Global Policy Forum

Middle East Oil and the Energy Crisis


By Joe Stork

The following text is an excerpt from Joe Stork's Middle East Oil and the Energy Crisis (New York: Monthly Review Press, 1975).

"The Struggle for Iraqi Oil" (pp. l02-108).

Even before the revolution in Iraq in July 1958, there were many areas of conflict between the government and the Iraq Petroleum Company consortium that controlled the country's entire actual and potential resource base. The initial conflicts in Iraq (as in the other producer countries) centered around the cost accounting practices of the company in calculating the profits to be shred with the government. Kassem's 1958 revolution temporarily interrupted contacts between the government and company representatives as Kassem hastened to assure the United States and Britain that the new regime would not nationalize the oil fields. In 1959 and 1960, the posted price reductions (referred to earlier) added another dimension to the conflict. The ability of the governments of Iran and even Saudi Arabia to enter into new and better deals with the companies through joint ventures on territory not under concession accentuated the fact that in Iraq the IPC group controlled virtually the whole country, thus leaving no areas on which new agreements might be made.

With the new regime in power, negotiations between IPC and the government resumed in 1959. One of the prime targets for the regime was IPC's relinquishment of 60 percent of its total concession area so that new joint-venture deals might be worked out. Other demands including a doubling of output and the construction of refineries in Iraq. The companies agreed in principle to doubling output "depending on market conditions," They also made it clear that they would not set up refinery installations in Iraq, nor relinquish anywhere near the entire 60 percent of the concession territory demanded by the government. They also denied the government any significant role in choosing the areas to be relinquished.

Before negotiations between IPC and Iraq resumed in the summer of 1960, another conflict emerged: a dispute over the government's attempt to raise cargo dues in the port of Basra. After undertaking a comparative study of port dues in Kuwait, SaudiArabia, Bahrein and Iran, the port authority announced an increase from 23.4 fils to 280 fils per ton for oil and other cargoes. The 23.4 fils rate had been set by an agreement in 1955 between the oil company and the Port Administration (run by British personnel), and ratified by a British-dominated cabinet under Nuri as-Said. IPC's response was to halt production from one field and curtail production in another. It rationalized its decision on economic grounds, asserting that higher costs made Basra oil noncompetitive. Since the oil industry has never based production decisions on the logic of competitive pricing, this meant that the international companies which owned IPC would simply turn to cheaper sources of supply in countries where their profits would be greater. This was 1960. The next month came the second posted price cuts. The government went into the August negotiations with a set of far-reaching demands, oil and new, which they were more than ever determined to achieve. Among them was the demand that the government be given 20 percent participation in ownership of IPC and a position in the executive directorship of the company. Both of these provisions had actually been written into the old concessions but were circumvented by the companies' tactic of maintaining the IPC as a private rather than public corporation.

Negotiations continued intermittently for a year before they were finally cut off in October 1961. While the internal stability of the regime and its open hostility to Nasser's Egypt pushed Kassem into taking a progressively more demagogic attitude towards the company, there is little doubt that the company shared a good part of the blame for the breakdown in negotiations and the long years of hostility that ensued. The company attitude as reflected in the negotiations was one of determination to maintain full and unhampered control of every aspect of the industry in Iraq, including production, pricing industrial development, intermediate fees, and concession territories. One is forced to conclude that company behavior indicated a decision to make an example of Iraq and that there was a strong political flavor to this decision. Although ultimately Kassem was to have little success in uniting either the Iraqi people or the Arab world, the oil companies had every incentive to insure that he did not. The companies, in addition, felt themselves to be in a position of strength owing to the world crude surplus developing over the previous years. They all held other sources of supply and any decline in Iraqi production would only help to strengthen market prices.

While Iraq was not the first or only radical nationalist Middle East state to emerge in the1950s, it was the only oil-producing state to do so. Iran was back under the friendly, if not yet stable, rule of the Shah. Saudi Arabic was still under the rule of the reactionary and dissolute King Saud, and in 1962, this rule was strengthened by the accession of Faisal. The main perceptible threat to royal rule in Kuwait came from Iraqi claims to that country following British withdrawal in 1951.

By contrast, Kassem's reassurances to the oil companies following his coup were strongly offset by his anti-imperialist rhetoric and more importantly, Iraq's formal withdrawal from the Baghdad Pact and simultaneous economic and technical aid agreement with the Soviet Union in 1959. In quick succession Iraq withdrew from the sterling bloc, ordered British air force units out of the Habbaniya base, and cancelled the Point Four Agreement with the United States. Internal power plays led Kassem to give prominent, if temporary, cabinet roles to "Communist sympathizers."

Kassem closed the futile negotiations in October 1961 by announcing that the companies could continue to exploit existing wells as they wished, but went on to say: "I am sorry to tell you that we will take the other areas according to legislation that we have prepared, so that our action will not be a surprise to you. Thank you for your presence here." Two months later, the government issued Law 80, under which the companies were permitted an area of exploitation limited to little more than their existing facilities, or 0.5 percent of the original concessions. All previous rights in 99.5 percent of the concession area were withdrawn and assumed by the government. The lengthy explanatory statement that accompanied the promulgation of this law showed the extent to which abiding historical resentment of the colonial system that fostered the original concessions was as important as the immediate controversy in leading to expropriation.

The companies rejected the new law and demanded that the dispute be arbitrated. They retaliated by holding down production even though the investment and expansion program initiated in 1959 was largely completed. Iraq's production for 1962 increased by only 0.5 percent. By contrast, production in Kuwait, Iran and Saudi Arabia, where each of the companies held concessions, increased by 11.5 percent, 12 percent, and 9.2 percent respectively. Furthermore, the government failed to get any bids from other companies on the expropriated area or offshore. By February 1963, there were indications that the regime was considering the arbitration the companies demanded, but in that month Kassem was killed by a new coup. The new Ba'ath regime moved towards negotiation, but made it clear that Law 80 was irrevocable. In February 1964, the Iraq National Oil Company was established to facilitate state exploitation of the expropriated areas. The companies interpreted this as a further violation of their concession rights, but entered into negotiations with the Aref regime (which had replaced the Ba'ath in November 1963) that resulted in a draft agreement in June 1965.

Under the proposed settlement of June 1965, the companies would be granted a further 0.5 percent of the original concession area as permitted by Law 80, including the rich North Rumaila field which IPC had discovered but failed to exploit. Other disputed were settled along the lines being worked out in other countries through the OPEC negotiations. Minimum production quotas were established and IPC agreed to enter a joint venture with INOC to explore and develop a large portion of the expropriated area. The conventional wisdom of the time viewed this as a reasonably good deal for Iraq and certainly the best it could expect under the circumstances. Nevertheless, there was sharp criticism of the proposed agreement, notably from Tariki, by than an oil consultant in Beirut.

Political instability was followed by a shift to the left in Baghdad. By the summer of 1966, the most recent cabinet was publicly questioning the desirability of the proposed agreement. An extensive dispute between IPC and Syria over the pipeline from Kirkuk to the Mediterranean (the outlet for two-thirds of Iraq's oil) erupted in 1966, further disrupting any movement towards an agreement. The June War of 1967 radically changed the whole situation. In the climate following the war, the Iraqi government issued Law 97 in August 1967, assigning to INOC the exclusive right to develop oil in Iraqi territory except that which IPC retained under Law 80. Law 123, issued in September, reorganized INOC as the base of the national petroleum industry that would serve as a core of the country's future industrialization. IPC, of course, protested this new legislation as a further infringement of its rights under the old concessions and threatened to prevent the sale of any crude from the expropriated area by legal means. The Ba'ath Party returned to power in 1968. In June 1969, INOC entered into an agreement to develop the North Rumaila fields with the Soviet Union which, in the words of one expert "constituted the most significant development in the recent history of the Miiddle East oil industry."

The basic strength of the companies resided in their unfettered ability to control production under the concessionary arrangements. Between the years 1961 and 1968, production in Iraq increased by only 165.3 million barrels per years, while the comparative figures for Iran, Kuwait, and Saudi Arabia were 600.5, 323.3, and 574 million barrels respectively. The companies could adjust output among their several concessions in a way to best meet financial and political objectives. An individual country like Iraq, on the other hand, was totally dependent on the production decisions of the companies for its main source of government and development revenue. There can be little doubt that the financial constraints caused by the small increase in production in Iraq over these years contributed to the overall political instability of the country, and certainly prevented the various regimes from more substantial undertakings in the areas of land reform and economic development.

This is in sharp contrast to Iran, where the companies were more accommodating in increasing production when the Shah's regime was most dependent on increased revenues for its very survival . . .

"Nationalization in Iraq" (pp. 189-194)

Over the next several years there was sharp political struggle in Iraq over further courses of action. The IPC companies, of course, vowed to use all their resources to prevent any settlement which did not include rights to the North Rumaila fields. We have already noted the 1965 government-company agreement that would have given IPC full rights to North Rumaila in return for acknowledging nationalization of the rest of the expropriated concession area and recognition of the full rights of Iraq National Oil Company (INOC) to develop them through joint ventures or other means. This settlement was favored by the technocrats running INOC but was opposed by the leading radical nationalist political organizations, including the Ba'ath and the ANM (Arab Nationalist Movement), and by Tariki. The political instability that characterized Iraq throughout the 1960s was most intense in the 1965-1967 period, including more than one attempted coup, and in 1968 a successful one. The moderate forces in the government and INOC were not able to muster sufficient support for the agreement, and as a result it was never ratified. This represented a success for the nationalist forces who insisted that INOC take sole responsibility for developing North Rumaila. The June War, and the anti-American and anti-British political pressures it created, eliminated any possibility that Iraq would give North Rumaila to the Anglo-American companies and assigning exclusive development rights to INOC. INOC was expressly forbidden to grant any concessions. A joint venture between INCO and the IPC companies was not ruled out, but the political atmosphere made such an outcome extremely unlikely.

The move was followed a month later with the reorganization of INOC under Law 123. The company's responsibilities were expanded and its authority reduced. The post of Managing Director, usually staffed by a top technocrat, was abolished and decision-making power was invested in a board of directors nominated by the Minister of Oil and approved by the Cabinet. Final authority was vested with the Cabinet. In establishing this high degree of political control over the national oil company, an explanatory memorandum accompanying Law 123 noted that the company is expected to work for the development and expansion of oil exploration in Iraq in all phases of the petroleum industry including the production of crude oil and petrochemicals and refining, export and marketing operations; and to undertake all domestic and foreign operations required to promote the growth of the national income and achieve a self-sufficient and balanced economy.

Iraq looked mainly to France and the Soviet Union for assistance in implementing its national oil policy. In November 1967 INOC signed a contract with the French company ERAP for the development of some very promising areas (not North Rumaila) expropriated under Law 80. Under the terms of the contract, all exploration and development costs were to be put up by ERAP as a loan, repayable only after commercial production began. Fifty percent of discovered reserves was to be put under exclusive control of INOC; the remaining 50 percent was to be developed cooperatively. Of this cooperatively developed oil, ERAP would buy 30 percent: 18 percent at cost of production – plus 13.5 percent royalty plus one-half the difference between that sum and the posted price – the other 12 percent for the cost of production plus the royalty. INOC was to have full control over the remaining 70 percent of production to sell at whatever prices it could get on the market. If these prices are not satisfactory ERAP has to market a substantial portion of INOC oil through its channels at a per-barrel fee of one-half cent on the first 100,000 b/d and one and one-half cents on each barrel above that amount. This agreement came in for sharp criticism from the technocrats formerly in charge of INOC on the grounds that it would result in greater profits for ERAP and less revenues for Iraq than under the traditional concession system. Western oil economists have made similar charges. It is impossible for us to compute here the merits of this criticism. Whatever validity it had in the days of market surplus and weak prices is surely negated by the strong seller's market that developed around 1971. In any case, such arguments do not and cannot measure the independence and autonomy established by INOC that would have been absent in any concession with the IPC companies.

To aid in the development of the North Rumaila fields, where oil had already been discovered, Iraq turned to the Soviet Union. This was due in part to IPC threats to sue any Western company involved in producing or even purchasing "their" oil. A Soviet delegation visited Iraq in late 1967 and signed a letter of intent that in July 1969 was translated into a definite program by a Soviet-Iraq agreement. It was designed to prepare and put the North Rumaila fields into operation at an initial production rate of 100,000 b/d beginning in early 1972, rising to nearly 400,000 b/d by 1975. Implementation of the government agreement came through a contract between INOC and the Soviet Machinoexport Organization, providing for drilling rigs, geophysical and geological teams, pipeline construction from the fields to the Gulf port of Fao, and the ancillary services. The operation was financed by a $70 million Soviet loan at 2.5 percent interest payable in crude oil at market prices, and a further $72 million in credits from Machinoexport. This deal, combined with previous loan and barter arrangements with socialist bloc countries, represented a pronounced orientation of Iraq's foreign economic policy towards socialist countries and a "proportionate erosion of the Western political and economic position in the country." Production from the North Rumaila fields began in April 1972, more or less on schedule, at a cost of $55 million. INOC predicted further investments of $153 million over a ten-year period, with earnings of $3.8 billion and claimed to have outlets for some $550 million worth of crude on the basis of port-1969 barter deals alone.

Iraqi success in developing the North Rumaila fields with Soviet assistance did not make any easier the settlement of the long-simmering compensation dispute with IPC (for the 1961 Law 80 expropriation). IPC claims on North Rumaila crude hindered Iraq's ability to market that oil in the West. IPC undertook little or no expansion of its Kirkuk and Basra facilities, with a continued restraint on the growth of Iraqi government revenues and sought in negotiations to tie up the purchase contract. In November 1971, just months before North Rumaila came on stream, President Bakr warned IPC that Iraqi patience with their obstructionist tactics was wearing thin. Talks began anew but made no progress. In February there were reports of a renewed impasse. In March and April Kirkuk-Mediterranean exports were down to half of normal. IPC claimed tht this was due to the extra premium on Mediterranean liftings which made them more expensive than Gulf exports to the European market. The Iraqis pointed out that the 44 percent decline in Kirkuk production paralleled an increase in Nigerian production, which was largely controlled by IPC parents like Shell, and that there had been no reduction in Aramco's Mediterranean output via TAPline. The government issued a two-week ultimatum in mid-May, insisting that IPC restore Kirkuk production to normal levels and rejecting the proposal of a 35¢ discount per barrel from the posted price. The Revolutionary Command Council gave IPC three options: (1)hand over excess production at cost to INOC; (2)relinquish idle producing capacity to INOC; or (3)turn over the Kirkuk fields to INOC. The political essence of the dispute was confirmed when IPC refused to make a satisfactory response by the end of May. The company's assets were nationalized – on June 1, 1972.

Iraq moved to neutralized Western opposition to buy Compagnie Franí§aise de Pétrole's 23.75 percent share of the nationalized oil (280,000 b/d) at tax paid cost (the same as it had been paying under the concession), citing "the just policy pursued by France towards our Arab causes and more specifically towards the Palestinian cause." Additional purchases could be made at competitive prices. The tactic was successful and resulted in a sharp increase of French trade and credits for Iraq as well as CFP's serving a mediatory role in the compensation talks with IPC. The company postponed taking action against the buyers of the nationalized oil, and Iraq vigorously pushed sales to state companies in Brazil, Japan, Ceylon, and elsewhere, including more deals with Eastern European countries. Political support for Iraq was strong in some parts of the Middle East, especially in Algeria and Libya. The Shah publicly declared himself "totally out of sympathy" with Iraq's move, proclaimed his belief in "genuine cooperation with the foreign oil firms," and asserted that Russian involvement in Iraq "put a potential stranglehold on the West's oil supplies." Iran and other countries failed to implement an OPEC resolution against raising production to supplant what IPC lost.

The Iraqi move came in the midst of the participation negotiations. It increased the political pressure on the companies for a nationalist solution to the question of control and threatened "the speedy collapse of the whole concession system." Although Iran helped the companies redress the balance a bit by pulling out of the participation talks a few weeks later, there is little doubt that the Iraqi action resulted in more pressure on the companies to come to some agreement with Yamani. A settlement with IPC was finally worked out at the end of February 1973, removing legal obstacles to INOC sales of Kirkuk and North Rumaila crude. Together with 25 percent participation in the remaining Basra concession, the settlement left Iraq with full control of 75 percent of its crude production, which then had a total capacity of 2.8 million b/d. Compensation to IPC for the takeover was set at $300 million, payable to crude, but was effectively offset by company payments of $345 million in back claims. The price was not cheap: more than a dozen years of economic stagnation, political instability, and confrontation.

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