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WEEKLY NEWSLETTER
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Iraq
Index
With the end of World War II, IPC and its affiliates
undertook repair and development of facilities in Iraq as rapidly
as financing and materials became available. Exploration and
drilling were pressed, particularly in the Basra and the Mosul
areas, to meet concession terms. Although considered a priority,
the elimination of transport constraints was set back when a
larger second, nearly completed pipeline to Haifa was abandoned
in 1948 as a result of the first Arab-Israeli war. Use of the
existing Haifa line was also discontinued. In 1951, however,
commercial exports by the BPC of good quality crude began via a
new pipeline to Al Faw, on the Persian Gulf. Exports were boosted
further with the completion in 1952 of a thirty-inch pipeline
linking the Kirkuk fields to the Syrian port of Baniyas, which
had a throughput capacity of 13 million tons per year. In that
year, production from Basra and Mosul approached 2.5 million tons
while the Kirkuk fields increased production to more than 15
million tons. In the space of a year (1951-52), total Iraqi oil
production had doubled to almost 20 million tons.
Iraqi officials still harbored ambitions, dating back to the
1920 San Remo Conference, to take control of their nation's oil
resources. The elimination of transportation bottlenecks and the
subsequent rapid growth of exports encouraged Iraqi
assertiveness. IPC's costly, irretrievable investments in Iraq's
oil infrastructure gave the government even greater leverage.
One particularly sore point among the Iraqis concerned IPC's
contractual obligation to meet Iraq's domestic requirements for
gasoline and other petroleum products. An IPC subsidiary operated
a small refinery and distribution company based near Kirkuk that
supplied two-thirds of Iraq's needs. But IPC imported the
remaining third from a large refinery in Abadan, Iran. Iraq
considered this arrangement politically imprudent, a judgment
that was vindicated when, in the early 1950s, Iranian production
was cut during that country's oil industry nationalization
crisis. In 1951 the Iraqi government took over, with
compensation, the small Kirkuk refinery and hired a United States
contractor to build a refinery near Baghdad. This represented
Iraq's first concrete step toward taking control of the oil
industry.
In 1952 Iraq followed the examples of Venezuela and of Saudi
Arabia by demanding and receiving a 50 percent tax on all oil
company profits made in the country. The tax more than doubled
Iraqi profits per ton on exported oil.
The 1958 Iraqi revolution had little effect at first on the
government's attitude toward IPC. The government needed the oil
revenues generated by IPC; moreover, Iran's experience when it
nationalized its oil industry was a vivid reminder to the Iraqis
of the power the oil companies still wielded. In 1959 and in
1960, surpluses led the international oil companies to reduce the
posted price for Middle Eastern oil unilaterally, which reduced
government revenues significantly. IPC's policy of exploiting and
developing only .5 percent of the total concessions it held in
Iraq, and of holding the remainder in reserve also reduced Iraqi
revenues. Perhaps in response to the general situation, Iraq
convened a meeting in Baghdad of the major oil-producing nations,
which resulted in the September 1960 formation of the
Organization of Petroleum Exporting Countries (OPEC). In December
1961, the Iraqi government enacted Law No. 80, which resulted in
the expropriation of all of the IPC group's concession area that
was not in production. The expropriation locked the government
and the oil companies in a controversy that was not resolved for
more than a decade. The companies had two paramount objectives in
seeking to mitigate the law's effect. One was to regain control
of the concession to the North Rumaylah field in southern Iraq,
which was expected to be a major source of oil. In particular,
the companies did not want competitors to gain access to it. The
companies' second major objective was to limit the impact of
Iraq's actions on IPC concession agreements in other oil-
exporting nations.
In February 1964, the government established the state-owned
Iraq National Oil Company (INOC) to develop the concession areas
taken over from IPC. INOC was eventually granted exclusive rights
by law to develop Iraq's oil reserves; granting concessions to
other oil companies was forbidden, although INOC could permit IPC
and other foreign companies to participate in the further
development of existing concessions. Nevertheless, IPC continued
to lift the bulk of Iraqi oil from the Kirkuk field that it had
retained, and, more important, to export and to market it. IPC
therefore remained the arbiter of existing, if not potential,
Iraqi oil production.
Iraq's disillusionment with newly formed OPEC began just
after the enactment of Law 80. Iraq applied pressure on OPEC to
adopt a unified negotiating stance vis-a-vis the oil companies.
Instead, OPEC members negotiated separately. This allowed the oil
companies to extract concessions that permitted them to switch
production away from Iraq and therefore to pressure Iraq with the
prospect of lower oil revenues. Iraq's relationship with IPC was
further aggravated in 1966 when Syria raised transit fees on the
pipeline that carried two-thirds of Iraqi oil to port and
demanded retroactive payments from IPC. When IPC refused to pay,
Syria closed the pipeline for several months, an action that cost
the Iraqi government much revenue.
The eight-year shutdown of the Suez Canal that followed the
June 1967 Arab-Israeli War increased the importance of
Mediterranean oil producers because of their proximity to
European markets. In 1970 Libya took advantage of this situation
to win higher prices for its oil. Iraq, which was in the unusual
position of exporting oil through both the Gulf and the
Mediterranean, demanded that it be paid for its oil at the Libyan
price. IPC countered that Iraqi oil, because of its higher sulfur
content, was inferior to Libyan oil. Meanwhile, exports of Iraqi
oil via the Mediterranean began to decline, which IPC attributed
to falling tanker rates that made Gulf oil more competitive.
Iraq, however, interpreted the declining exports as pressure from
the oil companies. In general, Iraq believed that IPC was
intentionally undercharging customers for oil it sold on behalf
of Iraq and was cutting back Iraqi production to force Iraq to
restore the nationalized concession areas. In response, Iraq
attempted to make INOC a viable substitute for IPC. The INOC
chairman of the board was given cabinet rank and greater
authority, but INOC's activities were hampered by lack of
experience and expertise. Iraq therefore sought assistance from
countries considered immune to potential IPC sanctions and to
retaliation. In 1967 INOC concluded a service agreement with
Entreprise des Recherches et des Activites Petrolieres (ERAP)--a
company owned by the French government--covering exploration and
development of a large segment of southern Iraq, including
offshore areas. Some foreign observers doubted that the terms of
the arrangement were more favorable than IPC's terms, but more
important from Iraq's point of view, the ERAP agreement left
control in Iraqi hands. By 1976 ERAP started pumping the oil it
had discovered, at which point INOC took over operation of the
fields and began delivering the oil to ERAP.
In 1967 INOC tapped the Soviet Union for assistance in
developing the North Rumaylah field. The Soviet Union provided
more than US$500 million worth of tied aid for drilling rigs,
pumps, pipelines, a deep-water port on the Persian Gulf, tankers,
and a large contingent of technicians. In 1972, the North
Rumaylah field started production and produced nearly 4 million
tons of crude.
In the same period, Iraq obtained aid from French, Italian,
Japanese, Indian, and Brazilian oil companies under service
contracts modeled on the 1967 ERAP agreement. The service
contracts, which Iraq did not regard as concessions, allowed the
foreign oil companies to explore and to develop areas in exchange
for bearing the full costs and the risks of development. If oil
were discovered, the companies would turn their operations over
to INOC, which would sell them the oil at a discounted rate.
Iraq's increasing ability to manage its petroleum resources
finally induced IPC to negotiate. In 1972 IPC promised to
increase its production in Iraq and to raise the price it paid
for Iraqi oil to the Libyan level. In return, IPC sought
compensation for its lost concession areas. Iraq rejected this
offer and, on June 1, 1972, nationalized IPC's remaining holdings
in Iraq, the original Kirkuk fields. A state-owned company, the
Iraqi Company for Oil Operations (ICOO), was established to take
over IPC facilities. BPC was allowed to continue its operations.
In February 1973, Iraq and IPC settled their claims and
counterclaims. IPC acknowledged Iraq's right to nationalize and
agreed to pay the equivalent of nearly US$350 million to Iraq as
compensation for revenue lost to Iraq over the years when IPC was
selling Iraqi oil. In return, the government agreed to provide to
IPC, free of charge, 15 million tons of Kirkuk crude, valued at
the time at over US$300 million, in final settlement of IPC
claims. Some observers believed that IPC had received a liberal
settlement.
The October 1973 Arab-Israeli War impelled the Iraqis to take
complete control of their oil resources, and Iraq became one of
the strongest proponents of an Arab oil boycott of Israel's
supporters. Although Iraq was subsequently criticized by other
Arab countries for not adhering to the agreed-upon production
cutbacks, Iraq nationalized United States and Dutch interests in
BPC. By 1975 all remaining foreign interests were nationalized.
Fifty-three years after the humiliating San Remo agreement, Iraq
had finally gained complete sovereignty over its most valuable
natural resource.
Throughout the mid- to late-1970s, increases in the price of
oil caused Iraqi oil revenues to skyrocket even as production
fluctuated. Iraq funneled much of this revenue into expanding the
oil industry infrastructure. Refinery capacity was doubled, and
in 1977 a key pipeline was completed from the Kirkuk fields
across Turkey to a Mediterranean terminal at Dortyol.
In 1976, the structure of the Iraqi oil industry was
revamped. A new Ministry of Oil was established to direct
planning and construction in the petroleum sector and to be
responsible for oil refining, gas processing, and internal
marketing of gas products through several subsidiary
organizations. INOC would be responsible for the production,
transport, and sale of crude oil and gas. Some of its operations
were contracted out to foreign service companies. The State
Organization for Northern Oil (SONO), subordinate to INOC,
replaced ICOO as the operating company in the northern fields. In
subsequent reorganizations, SONO was renamed the Northern
Petroleum Organization (NPO), and a Central Petroleum
Organization (CPO), as well as a Southern Petroleum Organization
(SPO) were also established. The State Organization of Oil
Projects (SOOP) took over responsibility for infrastructure from
INOC, and the State Organization for Marketing Oil (SOMO) assumed
responsibility for oil sales, leaving INOC free to oversee oil
production.
Data as of May 1988
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