CAPITAL FORMATION IN THE PETROLBOm
INDUSTRY IN IRAN:
PRODUCING -AND RE-FI-N^O 1954-197^3
BY
SEYED HASSAN SEYEDI MANSOOR
Thesis submitted for the degree of Doctor of Philosophy at'the University of London
School of Oriental & African Studies February 19 79
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Capital F or m a t i o n in the Oil Industry in Iran: P r o d u c i n g and Ref i n i n g 1954-1975.
Seyed H a s s a n Seyedi Ma n s o o r A BSTRACT
As a step towards a rigorous study of capital f o r m ation in Iranian economy, this study is con c e r n e d w i t h the d e t a i l e d m e a s u r e m en t of capital stock in the oil industry in Iran. The study is an empirical one in that it is b ased on the i t em -b y -i te m e xa mi n a t i o n of investment flows and presents d i s a g g r e g a t e d series of capital s tock according to types of capital goods.
The first two chapters comprise an attempt to put the study on the context of Iranian oil industry and to examine the framework of i n v e s t m e n t - d e c i s i o n - m a k i n g s .
Chapters three - five deal w i t h the technical problems i n v olved in defining, classifying, def l a t i n g and acc o u n t i n g for d e p r e c i a ti on and obsolescence. Cha p t e r six treats the problems in d e t e r m i n i n g zero-year-stocks and presents b o t h i n v e s t m e n t - f l o w and s t o c k s - f l o w series in
formats (92 Tables) w h i c h suggest structural and temporal c o m p o s i t i o n of the stocks.
The mat e r i a l thus provided, opens up new areas
for i n v e s t i g a t i on and analyses. And Chapter seven points at one such area of i n v e s t i g a t i o n by trying to e x p l a i n the increased- o u t p u t - p e r - u n i t of-input, w h i c h is not e x p l a i n e d b y the
a v a il ab i l i t y of l a b o u r - p e r - u n i t -o f- ou tp ut a n d/or capital p e r - u n i t - o f - o u t p u t . The analysis establishes that capital has b e en deeply r e - s t r u c tu re d in favour of the more t e c h n o l o g y
intensive i n f r a - s t r u c t u r a l components. It also shows a c o n stant technical bias in c a p i t a l - l a b o u r substitution. Finally a techno l o g y index (A(t)) is c o n s t ructed in order to determine the s ha re -i n- co nc r e t e - p r o d u c t i o n of combined inputs of-zero- y e a r - q u a l i t y vis-a-vis that of mo d e r n technical e m b o d i m e n t s .
A C K N O W L E D G E M E N T
T h r o u g h o u t the w h o l e p e r i o d in w h i c h the p r e s e n t r es e a r c h was in m a king, m a n y p e o p l e h a v e g e n e r o u s l y a s s i s t e d me in va r i o u s ways. To all of th e m I own m y s i m p l e but h e a r t y
g ratitude. I can on l y s ingle out a few w i t h o u t w h o s e h e l p and e n c o u r a g e m e n t this w o r k w o u l d n o t h a ve b e e n r e a l i z e d in its p r e s e n t form.
I shall e t e r n a l l y r e m a i n i n d e b t ed to P r o f e s s o r Pe nr os e w h o s e m e t i c u l o u s g ui da n c e and p a t i e n t c r i t i c i s m n o t on l y w e r e an e y e - o p e n e r for me, b u t th e y w e re al s o a h ea r t y c o n t r i b u t i o n to the o b j e c t i v i t y of the views e x p r e s s e d in this thesis.
I am also i n d e b t e d to Messrs. J. Cole and K.
G o od wi n of B r i t i s h P et r o l e u m , Mr. D. Brooks of I r an ia n Oil P a r t i c i p a n t s H.Q. and M e s s rs Modir, Shahlavi, and S al e h i of NIOC, T e h r a n and Mr. K a h f i - Z a d e h of Ahwaz O ff ic e w h o s e s y m p a t h e t i c h e l p in p r o v i d i n g m e w i t h p u b l i s h e d m a t e r i a l
e n a b le d m e to c a r r y m y w o r k to a (I hope) s a t i s f a c t o r y conclusion.
I s ho u l d also express m y thanks to P r o f e s s o r
V.M. D a n d e k a r of G o kh al e Ins t i t u t e of E c o n o m ic s and Politics, Poona, India, w h o s e s in c e r e e n c o u r ag em en t in the earlier
stages of this w o r k p r o v e d to be a great i n t e l l e c t u a l stimulus to me.
M y g r a t i t ud es are also due to all the a d m i n i s t r a tive staff of the D e p a r t m e n t of E c o n o m i c s and P o l i t i c s of SOAS, U n i v e r s i t y of London, in p a r t i c u l a r to Miss Janet Marks, the s e c r e t a r y of the D e p a r t m e n t w h o s e e f f i c i e n c y and p a t i e n c e in d e a l i n g w i t h w h at m a y h a v e s ee me d m y u n e n d i n g
demands h a v e b e e n a dmirable. E q u a l l y I am i n d e b t e d to Mrs.
W il li a m s wh o has d i s p l a y e d a h i g h de g r e e of c a r e a n d e f f i c i e n c y in a r r a n g i n g a n d t yp i n g the p r e s e n t work.
Finally, X ca n n o t express m y i n d e b t e d n e s s to m y m o t h e r a n d two y o u n g e r b r o t h e r s w i t h o u t a c e r t a i n d e g r e e of
emotion, who, h a v i n g s u f f e r e d the u n e x p e c t e d loss of our father, d i s p l a y e d a h i g h d eg r e e of t o l e r a n c e an d p a t i e n c e in m y absence, at a time w h e n b o t h the f a m i l y a n d m y b e l o v e d c o u n t r y were' u n d e r g o i n g deep suffering.
S.H. M a n s o o r
I V
C O NT EN TS
A b s t r a c t
A c k n o w l e d g e m e n t
PART ONE
C H A P T E R I B A C K G R O U N D TO THE OIL A G R E E M E N T OF 1954 1.0. F o r e w a r d
1.1. B a c k g r o u n d to General E c o n o m y 1.2. C o r p o r a t i o n as ’p o o l 1 of
P r o d u c t i v e R e s ources
1.3. P r i c i n g S y s t e m pr i o r to 1950s 1.4. D e v e l o p m e n t of C o n c e ss io ns C H A P T E R II F A C T O R S I NF L U E N C I N G I N V E ST ME NT
B E H A V I O U R OF IRA N I A N OIL C O N S O R T I U M 1 1 . 0. F o r e w ar d
1 1 . 1. O r g a n i z a t i o n a l S t r u c t u r e 1 1 . 2. G e neral P o l i c y Lines
I I . 3 I I . 3.1. P r o v i s i o n s of the A g r e e m e n t as reg a r d s c osts of A c c e s s to R e s o u rc es
I I . 3.2. O p e r a t i n g fees, R o y a l t y and Taxes
1 1 . 4. I n t e r - c o m p a n y L i f t i n g A r r a n g e ments
1 1 . 5. S um m a r y
P A RT TWO
C H A P T E R III CAPITAL: C ON CE PT S, D EF IN I T I O N S , C L A S S I F I C A T I O N A N D M E T H O D O L O G Y 111.1. S ub j e c t - m a t t e r
1 1 1 . 2. D e f i n i t i o n 1 1 1 . 3. C l a s s i f i c a t i o n
I I I . 3.1. Buildings
I I I . 3 . 1 . (a) R e s i d e n t i a l B u i l d i n g s
Page ii
1 1- 5
5- 8 8-12 12-25
27 28-32 33-35
35-40
40-43
43-52 52-53
55-56 56-58
60
1 1 1 . 3 . 1 . (b) N o n - R e s i d e n t i a l B ui l d i n g s
1 1 1 . 3.2. C o n s t r u c t i o n Wo r k s 1 1 1 . 3 . 2 . (a) Oil C o n s t r u c t i o n III. 3,2. (b) N o n - O i l C o n s t r u c t i o n 1 1 1 . 3.3. M a c h i n e r y an d E q u i p m e n t 1 1 1 .3.3. (a) M a c h i n e r y
111. 3 . 3 . (b) E qu ip me nt
1 1 1 . 3.4. T r a n s p o r t E q u i p m e n t 1 1 1 . 3.5. M i s c e l l a n e o u s
111. 3. 6. E x p l o r a t i o n and D e v e l o pm en t
1 1 1 . 4. I I I . 4.1. M e t h o d o l o g y of M e a s u r e m e n t
1 1 1 . 4.2. Sources R e s t r i c t i n g Choice of M e t h o d 1 1 1 . 4.3. A p p l i c a t i o n a n d
C l a s s i f i c a t i o n 1 1 1 . 4.4. R e c o n c i l i a t i o n of
C l a s s i f i c a t i o n
1 1 1 . 5. V a l u a t io n: C r i te ri a an d Stages C H A P T E R IV D E F L A T I O N
I V . 1. The Con c e p t of C o ns ta nt P ri c e I V . 2. D e f l a t o r Series C o n s t r u c t e d and
A p p l i e d
I V . 3. M e t h o d o l o g y of C o n s t r u c t i n g D e f l a t o r Series
I V . 4. Series
I V . 4.1. Bui l d i n g s D e f l a t o r Series I V . 4.2. C o n s t r u c t i o n D e f l a t o r
Series
I V , 4.3. M a c h i n e r y and E q u i p m e n t D e f l a t o r Series
Page
60-61
62 62
63 64-65 65 65
65-67
67-68
68
68-72
79-73 73-74
75-77
77-79
79-82
83-85
86-87
88-89
Vfi
C H A P T E R
C H A P T E R
C H A P T E R
P age I V . 4.4. .Transportation D e f l a t o r
Series 90
I V . 4.5, M i s c e l l a n e o u s D e f l a t o r
Series 91
I V . 4.6. Ge n e r a l D e f l a t o r Series 92 D E P R E C I A T I O N A N D O B S O L E S C E N C E ■ V.l. The N at u r e of the P r o b l e m 93- 96 V.2. C o u n t e r a c t i n g T e n d en ci es 96- 93
V.3. M e t h o d o l o g y 98-101
V.4. E s t i m a t i o n of O p e r a t i o n a l Life 1 0 1-103 F I X E D CAPITAL: S T O C K FLOW; D E P R E C I A T I O N
A N D G R O W T H
•i—1 *I—f >
On I n v e s t m e n t Series 1 0 4-111 VI. 2. O n S t o c k - F l o w and R e l a t e d
Con c e p t s
VI.II.l, A s s u m p t i o n s 11 2-115 VI. 11. 2. Concepts
V I . I I . 2.1. Gross St o c k 115-116 V I . I I . 2.2. D e p r e c i a t i o n 116-117
VI.11. 2.3. Net S tock 118-119
V I . I I . 2.4. A g e Index 1 1 9 - 1 20 V I . I I . 3. The Or d e r of D a t a 120-124
V I . I I . 4. Graphs 124-129
C A P I T A L - L A B O U R S T R UC T U R E S A N D P R O D U C T I V I T Y G R O W T H
V I I . 1 . Th e Sc o p e of A n a l y s i s 1 3 0-131 V I I . ,2.1. M e a s u r e m e n t of O u t p u t 131-134
V I I . 2.2. F o r e w a r d 134-137
V I I . 2.3. On M e a s u r e m e n t of
La b o u r 137-147
V I I . 3.1. O u t p u t - F a c t o r Ratios 147-149
VIII.l
V I I . 3.2. C a pital R atios V I I . 3.3. L a b o u r Ratios V I I . 4. P r o d u c t i v i t y A n a l y s i s
Page 149-152 152-156 157-162
VIII A P P E N D I C E S A P P E N D I C E S TO C H A P T E R IV VIII.l. A p p e n d i c e s 1-8
VIII. 2. A p p e n d i c e s to C h ap te r VI: A p p e n d i x 9 1. Gross F i x ed Investment;
C o n s o r t i u m
2. Gross F i x e d Investment; NI O C 3. Gross F i x ed Investment; Oil
I n du s t r y
4. Ca p i t a l Stock; C o n s o r t i u m
163-171
V I I I . 2.4.
V I I I . 2.4.
V I I I . 2.4.
V I I I . 2.4.
V I I I . 2.4.
V I I I . 2.4.
V I I I . 2.4.
V I I I , 2.4.
V I I I . 2.4.
V I I I . 2.4.
V I 1 1 . 2 . 4 •.
V I I I . 2.4.
173-184 185-194
195-196
B u i l d i n g s ; C o n s o r t i u m
B u i l d i n g s ; N I OC C o n s t r u c t i o n ; C o n s o r t i u m
C o n s t r u c t i o n ; NI O C M a c h i n e r y ;
C o n s o r t i u m
M a c h i n e r y ; NI O C E q u i p m e n t ;
C o n s o r t i u m
Equ i p m e n t ; NI O C T r a n s p o r t at io n;
C o rsort ium
T r a ns p o r t a t i o n ; NIOC
M i s c e l l a n e o u s ; C o n s o r t i u m M i s c e l l a n e o u s ; NIOC
197-199 200-202
203-205 206-208
209-211 212-214
215-217 213-220
221-223
224-226
227-229
230-232
V I I I . 2.4.
V I 1 1 .. 2. 4.
V I I I . 2.4,
V I I I . 2.4.
V I I I . 2.4.
V I I I . 2.4.
V I I I . 2.4.
V I I I . 2.4.
V I I I . 2.4.
V I I I . 2.4.
V I I I . 2.4.
V I I I . 2.4.
V I I I . 2.4.
V I I I . 2.4.
m
n
Page A c c u m u l a t e d I n v e s t
ment; C o n s o r t i u m 233-235 A c c u m u l a t e d I n v e s t
ment; N I O C 236-23$
Gross Stock;
C o n s o r t i u m 239-241 Gross Stock; N I O C 242-244 D e p r e c i a t i o n ;
C o n s o r t i u m 245-247 D e p r e c i a t i o n ; NIOC 248-250 Net Stock;
C o n s o r t i u m 251-253 Net Stock; N I O C 254-257 A g e C o m p o s i t i o n ;
C o n s o r t i u m 258-259 A g e C o m p o s i t i o n ;
NIOC 260-261
A n n u a l G r o w t h Rates;
C o n s o r t i u m 262 A n n u a l G r o w t h R a t e s ;
NIOC 263
D e p r e c i a t i o n and F i x e d A ss et s Charges
(BP) 264
F i x ed A ss e t s Charges and M o v a b l e A s s et s
D e p r e c i a t i o n (author) 265 V I I I . 3. A P P E N D I C E S T O C H A P T E R VII: A p p e n d i x 10:
V I I I . 2.1. Net P r o d u c t i o n V I I I . 2.2. P r o d u c i n g P er so nn el
V I I I . 2.3. P r o d u c i n g O p e r a t i o n a l Costs
267 268 269-270 V I I I . 2.4. Oil Fi e l d and P r o d u c t i o n U n it D a t a 271 V I I I . 2.5. W e ll P r o d u c t i v i t y 272 V I I I . 2.6, A v e r a g e G r a v i t y 273
V I I I . 2.7. P r o d uc ts Prices 274
V I I I . 2.8. Indexes for C o n v e r s i o n of O p e r a t i n g
Costs 275
V I I I . 2.9. E s t i m a t e d Age D i s t r i b u t i o n C harts 276 IX S O UR CE S A N D B I B L I O G R A P H Y
I X . 1. P r i m a r y S o urces and D o c u m e nt s 277-281 I X . 2. S e c o n d a r y Sources
I X . 2.1. A r t i c l e s and P a p e r s 281-293
I X . 2.2. Books 293-297
I X . 3. T e r t i a r y S o u r c e s , 297-301
To m y c o u n t r y m e n w h o s e s u ff e r i n g s I h a ve w i t n e s s e d
and s h ar ed all m y life.
S.H. M a ns oo r
PART ONE
C H A P T E R I
B A C K G R O U N D T O TH E OIL A G R E E M E N T OF 1954
In or d e r to t h r o w some light on the c o n t e x t in w h i c h the Oil A g r e e m e n t of 1954 was con c e i v e d , this c h a p
ter p u r po rt s a) to cast a c a u t i o u s glance, t h r o u g h c e r t a i n indicators, at the e co n o m i c p e r f o r m a n c e of P e r s i a by the tu r n of the c e n t u r y (Section 1), b) to de p i c t a s u m m a r y p i c t u r e of some of the m a i n features of i n t e r n a t i o n a l oil
i nd us t r y (Section 2), c) to f o r w a r d an e x p l a n a t i o n of the m a i n lines of e v o l u t i o n of the p r i c i n g s ys t e m p r e v a l e n t in the w o r l d oil i n du s t r y (Section 3), and d) to a c c o u n t for c e rt ai n s a li e n t po i n t s in the f i f t y - y e a r h i s t o r y of c o n c e s s i o n a r y a g r e e m en ts as an i mm e d i a t e b a c k g r o u n d (Section 4).
1.1. By the tu r n of the c e n t u r y Iran was, m a inly, a n o n - i n d u s t r i a l society, r a n g i n g in s t r a t i f i c a t i o n from wide, d i s p e r s e d ^ p a s t o r a l ’p a t e r n o - f e u d a l i s t i c ' c o m m u n i t i e s to h i e r a r c h i e s of power. R es o u r c e and p r o d u c t s m a r k e ts w e r e far f r o m ’f r e e ’ and n a t i o n a l l y integrated. The d i s t r i b u t i o n of w e a l t h and p o w e r was e x t r e m e l y p o l a r i z e d an d o u t b r e a k s of famines w e r e b y no me a n s rare.-*-
P o p u l a t i o n was e s t i m a t e d at about ten m i l lion, the d i s t r i b u t i o n of w h i c h was o v e r w h e l m i n g l y d e t e r m i n e d by
1. See Curzon, P e r s i a and the P e r s i a n Q u e s t i o n , two vols., London, 1892.
the a v a i l a b i l i t y of w a t e r . ^ The m e a n age was 25 years and l i f e - e x p e c t a n c y di d not e xc ee d 30, w h i l e the p o p u l at io n h a d an av e r a g e g r o w t h rate of 0.7 5 p e r cent.
A lm o s t one out of five of the total i nh a b i t e d u r b a n areas (that is: 24% in 3 cities, 21% in 7, and 45%
in 90 t o w n s ) , w h i l e w e l l above ha l f the p o p u l a t i o n l i v ed in 1 5,200 v i l l a g e s and h a ml et s and a q u a r te r of the
w ho le li v e d a n o m a d i c life.
M i g r a t i o n was m a r g i n a l and that b e t w e e n the rural areas m o s t l y c a us ed by famines, d r o u g h t s or feuds.
L a bo u r was p r e d o m i n a n t l y u n s k i l l e d and the r e m u n e r a t i o n , m a i n l y in kind, d i d not e x c e e d the 'accepted' level of sub s i s t e n c e . I l l i t e r a c y m a r k e d up to 95 p e r cent, and n u t r i t i o n p e r c a p i t a was e s t i m a t e d at 50 l b / m o n t h of w h e a t c on su mp t i o n . Some one m i l l i o n p e o p l e l iv e d in R us si a and C a u c a s i a n oil fields as u n s k i l l e d labour, and m i n i m a l l y as b us i n e s s m e n .
The Gross D o m e s t i c F i x e d Ca p i t a l F o r m a t i o n is e s t i m a t e d at a bout 300 m i l l i o n Krans (one K r a n e q u a l l e d 4.5 p e n ce in 1900), c on si s t i n g of 98% i n d i g e no us and 2%
i m p o r t e d goods, 47% of the total b e i n g c o n s t i t u t e d b y rural and u r b a n housing. The e c on om y is t h ought to h a v e ha d
a g ro wt h rate of 0.5 p e r cent (1900-8).
1. By r e t r o g r e s s i o n f r o m the 1956 census, J u l i a n B h a r ie r c o n c l u d e d the f i gure 9.86 m i l l i o n in his E c o n o m i c D e v e l o p m e n t in Iran 1 9 0 0 - 1 9 7 0 . The figures in this s e c t i o n draw’ u p o n his studies b o th in the b o o k and his u n p u b l i s h e d thesis, Capital F o r m a t i o n in I r a n , U n i v e r s i t y of London, 19 65, unless o t h e r w i s e stated.
P r i va te c o n s u m p t i o n e x p e n d it ur e is e s t i m a t e d at 3.1 t h o u s a n d m i l l i o n Krans and g o v e r n m e n t e x p e n di tu re at K. 67 m il l i o n , only ab o u t 2% of the GNP. 43% of this e x p e n di t ur e we n t to the army, 24% to p e n s i o n s , 13%
to the r oyal fam i l y and 7% to the a l l - c o u n t r y a d m i n i s tration. This g o v e r n m e n t e x p e n d it ur e was f i n a n c e d from v ar i o u s sources, 25% fr o m customs, 8% f r o m m o n o p olies a nd 60-65% fr o m taxes and gifts.
The single m o s t i m p o r t a n t fac t o r d e t e r m i n i n g e co n o m i c s tr uc tu re was the o c c u p a t i o n al p a t t e r n of l abour distrib u t i o n . A l m o s t 80 to 90 per cent of e m p lo y m e n t was in agri c u l t u r e , u n d e r a s y s t e m of l a t i f u n d i a of the
crown, a bs e n t e e lords, and v a g f (religious trusts).
F i s h i n g in the Gulf, le a s e d to Russians, b r o u g h t 850,000 Krans yearly; and in the N o r t h it was a n o n - i n d u s t r y , a s p ar e- ti me hobby. The f o r es tr y - some 20 m i l l i o n
h e ct a r e s - was a G r e e k m o n o p ol y, and the total m i n i n g o u t put e s t i m a t e d at a bo u t three m i l l i o n Krans per year, was
l e as e d for 80 0 , 0 0 0 Krans.
Industry, m a i n l y c o ns is ti ng of small m a n u f a c tures, c ot t a g e i n du st ri e s a n d han d i c r a f t , r e l i e d e n t i r e l y on m a n p o w e r and animal, since steam p o w e r was v i r tu a l l y n on ex is t e n t . M a r k e t s w e re g en e r a l l y i n s ul at ed from one a n ot he r m o s t l y b e c a u s e of low demand,
simple h o m o g e n e i t y of goods, and the lack of c o m m u n i c a t i o n and t r a n s p o r t a t i o n system.
There w e r e on l y 800 m i l e s of roads o f w h i c h 227 we r e b u i l t and c o n t r o l l e d by the R u s s ians, 160 by
the British, 280 b y the B a k h t i a r i c h i e f tains, and on l y 120 by the government. The only means of t r a n s p o r t a t i o n was animal. F r ei gh t was v e ry h i g h and in the case of i mp o r t e d goods it a m o u n t e d to some 40% of the final price.
T here were 8 mi l e s of r ailroads, and the w a t e r w a y s we r e
r e s t r i c t e d to a fe w m i l e s o n R i v e r K a r u n and Lake R esaieyeh, the l at t e r b e i n g n o r m a l l y le a s e d for some 1 3, 00 0 Krans
annually. Ports were l i m i te d to four, in the P e r s i a n Gulf, w i t h 4 50 , 0 0 0 t o n/ y e a r capacity, 88% of w h i c h we r e B r i t i s h g o o d s .
Customs was a l most n o n - e x is te nt . Imports a m o u n t e d to 255 m i l l i o n Krans of w h i c h 1% was capital goods, 60% m a n u f a c t u r e d c o n s u m e r goods, 29% f o o d s tuffs, 3% ker o s e n e , 4% raw m a t e r i a l s and 3% tobacco, as ag a i n s t the e x p o r t of 147 m i l l i o n Krans c o n s i s t i n g of r a w v e g e tables 50%, raw animal p r o d u c t s 25% and m a n u f a c t u r e d goods 25%. The b a la nc e was more or less s t r uc k by
i nv i s i b l e incomes. The m a i n trade p a r t n e rs w e r e Russians (45%), B r i t i s h (34%), T u r k e y and F rance (7% e a c h ) .
N a t i o n a l c u r r e nc y was s il ve r - b a s e d , w h i c h
d e c l i n e d in e x t e r n a l v a l u e since 1875 (9.06 - 4.57 p ence
* 1 K r a n ) , the m a i n re a s o n s for its d e v a l u a t i o n being:
a) depreciation, of s i l v e r - g o l d p a r i t y and b) adv e r s e
b a l a n c e of pay m e n t s . T here we r e two banks in the country:
The Imperial B a n k and B a n q u e de Pr§te. The f ormer was B r i t i s h a n d e n j o y e d e xc l u s i v e rights of i s suing notes, and h a d e ight b r a n c h e s in the country. The latter was R u s s i a n lo a n b a n k a n d h a d three branches. A se c o n d
5.
R u s s i a n b a nk was f o u n d e d by the turn of the century.
All the rest of the f i n a nc ia l ope r a t i o n s r e s t e d in the hands of the t r ad it i o n a l sarrafs, usurers.
1.2. In contrast, i n d u s t r i a l i z e d E u r o p e a n c o u n tries ha d e v ol v e d into some r e a s o n a b l e degree of s o cial i n t e g r at i o n v i a s tr on g so c i a l an d e c o n o m i c inst i t u t i o n s .
One c ou l d c o n c e i v a b l y t a l k of n a t i o n a l m a r k e t i n t e g
r a t i o n for b o t h factors and products. The c o r p o r a t i o n h a d e m e r g e d and was e v o lv in g as the o r g a n i z a t i o n a l
e m b o d i m e n t of social p r o d u c t i v e resources. F r om a mere o f f s p r i n g of ea r l y o w n e r - m a n a g e r ente r p r i s e s , they were on their w a y to a h i g h l y s o p h i s t i c a t e d a n d r e f i n e d stage of p l a n n i n g and a d m i n i s t r a t i v e units of the i n d u s t r i a l i z e d e conomies. As e f f i c i e n t pools of r es ou rc es they could o r g a ni ze f a ctors of p r od uc t i o n , and i n t e g r a t e o t h e r w i s e i s o la te d m a r kets. T h e y co u l d tu r n f i n a n c i e r s ’ m o n e y into p r o d u c t i v e capital, a n d thus i n s t i t u t i o n a l i z e d investors - s en s i t i v e to cre d i b i l i t y , s e c u r i t y and rates of r et u r n - w e l c o m e d the o rg a n i z a t i o n s w h i c h t ur ne d s p o nt an eo us o p po r t u n i t i e s into some o p p o r tu ne inst i t u t i o n s .
In oil e n terprise, wh e r e the d e g r e e of u n c e r tainty was e x t r e m e l y high, and sinking c ap i t a l b ef or e it c o u l d re s u l t in p r o d u c t i o n w a s enormous, l o n g - t e r m and
1. The co n c e p t has been developed in a comprehensive manner by Edith Penrose in The T h e o r y of the G r ow th of the F i r m , London, 1st e d . ,
19 59. See also her The Large I n t e r n a t i o n al F i r m in D e v e l o p i n g Countries, L o n d o n " 1968.
r e w a r d i n g c o n c e ss i on s w e r e p r e - r e q u i s i t e s for any
investment. O n the other h a n d the e x i st en ce of n u m e ro us stages in b e t w e e n the p r o d u c t i o n of the crude and m a r k et in g of the e nd -p ro d u c t s , an d the d e r i v e d n a t u r e of the d e m a n d for p r o d u ct s m a de the c o r p or at io ns e n t e r
p r i s i n g in it to i n t e g ra t e ver t i c a l l y . Thus, i n t e g r a t i o n apart from a i m i n g at p r of it s and e xc l u s i v e c o n trols - b ot h of w h i c h ha v e p l a y e d a p a rt in s t r u c t u r i n g the i n d us tr y - was d e v i s e d to c oo rd i n a t e ope r a t i o n s of c o nt in uo us stages of the one i nd u s t r y and imbue it w i t h f l e x i b i l i t y . This f e ature of the i n du s t r y h a d p e r h a p s the single m o s t i m p o r tant i mpact on its trends of d e v e l o p m en t a nd in the f o r m a t i o n of its m a r k e t s tructure; oligopoly. F u r t h e r m o r e
it h e l p e d to w a r d off the rivals from the s ou r c e s of low- cost crude by me a n s of long term legal conces s i o n , and from p r o d u c t s - m a r k e t s by m e a n s of e s t a b l i s h i n g great m a rg in s b e t w e e n t r a n s f e r - p r i c e s an d a r m s - l e n g t h pr i c e s , and thus s qu e e z i n g r e f i n i n g m a r gi n s for them.
The p a t t e r n of n a tu ra l d i s t r i b u t i o n of r e s o urces of crude on the one hand, and the p at t e r n s of d e m a n d for its p r o du ct s on the other, m a d e it an i n t e r n a t i o n a l
industry. A n d this i nt er n a t i o n a l o r g a n i z a t i o n of the
i n d us tr y plus the c l o s e d - o l i g o p o l y s t r u c t u r e of its market, t o ge th er w i t h v e r t i c a l i n t e g r a t i o n of the firms o pe r a t i n g in it and j o i n t - o w n e r s h i p of the crude by the e n d - p r o d u c t - m a r k e t competi t o r s , e q u i p p e d the i n d u s t r y w i t h hi g h
degrees of m a n o e u v r a b i l i t y . Thus in a sh o r t time they co u l d g r a d u a l l y o u t - m a n o e u v r e the t r a d i t i o n a l l o w -cost
fuel in the less d e v e l o p e d h o st c o u n tries a l t h o u g h these m a rk et s have, for the m o s t part, r e m a i n e d ma r g i n a l .
In the a d v an ce d i n du st ri a l countries, h o wever, the
i n d us tr y was not u nr iv al l e d . In Europe, c o a l .c o m m a n d e d h i gh rates of emp l o y m e n t . Furt h e r m o r e , the oil h a d to p r o ve s u f f i c i e n t l y e c on om ic a l to w a r r a n t a d j u s t m e n t or early scrap of the e x i s t i n g m a c h i n e ry , a n d to w i n a race
a g ainst the coal (which was m a i n l y u s e d to o p e r a t e t r a i n s ) . T h e se c om mo n causes of s u p p o r t i n g o i l - o p e r a t e d
\
industries, e n g i n e e r i n g d e mands for oil p r o d uc ts , c o m b a t t i n g e s t a b l i s h e d a l t e r n a t i v e sources of energy, d i d not however, rule out the o c c u r r e n c e of the p r e c a r i o u s game of c o m p e t i t i o n in the industry: In a p r i c e - c o m p e t i t i o n of a 'perfect c o m p e t i t i v e ’ m o d e l the limit to the pri c e - cut is set by the m a r g i n a l p r i ce e q u a l l in g m a r g i n a l cost, and the m a x i m u m size of the p r o d u c t i o n is f i x e d at this po i n t w h i c h com m a n d s m a x i m u m revenue. Th i s ’size of p r o d u c t i o n ’ in turn d e t e r m i n e s the 'optimum size of a firm' in the 'theory of firm'. But in a p r i c e - w a r - w h i c h is the m os t p r o b a b l e shape of pr i c e c o m p e t i t i o n in an o l i g o p o l y - the p r i ce m a y d e s c e n d further do w n the cost to p a r a l y z e the adv e r s a r i e s . H e n c e the t e n d e n c y to sub- s titute p r i c e - l e a d e r s h i p , 2 for p r i c e wars. T h e t e n d e n c y
1. For an e l ab or a te d i s c u s s i o n and c r i t i c i s m see Penrose, Edith, The T h e o r y of the Gr o w t h of the F i r m , op.cit., pp. 9-13.
2. M a r kh am , S.W., d i st in gu i sh es B a r o m e t r i c f ir m leadership, d o m i n a nt f i r m l e a d e r s h i p and c o l l u s i v e leadership.
See 'The N a tu re and S i g n i fi ca nc e of Price L ea d e r s h i p ' , A m e r i c a n E c o n o m i c R e v i e w , 1951, p. 891.
however, has far less t h a n d o m i n a t e d the scene, w i t h r e s u l tant changes in the m a r k e t s t r u c t u r e and p o s i t i o n s of
the firms v i s - a - v i s one another.
1.3. Si n c e 1921, a r m s - l e n g t h crude p r i c e s we r e f i x e d on the basis of f.o.b. crude of the Gulf of M ex i c o , w h i c h r e q u i r e d c e r t a i n convent i o n s : a) the p r i c e of f.o.b.
M e x i c a n crude d e t e r m i n e d w o r l d crude prices; b) Gu l f of M e x i c o was the po i n t of d e p a r t ur e for t r a n s p o r t a t i o n w h e r e
soever, bas ing point; c) t a n k e r rates w e r e a s s u m e d to be 'given' and d) g r a vi t y was the sole a r b it e r of p rice d i f fere n t i a t i o n . Thus the crude e x p o r t e d f r o m the P e r s i a n Gulf po r t of A b a d a n to n e i g h b o u r i n g India was p r i c e d as if it were t r a n s p o r t e d fr o m the Gu l f of M ex ic o , and thus a b s o r b e d a 'phantom freight'. On the other hand, the P e r s i a n Gu l f oil in E u r op e was to absorb the d i f f e r ential f r e i g h t equal to A b a d a n - E u r o p e m i n u s M e x i c o - E u r o p e .
Due to its volume, p e t r o l e u m is f r e i g h t - s e n s i t i v e . Thus the o i l - c o n s u m i n g n a t i o n s felt c o n c e r n e d about the
t a n k e r rates. In the i n t e r - w a r p e r i o d some 50 per cent of the w o r l d tankers w e r e owned, and the o t h e r 40 per cent were c h a r t e r e d for lon g - t e r m s by the i n t e r n a t i o n a l oil 'corporations, and o n l y 10 p e r cent w e r e a v a i la bl e for s i n g l e - v o y a g e charters. W a r t i m e n e c e s s i t y h e l p e d e s t a b lish two s t a n d a r d rates of freight, i.e. 'Tanker M a r k e t N o m i n a l F r e i g h t Scale' fin Britain) and 'United States M a r i t i m e Commission' (in the U n i t e d S t a t e s ) . In reality, however, 'perfect rates' m e a n i n g ' c o incidence of m ar ke t
rates w i t h Scale' w e r e rare and the n o r m a l cases w e r e 'Scale plus x pe r cent' or 'Scale mi n u s x pe r cent'.
This s i n g l e - b a s i n g - p o i n t s y s t e m p r e v a i l e d until the S e c o n d W o r l d War, w i t h the e x c e pt io n of R o m a n i a n oil in w h o s e case, R o m a n i a - E a s t A m e r i c a was a s s u m e d e q u i
dis t a n t w i t h East A m e r i c a - C a r r i b e a n ports. This s y s t e m of p r i c i n g f a v o u r e d d e v e l o p i n g A s i a n and A f r i c a n low- cost oil, and the com p a n i e s de a l i n g in t h e m h a d strong m o t i v e s to e x p a n d o v er the m a r k e t s b e y o n d the w a t e r s h e d w h e r e the n o mi na l cost plus fr e i g h t p rices b r o ke even w i t h A m e r i c a n oil b e c au s e the real cost in A f r i c a and M i d d l e E a s t was m u c h lower. Thus the e n t e r p r i s i n g a t t i
tudes of c o m panies led to o c c a s i o n a l c u t -t h r o a t c o m p e tition, e.g. A s i a t i c p e t r o l e u m and S t a n d a r d of N ew J er s e y in In d i a n m a r k e t in 1927. Besides, u n s e t t l i n g entries also happened, e.g. Sov i e t e n t r y , i n t o the h a z a r d o u s
m a r k e t s i t u a t i o n s w h i c h w e r e to be g u a r d e d b y all means, not the least by m a r k e t - s h a r i n g a r r a n g e m e n t s , l o n g - t e r m su p p l y a r r a n g e m e n t s , s u p p l y - a n d - p r i c e con t r o l a r r a n g e m e n t s a n d so forth.
The o u t s et of the S ec o n d W o r l d W a r t e m p o r a r i l y s t o p p e d the flow of oil f r o m the P e r s i a n Gu l f to E u r o p e a n m a r k e t - a f r ei g h t a b s o r b i n g area. T h e n the d e l i v e r y
in P e r s i a n Gulf to E u r o p e a n powers b r o u g h t the p h an to m- freight u n d e r di s p u t e and r e s u l t e d in e s t a b l i s h m e n t of a d u a l - b a s i n g - p o i n t s y st e m of pricing, w i t h P e r s i a n Gulf as a s e c o n d point.
To ass i s t r e c o v e r y of the p o s t - w a r E u r o p e a n industries, s e l f - s u f f i c i e n c y in oil p r o d u c t s was desirable,
and this r e q u i r e d larger r e f i n i n g margins to s p u r c o n s t r u c tion of r e f i n e r ie s w h i c h w o u l d m e an ei t h e r lower crude
prices or h i g h e r p r od u c t s prices. M e a n w hi le , the r el a x a t i o n of the U.S. price s t a b i l i z a t i o n p o l i c y a l lo we d the price of crude f.o.b. Gulf of M e x i c o to rise from $1.05 per b arrel to $2.60 p er b a rrel, a m a r g i n high e nough to p ro vi d e o p p o r tunities for m a n o e u v r i n g to re t a i n West E u r o p e a n market.
Thus crude f.o.b. P e rs ia n Gulf plus Suez Canal tolls plus USMC f r eight rates from P e r s i a n Gulf to L o n d o n was equated against crude f.o.b. M e x i c a n ports plus U S M C freight rate from there to London. In other w o r d s 'L o n d o n was re n d e r e d a point w h e r e pr i c e s of P e r s i a n and M e x i c a n Oils were set to be equal. H o w e v e r since L o ndon was n e a r e r to M e x i c an Gulf .than to P e r si a n Gulf, P e rs ia n oil was the r e b y re d u c e d by some 44^ per barrel (equal to freight from e q u a l i z a t i o n p oint in s o u t h e r n Italy to L ondon a cc or di ng to scale r a t e s ) .
In. 1948 R a a s - a t - t a n o o r a h r e p l a c e d A b adan, and C a r r i b e a n that of M e x i c a n Gulf as ports of export, by virtue of w h i c h M i d d l e E a s t e r n oil price was r e d u ce d from
$2.22 to $2.03 per barrel. Since D e c e m b e r 1948 - i m p l e m e n t ation of the U.S. c o n s e r v a t i o n po l i c y - M i d d l e E a s t e r n oil i n c r e a s i n g l y c o m p e n s a t e d for A m e r i c a n s h u t - d o w n
capacity. In fact E u r o p e p a i d more for its i m ported oil than did the U.S. On this g round E u r o p e a n C o- op er at io n A d m i n i s t r a t i o n (ECA) r a i s e d an objection. As a result
of this o b j e c t i o n E u r o p e a n p rice was r e d u c e d b y 15 cents per b a r r e l - a r e d u ct i on w h i c h was already i n i t i a te d by
the Gulf Oil Company.
Later, N e w Y or k r e p l a c e d L o n d o n as the po i n t of p rice e q u a l i z a t i o n an d the d o m i n a n t f r eight rate w h i c h was U SM C m i nu s 35|%, was m a d e the b asis of p r i ce d e t e r m in a t i o n . This a r r a n g e m e n t r e d u c e d the p r i c e to E u r o p e b y an o t h e r 13 cents p er barrel.
The system, n o t w i t h s t a n d i n g its p r a g m a t i c
con v e n i e n c e , was f r a u g h t w i t h i n c o n s i s t e n c i e s a nd a n o m alies, un d e r w h i c h it e v e n t u a l l y b r o k e down. Two e x a m p l es
w o u l d suffice: a) In 19 52 the M ut u a l S e c u r i t y A g e n c y (a s u b st it ut e for ECA) b r o u g h t a case in the US J u s t i c e
A d m i n i s t r a t i o n aga i n s t J e r s e y Standard, S o c o n y V a c u u m and Caltex. The s ub s t a n c e of the case was that since on the one hand, the V e n e z u e l a n oil of 36°API was $2.65 bbl
a nd s p o t - f r e i g h t f r o m V e n e z u e l a to N e w Y o r k was $0.38 bbl, (total $3.03), a n d on the ot h e r h a n d the f r e i gh t from
P e r s i a n G u l f to N e w Y o r k was $1.70 bbl, t h e n crude f.o.b.
P e r s i a n Gulf s h o u l d have b e e n 3.03 m i n u s 1. 7 0 equal to
$1.33 bbl, w h i l e the three companies r e c e i v e d their
oil from an a f f i l i a t e of A r a m c o at $1.43 bbl. b) A n o t h e r a n o m a l y w h i c h was n a m e d af t e r its author's n a m e - S t o c k i n g a n o m a l y - was that the d e m a n d for tankers was d e r i v e d
f r o m the d e m a n d for oil. Thus a b o o s t of d e m a n d for oil i n c r e a s e d the d e ma nd for tankers and c o n s e q u e n t l y i n c r e a s e d the fr e i g h t rates, a n d this, p a r a d o x i c a l l y , d e p r e s s e d the pr i c e of o i l ; w h i l e a d e p r e s s i o n of oil demand, d e p r e s s i n g the f r e i g h t rates, w o u l d i n c r e a s e the p r i c e of oil. Thus b e c a us e of these and ot h e r reasons, by the e a r l y fifties
the s y s t e m g r a d u a l l y c o r r o d e d and was r e p l a c e d by p o s t e d
12.
price s y stem.^
1,4. T he first oil e x p l o r a t i o n activi t i e s in Iran w er e u n d e r taken b y a B r i t i s h g e o l o g i e s t ’L o f t u s ’ in 1885. The first c o n cession, how e v e r , was g r a n t e d to a B r i t i s h ’Mr. T o r y ’
five years a f t e r D r ak e ' s d i s c overy, to co v e r oil as parte in t o t o . In 1872 B a r o n Julius de R e u t e r was
g r a n t e d a c o n c e s s i o n to the a ma z e m e n t of the w o r l d w h i c h c on s i s t e d of:
The m o n o p o l y of r a il wa y (Art. II), t r a m w a y (Art, III, IV, V an d VI), e x t r a c t i n g all m i n e s e x c e p t i n g go l d and s il v e r and p re c i o u s stones (Art. XI-XII), all g o v e r n m e n t f o rests (Art. XIV) a nd u n c u l t i v a t e d land (Art. IV),
c o n s t r u c t i n g canals a n d i r r i g a t i o n w o r ks (Art. XV), an o p t i o n of a N a t i o n a l B a nk (Art. X X ) , and all e n t e rp ri se s
1. The l it er a t u r e is ample, see for e x am pl e Leeman, Wayne, The P ri c e of M i d d l e E a st Oil, N e w Y o r k 1962; Nie l s o n , R . , Oil T a n k e r E c o n o m i c s , Bremen, 1959; M an s o o r , Foroozan, Iq t isadi N a ft ~ Tehran, 1342 ; D eC h a z e a u , M.G., and Kahn, A.E., I n t e g r a t i o n and C o m p e t i t i o n in the P e t r o l e u m I n d u s t r y ; and Cassady, R . , Price M a k i n g and P r i c e B e h a v i o u r in the P e t r o l e u m I n d u s t r y ^ 19 56 .
2. The p ol i t i c a l h i s t o r y of the c o n c e s s i o n has b e e n a b u n d a nt l y d i s c u s s e d in the r e l a t e d lit e r a t u r e , so r e p e t i t i o n wi ll be r a t h e r u n ne ce s sa ry . The f o l l o w i n g m a k e some v e r y i n t e r e s t i n g reading: L o r d G.N. Curzon, P e r s i a and P e r s i a n Q u e stion, London, 1892, pp. 480-481. The author ca l l e d the c o n c e s s i o n 'a p o l i t i c a l b o m b sh el l all over the w o r l d ’ . B e n j a m i n S h w a d r a n in his The M i d d l e East, Oil and the
Great P o w e r s , N.Y. 1955 , p~! speaks of it as ’ a c o n c e ss i o n that in the era of s w e e pi ng c o n ce ss io ns put all the rest to s h a m e ’ . Sir P e r c y Sykes in his A H i s t o r y of P e r s i a , 1921, pp. 370-72, gives a c o l o u rf ul ac c o u n t of its h i s t o r i c a l setting. Sir H e n r y R a w l i n s o n in his E n g l a n d and R u s s i a in the E a s t : A series of pa p e r s on the p o l i t i c a l and g e og ra ph ic al c o n d i ti on s of C en t r a l Asia, London, 1875, p. 126, e x a mines w hy the c o n c e s s i o n was not p r ac ti c a b l e . A n d L en cz o w k s i in his R u s s i a and the W e s t
in I r a n , N.Y., 1949, p. 4, examines its c o n s e q u e n c e s m Persia.
13.
c o n n e c t e d w i t h roads, t e l e g r a p h systems, f a c t o r i e s and o p e r a t i n g the entire customs of the c o u n t r y for twenty- five years (Art. XIX)?
Upon p a y m e n t of: A s t i p u l a t e d sum for the first five years, and 60 per cent of the d i f f e r e n c e b e t w e e n the annual net
p r o ce ed s and the a mo u n t r e a l i z e d ’t h e n ’ b y the g o v e r n m e n t for the r e m a i n i n g 20 years (Art. XIX) plus 20% of the p r of it s a cc r u i n g f r o m r a i l w a y s C A r t . IX) and 15% of tliose d e r i v e d fr o m all o t h er s o urces (Art. XI-XII). This c o n c e s s i o n was a n n u l l e d s h o r t l y afterward.
In 1884 the first ’oil concession' was g r a n te d to the fi r m of Hotz an d Co. of Bushehr. B y this time A m e r i c a n oil was e x p a n d i n g over E u r o p e a n m a r k e t s and
Europe was s e a r c h i n g for oil in the East. C a u c a s i a n oil 2
h a d a l r e a d y b e e n d e v e l o p e d by N obel B r o t hers. Hotz c o ncession, ho w e v e r , was a b o r t e d in 1899. But in the same y e a r two R u s s i a n s u b jects o b t a i n e d a m i n i n g rights c o n c e s s i o n in A z a r b a i j a n (Gharajeh-Dagh) w h i c h r e s u l t e d in eight. m i n i n g e n t er pr is es b ef o r e it w as i n v a l i d a t e d u n d e r the S o v i et c o m p r e h e n s i v e a n n ul me nt of all R u s s i a n
rights o b t a i n e d in the T s a r i s t era.
1. Al l r e f e r en ce s are to the text of the C o n c e s s i o n of the P e r s i a n G o v e rn me nt to B a r on R e u t e r , J u l y 1872.
2. A l f r e d Nobel, the f o u n d e r of the Nobel Pr i z e was among them. See T ugendhat, Oil, The B i g g e s t Bus i n e s s , 1968, p. 34.
3. 1921, T r a n s - S o v i e t Treaty, League of N a t ions, T re a t y Series, 1922, Vol. IX, pp. 383-415.
14.
By 1901 ’B u r m a h O i l 1 was dri l l i n g in B u r m a h u p o n p a ym en t of five per cent of the gross v a l u e of oil w i t h o u t any f iscal e x e m p t i o n on its o p erations. In Baku, however, the r o y a l t y was t w e n t y - f i v e per cent of the va l u e or the v ol u m e of p r o d u c t i o n , and the m a x i m u m size of the area c o v e re d by the c o n c e s s i o n was one squ a r e m i l e o f f e r e d by auction. The d i s c o v e r y of oil was by no m e a ns g u a r a n teed.
D ^ r c y c o n c e s s i o n on M a y 26, 1901, ag a i n s t such a b ac kg ro u n d , gave w a y to sus p i c i o n s of d i p l o m a t i c m e d -
2 3
dlings, and a t t r a c t e d p u b l i c opinion. The c o n c e s s i o n aire was c o n f e r r e d upon: an e xc l u s i v e ri g h t to explore, extract, r efine or treat in any ot h e r w a y and sui t a b l e for commerce, all h y d r o c a r b o n res o u r c e s in an area of 500,000 square m i l es for a p e r i o d of 60 year's (Art. I), the e x c l u sive ri g h t to lay p i p e l i n e s to the P e r s i a n G u l f w h i c h b ar r e d the e n t ry of p o t e n t i a l rivals. U p o n p a y m e n t to
1. C au c a s i a b e l o n g e d to an almost d e v e l o p e d pa r t of the
i n d u s tr ia l world. Thus it did not s uf fe r f r o m the hazards, u n c e r t a i n t i e s an d i nf ra -s t r u c t u r a l b o t t l e n e c k s c o mp ar ab le to those in a c o u n t r y like Persia. Out of c o ntext c o m parisons, t h e r efore, do not s e em to do full j u stice to the facts of the case. For such c o m p a r i s o n however, see, for example, M i k d a s hi , Z., A F in a n c i a l A na l y s i s of M i d d l e E a s t e r n Oil C o n c e s s i o n s , L o n d o n , 1966, p. 20.
2. For a d e t a i l e d s t o ry in his own words, see Si r A r t h u r
H ar d i n g e , A D ip lo m a t in the E a s t , London, 1928, pp. 278-280.
Also Fatemi, Oil Diplom a c y , A P ow d e r K e g , N.Y., 1954, p. 35 7, w h e r e Ke wri t e s of m i l i t a r y s u pport for D JArcy.
See also E lw e l l Sutton, P e r s ia n Oil: A S t u dy in Po w e r P o l i t i c s , London, 1955, p~[ 15, w h e re he speaks of 1 sweet- e n e r s 1 g i v en to the Shah. Al s o Fateh, M.K., P an j a h Sal Naft-e I r a n , Tehran, 1335, p. 254, w h e r e he do c u m e n t s
1 g i f t s 1 to the Shales m in in is t e r s . A n d also see E l i z a b e t h Monroe, B r i t a i n ^ M o m e n t in the M id d l e East, 1 9 1 4 - 1 9 5 6 ,
London, 196 5, pp. 105-6 w h e r e she argues that B r i t i s h g o vern- m e n t was e n t i r e l y i mp a r t i a l in S h a h - D ^ r c y c o ncession.
3. A s tory of an e sp io na ge b a s e d on a c o n fl ic t b e t w e e n / C o n t i n u e d over
15.
the g o v e r n m e n t of' a 16 p e r cent a f t e r - t a x in c o m e of the c o m p a n y (Art. X) j a fi x e d rate d e t r i m e n t a l to the c o n c e s s io n a i r e w h e n p r o f i ts we r e b e l o w the e x p e c t e d ’r e a s o n a b l e ’ returns and to the host g o v e r n m e n t w h e n the p r o f i t s were excessive.- Be s i d e s , the f e a tures of the c o n c e s s i o n p r o v e d to be r u inous to the h e a l t h y conduct of a ct iv i t i e s in the long-run, in that the c o n c e s s i o n a i r e was the sole a r b i t e r of d e v e l o p m e n t an d that the c on ce s s i o n did not p r o v i d e for change of terms in the future.
The c o n c e s s i o n a i r e f o r m e d The F irst E x p l o r a t i o n C o mp an y in 1903, to be a s s i m i l a t e d in the C o n c e s s i o n S y n d i cate of D ’A r c y - S t r a t c o n a and B u r m a h Oil in 1 905.^ By
1908 all i n v e s t m e n t was sunk, 2 u n t i l the first rig tap p i n g
a large r e s e r v o i r on M a y 26, 1908 in M a s j i d - e Suleiman.
In 1909, the S y n d i ca te c o n c l u d e d some o t h er a g r e e m e n t s of e xpediency, w h i c h in a later date b e c a m e
F o o t n o t e 3 c o n t i n u e d fr o m page 14.
R o c k e f e l l e r and D e t e r d i n g is first t o l d in La G r a p o u i l i o t in Paris, th e n r et ol d in A n t o n Zischka, La Gu e r r e S ecret du P e t r o l e , la t e r p u b l i s h e d in the P e r s i a n n e w s p a p e r Shafagji-TT S o r k h , and r oo t e d in p u b l i c opinion.
1. For a d i s c u s s i o n of a case for the B r i t i s h g o v e r n m e n t ’s p r e s e r v i n g the c o n c e s s i o n see Church i l l , Win s t o n , The W o r l d Crisis 1 9 1 1 - 1 9 1 8 , London, 1938, Vol. I, e s p e c i a l l y pT 54 .
2. A n e m o t i v e a c c o u n t of the story is to be f o u n d in H e n r y Longhurst, A d v e n t u r e in O i l , London, 1959, p. 72.
3. In his h y p e r b o l i c language, St e p h e n L o n g r i g g c a l l e d this ’one of the m o s t s i g n i f i c a n t events of all
P e r s i a n h i s t o r y ’, see Oil in the M i d d l e E a s t , op.cit., p . 19.
bones of contention:
a) B a k h t i a r i Oil C o m p a n y A g r e e m e n t - in effect the C o mp an y was f o r m e d w i t h an initial c a pital of 4 00 ,0 0 0 pounds sterling, 3 per cent of w h i c h we n t to local c h i e f tains as s ha r e - c a p i t a l .
b) B a k h t i a r i la n d a g r e em en t. ^
c) B a k h t i a r i - S y n d i c a t e s e c u r i t y p r o v i s i o n a g r e e m e nt . ^
d) K h a z a l - S y n d i c a t e a g r e e me nt for p r o v i s i o n of one square m i le of la n d for c o n s t r u c t i o n of a r e f i n e r y
3 and g u a r a n te e of s e c u r i t y in Khuzistan.
The f o r m a t i o n of A n g l o - P e r s i a n Oil C o m p a n y (APOC) in 1909 t o ok pl a c e aga i n s t the b a c k g r o u n d of a
p r i o r e s t a b l i s h m e n t o f the J e r s e y S t a n d a r d and Royal D u t c h Shell c o n co mi ta nt ly . The i r r e v oc ab le trends in the naval d e v e l o p m e n t s c o n s t i t u t e d a p r e s s i n g n e c e s s i t y for the
B r i ti sh g o v e r n m e n t to b e c o m e the o w n e r / p r o d u c e r of its 4
supplies of l i q u id fuel. The government, t h e r e f o r e , b o ught
1. For an ana l y s i s of the f i n a n c i a l terms of some t r a n s
actions u n d e r this agr e e m e n t , see M i k d a s h i , A n A n a l y s i s ..., o p .c i t ., p , 19.
2. R a m s a y M a c d o n a l d c r i t i c i z e d these a gr e e m e n t s , in the H ouse of Commons, as the i n f r i n g e me nt of P e r s i a n G o v e r n m e n t ' s sove r e i g n t y , and an a t t e m p t to w e a k e n its central
authority. See Fateh, op.cit.
3. On M a y 6, 1909, on b e h a l f of H.M. G o v e r n m e n t , Sir P e r c y Cox gave S h e i k h Khazal a g u a r a n t e e that B r i t a i n w o u l d not al l o w the P e r s i a n G o v e r n m e n t to di s t u r b the status quo of h i m s e l f or his heirs and s uccessors. See
S utton,E., op.cit., pp. 20-21.
4. P o l i c y S t a t e m e n t , J u n e 17, 1914, H C D , Col. 1140.
its w a y in towards a c o n t r o l l i n g share.^ This was f o l l o we d b y an A P O C - A d m i r a l t y sales contract, the c o n f i d e n ti al it y of the terms of w h i c h bec a m e a n o t h e r source of c o n t e n t i o n in a later period. 2
In the m e a n t i m e the AP O C was a c q u i r i n g shares in T u r k i s h P e t r o l e u m C o m p a n y ( T P C ) , later Iraq P e t r o l e u m C o m p a n y ( I P C ) , an d K u w a i t Oil. A m e r i c a n so u r c e s were b e co m i n g g r o w i n g l y c o n c e r ne d about w o r r i e s of e x h au s t i n g reserves, and B r i t i s h g o ve r n m e n t e s t a b l i s h e d in S ou t h e r n P e r s i a a S o u t h e r n P o li c e R e g i m e n t (SPR) - a b o d y of
5 5,000 - u n d e r Gen e r a l Sykes.
The collapse, in 1917, of the T a a r i s t Russia, c a us ed the u n i l a t e r a l d e n u n c i a t i o n by the So v i e t g o v e r n me nt of 1907 R u s s o - B r i t i s h c on fi de nt ia l p ac t d i v i di ng P er s i a into zones of influence,- and thus gave the B r i t i s h a full sway. H e nc ef or th , events u n f o l d e d rapidly:
V o s u g h - F i r u z C a bi ne t was i n t r o d u c e d w i t h A r m i t a g e - S m i t h - a s s i s t a n t s e c r e t a r y to B r i t i s h T r e a s u r y - as fin a n c i a l adviser, and the p r o c e ss c u l m i n a t e d in 1919 A g r e e m e n t .
In 1920 A P O C was e n g a g e d in n e g o t i a t i o n s c o n c e rn ed w i t h the p u r c h a s e of a c o n ce s s i o n g r a n t e d to a K h o s h t a r i a in 1916 c o v e r i n g ’N o r t h P e r s i a n ’ Oil, and on N o v e m b e r 29th, 1920, it was n e g o t i a t i n g y e t an o t h e r
1. In 1914, the share of the g o v e r n m e n t was £ 2 , 0 0 1 , 0 0 0 as a ga i n s t B r u m a h ’s £ 1 ,0 69 ,0 00 and p u b l i c £1,530,000.
2. P a r l i a m e n t a r y Deb a t e s (Mozakerate M a j l i s ) , Tehran, XLV (1951) , p. 8.
c o n c e s s i o n to co v e r A z e r b a i j a n and K h o r a s a n . ^ But a p o t e n t i a l snag was that n e i t h e r the A PO C n or the K h o s h t a r i a c o n c e s s i o n h a d r e c e i v e d the p a r l i a m e n t a r y r at i f i c a t i o n , r e q u i r e d by A r t i c l e 24 of the 1906 con- s t i t ut io n of Persia. H e n c e the n e c e s s i t y , f r o m A P O C p oi nt of view, of i n t r o d u c i n g any change, i n t e r p r e t a t i o n or s u p p le me n t w h i c h b y its a p p roval in the p a r l i a m e n t w o u l d i m p l i c i t l y enact the o r i g i n a l con c e s s i o n . One such i n t e r p r e t a t i v e ’ a t te mp t was that of A r m i t a g e - S m i t h ,
? . c o n t a i n i n g v a r i a t i o n s to the d e t r i m en t of Persia, m that, a) the p r o f i t s of the B r i t i s h T a n k e r Company, a fully ow n e d s u b s i d i a r y w e r e to be e x c l u d e d fr o m r o y a l t y payments; b) the p r o f i t s of o t h e r s u b s i d i a r i e s w e r e also e x cl u d e d to the e x te nt that they were t r a d i n g in non- P e r s i a n oil; c) the p r o fi ts of s u b s i di ar ie s r e f in in g or m a r k e t i n g P e r s i a n oil o u ts id e P e r s ia we r e m a d e el i g i b l e
for s i z ea bl e d e d uc ti on s b ef o r e c o m p ut in g r o y a l t y payments;
d) s ub si d i a r i e s w e re so d e f i n e d as to i n c l u d e o n l y those in w h i c h A P O C h ad a m a j o r i t y share.
By 1921, m a n y i mp ed im e n t s w e r e o b s t r u c t i n g the i m p l e m e n t a t i o n of the ' V o s u g h 1 agreement, w h e n a coup
e l im in at ed any ch a n c e the 'interpretative' a g r e e m en t ha d for ratific a t i o n . Two years later, Sinclair was d e f e a t e d
1. Fatemi, op.cit., p. 79.
2. In fact the d e t e r i o r a t i o n was due to e r o s i o n of the b a r g a i n i n g p o s i t i o n of P er si a v is -a -v is gro w i n g p ow e r of the B r i t i s h g overnment. See for example H o s s e i n Makki, T a r i k h - e Bist Saleh-e Iran, Tehran,
2 vols.
19.
in P e r s i a , h o w e v e r , in 1924, Kavir-e K f m r i a n c o n c e s s i o n was revi t a l i z e d , and a m a j o r i t y share of it was sold to the S o v i e t g o v e r n m e n t vi a K h oshtaria.
O n N o v e m b e r 28, 1932, D ' A r c y c o n c e s s i o n was u n i l a t e r a l l y cancelled.
2
O b j e c t i o n s and r e s e n t m e n t sensued. B a r g a i n i n g got u n d e r w a y and on A p r i l 29, 1933 a ne w c o n c e s s i o n was concluded, r a t i f i e d and endorsed, and be c a m e a law. The c o n c e s s i o n e m b o d i e d the f o l l o w i n g changes: a) the area was r e s t r i c t e d (Art. 2.A), and was to be f u r t h e r r e s t r i c t e d to 10 0 , 0 0 0 s quare m i l e s (Art. 2.B);
b] p r o f i t - s h a r i n g a r ra n g e m e n t gave w a y to a tonnage-
r o y a l t y s y s t e m at 4S p e r ton (Art. 1 0 . 1.a), w i t h a l l o w a n c e for p o s s i b l e d e v a l u a t i o n of s t e r l i n g in terms of gold
(10-V, a , b ) , a n d w i t h a g u a r a n t e e d m i n i m u m of £ 7 5 , 0 0 0 p e r a n nu m ( 1 0 . 1.c); c) K e r m a n s h a h * Oil was to be o p e r a t e d un d e r a s u b s i d i a r y (Art. 9), and d) the right to lay p i p e - l i n e s was r e n d e r e d n o n - e x c l u s i v e (Art. 3).
The 4 S/ t o n arrange m e n t , w h i c h in a y e a r of d e p r e s s i o n - su c h as was the case w h e n the n ew c o n c e s s i o n
1. A P OC f ou g h t this war: R u mours of S i n c l a i r e - J e r s e y a r r a n g e m e n t s t a l e m a t e d the govern m e n t , b e c a u s e J er s e y h a d an a rr a n g e m e n t w it h APOC, w h i c h was c o n t r a r y to a P e r s i a n d e c i s i o n not to give a f o o t h o l d to A P O C in the North. B es i d e s the story of the ’T e a p o t - D o m e ’ - S agga K h uneh- S c a n da l w h i c h r e s u l t e d in the d ea t h of A m e r i c a n consul in T eh r a n is s u s p e c t e d to ha v e b e e n e n g i n e e r e d by Pr i n c e Firuz, w h i c h if p r o v e n right, c on f i r m s B r i t i s h
i n v o l v e m e n t .
2. For an an a l y s i s of the p ol i t i c s of c a n c e l l a t i o n see Noori, H o s s e i n Sh e i k h Hosseini, A St u d y of the Nat i o n - a l i z a t i o n of the Oil Industry in Iran, C o l or ad o State College, Ed.D., 1965, pp. 70-75.
3. R e f e r e nc es are to the A r t i c l e s of the text of P e r s i a n C o n c e s s i o n 1933-1993.
was s i g n e d - s e e m e d mo re f a v o u ra bl e to P er si a than
p r e vi ou sl y, d a t e d b a c k to 1925 TPC conc e s s i o n , w h i c h by then was a s s u m e d equal to 1/8 of the va l u e of the M i d d l e East crude f.o.b. P e r s i a n Gulf. One i m p o r t a n t feature of this a r r a n g e m e n t was that the oil i n d u s t r y m a n a g e d to rel i e v e i t se lf of the i n t r u s i o n of g o v er n m e n t s , gu a r d a g ainst i n f o r m a t i o n - l e a k , a n d p ro t e c t m a n a g e r i a l autonomy.
In 1934, K e r m a n s h a h s u b s i d i ar y s t a r t e d to operate.
A y e ar later, A P O C b e c a m e A n g l o - I r a n i a n Oil C o m p a n y ( A I O C ) T w o years la t e r an a b o rtive c o n c e s s i o n -
A m i r a n i a n - was g r a n t e d to the S ea bo a r d Oil Co. and in 19 39 the Du t c h 'A l g e m e e n e E x p l o r a t i e M a u t s c h a p p i j ’ set a p r e c e d e n t of a 50-50 a r r a ng e m e n t , to be la t e r a b o l i s h e d due
to w a r t i m e o p e r a tions.
As a r esult of the start of the W o r l d W a r II, Iran f o u nd it s e l f u n d e r the o c c u p a t i o n of the Allies.
The oil i n d u s tr y thus was g e a r e d to the needs of the m i l i t a r y command. It was h i g h time the So v i e t s us e d their K a v i r - K h u r i a n c o n c e s s i o n as a v e h i cl e of p ro po sa ls d e s t i n e d to repel Jersey, S i n c l a i r e or A I O C f r o m t heir b or de r areas. ? A g i t a t i o n s by the B r i t i s h to h av e So v i e t
1. The c hange of the n a m e from P er s i a - the land of the Parsis - to Iran - the la n d of A r y a n s - h a d a s i g n i f i cant p o l i t i c a l i mp l i c a t i o n at the time. Therefore, they s h ou ld not be c o n f u s e d as some a u thors h a p p e n to have done, for e x am pl e Noori, op.cit., t h r o u g h o u t his
t h e s i s .
2. A l t h o u g h J e r s e y a n d S i n c la ir e did not p u b l i c i z e their terms, however, M i c h a e l Brooks argues on evi d e n c e that K a f t a r a d z e h p a c k a g e was so e m b a r r a s s i n g l y s u p e ri or to Iran as c o m p a r e d to that of other b i d d e r s that they d e c i d e d to leave the scene for a while. See Brooks, M ic h a e l , Oil and F o r e i g n P o l i c y , London, 1949.
