Global Policy Forum

Oil in Iraq: The Byzantine Beginnings

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By Dr. Ferruh Demirmen

Global Policy Forum
April 25, 2003


Part II: The Reign of a Monopoly
Great Power Conflict over Iraqi Oil: the World War I Era

Part I: The Quest for Oil

The U.S. is playing today roughly the same role with respect to Iraq's oil riches that Britain did early last century. History has a habit of repeating itself, albeit with different nuances and different actors. In this two-part series, we shall review the intricacies of oil-related events in Iraq through the 1950's.

Early Ambitions

Oil development in Iraq took place against a backdrop of war, political intrigue, deception, secret agreements and oil company haggling. Iraq, historically known as Mesopotamia, was part of the Ottoman Empire since 1534. ("Iraq" was the name given by the British to their newly created mandate). Collapse of the Ottoman Empire in early 20th century gave the Western powers the opportunity to seek political influence and commercial benefits in new territory – in Iraq as well as the rest of the Ottoman territory. Oil was the major prize.

Discovery of oil in 1908 at Masjid-i Suleiman in Iran – an event that changed the fate of the Middle East – gave impetus to quest for oil in Mesopotamia. Oil pursuits in Mesopotamia were concentrated in Mosul, one of three provinces or "vilayets" constituting Iraq under the Ottoman rule. Mosul was the northern province, the other two being Baghdad (in the middle) and Basra (in the south) provinces. Foreign geologists visited the area under the disguise of archeologists.

For a good part of the last century, interests of national governments were closely linked with the interests of oil companies, so much so that oil companies were de facto extensions of foreign-office establishments of the governments. The latter actively lobbied on behalf of the oil companies owned by their respective nationals. The oil companies, in return, would guarantee oil supply to respective governments – preferably at a substantial discount.

This symbiotic relationship manifested itself superbly when Turkish Petroleum Company (TPC), founded in 1911 and named as such in 1912 to exploit Mosul oil, was reorganized in March 1914 at a meeting held in Foreign Office in London where British and German diplomats sat next to executives of British and German banks and British and Dutch oil companies. Notwithstanding its name, TPC did not have Turkish participation. At that time World War I had not broken out yet, and Germans were welcome at TPC.

The British and Dutch were attracted to German participation because German banks had obtained a concession from the Ottomans in 1904 – a concession that in fact had been allowed to lapse. Calouste Gulbenkian, the consummate deal-maker of Armenian origin that helped found TPC, was not present at the meeting, but his interests were well looked after. He ended up with 5 percent share in TPC, though with no voting rights.

Dogged British Determination

Among the foreign powers the British, seeing Iraq as a gateway to their Indian colony and oil as lifeblood for their Imperial Navy, were most aggressive in their pursuits in Mesopotamia, aspiring to gain physical control of the oil region. Winston Churchill, soon after he became First Lord of the Admiralty in 1911, declared oil to be of paramount importance for the supremacy of the Imperial Navy. Churchill was educated about the virtues of oil by none other than Marcus Samuel, the founder of Shell.

During the war, Sir Maurice Hankey, secretary of the War Cabinet, advised Foreign Secretary Arthur Belfour in writing that control of the Persian and Mesopotamian oil was a "first-class British war aim." Britain captured the towns of Basra, Baghdad and Mosul, capitals of the provinces bearing the same names, in November 1914, March 1917 and November 1918, respectively. Mosul was captured 15 days after Britain and Turkey signed the Mudros Armistice ending hostilities at the end of the war, an event that drew protests from the Turkish delegation at the Lausanne Peace Conference four years later.

In 1913 Churchill sent an expeditionary team to the Persian Gulf headed by Admiral Slade to investigate oil possibilities in the region. More or less coincident with Admiral Slade expedition, Britain signed a secret agreement with the sheikh of Kuwait who, while ostensibly pledging allegiance to the Ottoman Sultan in Istanbul, promised exclusive oil rights to the British. Kuwait became a British protectorate in November 1914.

The British were so concerned about the security of their oil supply prior to the war that they wanted to have guaranteed British dominance in any oil company exploiting Mesopotamian oil. The government favored Anglo-Persian Oil Company (APOC, predecessor of BP) over Royal Dutch/Shell (RDS) in TPC. APOC, already holding oil concession in Iran but not one of the original participants in TPC, was 100 percent British while RDS, an original participant, was 40 percent British.

When the government indirectly asked RDS to drop out of IPC to give way to APOC, Henri Deterding, head of RDS, was infuriated. In 1914 the government acquired majority (51 percent) share in APOC, in part over concerns (unfounded) that RDS may take over APOC.

With government backing, APOC eventually made its way into IPC. Before the war, TPC shareholding stood at: APOC: 47.5 percent, RDS: 22.5 percent, Deutsche Bank: 22.5 percent, and Gulbenkian (with no voting rights) 5 percent. The British had a clear dominance.

Sharing the Oil Trophy

Political dimensions of oil interests in Mesopotamia reached a new height during World War I in the secret Sykes-Picot agreement signed between Britain, France and later Russia during April-October 1916. Designed to partition the Ottoman Asia after the war, the agreement, among others, assigned the Baghdad and Basra provinces to British control and "zone of influence" and the Mosul region and a good portion of what is now Syria to French "zone of influence." Some in the British government were enraged that Mosul had been "surrendered" to the French.

After the war, with the German and Ottoman Empires defeated and German interests in TPC confiscated by the British, the partition plans changed. At the Paris Peace Conference in June 1919, Iraq, under the League of Nations Covenant, was made a mandate entrusted to Britain. This award was completed in a treaty signed between Britain and France in San Remo, Italy, in April 1920. France accepted Britain's mandatory control on Iraq in return for receiving recognition to an enlarged French mandate on Syria. A few months later, in August 1920, the mandatory arrangement received further recognition at the Treaty of Sí¨vres.

In a supplemental oil agreement in San Remo, France was granted 25 percent share in Mesopotamian oil (effectively pre-war German share in TPC). It was stipulated that any company formed to develop Mesopotamian oil fields would be under permanent British control. A "native company" would have the right to 20 percent participation in such company. The agreement called for close cooperation between Britain and France on oil exploitation in Persia and Mesopotamia.

Three weeks after the San Remo oil agreement, the U.S. ambassador in London sent a strongly worded diplomatic note to Foreign Office expressing his government's concerns (see below).

At about the same time, Gulbenkian, in addition to his 5 percent beneficiary participation, acquired 5 percent voting rights in TPC after bribing a high French official with a furnished flat in Paris.

Enter the Americans

World War I augured another fundamental change in the oil scene in Mesopotamia: assertiveness on the part of the American government for an "open-door policy" on oil concessions. Forcefully advanced by President Wilson, the policy meant equal access for American capital and interests. The policy was in response to reluctance of European oil companies to welcome American companies to the Mesopotamian oil scene.

Before the war, the American Chester Group had tried to get a foothold in the Ottoman territory by applying for an oil concession, but got nowhere. A concession was granted by the newly established Ankara government in April 1923 (drawing protests from Britain and France), but it was canceled in December 1923 after the American banks withdraw their support from the group when it appeared that Turkey might lose Mosul (see below).

A rising demand for oil, fuel shortages and price increases during the war, and rumors of depleting domestic resources soon after the war rallied the American administration to give active support to American oil companies in search of foreign oil. Mesopotamia would not be a preserve for the European oil interests, Washington decided.

The British initially tried to foil the American efforts by stonewalling American requests and by refusing access to American geologists who wanted to survey oil potential in the region. Britain's tactics drew strong protest from Washington. The American government withheld its recognition of the Draft Mandate for Iraq on the grounds that it sanctioned discrimination against nationals of other countries. The San Remo agreement, in particular, caused consternation in Washington and catapulted the State Department and American oil companies into action. Walter Teagle, the head of Jersey (later Exxon), became the spokesperson for American corporate oil interests.

Among TPC shareholders, Gulbenkian proved to be the most difficult to accept American presence. He considered American presence an intrusion into his beloved TPC. The Americans, in turn, considered him to be a British-inspired trouble-maker. After some wrangling, a provisional agreement was reached in 1922 providing a syndicate of seven American oil companies (called Near-East Development Company, NEDC) to be admitted to TPC.

In 1924 the ownership of TPC was revised to recognize American presence, with Gulbenkian retaining his 5 percent and the rest of the shares equally divided among APOC, RDS, CFP (Compaigne Franí§aise des Pétroles, later Total) and the American syndicate (now composed of six companies), each holding 23.75 percent. In return for losing its majority share, APOC was granted 10 percent royalty (reduced to 7.5 percent in 1934) on oil produced by TPC. CFP was formed by the French specifically to represent France's interests in TPC. As later events would prove, CFP and Gulbenkian became the underdogs in TPC.

High Drama at Lausanne

The Lausanne Peace Conference held in November 1922-February 1923 (1st session) in Switzerland marked the height of political brinkmanship and skullduggery in oil politics. The "Mosul question," i.e. whether Mosul belonged to Turkey or whether it would be included within the borders of a newly created Iraq, was taken up by a special Council dealing with territorial issues. The Turkish delegation, headed by Foreign Minister Ismet Pasha, came to the Conference with explicit instructions from Ankara to keep Mosul within Turkey, in accord with the National Pact ("Misak-i Milli") adopted by the last Ottoman parliament in January 1920. The British had a totally different agenda.

The two sides tried initially to resolve the Mosul question through bilateral discussions, but these talks went nowhere. Britain proposed that the issue be referred to the League of Nations for arbitration, which the Turkish side opposed. Turkey had serious reservations about the intervention of the League Nations where Britain carried much clout – e.g. the General Secretary Sir Eric Drummond being British. Turkey was not even a member of the League. As a counter-proposal, the Turkish side offered to resolve the issue through a plebiscite, which the British opposed. The two sides were far apart.

At the official opening of the Council's session, Lord Curzon, the British Foreign Minister and head of the British delegation, must have marveled at his diplomatic chivalry when he made, without significant challenge, statements that did not accord well with the truth. Ismet Pasha, coming from a military background, was not sufficiently informed about the past intricacies in Mesopotamian oil and did not make a forceful rebuttal. The Pasha expressed his concern about not being fully briefed on oil matters in one of his "coded" telegraph messages to Ankara – messages that were in fact de-coded by British intelligence.

Lord Curzon argued that the policy of His Majesty's Government on Mosul was not in any way related to oil, that instead it was guided by the desire to protect interests of Iraqi people consistent with its mandatory obligations, that he had never spoken to an oil magnate or an oil concessionaire regarding Mosul oil, but that a company called TPC had obtained a concession from the Ottoman government [in June 1914] before the war that his government had concluded was valid, that his government and TPC had no monopolistic designs on Iraqi oil, and that the Iraqis would be the chief beneficiaries of oil exploitation in Iraq. He added that Turkey would benefit as well.

Considering British governments past knee-deep involvement in Mesopotamian oil, and TPC's monopolistic charter (see below) and exclusionary tactics, it was almost surreal that Lord Curzon would make such statements, including the intimation that he was unaware of oil-related developments surrounding Mosul. At the time of the Lausanne Conference the British, Dutch, French and American oil companies were negotiating the future of TPC in London, and Lord Curzon was kept fully informed on the progress of these negotiations.

The American observer at the Conference was bemused at Lord Curzon's high-principled claims. In a vague, convoluted language, he remarked that the character of TPC concession should be evaluated by an impartial tribunal and that his government had not given up on the "open-door" policy. In a subsequent diplomatic note to Britain, the State Department expressed its discomfort on some of the claims made by Lord Curzon at the Conference.

Lord Curzon also misled and appeased a war-weary British public by making similar statements in British press. The British public was longing for peace and did not want a new military conflict for the sake of oil. Similar attempts by the government at the Parliament were less successful. Some members of the Parliament expressed deep skepticism on Britain's motivations on Mosul, including one MP who complained about the "vein of hypocrisy" running through Britain's policy on Mosul. The government repeatedly ignored requests from MPs to produce the so-called oil concession agreement, or state clearly its terms.

That was for good reason. Because what Lord Curzon had called "concession" was far from being a proper concession. It was a mere diplomatic promissory note, a short one at that, subject to certain conditions, that was handed in June 1914 by Grand Vizier Said Halim Pasha to the British and German ambassadors in Istanbul. The British establishment had internally concluded that the concession was not valid. In late 1915, the Foreign Office informed APOC that it regarded the TPC concession as invalid and that the company should not hold the British government responsible for not securing its position.

Also, in 1921, when Lord Curzon was already the Foreign Minister, Whitehall was forced to admit that the TPC concession was on shaky legal grounds. That did not deter Lord Curzon from making his preposterous claims a year later at Lausanne.

With no solution in sight, and after receiving veiled threats from Lord Curzon on renewed hostilities in Iraq (which prompted a worried France to urge Turkey not to turn down the British proposal), Ankara reluctantly agreed in March 1923 to British proposal to refer the Mosul question to the League Nations for arbitration if direct negotiations with Britain failed. These talks, indeed, bore no fruit, and Britain took the Mosul question to the League of Nations.

When the Lausanne Conference (2nd session) ended in July 24, 1923, the communiqué issued officially recognized these developments. The British, however, failed in their efforts to have inserted into the treaty a clause indicating Ankara's acceptance of the so-called TPC concession.

In January 1923, Britain, as the mandatory power, pressured Iraq to forego its right to 20 percent participation in TPC, voiding the provision that was included in the 1920 San Remo Agreement signed with France. (Years later this became a major bone of contention between TPC and Iraqi government, and the issue, appealed to international arbitration by Iraq, had still not been settled by 1991. Most likely, the case is still officially in limbo).

In March 1925, TPC concluded an oil concession agreement with Iraq. The agreement, to be in effect for 75 years, stipulated that TPC would be and remain a British company registered in Great Britain.

TPC was now ready to start oil exploration in Mosul. Except that the official status of the province had not yet been settled. To which country did Mosul actually belong: Turkey or Iraq?

The Mosul question was settled in December 1925 when the League of Nations Council issued its decision against Turkey by accepting the "Brussels Line" (conceived in Brussels) as the boundary between Iraq and Turkey. For Ankara, the decision was no surprise. Having many other issues, e.g. foreign capitulations, Kurdish uprising in the southeast, on its plate, and wanting to join the League of Nations, Ankara reluctantly accepted the Council's decision. For Turkey that meant the end of the road as far as regaining Mosul.

Joy at Last

With the Mosul question thus settled, TPC immediately turned its attention to the obvious oil prospect near Kirkuk, a small town in northern Iraq. A team of geologists from the partner companies descended on the region. Based on surface indications alone, including extensive oil and gas seeps, it did not take a geological guru to figure that the 100 km-long Kirkuk structure was very likely an oil-bearing deposit of mammoth proportions.

Oil was struck at Baba Gurgur, immediately north of Kirkuk, in October 1927. Black crude and gas gushed violently to the surface with a thunderous sound. It was what the oil hands call a "blowout": losing control of a live oil well. The countryside was flooded with oil, and a thick pall of gas filled the air. Two drillers lost their lives. It took nine days to bring the well under control. Kirkuk soon became a major oil town.

Discovery of the Kirkuk field was the second major oil-related event in the Middle East history after Masjid-i Suleiman in Iran. The event marked the fulfillment of a long-hoped dream for the TPC partners and shaped the destiny of Iraq, in fact the Middle East, until our times. The field, with reserves of 16 billion barrels, or 2150 million tons, lived up to expectations as to its immense size. In June 1929 TPC changed its name to Iraq Petroleum Company (IPC).

Part II: The Reign of a Monopoly
Great Power Conflict over Iraqi Oil: the World War I Era


More Information on the Iraq Crisis
More Information on Oil in Iraq
More Information on Iraq's Historical Background

 

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