OIL POLITICS

West Asian countries have oil reserves, but in the early nineteenth century, their people were unable to exploit it for their own use or anyone else’s benefit. In 1908, William Knox, a New Zealander had obtained a concession for the exploitation, sale and export of oil in Iran through the APOC.

The terms of the treaty were:

The concession was to last for 60 years after which all machinery, buildings and installations were to revert to Iran without any compensation.

The Iranian Government was to receive an annual royalty of 16% of the net profits of the APOC.

Oil was struck in commercial quantities in May 1908 at Majid-e-Suleman. In 1909, APOC was formed with a capital of 2 million pounds. In I914, the British navy began to use oil instead of coal-based energy in its ships. In order to obtain oil at a low price and to prevent other countries from having a share in the rich Iranian oil deposits, the British Navy purchased 55% of APOC’s shares and became the controlling shareholder.

Meanwhile, Russia and American Companies tried to extract concessions but were unsuccessful. APOC was increasing oil production and by 1933 it was producing 70 million tons per year. most of the administrative staff were British and they occupied all key positions. The Iranians were exploited and treated as inferior.

The Advent of Reza Shah: When Reza Shah came to power in 1925, the concession agreement with the APOC was revised to make it more favorable to the Iranian government.

It reduced the area covered by the concession to 100,000 sq miles.

The royalty payment guaranteed a fixed income to Iran

The new arrangements were not beneficial to the Iranian government.

In 1935, Reza Shah changed the name of the APOC to Anglo Iranian Oil Company (AIOC)

Iran and World War II: During World War II, Iran was occupied by British, Americans, and Russian troops, which took over or otherwise controlled most of the administration. In 1943, the three powers reached an agreement for withdrawing their respective troops from Iran within six months after the end of the war. Russian troops left Iran only after the UN exerted considerable pressure on Russians. Even then Russians set up a pro-Russian regime in Iran’s northern province Azerbaijan, adjacent to the Russian border. This political confusion at home weakened Iran’s international standing.

After the war, both Britain and Russia were interested in controlling the oil rich deposits in Iran. Russia agreed to withdraw her forces only if their demand for oil concessions was granted. However, in 1945 the Iranian Majlis (Parliament) prohibited granting oil concessions to any foreigners. Britain withdrew troops but Russia didn’t. ultimately, the matter was referred to the UN Security Council (March 18, 1946). Therefore, Russia signed an agreement for oil concessions and then withdrew on 9 May 1946.

Oil Crisis: The question assumed crisis proportions in June 1948 when the AIOC announced that the royalty payment would remain the same as 1947 even if its net profits had increased from $26 million in 1947 to $52 million in 1948.

In 1947, the Iranian government received $19 million in royalty payment and taxes whereas the British Government received $56 million from dividends and taxes.

When the figures were published the Iranian people were agitated.

In 1948, the Iranian Government submitted a 25-point memorandum to the AIOC calling upon it to:

Increase the governments share of profit to 50%

Employ fewer foreigners and

Train more Iranians for technical and managerial position in the AIOC.

The two reached an agreement in 1949 known as ‘Supplementary Agreement’ (1949) which gave some concession to the Iranian Government. Unfortunately, the AIOC failed to keep its promises. The AIOC Annual Report of 1949 showed that Iran was given about $37 million in royalty payment and taxes whereas Britain received about $79 million from dividends and taxes.

Rise of Mussadiq: In 1950, the Iranian Majlis appointed an Oil Committee under the chairmanship of Dr. Muhammad Mussadiq to deal with AIOC. Dr. Mussadiq was a distinguished lawyer known for his loyalty. There followed negotiations between the oil committee and the AIOC which were unsuccessful. Britain found it difficult to accept the fact that she was no longer an eminent world power. America tried to persuade Britain to accept some demands of the Iranian Oil Committee. However, the AIOC refused to act.

Nationalization of Oil Industry: In December 1950, the Oil Committee rejected the supplementary agreement on the ground that it did not safeguard Iranian rights and interests. Dr. Mussadiq moved a resolution in the Iranian Maajlis calling for – nationalization of the oil industry in Iran. The government opposed this resolution, declaring nationalization to be impracticable.

Four days later the Iranian Prime Minister Razmaia was murdered. With his murder opposition to Dr Mussadiq’s proposal of oil nationalization crumbled and the Majlis passed a bill nationalizing the oil industry in Iran.

In April 1951, Mussadiq became the new Prime Minister and in October the AIOC was ousted from Iran.

 

Post Nationalization developments: After rejecting the supplementary agreement even the oil concessions to Britain were rejected. The British Government proposed arbitration and referred the dispute to the International Court of Justice at Hague but Mussadiq refused to submit to the courts jurisdiction. He argued that the dispute was between the sovereign state of Iran and a private company.

Thereafter, the British Government showed its willingness to accept the nationalization of the AIOC in a modified form. Dr. Mussadiq was also willing to negotiate with the British Government since he won the main battle. In a series of negotiations each side believed that it possessed the stronger bargaining power to back up its legal position.

The AIOC believed that only they could operate the intricate oil industry, the Abadan refinery and provide the necessary capital. In the absence of oil royalty payment, the Iranian economy would face serious difficulties which would face serious difficulties which would force the government to come to terms with it. It further believed that the action of the Iranian government in nationalizing the AIOC was illegal and wrong as it contravened the 1933 agreement. To the Iranians this nationalization meant independence.

Dr. Mussadiq encouraged the Iranians to believe that income from oil royalty and profits would enable them to live in ease and comfort, but he failed to realize the complexities of the international oil industry, or the difficulties involved in selling Iranian oil on the world market without the cooperation of international oil companies. He believed that Britain and France required Iranian oil to sustain their economies and would come to terms with him. He also expected the US Government to support him.

Deadlock I the negotiations and the resultant crisis: Very soon the negotiations reached a deadlock as either side refused to make any concessions. By mid 1951 oil production was completely stopped and arbitration failed. Mussadiq refused to submit the issue either to the Inteirnational Court of Justice or the United Nations.

Britain and Western Europe adjusted themselves to do without Iranian oil support.

Under these circumstances the situation in Iran began to deteriorate. Loss of royalty and profits began to pinch, scarcity of foreign exchange and credit forced Iran to curtail her imports. The army was short on supplies and wealthy landlords were forced to curtail on spending and luxuries. Iranian nationalists were frustrated at the continuing deadlock.

Dr. Mussadiq became more autocratic and in July 1952 he demanded autocratic power for himself. He wanted to rule by personal decree, dissolve the Majlis and introduce a comprehensive reform program. He held a referendum to dissolve the Majlis and got a 99.93% vote in favor of dissolution.

On 12 August 1953, he dissolved the Majlis.

By this time, he had been isolated, and he lost all support except from the communists. On August 13, 1953, the King dismissed him and appointed General Zahedi as the new Prime Minister. Dr. Mussadiq was arrested, found guilty of attempted rebellion and sentenced to three years imprisonment.

With General Zahedi at the helm of affairs, the Iranian crisis was nearing a solution.

In September 1953, the United States government granted Iran an emergency loan of $45 million to settle temporary difficulties. The oil dispute was finally settled in February 1954, by a consortium of 8 major oil companies.

On August 5, 1954, the Consortium and the Iranian Government signed a formal agreement which formally settled the dispute. The agreement went as follows:

-       The Consortium would extract, refine and market oil for the National Iranian Oil Company (NICO).

-       The NICO would receive 50% of the profits.

-       The Iranian Government would pay $70 million as compensation for nationalizing the AIOC.

-       In 1956, the NIOC took over the Russian oil concessions and thereby acquired full control over Iranian oil resources. In 1965, was formed the National Iranian Gas Company (NIGC), to exploit and utilize the seemingly limitless natural gas deposits in Southern Iran. In 1966, the royalty and profit income of Iran stood at $500 million.

Dr. Mussadique set an example for others to be cautions and the foreign companies became more reasonable, and therefore his cause was never lost. This episode in Oil Politics has been referred to as ‘an important reminder of strength’.