Preface

As a result of the concession granted to William Knox Darcy by Mozaffarol din- Shah of Qajar in 1901 for the extraction and production of oil in Iran- excluding the 5 northern provinces – drilling bits rotated for the first time in the middle east, registering Iran as the premier birthplace of Middle East oil industry, in the history of oil operations of this resource – rich region of the world.

It is now a full century from that date and the oil industry of Iran is preparing to enter into the second century of its life.

In the course of the past one hundred years, the industry, as a technical and industrial phenomenon, opened the doors of the modern day sciences for the Iranians, while in connection with foreigners' immerses, it acted as the cornerstone for many political, economic & social developments of the country.

Eruption of oil from the first well drilled in Masjid-e-Solaiman in 1908 construction of the Abadan oil refinery in 1913, the unsuccessful revision of the D'Arcy concession in 1933, the victory of the oil industry nationalization movement in 1950, the negotiation of a futile agreement with the consortium of oil companies in 1945 which brought the domination of foreigners over Iranian oil reservoirs a symbolic approach to petrochemical and gas industries in 1961, and finally, the wasteful utilization of the country's oil resources, are some of the tragic events from which many lessons may be learnt. The victory of the Islamic revolution caused the cancellation of all previous rules and regulations, and following the withdrawal of foreign employees from Iran's oil industry, domestic expert manpower took full control of its affairs.

Although heavy damages were inflicted on the industry during the imposed war, massive reconstruction efforts were launched after the war to repair them.

The oil industry opened a new chapter in the country's growth and development process as the basis of all profound changes.

How was the first middle-east oil field discovered?

The signing of the notorious D'Arcy concession on 28 may 1901 marked the foundation of the oil industry of Iran, now celebrating its one – hundred and fifth anniversary.

Oil and bitumen, in seepages, were used in traditional and primitive ways in old Iran. In the second half of the 19 century, when the U.S oil industry came into being (1859), several concessions were granted in Iran for the extraction of oil. Drilling operations were carried out in several parts of the country, but none ended in satisfactory results.

The first phase of drilling operations carried out on the basis of D'Arcy's concession in Ghasr-e-Shirin and Chah- Sorkh were not very satisfying either. Although drilling activities had proved the existence of oil, the wells' output ratio did not justify continuation of operations there. Drilling rigs were moved further south, to Shooshtar area. Experts were optimistic about the outcome of drilling operations in that region, but major obstacles were the insufficiency of D'Arcy's finances. Related projects required heavier investments, for which, D'Arcy was personally unprepared. By 1904, he had spent 220 thousand pounds, which was a huge amount at the time.

The impediment was removed by a Scottish oil company, which had obtained a concession in Burma, and had constructed a refinery in Rangoon.

At the time, the British admiralty had decided to replace oil for coal, to fuel its warships, and for that purpose, needed 50 thousand tons of oil per year.

The British government resorted to the Scottish entity, the Burma oil company, to procure the required amount of oil.

That company's oil reserves, however, were not sufficient enough to enable it to undertake a long-term commitment. Technical experts did not recommend a further expansion of oil operations in the Burmese concessionary area. D'Arcy had a much better concession for the solution of the British admiralty's problem, provided the Burma oil company's financial capabilities were diverted to his area for further investment.Negotiation of D'Arcy and the Burma Oil Company resulted in the establishment of the concessions ltd, in 1905 it's headquarter was in Glasgow, south central Scotland. The syndicate was to carry on with drilling operations in the Masjid- e – Solaiman area, with the financial support of the Burma oil company. To that end, the syndicate negotiated a contract with Bakhtiari tribal chieftains, and they agreed to guard and protect the company's properties and installations in return for a set amount of wages. 

The government of Iran never recognized the contract, which was negotiated by the British consul in the absence of country officials, and Reza Shah officially cancelled it in 1924.

Meanwhile drilling operations continued in several spots. Two wells drilled north of Ahwas did not show favorable results. Well drilled in Masjid- e –Solaiman, however, struck oil on 26 may 1908. Tests proved that experts had come to what they were looking for. Second and third wells were also proof of a huge oil reservoir, and as a result, Masjid – e- Solaiman was registered as the first Middle East oilfield in the oil history of the world It was very surprising, because Reynolds, head of drilling operations, who was happily on his way back to Ahwas back to Ahwaz, had received a letter dated 14 may from the company headquarters in Scotland. The letter, written less that two weeks earlier than the Masjid – e – Solaiman drilling success, indicated the disappointment of company authorities with the operations. They had instructed revolts that should drillings not reach oil at 151016 hundred feet, all company machinery and equipment were be transported to Khorramshahr.

Anglo – Iranian Oil Company (AIOC)

A few months after the Masjid – e – Soleiman oil the Burma oil company, the concessions syndicates Ltd; and Lord Strathcona, a British financier, established the Anglo-Iranian Oil Company. All of D’Arcy’s concessionary rights were transferred to this new company and D’Arcy himself became a member of its board of directors. Steps had to be taken for the production and export of oil. It was decided that oil should be transferred to Abadan, where a refinery was to be built. Tankers were to lift oil products from there.

A 138-mile long pipeline was to be constructed for the transportation of oil to Abadan. Storage and loading facilities were also planned for construction. Sheikh Khazal, ruler of Khorramshahr who had longstanding ties with Britain’s diplomatic representative in the Persian Gulf placed the land required for the refinery, at the disposal of the company. Based on an agreement, in addition to an annual lease, the Sheikh was to receive a loan of 10 thousand pounds. The British diplomatic representative also assured the Sheikh and his family, of his respective government’s support and protection.

It was evident that the company was strengthening its position on the basis of British diplomatic officials’ influence, completely neglecting the central government of Iran. The company’s arrangements with Bakhtiari tribal heads and Sheikh Khazal were examples of such measures that Reza Shah’s government took full control and suppressed the sheikhs and tribal heads.

This working style was abandoned throughout the fifteen-year period Reza Shah was in power. But after 25 august 1941 when the British military forces entered Iran, that same approach resumed more vigorous.

Oil Refining Export Operations in Iran Refinery

Construction operation began in October 1909. Company employees who to time were limited to several drillers, mechanics, an accountant and a physician, rose to 2500 in 1911, the company’s airplane landed in Iran for the first time and the first Iranian crude oil cargo was lifted for export in 1912 by 1914, there were altogether 30 oil wells drilled in Masjid-e-Solaiman area. The company and the British government reached an agreement in the same veer where by the latter became the majority shareholder of the company.

From then on, the British government had two members on the company board of directors with special powers to veto those decisions of the board which were considered contrary to the interests of the British government the arrangement was approved by Britain's House of Commons on 17 June 1914, on the eve of the First World War. Based on a confidential agreement negotiated with the British admiralty, the company undertook to supply all the fuel requirements of the British navy at low prices. The First World War (1914-1918) proved the tremendous importance of oil.

The use of oil in wars dates back to older times. In explaining the organization of the ancient warrior forces, historians have repeatedly referred to horsemen, infantrymen, archers and “oil-throwers”. But the use of oil in contemporary wars is not so limited. all the awesome movement and firepower in today’s ground, sea and air wars, in fact, are possible, only because of oil. Without it, personnel carriers, tanks, and fighter planes will not be able to move. Based on this same reality, lord Curzon said after the First World War that the war was won on waves of oil.

Disputes

Britain had come to appreciate the importance of the Iranian concession it had obtained through William Knox D’Arcy. This, however, did not cause either the company or the British government to be grateful to Iran. On the contrary, their greed and, avarice increased with the rising importance and value of oil. Although Iran had declared neutrality in WWI, warring forces turned Iranian territory into a war zone. Operations of the pipeline that transferred oil from Masjid-e-Soleiman to Abadan was interrupted by German inspired saboteurs and it took 5 months to repair it.

Reza Khan and the oil issue

Reza Khan who entered Iranian politics as a result of the 1921 coup d’etat, became Prime Minister in 1923 and had his coronation in 1925. First, he made all efforts to put an end to the activities of Sheikh Khazal who considered himself the ruler of Arabia, and had practically pulled Khorramshahr and Ahwaz out of the control and authority of the central government of Iran. The Sheikh was apprehended in early 1925 and spent the rest of his life in Tehran under house arrest.

Reza Khan established security and order that served the interests of the company.
Government’s powers prevented workers from forming unions or voicing their objections. The first case of southern oil workers’ strike occurred in 1929. Living conditions of local workers were very poor and intolerable. The total number of oil industry employees amounted to 30,000, out of which 6000 were British. Indian Government forces put an end to the strike and about 200 instigators and agitators were arrested. Some of them were kept imprisoned until the culmination of Reza Shah’s rule.

A year after coronation, Reza Shah concentrated his attention on the issue of oil. He needed money for his ambitious plans of cross-country railroad and military programs. The government first believed that the oil conflict had to be referred to arbitration, but the company suggested that they should solve the problem through negotiation.

Cancellation of D’Arcy Concession and the Signing of the New Agreement

Taimoortash, the powerful court minister was appointed by the government to negotiate with the company. The government wanted an arrangement on the basis of which Iran could own 25% of the company’s shares, a two Shillings royalty per ton of oil produced, the return to Iran of ¾ of the concession area, payment of tax by the company according to Iranian taxation rules and recognition of Iran’s rights in all company operations even after the termination of the terms of concession.
Once those conditions were accepted, the government was ready to extend the agreement for another 20 years period. Negotiations continued until 1931. In that year, Iran’s oil income plunged to 30 thousand pounds or a quarter of is revenue of 1.28 million pounds in the previous year. The company blamed global recession for the fall in revenues. But Reza shah who was unhappy with lengthy negotiations and repeated company pretexts, lost control, got hold of the oil files and threw them in the heater to burn. He then ordered his ministers to abolish the D’Arcy concession. The company was immediately informed of the Shah’s the D’Arcy concession.

The company was immediately informed of the Shah’s instructions, and the parliament (Majlis), in its 10 the session confirmed his decision.

In a strongly worded memo, the British government voiced objection to the action taken by Ian. Sever warships were dispatched to the Persian Gulf, and a complaint was filed with the League of Nation - the present Untied Nations. The Security Council, however, advised the two sides to find a solution to their problem through negotiations.

Iranian and company representatives held their talks-first in Europe and then in Tehran-until 24 April 1933. They reached agreement on all principal matters, except the renewal of the D’Arcy Concession, which was to terminate in 1951, but Cadman insisted that it should be extended for another period of 30 years. Finally, the Shah himself intervened, and a new agreement which included the extension of the concession, was concluded.

The Second World and Oil

The Second World War proved the ever rising importance of oil. Allied air forces in the Middle East, the Far East and Europe were mainly reliant on Abadan for fuel. In August 1944 the Soviet government sent its foreign minister to Tehran for an oil concession. The negative response of the Iranian government which had decided to abstain from granting concessions until the end of the war, enraged the Soviets, and the Tudeh (communists) Party held anti-government demonstrations and rallies across the country.

Dr. Mohammad Mosaddegh and the Anti-Concession Law

Meanwhile, Dr. Mohammad Mosaddegh took the anti-concession bill to the consultative assembly (Majlis), which was passed on 2 December 1944. The Second World War came to an end in 1949, and allied forces agreed to pull out of Iran in 6 months' time. The Soviets, however, annoyed of the Iranian government’s response, did not abide by the agreement. Finally, the conclusion of “Ghavam-Sadchikov” agreement brought with it the withdrawal of Soviet forces from the country.

Nationalization of Oil

Election campaigns of the 16th Majlis, the assassination attempt against the Shah on 4 February 1949, Ayatollah Kashani’s exile, assassination of Hajir by Fedayeen e-Islam on 4 November 1950, the Iranian National Front’s success in Tehran, and the return form exile of Ayatollah Kashani, were some of the major events that further heightened discussions on the oil issue. The “Gass-Goldhsyan” agreement as the outcome of the Iranian government and company negotiations was taken to the 14 Majlis on its final days. Thus the 16 Majlis had to take up relevant discussions. The agreement would increase royalty earnings of the government, but would not serve the main purpose or the rights of the Iranian people. This came at a time when agreements such as the 50-50 profit sharing had become the norm of the day in The Second World and Oil the Second World War proved the rising importance of oil. Allied air forces in the Middle East, the Far East and Europe were mainly reliant on Abadan for fuel.

In August 1944 the Government sent its foreign minister to Tehran for an oil concession. The negative response of the Iranian government which had decided to abstain from granting concessions until the end of the war, enraged the Soviets, and the Tudeh (comminutes) Party held anti-government demonstrations and rallies across the country.

The Oil Nationalization Bill and the Government of Mosaddegh

Following the assassination of Razmara, Hossain Ala was given the task of forming a cabinet, whit the wave of strike had swept oil workers in Khozestan. Ala resigned on 27 April 1951 and the Majlis gave its vote of confidence to Dr. Mosaddegh as the new prime Minister. The 9 point oil nationalization law written by the special oil committee, was approved by the legislative body on 29ht April 1451, received the Shah’s confirmation on 30ht April and went into force. The next day, Dr.Mosaddegh’s cabinet presented its program to the Majlis. The National Iranian Oil Company (NIOC) was formed with a three member provisional board of directors, as the first step in the nationalization process. The board arrived in Abadan on 9ht June 1951. The next day the flag of Iran was posted on top of the company’s main office in Khorramshahr.

The board had instructions not to obstruct Iran’s oil exports, and it agreed that tankers should continue to lift oil cargoes, in return for which they were to sign receipts, to allow for accounting at a later period. Oil tankers, which were either owned or leased by the company, refused to sign unconditional receipts. Thus oil lifting from Abadan came to a halt. Oil storages were filled, the Abadan refinery's operations also come to a halt, and 4500 non Iranian oil personnel resigned collectively. At the time there were 61500 Iranian and foreign workers employed by company. Interruption of oil operations, stopped oil revenues, and forced the government to pay their salaries.

Unsuccessful Attempts at solving the oil issue

On 10 June 1951 when the provisional board stationed itself in Khorramshahr, a mission headed by Basil Jackson (the deputy chairman of the company) arrived in Iran with proposals that were turned down because they were contradicting the oil nationalization law. The British government filed a complaint with the International Tribune at the Hague which issued an interim ruling for the continuation of the operation of oil installations, and called on the government of Iran to avoid intervening with the affairs of the company, to allow the court to study the case and issue its final verdict. Iran did not accept the ruling, because it did not recognize the court’s jurisdiction over the case.

Following the failure of the Jackson Mission, the U.S. President Turman dispatched one of its senior advisors named “Harriman” for mediation to Tehran. Another mission headed by a British minister Stokes-arrived in Tehran at the same time. Ensuing talks also failed and Harriman left Tehran following Stokes. The British government, which had plans to resort to military forces and occupy Khuzestan and Abadan, dispatched its paratroopers to Cyprus and stationed several warships in Abadan area waters, the move was countered by U.S. opposition, which feared the Soviet intervention in the situation.

The Uprising of 21 July 1952

As a result of massive popular unrest, Ghavam was forced into resignation on 21 July 1952, and Mosaddegh became Prime Minister again. About a month after this development the joint proposal of “Churchill and Truman” was put forward for the solution of the oil problem (27 August 1952). This proposal was not accepted either, because it was in violation of the principle of nationalization. To counter the British spies’ moves that had launched extensive operations under diplomatic cover, to undermine the government, Mosaddegh declared the interruption of all political lies with Britain.

The Coup of 19 August 1953

The United States’ ambassador left Tehran for Washington on 30th may 1953 in a meeting of CIA officials in Washington on 25 June 1953, the coup attempt designed to overthrow Mosaddegh was approved by the U.S. Secretary of State, Dulles, and U.S. President, Eisenhower issued instructions for its implementation. Credit Roosevelt, chief CIA operations in Africa and the Middle East entered Iran through Iraq on 19ht July on a counterfeit passport to implement the coup.

Based on a decree from the Shah. Appointing General Fazlollah Zahedi as prime Minister, the organizers of the coup arrested several ministers at midnight. Brigadier Nassiri headed a convoy of military trucks and personnel carries to inform Mosaddegh of his dismissal. Mossaddegh, who had earlier learnt of coup plan, countered their actions and brigadier Nassiri was arrested. In the early morning of August 16, a government declaration gave news of the failure of the coup, and the Shah fled to Baghdad on a private plane. Opposition to monarchy, which was strengthened by the Tudeh party activities, spread to all corners of the country. Operators of coup d’etat, however, tried again and on 19 August took over government offices, set fire to party centers, pro-government newspapers, and occupied radio centers of the army.

The message of the new Prime Minister was radio broadcast from the radio, and agents of the coup raided the residence of Mossaddegh using machine guns and tanks, and set it on fire. Mossaddegh and several of his friends who had fled to a neighbor's house surrendered themselves to the military commander. After a controversial trial, he was exiled to Ahmadabad, where he died.

The Consortium Agreement of 1954

The government of coup d’ etat signed the Consortium Agreement in 1954.

The Anglo-Persian Oil Company, which had then become the British Petroleum, had 40 percent of shares, and 40% was owned by American oil companies. Of the remaining 20%, fourteen percent of the shares went to the ‘Royal Dutch-Shell’, and 6% to the French ‘CFP’. Financially, this agreement did not differ much from other agreement in the Middle East, because Iran’s revenues would not move beyond the 50% which was the basis in all of them. In addition to 10 million Pounds it received from Iran, as compensation for Kermanashah refinery and domestic distribution facilities. The British Petroleum also obtained from its new partners who had 60% of the shares of the consortium, the amount of 214 million Pounds (600 million dollars) as key money. From the point of Iran, the contents of this agreement were much more unfavorable than conditions set forth several months earlier in the joint ‘Churchill-Eisenhower’ proposal to Dr. Mosaddegh. Iranian oil production in the first 3 years reached the pre-nationalization era level. From then on, production operations that was limited to Masjid-e-Solaiman and Haftgel fields up to time the oil industry was nationalized quickly expanded and covered the huge oilfields of Gachsaran, Ahwaz and Aghajarj.

Oil Bill and Company Agreements

In 1957, or three years after then signing of the consortium agreement, the first Iranian oil bill passed into law, which allowed for the signing of agreements based on participation with foreign investors, outside the area where the consortium operated. The participation formula, which was an innovation at the time, triggered the dissatisfaction of major oil companies. They, however, gradually changed their attitude and found it a more proper approach to ensuring there continued cooperation with oil producing countries. Iranian participation agreements were 50:50 agreements. 50 percent of shares belonged to the National Iranian Oil Company and the remaining 50 percent went to one or several foreign companies. Foreign partner or partners paid 50 percent of their 50 percent shares as tax to the government of Iran. As a result, those agreements came to be known as 75:25 agreements.

Tax payment was revised later on and was raised to 85 percent. Also, foreign partners were obliged to pay another as royalty to the National Iranian Oil Company.

Contracts of Service Contracts

The oil law of 1957, however, was revised in 1974. As a result, foreign companies’ investments in the upstream oil sector operations, or exploration, development and production became possible only through service contracts. The law prohibited foreign participation in the production and utilization phases. Based on the new law, foreign companies prepared to sign a service contract, would have to accept the risks associated with exploration operations.

In other words, if operations were not positive in leading them to commercially producing fields, they could not exact the amount they had spent. But if they reached oil, they had to hand over the discovered field to the National Iranian Oil Company and exact their expenses in 10 yearly installments and deduct them from their payments for crude oil they purchased.

The Islamic Revolution and End of the Contracts

The consortium agreement of 1954 was also revised in 1974 and a new agreement replaced it. Decisions of the Organization of Petroleum Exporting Countries (OPEC), which were implemented, by member countries, including Iran, further restricted the operations companies.
Concession holding companies practically turned into oil-exporting countries’ service contractors in the late 70s. Their tax payments had increased from 50 percent to 80% and their royalty payments from 12.5 to 20%. Oil prices were also set by producing countries. Thus, foreign companies were left with just 22 cents per barrel. Consortium member companies had to lift and export much of the crude oil they produced.

They also had to process 300 thousand b/d of crude oil in the Abadan refinery and export products. In addition, they had to pay NIOC, 40% of capital expenses, interest-free, as down-payment for the crude oil produced. They were also obliged to provide NIOC, all technical services required for operations, for a period of 5 years. Because of limitations imposed on companies as a result of OPEC decisions, the implementation of those commitments became difficult. The situation became intolerable for the Consortium after the 1953 agreement, and called for the resumption of negotiations aimed at reaching a new agreement.

Negotiations started in 1976 and went on up to the victory of the Islamic Revolution, and never came to positive results. With the triumph of the Islamic Revolution led by the late Imam Khomaini, the National Iranian Oil Company officially declared the end of Iran’s relation contracts that had been signed with foreign companies before the revolution were declared cancelled based on the Revolutionary Council of 7 January 1979.

Oil Industry after the Victory of the Islamic Revolution

Iranian employees of the oil industry that had played a major role in the Islamic Revolution by their all out presence in popular campaigns, cross-country strikes and interruption of the flow of oil, undertook the management and operations of the industry including exploration, drilling, production, transportation, refining and exploration following the exit of foreign oil companies from Iran.

Despite doubts expressed by international experts, Iranian employees proved their ability and expertise in successfully running the affairs of Iran’s oil industry.

Following the eruption of the imposed war on 21 September 1980, oil, gas and petrochemical industry centers installations and complexes, turned into targets of heaviest enemy air and ground attacks.

In the course of incessant Iraqi air attacks aimed at interrupting Iran’s oil production and exports, as well as disrupting fuel transmission to cities, industries and warfronts, the strategically vital oil industry centers were seriously damaged. The Abadan refinery was demolished and other refineries were attacked many times by the enemy.
 
Kharg Island and other oil export terminals were continually targets heavy enemy fire. Despite such intense pressures, which were aimed at shattering the backbone of the country’s oil industry and economy, oil export did not halt even for a single day. The period witnessed a new episode came to be known as ‘Oil-Tankers war’, in the course of which even oil-wells and oil platforms were also targeted by enemy invasions.

With about a thousand martyrs, the captivity and martyrdom of Engineer Mohammad Javad Tondgoodyan, then Minister of Petroleum, oil industry employees and experts protected and experts protected and maintained production, refining and export facilities, and continuously acted and rebuilt installations damaged in enemy air raids. By implementing innovative plans, they countered enemy plots, and brought about conditions, under which, neither the country nor the combatants faced any problems.

Heroic Reconstruction and Development Campaigns

The culmination of the war was followed by oil industry reconstruction and renovation efforts. Refining, production and export capacities surpassed their pre-war era levels. Despite restrictions emanating from sanctions imposed on Iran by the U.S and its allies, the Ministry of Petroleum pursued oil industry development plans. Oil industry development plans were based on 5 Major approaches.

1. Expansion of the petrochemical industry, in light of its value-added products in world markets, and requirements of domestic downstream industries;
2. Giving priority to the expansion often gas network to industrial centers, power plants, and the residential sector, because of economic and environmental advantages of natural gas, and its substation as a clean burning fuel, for valuable oil products;
3. Making investments in the upstream sector of the oil industry, and executing exploration projects to strengthen Iran’s position as the second oil producer among OPEC member countries, and as the second holder of huge world natural gas reserves. Discovery of giant fields of Azadegan, Tabnak, and Hama have been some of the outcomes of these efforts;
4. Playing an active role in OPEC and other international fore to bring stability to world markets.
5. To secure financial resources required for development projects through buy-back contracts, as a practical approach to the implementation of development projects, while placing emphasis on the utilization of domestic expertise and investment potentials, and the transfer of technology;

Thus the Iranian oil industry was able to make great achievements in different sectors in recent years, and experience a fundamental change in growth and development.

Negotiation of different contracts for the expansion of oil and gas fields including the 8 phases of South-Pars fields, and offshore oil fields’ development, absorption of foreign resources for exploration projects, increasing the production capacity of petrochemical industries to 12 millions tons per year, form 500 thousand tons per year in per-Islamic Revolution era, raising the country’s crude oil refining capacity to 1.7 million barrels per day from a bout 700 thousand barrels per day carrying out varied programs in “ The Petrochemical Economic Zone ” as the nation’s major economic pole, and in The Special Economic and Energy Zone of Pars ”, expansion of the domestic gas consumption network to cover 370 cities or 6.5 million households.

Considerable increase in the number of high pressure pipelines, as well as the unprecedented increase in the level of gas processing and transmission is some of the achievements of the Ministry of petroleum in recent years.

In the international arena too, the Ministry of Petroleum has pursued the objective of strengthening the status of OPEC through the expansion of cooperation with OPEC member countries and other oil producer and consumer nations.

In the years after the victory of the Islamic Revolution, especially in the very recent years, the petroleum industry of Iran has had a unique performance because of a more favorable international scene and the loss of intensity in American economic sanctions. Now in its 24th year of self- reliance, the national petroleum industry is moving on with full strength and confidence utilizing up-to- date technology, powerful and innovative management, highly skilled and creative manpower resource, and a futuristic approach to planning development projects.

References: National Iranian Oil Company Website.