By Dr. Ferruh DemirmenGlobal Policy Forum
April 26, 2003
Part II: The Reign of a Monopoly
In Part I, we reviewed political ambitions and developments leading to the discovery of oil at Kirkuk. In Part II, we will examine the birth, transformation and demise of an oil monopoly.
The Birth of a Monopoly
In its charter the Turkish Petroleum Company (TPC, later IPC) contained a monopolistic self-denial clause that prohibited any of its shareholders from independently seeking oil interests in the ex-Ottoman territory. Egypt, Kuwait and a small area called "transferred territory" (a patch of land transferred by a protocol from Persia to the Ottomans in 1913/14) at the Iraq-Iran border were excluded from the scope of the clause, but the rest of the ex-Ottoman territory including the Arabian peninsula and today's Turkey were included.
The self-denial clause meant that new pursuits within the included areas would be made either as a group or not at all. TPC did not want to take a chance with "straying" partners.
The self-denial clause initially met stiff resistance from the State Department and the American companies that had set their eyes on Mesopotamian oil. The clause conflicted with the open-door policy espoused by the Americans. The clause also ran afoul of the equal-access understanding under which Britain was granted mandatory control of Iraq by the League of Nations. But once the American companies joined their European brethren in TPC in 1924, they lost enthusiasm for the open-door policy. They tacitly accepted the self-denial clause. Washington also became muted in its high-principled stand on this issue.
Separate from the self-denial clause, TPC's concession agreement contained a clause designed to restrain monopolistic tendencies and invite competition within Iraq. But as it will be noted below, that attempt was foiled through new agreements and formation of subsidiaries.
Red Line Agreement
TPC, reorganized in 1924 to include Americans among its partners, having obtained a concession from the Iraqi government in 1925, and having discovered the Kirkuk field in 1927, was now poised to operate in a big way, exploiting the Kirkuk reserves. But there was one more hurdle to overcome: formalizing the corporate structure and binding all partners to the original self-denial clause.
To this end, the partners met in the town of Ostend in Belgium on July 31, 1928 to sign the definitive Group Agreement. They confirmed the existing shareholding structure, with the added provision that Gulbenkian could sell his 5 percent share of oil to the French at the market rate, thus assuring himself cash without the trouble of marketing. In return, the French would have the guarantee of an additional 5 percent oil in their oil off-take. At this time, only 5 companies were represented in the American syndicate.
As to the self-denial clause, Gulbenkian took out a large map, laid it on the table and drew with a thick red pencil an outline demarking the boundaries of the area where the self-denial clause would be in effect. He said that was the boundary of the Ottoman Empire he knew in 1914. He should know, he added, because he was born in it and lived in. The other partners looked on attentively and did not object. They had already anticipated such a boundary. (According to some accounts, the "red line" was drawn not by Gulbenkian but by the French).
Thus came into being the infamous "Red Line Agreement." It marked the creation of an oil monopoly, or cartel, of immense influence, spanning a vast territory. The cartel preceded easily by three decades the birth of another cartel, OPEC, which was formed in 1960. Excepting Gulbenkian, the partners were the super majors of today. Within the "red line" was included the entire ex-Ottoman territory in the Middle East, including the Arabian Peninsula (plus Turkey) but excluding Kuwait. Kuwait was excluded, as it was meant to be a preserve for the British. Years later, Walter Teagle of Jersey remarked that the agreement was "a damn bad move."
The Red Line Agreement lasted as long as it served the interests of the partners. By 1934 the American syndicate in TPC (IPC) had trickled down to two companies: Jersey and Socony (later Mobil), the two splitting equally the 23.75 percent American share. In 1935 through 1937 the IPC group, under different names, took oil concessions in Oman, the Trucial Coast and Qatar, all within the "red line." Also, in 1929 two American oil companies, Socal (later Chevron) and Texas Company (later Texaco) obtained an oil concession in Bahrain. Because these two companies were not part of IPC, the Bahrain concession did not create a fuss within IPC. But another, far more serious threat was looming on the horizon: the lure of Saudi Arabia.
Saudi Arabian Oil Spoils the Deal
In 1933 Socal, after outbidding the IPC group, won an oil concession in Saudi Arabia. In 1936 Socal and Texas Company teamed up to form a joint venture which was later called Aramco (Arabian-American Oil Company). The new company, having expanded its Saudi concession in 1939, needed additional capital, and Jersey and Socony were the obvious sources of new capital to turn to. The four companies agreed to join hands, and they received Washington's endorsement for their alliance.
The problem was, however, that by the provisions of the Red Line Agreement, Jersey and Socony were prohibited from entering Saudi Arabia. The agreement the two companies had signed years ago was now standing in their way. The new leaders of the giant American oil companies were a new brand of aggressive capitalists who decided that they would not be held back by an arcane agreement that restricted their options. Besides, Jersey and Socony each held a paltry 11.875 percent share in IPC, they reasoned. Oil had been struck (in 1938) in Saudi Arabia, and the new "land of oil" was beckoning.
Starting in 1946, and with the blessing of Washington, Jersey and Socony ran a relentless campaign to squash the Red Line Agreement. Their executives bluntly told their European partners that in their view the old IPC agreement was no longer in effect. As for legal cover, the Americans invoked the doctrine of "supervening illegality." What the fancy phrase meant was that the war (World War II) had rendered the Red Line Agreement null and void. (Were he alive, Lord Curzon would have chuckled at hearing the argument).
There was a special irony in Washington's support of the Aramco enterprise. The U.S. Justice Department, which had so diligently and successfully worked to bust the Rockefeller Oil Trust in 1911, was now acquiescing to amalgamation of four American oil giants – three of them spinoffs from the original trust – in Aramco. The Attorney General declared that the deal "should be good for the country." Times had changed. Besides, Aramco would operate on foreign soil.
Initially, IPC's European partners wanted to hear none of Jersey's and Socony's high-handed protestations. They resisted efforts to have the Red Line Agreement annulled. But the war had created new realities. The British, in particular, holding Iranian oil completely under their control (through APOC, now called AIOC or Anglo-Iranian Oil Company), and having already secured an oil concession (together with Gulf Oil) in Kuwait, were hardly in a position to make a fuss. The Dutch were riding on the coattails of the British. As for the French, they were glad to get back their 23.75 percent share in IPC, which the British had seized from the Vichy government as "enemy property."
Still, CFP brought a lawsuit in a London court against Jersey and Socony alleging breach of contract. The Americans responded with a countersuit of their own. As a fallback option, the Americans approached King Ibn-i Saud of Saudi Arabia to inquire whether his Royalty would accept the presence of a European company in Aramco. In no uncertain terms, the King said "no." He wanted Americans and Americans only. (He even asked if Jersey and Socony were solely American). Before matters got out of hand, and with France having other things on its political agenda, the dispute between the French and the Americans quieted down. France received promise of greater oil supply, and CFP withdrew its lawsuit.
Gulbenkian, as usual, proved to be a tougher nut to crack. Collaborating with the Vichy government during the war, and branded by the British "Enemy of the Act," he too had lost his 5 percent share in IPC. He got back his share in 1943. But the crafty deal maker was not willing to let go so easily a basic construct of IPC (TPC) that he had helped create. Cash, lots of it, was what mattered for him. He instructed his army of lawyers to file a suit against the American oil companies in a London court.
After much wrangling, the Red Line Agreement was unceremoniously scrapped in the grand Hotel Aviz in Lisbon in November 1948. A new Group Agreement was reached in the early hours of a Sunday morning, one day before the scheduled court hearing on Gulbenkian's lawsuit in London. Gulbenkian withdrew its lawsuit, dropped his opposition to Jersey's and Socony's plans to enter Saudi Arabia, and the Americans agreed to surrender their right to restrict Iraqi oil production. This gave "Mr. Five Percent" the chance to vastly increase his income from Iraq. He also received compensation for his "losses" in Bahrain.
By mere coincidence, the concession Gulbenkian wrenched from the Americans was also beneficial for Iraq, which had been feuding with IPC on the latter's restrictive production policy. Unintentionally, "Mr. Five Percent" had done a favor for the Iraqis.
Thus an oil cartel that was formed quietly behind closed doors in Ostend in 1928 ended quietly in Lisbon – also behind closed doors – 20 years later. The shareholders – all of them except Gulbenkian - were careful to avoid publicity, or wash their linen in public, by settling their differences out of court. Bad publicity was the companies' worst enemy. The shareholding structure of IPC was not affected by the new agreement; but new terms, i.e. a specific development program and prices for inter-Group sales, were prescribed.
Monopolistic Rule Continues
Dissolution of the Red Line Agreement clipped the monopolistic reach of IPC but did not end it. The monopolistic mantle of IPC, in fact, comprised two layers: one associated with the "red line," and a second one concerning Iraq only. When the Red Line Agreement was dissolved, only the first layer was discarded. The second layer remained in effect, and IPC continued its operations as a full-fledged monopoly within the country.
A monopoly within Iraq was not meant to be. The original concession agreement IPC (TPC) signed with the Iraqi government in 1925 covered a loosely defined area comprising all of Iraq except the Basra province (in the south) and the "transferred territory" at the Iraq-Iran border. Within 4 years of the agreement, and annually thereafter, a 500 km-square plot in the concession area would be offered by the government to competitors, with TPC acting as the government's agent. The subleasing arrangement was supposed to bring competition.
In March 1931, IPC signed a new agreement with Iraq giving the company the sole right to exploit territory to the east of the Tigris River. In return, the company would build a pipeline to the Mediterranean and make certain payments to the government in the interim period. The subleasing arrangement contained in the original agreement was abandoned.
In April 1932, a British-dominated international consortium, British Oil Development Company (BODC), obtained a 75-year oil concession for territory lying west of Tigris and north of 33rd parallel. The consortium was intended to be a competitor to IPC in Iraq. Ten years later, before it would start production, BODC was bought out by Mosul Petroleum Company (MPC), a fully owned subsidiary of IPC.
Likewise, in December 1938, Basra Petroleum Company (BPC), another subsidiary of IPC, obtained a 75-year concession for the rest of Iraq. Thus all of Iraq, with the exception of the "transferred territory," came under IPC's control. Competition was entirely eliminated.
IPC was not meant to be a profit-making enterprise. It operated as a production and transport company that delivered oil to its shareholders at export terminals (initially Haifa in Palestine and Tripoli in Lebanon) in proportion to participation interest. The partners were charged a nominal fee for the oil. Real profits were made by the partners which shipped, refined and sold the oil in foreign markets. (Until 1948 some of the crude was refined in Haifa).
Until 1940 or so, IPC maintained a strategy to delay production in Iraq. The strategy was aimed at protecting the interests of the British, American and Dutch partners, who had crude production of their own in areas outside Iraq and wanted to shield such production from competition. CFP and Gulbenkian, who had production interests only in Iraq, opposed the delay strategy; but with their minority shareholding, they had limited success. For good reason, the policy of retarding production irritated the Iraqi government as well.
During its operation IPC was frequently at loggerheads with the Iraqi government on a number of issues. The oil revenue structure, the pace of oil development, building refineries, participation in shareholding, and representation at company's board, were the chief areas of dispute. The disputes led to nationalization of Iraq's oil industry in 1972.
Iraq's oil development marks a century of turmoil and high drama. In this two-part series we have covered the first half of this period that was Byzantine in character, filled with armed conflict, political intrigue and corporate rivalry, with episodes of greed and deception.
As destiny would have it, Iraq's oil development was affected not so much by internal conflicts but by external factors. Iraq significantly benefited from the Iran oil crisis in the early 1950's, but suffered during the Suez crisis. The biggest setbacks were during the Iraq-Iran war and the Gulf War. And now, the American-led Iraq War has brought a new era of destruction and uncertainty.
The players in the big Mesopotamian oil game included an assortment of foreign countries and nationalistic oil companies that had a symbiotic and at times incestuous relationship with each other. What lip service was paid to free trade and competition, both in word and on paper, was soon discarded and forgotten when rhetoric clashed with self-interest. In many ways, these were not glorious days for the oil companies. Nor were the governments that knowingly supported the monopolistic designs and sometimes clandestine undertakings of these companies without blame.
Judging the players, the British played big poker and won. For Britain, oil was an instrument of imperial ambitions, and at times blood was the sacrifice that had to be accepted – e.g., 2500 British lives lost during the internal uprising in Iraq in 1920. The British camouflaged their true intentions on oil through pretexts, e.g., their righteous claim of being the trustees of Iraqi people's rights on oil. The Americans were more open in their intentions, although their tacit acceptance of the self-denial clause left them cold and dry on charges of hypocrisy.
Lacking the colonial over-drive of the British, and having relinquished Mosul to British control in San Remo in return for the German share in TPC, the French were relegated to play second fiddle in the big Anglo-American grab for oil in the Middle East. The French never trusted the British, and later the Americans, but were reconciled to their dominance on matters of oil.
As for the Dutch, they were the easiest winners. Thanks to 40 percent British share in RD Shell, the Dutch virtually got a free ride on the back of the British. At the beginning of WWI, RD Shell acquiesced to British control in order to operate freely on the high seas.
Gulbenkian, the legendary "Mr. Five Percent" of Armenian origin, was a big winner in the Mesopotamian oil game. Through twists and contortions that TPC (IPC) went through, he managed to keep his 5 percent share in the company. He defiantly took on the American oil giants Jersey and Socony and came out rather well. A canny businessman and a financial wizard, Gulbenkian trusted nobody and he himself inspired little trust. Born an Ottoman subject, he was suspected at one point of being a British agent by the French and was branded a "Vichy enemy" by the British during WWII. His allegiance to the Ottoman government – of which he was a senior finance advisor - was also dubious at best.
Upon dissolution of the Red Line Agreement in 1948, Gulbenkian became fabulously rich, more than enough to indulge in his expensive art collection – which he called "my children" - and lavish on his mistresses – except that by that time he was 80 years of age. He died in 1955 at Hotel Aviz in Lisbon, his long-time residence, attended to by four nurses. He never set foot in Iraq.
The Turks were the big losers in the oil game. The major reason for that, of course, was defeat during WWI and the headaches that the defeat brought. But Turks, the Ottoman Turks in particular, trailed the West in science and technology, which put them behind in appreciating the strategic value of oil. It is a poignant historical irony that at the time Admiral Slade expedition was surveying the Persian Gulf region for oil on instructions from Winston Churchill in 1913, Grand Vizier (Chief Minister) Mahmut Sevket Pasha, in blissful ignorance, was telling his cabinet in Istanbul that Qatar and Kuwait were "unimportant desert" sheikdoms that were not worth creating conflict with Britain.
The Ottomans, in fact, abandoned claims to Qatar in July 1913. The Industrial Revolution that transformed the West to a new age had come and nearly bypassed the Ottomans. Kuwait's proved oil reserves today are close to those of Iraq, and Qatar (together with its offshore) sits atop the third largest gas reserves in the world behind Russia and Iran. So much about the tiny "desert" sheikdoms!
The Turks were also at a disadvantage at Lausanne where they were out-foxed by the British who were intimately knowledgeable about the past machinations on Mosul oil and whose less-than-truthful claims on Mesopotamian oil during the Conference passed without significant rebuttal. Ismet Pasha could have used the services of a technical advisor who was well acquainted on matters of oil, in particular Mesopotamian oil. The clout Britain carried at the League of Nations also did not help Turkey's case.
As for the partners of IPC, the company's monopolistic character did not help reputation of the oil companies. Had the Red Line Agreement remained in effect (and no nationalization taken place), it would have occasioned the reign of the most powerful monopoly in history. It would have been as though today's British Petroleum, RD Shell, ExxonMobil and TotalFinaElf and an enterprise called Partex (representing interests of Gulbenkian's heirs) joining hands to control oil production in the entire Middle East with the exception of Iran and Kuwait. No oil company would have had the gall to compete with such a Goliath. Arguably, there would have been no need for OPEC.
In a wry, sarcastic commentary included in his memoirs, Gulbenkian remarked before his death in 1955 that what the oil companies had received from Iraq was a gift, because "none of the companies had any rights or concessions in Mesopotamian oil." "Mr. Five Percent" was not the type that would mince words.
Ferruh Demirmen, Ph.D., is a petroleum consultant in Houston, Texas. He occasionally writes on energy issues and geopolitics affecting Turkey and its region.
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