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WEEKLY NEWSLETTER
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Iraq
Index
Figure 8. Petroleum Industry, 1988
In 1912, several rival groups banded together to establish
the Turkish Petroleum Company (TPC), which would seek a
concession to explore for Iraqi oil. The original purpose of the
TPC was to eliminate rivalry among the partners and to outflank
American concession seekers. The TPC's guiding hand was Calouste
Gulbenkian, who had been hired by British banking interests
because of his knowledge and his ability to influence the
decisions of the Turkish government. His 5 percent holdings in
TPC reputedly made him the richest individual in the world for
many years, and were the source of his nickname, "Mr. Five
Percent."
Establishment of the TPC did not eliminate the rivalry among
the shareholders representing various national interests. Britain
had a long-standing strategic interest in Mesopotamia because of
its location in relation to Britain's military and commercial
routes to India. The British government's decision before World
War I to convert its naval fleet from coal to oil increased the
importance of the area. By 1914, the British-government-
controlled Anglo-Persian Oil Company had bought 50 percent of the
shares of TPC and was exerting pressure on the Turkish government
to grant the Anglo-Persian Oil Company a concession, but World
War I delayed negotiations.
World War I demonstrated to the major powers the importance
of securing their own sources of oil. The British-French San Remo
Conference of 1920 provided for permanent British control of any
company established to develop Mesopotamian oil, but allocated
Iraqi interests 20 percent if they chose to invest. France
claimed the German shares of TPC that had been seized as enemy
property and formed the CFP to hold the French shares in TPC. The
Italian and United States governments protested their exclusion.
After prolonged and sharp diplomatic exchanges, American oil
companies were permitted to buy into TPC, although negotiations
were not completed until 1928.
Although Iraq became a British mandate in 1920, that did not
guarantee TPC an exclusive concession. Using the promise of a
concession from the prewar Turkish government, TPC began
negotiating for one in 1921. A major point of contention was
Iraq's 20 percent share of any oil development company, a
condition stipulated at the San Remo Conference. By the early
1920s, TPC consisted almost entirely of oil companies that did
not want Iraq's representation or its interference in the
management of TPC. They successfully resisted Iraqi efforts to
participate despite pressure by the British government to accept
Iraqi shareholders.
A concession was granted to TPC in March 1925. Many Iraqis
felt cheated from the beginning of the concession. Its term was
for seventy-five years, and it covered twenty-four plots selected
by TPC. The Iraqi government was to receive royalties at a flat
fee per ton to be paid in English pounds sterling, but with a
gold clause to guard against devaluation of the pound. Royalty
payments were linked to oil company profits, but this clause
became effective only after twenty years. The Iraqi government
had the right to tax TPC at the same rate levied on other
industrial concerns. TPC was to build a refinery to meet Iraq's
domestic needs and a pipeline for the export of crude oil. The
Iraqi government had the right to lease other plots for oil
exploration and development, and TPC was not excluded from
bidding on these additional plots.
TPC began exploratory drilling after the concession was
ratified by the Iraqi government. Oil was discovered just north
of Kirkuk on October 15, 1927. Many tons of oil were spilled
before the gushing well was brought under control. This
indication of a large, valuable field soon proved well-founded.
The discovery of oil hastened negotiations over the
composition and the functions of TPC. The shareholders signed a
formal agreement in July 1928. The Anglo-Persian Oil Company, the
Dutch Shell Group, the CFP, and the Near East Development
Corporation (which represented the interests of five large
American oil companies) each held 23.7 percent of the shares, and
Gulbenkian the remaining, but nonvoting, 5 percent. TPC was
organized as a nonprofit company registered in Britain that
produced crude oil for a fee for its parent companies, based on
their shares. TPC was limited to refining and marketing for
Iraq's internal needs to prevent any competition with the parent
companies. The Anglo-Persian Oil Company was awarded a 10 percent
royalty on the oil produced, as compensation for its reduced
share in TPC.
A major obstacle facing United States firms had been a clause
in the 1914 reorganization of the TPC that stipulated that any
oil activity in the Ottoman Empire by any shareholder would be
shared by all partners. Gulbenkian had insisted on the clause so
that the oil companies could not circumvent his interests by
establishing other companies without him. This arrangement,
continued in the 1928 reorganization, came to be known as the Red
Line Agreement because the TPC partners were forbidden to act
independently within the boundaries of the now-defunct Ottoman
Empire. This "red line" effectively precluded the United States
and other TPC partners from concession hunting and from oil
development in much of the Persian Gulf region until after World
War II.
In 1929 the TPC was renamed the Iraq Petroleum Company (IPC).
IPC represented oil companies that had diverse and sometimes
conflicting interests. The Anglo-Persian Oil Company and Standard
Oil of New Jersey (also known as Esso and subsequently known as
Exxon), for example, had access to major sources of crude oil
outside Iraq, and they therefore wished to hold the Iraqi
concessions in reserve. CFP and other companies, in contrast,
pushed for rapid development of Iraqi oil to augment their short
crude oil supplies.
IPC's parent companies delayed development of the Iraqi
fields, and IPC's concession expired because the companies failed
to meet certain performance requirements, such as the
construction of pipelines and of shipping terminals. IPC's
concession was renegotiated in 1931. The new contract gave IPC a
seventy-year concession on an enlarged 83,200-square-kilometer
area, all east of the Tigris River. In return, however, the Iraqi
government demanded and received additional payments and loans as
well as the promise that IPC would complete two oil pipelines to
the Mediterranean by 1935.
Iraqi politicians remained suspicious of IPC's motives. Many
Iraqis believed that IPC was deliberately withholding Iraqi crude
from the market to boost the price of the parent companies' oil
produced elsewhere. In 1932 Iraq granted a seventy-five-year
concession to the British Oil Development Company (BODC), created
by a group of Italian and British interests, to 120,000 square
kilometers west of the Tigris River. The terms were more
favorable to the Iraqi government than those of earlier
agreements. BODC financing was insufficient, however, and the
company was bought out by IPC in 1941 and was renamed the Mosul
Petroleum Company (MPC). IPC shareholders asserted their monopoly
position again when they won the concession rights to southern
Iraq and in 1938 founded the Basrah Petroleum Company (BPC) as
their wholly owned subsidiary to develop the region.
Transport remained the main obstacle to the efficient export
of Iraqi oil. When France joined IPC after World War I, it wanted
the Iraqi pipeline to transit its mandate in Syria to a coastal
terminal at Tripoli, Lebanon. The Iraqis and the British
preferred a terminal at Haifa, in Palestine. In 1934, a pipeline
was completed from the Kirkuk fields to Al Hadithah, where it
divided, one branch going to Tripoli (the Tripoli branch was
closed by Syria--which supported Iran--in 1982 after the outbreak
of the Iran-Iraq War in 1980) and the other to Haifa (the Haifa
line was closed in 1948). In 1938, nine years after the discovery
of oil, Iraq began to export oil in significant quantities. Iraqi
production averaged 4 million tons per year until World War II,
when restricted shipping in the Mediterranean forced production
down sharply
(see
fig. 8).
Data as of May 1988
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