development below) and in other parts of Iran, with little visible benefit to the Iranian people.
As a result, by the early 1920s, there was widespread resentment of the British and APOC's role in Iran. The dispute with APOC was centered on a number of issues: access to APOC's books to assess profits and other operational numbers (information that is always available to stockholders), a 25% ownership in APOC, a higher dividend rate, having the royalty rate on oil lifted, a tax on profits, an end to the exclusive right of transportation of Iranian oil to APOC and the extent (area) of APOC's Iranian concession.
Negotiations made little progress, and by the early 1930s Iranian royalties were slashed to under 500,000 pounds sterling, in part because of the global economic slowdown and a global oil glut. In 1932, Reza Shah cancelled the original D'Arcy concession but then in 1933 signed a new agreement that looked good on the surface but again shortchanged Iran and the Iranian people in a new 60-year concession agreement. Iranian resentment continued to grow as AIOC exploited Iran - for example giving Iran only 15-20% of its after-tax profits after World War II and into the early 1950s - and employed Iranians in what could be classified as inhumane conditions.
In late 1950, Iranians became further incensed at the news that Saudi Arabia, to Iranians an unsophisticated newcomer, had reached a 50-50 profit sharing plan with American oil companies (more on Saudi oil development below). The British government, the major behind the scenes power in AIOC, refused to consider a similar arrangement with Iran and simply dismissed Iranian pleadings out of hand.
In 1951, what would lead to the most tragic episode in Iranian history in 1953 over the last 100 years began to unravel. The Iranian parliament nationalized AIOC and its holdings and elected an Iranian national hero, Mohammad Mossadeq, as prime minister. Britain persuaded countries to boycott Iranian oil and shut down the Abadan refinery while AIOC increased its oil output elsewhere (as discussed in an earlier article on the emergence of the Organization of the Oil Exporting Countries, or OPEC, as a power in dealing with the major and the independent oil companies in the early 1970s, the importance of diversified reserves for the companies cannot be overemphasized).
The Iranian economy, which had become so dependent on its meager oil revenues, collapsed. In 1953, the British persuaded the newly elected administration in Washington that Mossadeq was a closet communist and that Iranian oil and access to the Persian Gulf would soon pass to the Soviets. The Central Intelligence Agency and the British Secret Intelligence Service collaborated to overthrow Mossadeq in a tragic coup that in our opinion has since shaped Iranian and Persian Gulf history.
After Mossadeq's overthrow, a consortium controlled Iranian oil with the umbrella name of NIOC (the National Iranian Oil Company), with AIOC holding 40% of the shares in a 50-50 profit sharing arrangement with Iran, but still with no unfettered Iranian access to the consortium's books. While this was a much-improved arrangement for Iran, it was a humiliating treatment of a sovereign nation and, most importantly, the removal of Mossadeq would set Iran on a torturous path that continues today.
Oil activities in Iraq (then Mesopotamia and a part of the Ottoman Empire) started in 1912 under a newly formed company, the Turkish Petroleum Company (TPC). By 1914, the Anglo Persian Oil Company (APOC) had become the largest shareholder with 50% of the shares. But then with the onset of World War II, no significant activity was to take place until after the war.
In 1925, TPC got its concession in Iraq, in a loose agreement to share profits after a number of years. In 1927, oil was stuck near Kirkuk. As a result, in 1928 there was some urgency to reach a formal agreement that afforded shares of TPC (renamed the Iraq Petroleum Company - or IPC - in 1929) to British, American and French interests.
Foreigners in effect assumed total control of Iraqi oil, promising Iraq additional royalties and loans. But with the global economic slowdown and a glut of oil on the world markets, significant Iraqi oil exports did not reach world markets until just before World War II. All along, the British-installed monarchy (after World War I) in Iraq got along relatively well with IPC and negotiations for more favorable profit-sharing arrangements and higher levels of oil output were on the whole friendly and reflected terms that were similar to those afforded to Saudi Arabia.
But in 1958, friendly Iraqi-IPC relations were set to change with declining payments to Iraq, the revolution overthrowing the Hashemite monarchy and two years later with the formation of OPEC. During the 1960s, Iraqi-IPC relations were hostile. Iraq (like Iran) continued to seek more control over its oil with a higher level of ownership, higher output and higher prices for Iraqi crude.
In the case of Saudi Arabia, the government signed its first concession agreement in 1933 with the Standard Oil of California. A few years later, the Texas Oil Company, or Texaco, became a partner. It took about four years to hit oil in 1938 and oil was exported beginning the next year. In 1948, two more American oil companies joined the company that had been renamed the Arabian American Oil Company, or Aramco. In 1950, Saudi Arabia pressured Aramco and received a 50-50 profit-sharing arrangement, with the US government making tax concessions to the four US oil company partners in Aramco to make such a deal more palatable.
In sum, looking at the first 50 years of oil exploration and oil output in the Persian Gulf, country-company relations were tortuous throughout the period before World War II. The companies dictated the terms on a "take it or leave it" basis, something that was most vivid in British dealings with Iran, the country with the longest history of oil production and exports in the region.
The companies controlled oil exploration, production and the sharing of profits in these countries. The threats of oil boycott and military intervention were real, as the companies operated with the full support of their imperialist governments. By any reasonable standard, the oil-exporting countries were shortchanged and exploited. The British approach with Iran was much harsher than that of the American companies with Saudi Arabia. In fact, the participation of American companies may have been a major factor in "softening" the British a little.
Still, during most of the period before the formation of OPEC in 1960, the rulers and governments of these countries did what they could to get a fairer share for their countries. They were, however, negotiating from a position of weakness with looming economic and military threats.
All this, as we saw, was changed by market conditions - growing global demand for oil, an increasing OPEC share of world production and exports, the entry of independent oil companies with very limited sources of crude into the international markets and a strengthening of the financial position of Middle Eastern countries.
Today, as we will see, relations with the West are very different.
NEXT: Foreigners - the face of new colonialism
Previous articles in this series are:
Part 1: Riddle of the sands
Part 2: The sweet and sour of oil
Part 3: The driver of oil prices
Part 4: OPEC in the driving seat
Part 5: The OPEC bogeyman
Part 6: OPEC and the sanctions highway
Part 7: Oil-price shocks lie in wait
Part 8: Whose oil is it anyway?
Part 9: The dark side of oil
Part 10: Institutions matter
Part 11: Oil-rich rulers blind to the future
Part 12: 'Arab Spring' without a bloom
Part 13: Reform - or be kicked out
Part 14: Oil's toxic partner: Guns
Part 15: Islamic tools to the rescue
Part 16: Policy package for turnaround
Hossein Askari is Professor of Business and International Affairs at the George Washington University.