Anglo-Persian Oil Company

[Diarist]

The Anglo-Persian Oil Company (APOC) was a British company founded in 1908 following the discovery of a large oil field in Masjed Soleiman, Iran. It was the first company to extract petroleum from Iran. In 1935 APOC was renamed the Anglo-Iranian Oil Company (AIOC).

The D'Arcy oil concession

Exploration and discovery

In 1901 William Knox D'Arcy, a millionaire London socialite, negotiated an oil concession with Mozaffar al-Din Shah Qajar of Persia. He financed this with capital he had made from his shares in the highly profitable Mount Morgan mine in Queensland, Australia. D'Arcy assumed exclusive rights to prospect for oil for 60 years in a vast tract of territory including most of Iran. In exchange the Shah received £20,000 (£2 million today), an equal amount in shares of D'Arcy's company, and a promise of 16% of future profits.

D'Arcy hired geologist George Bernard Reynolds to do the prospecting in the Iranian desert. Conditions were extremely harsh: "small pox raged, bandits and warlords ruled, water was all but unavailable, and temperatures often soared past 50°C". After several years of prospecting, D'Arcy's fortune dwindled away and he was forced to sell most of his rights to a Glasgow-based syndicate, the Burmah Oil Company.

By 1908 having sunk more than £500,000 into their Persian venture and found no oil, D'Arcy and Burmah decided to abandon exploration in Iran. In early May 1908 they sent Reynolds a telegram telling him that they had run out of money and ordering him to "cease work, dismiss the staff, dismantle anything worth the cost of transporting to the coast for re-shipment, and come home." Reynolds received secret orders to delay following these orders and in a stroke of luck, struck oil shortly after on May 26, 1908.

Creation of APOC

On 14 April 1909, Burmah Oil created the Anglo-Persian Oil Company (APOC) as a subsidiary and also sold 50% to the London and Midlands Bank.

Volume production of Persian oil products eventually started in 1913 from a refinery built at Abadan, for its first 50 years the largest oil refinery in the world (see Abadan Refinery). In 1913, shortly before World War I, APOC managers negotiated with a new customer, Winston Churchill, who was then First Lord of the Admiralty. Churchill, as a part of a three-year expansion program, sought to modernize Britain's Royal Navy by abandoning the use of coal-fired steamships and adopting oil as fuel for its ships instead. Although Britain had large reserves of coal, oil had advantages in better energy density, allowing a longer steaming range for a ship for the same bunker capacity. Furthermore, Churchill wanted to free Britain from its reliance on the Standard Oil and Royal Dutch-Shell oil companies. In exchange for secure oil supplies for its ships, the British government injected new capital into the company and, in doing so, acquired a controlling interest in APOC. The contract that was set up between the British Government and APOC was to hold for 20 years. The British government also became a de facto hidden power behind the oil company.

APOC took a 50% share in a new Turkish Petroleum Company (TPC) organized in 1912 by Calouste Gulbenkian to explore and develop oil resources in the Ottoman Empire. After a hiatus caused by World War I it reformed and struck an immense gusher at Kirkuk, Iraq in 1927, renaming itself the Iraq Petroleum Company.

In 1920, the APOC also acquired a northern oil concession that had been formally granted in 1916 to a former Russian subject, the Georgian Akaki Khoshtaria. To manage this new acquisition, the APOC formed a new subsidiary, the North Persia Oil Company, but the Iranians refused to accept the new company, giving rise to a lingering dispute over the northern Iranian oil.

During this period, Iranian popular opposition to the oil concession and royalty terms whereby Iran only received 16% of net profits was widespread. Since industrial development and planning, as well as other fundamental reforms were predicated on oil revenues, the government's lack of control over the oil industry served to accentuate the Iranian Government's misgivings regarding the manner in which APOC conducted its affairs in Iran. Such a pervasive atmosphere of dissatisfaction seemed to suggest that a radical revision of the concession terms would be possible. Moreover, owing to the introduction of reforms that improved fiscal order in Iran, APOC's past practice of cutting off advances in oil royalties when its demands were not met had lost much of its sting.

In 1923, Burmah employed Winston Churchill as a paid consultant to lobby the British government to allow APOC to have exclusive rights to Persian oil resources, which were subsequently granted. In 1925, TPC received concession in the Mesopotamian oil resources from the Iraqi government under British mandate. TPC finally struck oil in Iraq on 14 October 1927. In 1928, the APOC's shareholding in TPC, which by now was named Iraq Petroleum Company (IPC), would be reduced to 23.75%; as the result of the changing geopolitics post Ottoman Empire break-up, and the Red Line Agreement.

Renegotiating of terms by Iran

The attempt to revise the terms of the oil concession on a more favourable basis for Iran led to protracted negotiations that took place in Tehran, Lausanne, London and Paris between Abdolhossein Teymourtash, Iran's Minister of Court 1925–32 and its nominal Minister of Foreign Affairs, and the Chairman of APOC, John Cadman, spanned 1928–32. The overarching argument for revisiting the terms of the original D'Arcy Agreement on the Iranian side was that its national wealth was being squandered by a concession that was granted in 1901 by a previous non-constitutional government forced to agree to inequitable terms under duress. In order to buttress his position in talks with the British, Teymourtash retained the expertise of French and Swiss oil experts.

Iran demanded a revision of the terms whereby Iran would be granted 25% of APOC's total shares. To counter British objections, Teymourtash would state that "if this had been a new concession, the Persian Government would have insisted not on 25 percent but on a 50–50 basis. Teymourtash also asked for a minimum guaranteed interest of 12.5% on dividends from the shares of the company, plus 2s per ton of oil produced. In addition, he specified that the company was to reduce the existing area of the concession. The intent behind reducing the area of the concession was to push APOC operations to the southwest of the country so as to make it possible for Iran to approach and lure other oil companies to develop oilfields on more equitable terms in areas not part of APOC's area of concession.

Apart from demanding a more equitable share of the profits of the Company, an issue that did not escape Teymourtash's attention was that the flow of transactions between APOC and its various subsidiaries deprived Iran of gaining an accurate and reliable appreciation of APOC's full profits. As such, he demanded that the company register itself in Tehran as well as London, and the exclusive rights of transportation of the oil be returned to the Iranian government. In fact in the midst of the negotiations in 1930, the Iranian National Consultative Assembly approved a bill whereby foreign companies would be required to pay a 4 percent tax on prospective profits earned in Iran.

In the face of British prevarication, Iran decided to demonstrate Iranian misgivings by upping the ante. Apart from finally allowing the press to draft editorials criticizing the terms of the D'Arcy concession, a delegation consisting of Reza Shah and other political notables and journalists was dispatched to the vicinity of the oilfields to inaugurate a newly constructed road, with instructions that they refrain from visiting the oil installation in an explicit show of protest.

In 1931, Teymourtash who was travelling to Europe to enrol Crown Prince Mohammed Reza Pahlavi at a Swiss boarding school, decided to use the occasion to attempt to conclude the negotiations. According to Cadman, Teymourtash worked feverishly and diligently to resolve all outstanding issues, but succeeded only in securing an agreement in principle while key figures and lump sum payments were not settled:

He came to London, he wined and he dined and he spent day and night in negotiating. Many interviews took place. He married his daughter, he put his boy to school[Harrow], he met the Secretary of State for Foreign Affairs, a change took place in our government, and in the midst of all this maze of activities we reached a tentative agreement on the principles to be included in the new document, leaving certain figures and the lump sum to be settled at a later date.

However, while Teymourtash was led to believe that after four years of exhaustive and detailed discussions, he had succeeded in navigating the negotiations on the road to a conclusive end; the latest negotiations in London were to prove nothing more than a cul de sac.

Matters came to a head in 1931, when the combined effects of overabundant oil supplies on the global markets and the economic destabilization of the Depression, led to fluctuations which drastically reduced annual payments accruing to Iran to a fifth of what it had received in the previous year. In that year APOC informed the Iranian government that its royalties for the year would amount to a mere £366,782 while in the same period the company's income taxes paid to the British Government amounted to approximately £1,000,000. Furthermore, while the company's profits declined 36 percent for the year, the revenues paid to the Iranian government pursuant to the company's accounting practices decreased by 76 percent. Such a precipitous drop in royalties appeared to confirm suspicions of bad faith, and Teymourtash indicated that the parties would have to revisit negotiations.

However, Reza Shah was soon to assert his authority by dramatically inserting himself into the negotiations. The Monarch attended a meeting of the Council of Ministers in November 1932, and after publicly rebuking Teymourtash for his failure to secure an agreement, dictated a letter to cabinet cancelling the agreement. The Iranian Government notified APOC that it would cease further negotiations. Rejecting the cancellation, the British government espoused the claim on behalf of APOC and brought the dispute before the Permanent Court of International Justice at the Hague, asserting that it regarded itself "as entitled to take all such measures as the situation may demand for the Company's protection." The Permanent Court of International Justice was a tool of the League of Nations which, in turn, was dominated by the victors of the Great War. At this point, Hassan Taqizadeh, had been appointed the new Iranian Minister entrusted with the task of assuming responsibility for the oil dossier. In modern political history Taqizadeh is known as a secular politician who believed that "outwardly and inwardly, in body and in spirit, Iran must become Europeanized". Taqizadeh was to intimate to the British that the cancellation was simply meant to expedite negotiations and that it would constitute political suicide for Iran to withdraw from negotiations.

After the dispute between the two countries was taken up at the Hague, the Czech Foreign Minister who was appointed mediator put the matter into abeyance to allow the contending parties to attempt to resolve the dispute. Ironically, Reza Shah who had stood firm in demanding the abolishment of the D'Arcy concession, suddenly acquiesced to British demands, much to the chagrin and disappointment of his Cabinet. A new agreement with the Anglo-Persian Oil Company was agreed to after Cadman visited Iran in April 1933 and was granted a private audience with the Shah. A new agreement was ratified by the National Consultative Assembly on May 28, 1933 and received Royal assent the following day.

1933 agreement

The terms of the new agreement provided for a new 60-year concession. The Agreement reduced the area under APOC control to 260,000 square kilometres (100,000 sq mi), required annual payments in lieu of Iranian income tax, as well as guaranteeing a minimum annual payment of £750,000 to the Iranian government. These provisions, while appearing favourable, are widely agreed to have represented an unfair deal for the Iranian government. The agreement extended the life of the D'Arcy concession by an additional 32 years, negligently allowed APOC to select the best 260,000 square kilometres (100,000 sq mi), the minimum guaranteed royalty was far too modest, and in a fit of carelessness the company's operations were exempted from import or customs duties. Finally, Iran surrendered its right to annul the agreement, and settled on a complex and tediously elaborate arbitration process to settle any disagreements that would arise.

The Anglo-Persian Oil Company continued its large Persian operations although it changed its name to the AIOC in 1935. By 1950 Abadan had become the world's largest refinery. In spite of diversification the AIOC still relied heavily on its Iranian oil fields for three-quarters of its supplies, and controlled all oil in Iran.
Under the 1933 agreement with Reza Shah, AIOC had promised to give labourers better pay and more chance for advancement, build schools, hospitals, roads and telephone system.

Source: Wikipedia - en.wikipedia.org/wiki/Anglo-Persian_Oil_Company