The Iraq Petroleum Company 1914-1982

The aim of this paper is to investigate the development of the Iraqi oil industry between 1914 and 1982. This will entail a survey:' Iraq's relations with Western oil companies, its role within OPEC, its involvement in the Middle Eastern arena, and its domestic politics.

Emphasis will be placed on the evolution of what is today called the Iraqi Petroleum Company against the background of these other developments. Over time, the general trend discerned is one:-: increasing nationalization of oil production, the extent of which -' determined by internal, regional, and global circumstances.

Iraq is situated in southwest Asia. It is bordered by Iran to the east, Syria to the northwest, Jordan to the west, Turkey to the north, Saudi Arabia to the south and southwest, and Kuwait to the southeast It is almost twice the size of Great Britain - about 170,000 square miles.

Modem Iraq is largely a product of British policy in the first half of this century. Following the defeat of Ottoman Turkey in the First World War, Iraq was formed out of three willayetes (regions) of the Ottoman. Empire - Baghdad, Basra and Mosul. The first two regions were Arab by race, culture and speech. However Mosul, the oil rich region in the north, differed from the other two in terms of its history culture and speech. Until 1926, it was uncertain whether or not the Mosul region would remain in Iraq. The Turks agreed to its incorporation into the state of Iraq in the treaty of Ankara in 1926. After twelve years of British mandatory rule, Iraq was granted independence in 1932 but remained linked to Britain by a treaty.

In July 1958 the monarchy was overthrown by Abd al Karim Al-Qasim who established a republic regime in its place.

Since 1958, there have been four military take-over and eight major changes of government, the most recent in 1979 when Saddam Hussein came to power.

From 1945 to 1950, no major changes occurred in relationship between the government of Iraq and the IPC. Production amounted to 4.7 million tons in 1946 and 1947. In 1948, Iraq entered the war against the newly established state of Israel; thus embarking upon a new stage of Iraq's involvement in Arab politics. The fact that Israel was supported by Britain and the US left the majority of Iraqis with anti-British and anti-American feelings. As we shall see, this fact had a major impact on relations between Iraq and IPC.

The agreement provided for an increase in Iraqi royalties from 4s to 6s per ton, while Iraqi oil exports were raised from 6 million tons in 1950 to 18 million tons in 1954.

However, in 1951 the Iraqi government signed a new agreement with IPC and its associates, MPC and BPC. The 1951 agreement, which was ratified by the Iraqi Chamber of Deputies on February 14, 1952, stipulated the following:

2. An annual minimum output of 22 million tons of crude oil was to be maintained from the Iraqi and the Mosul companies as of 1954;

3. Iraqi revenues were to increase according to present prices and costs, and the Iraqi government preserved the right to request similar payments paid to other producing governments;

4. The companies were to supply the government's refinery with all crude oil requirements at a fixed price for local consumption;

5. The companies were to appoint a number of Iraqis as directors of their boards; and

6. The companies would pay the Iraqi government an annual sum of 8 million British pounds for two years should production ceases.

In 1954, the companies completed the construction of the Kirkuk (Iraq) - Banias (Syria) pipeline. The pipeline, stretching 556 miles long and costing 42 million pounds, was to convey 14 million tons a year from northern Iraq to the Mediterranean, in addition to another 8 million tons carried by pipelines running from Kirkuk to the Tripoli terminal in Lebanon.

In 1955, IPC and its associate companies signed a new agreement with the Iraqi government.

The new agreement retained the 50-50 profit sharing arrangement included in the 1951 agreement. However, it amended the formula for calculating prices, the net result being an increase in the Iraqi government's royalties by about 7s per ton.

Iraqi officials estimated that Iraq's oil revenues in 1955 would be 72 million British pounds and that by 1958; revenues would exceed 100 million pounds.

In 1954, production amounted to 30 million tons, and rose to 32.7 in 1955. Due to the Suez Crisis, production fell temporarily to 30.6 million tons in (1956) then to 21.36 million tons in 1957, but regained a level of 34.93 million tons in 1958 followed by 40.9 million tons in 1959. These fluctuations in oil production were rooted in the regional turbulence of the 1950s, notably Iraq's role in inter-Arab politics.

After the establishment of the Arab League in 1945, Egypt began to participate in internal Arab affairs, thus reducing Iraq's influence in inter-Arab relations.

Iraq's position was further weakened by Syria's move towards closer co-operation with Egypt.

In the mid 1950s, Iraq signed the "Baghdad Pact," an alliance which consisted of Britain, Iran and Turkey which was supported by the US.

This move by Iraq indicated that Iraq was seeking allies outside the Arab World in order to counteract Egypt's leadership. This pro-Western Iraqi policy aroused Iraqi nationalist groups who were dissatisfied with the West's stand regarding the Palestinian problem.

The joint British-French-Israeli attack on Egypt and the Suez Canal in November 1956 was a turning point in Egypt's Arab policy.

The indignation in the Arab World was so powerful that even leaders friendly to the West, like Nuri Sa'id of Iraq, had to express verbal support for Egypt.

In Syria, the nationalists blew up the IPC pipelines that passed through Syrian territory. Both the interruption of oil supplies from Iraq and Saudi Arabia's refusal to export her oil in British and French tankers meant that the two supply channels which together provided 90 percent of Western Europe's oil (7.7 million tons per month) were halted.

This interruption created severe financial difficulties for the Iraqi government. In March of 1957, IPC granted Iraq an interest-free advance on future royalties of 25 million pounds in order to help the government. Syria agreed to allow IPC to repair the pipeline after the latter paid transit dues amounting to 5 million pounds. Oil production was resumed in March 1957.

In July 1958, the monarchy was overthrown and a republican regime was established in its place. The revolution put an end to the six-month-old merger between Jordan and Iraq.

Brigadier Qasim and his revolutionary council were well aware of the fact that they needed the oil revenues, hence nationalization seemed impractical.

Accordingly, it was agreed that IPC and its associates should be asked to increase production by assuring the companies of the revolutionary council's intentions to respect the oil agreement.

It was not until 1961 that the new Iraqi regime - now a member of OPEC - made a major decision that affected IPC. The former concession that had been granted to IPC and its associates covered almost the whole of the country. In December 1961, Qasim introduced "Law 80" which was designed to dispossess the oil companies of all land that was not used for oil production.

When the law was enforced, it dispossessed the companies of 99.5 percent of the area in which they had held prospecting rights under the former oil agreement.

The companies reacted only by registering their protest on the matter; oil production continued as before.

In 1960, production stood at 47.5 million tons then rose to a stable level of 49 million tons for 1961 and for 1962.

Among the other points of disagreement between Qasim and IPC were the Iraqi demands to increase the government's share of profits and to allow the government 20 percent participation share of the company.

IPC rejected both demands on the grounds that they were contrary to the terms of the agreement, and that any revision would raise complex problem vis-a-vis other companies and oil producing nations.

With the announcement of "Law 80" came the establishment of the Iraqi National Oil Company (INOC). The main task for INOC was the development of the ex-IPC areas.

The Company was interested, as were other national companies in the Middle East, in forming partnership companies with foreign concerns such as American Independents, ENI and other French companies. In 1965, the company was authorized to take over internal refining and distributing functions.

Qasim's regime was overthrown in 1963, and his predecessor, Abd al-Salam Arif, seemed likely to promote a more reasonable atmosphere. In May 1964, negotiations between the new-"Arif" regime and IPC began and continued until June 1965.

The negotiations covered all the points of dispute that had accumulated over the years. Both sides found it difficult to compromise.

The government could not easily repudiate the principle of "Law 80," because it might arouse public suspicion that the new regime was prepared to be an "instrument of the West." Nevertheless, a settlement was reached in 1965, which provided mainly for the following:

1. The parties settled for 50-50 shares of profit, and the companies agreed to restrict their right of exploration and production

2. The parties agreed that 32,000 square kilometers would be assigned under a joint venture in which INOC would be the largest shareholder with 33.5 percent interest.

In April 1966, President Abd al-Salam Arif died in a helicopter crash and was replaced by his brother Abd al-Rahman Arif.

The Arab defeat in 1967 created a new atmosphere among the Iraqi nationalists, who demanded that the oil industry be nationalized in retaliation for Western policies towards Israel.

In response, the Iraqi government suspended the pumping of all oil to Mediterranean terminals and broke off diplomatic relations with Britain and the US.

Although the ban on oil exports was lifted a month after the war, the Iraqi government implemented the principles embodied in "Law 80," and passed two new oil laws. The first, "Law 97," prohibited IPC from returning to any area which had been relinquished by "Law 80." Secondly, "Law 123" provided for the restructuring of INOC and further authorized it to begin exploring the relinquished area.

Thus immediately the door was open for foreign companies to compete with IPC, and negotiations with French and Soviet delegations began in early 1968.

In February 1968, an agreement was signed between the Iraqi government and the French state-owned ELF-ERAP. Under this agreement ELF-ERAP was granted prospecting rights against the payment of US$15 million in about 4,000 square miles of land and off-shore areas formerly held by the IPC in which oil had not been discovered.

The prospecting rights were for a period of six years, followed by a 20 year exploitation period during which half of any discoveries would be retained by Iraq.

When commercial production began, INOC would assume complete control of operations and the French company would assist INOC with marketing.

In return, ELF-ERAP would be permitted to purchase 30 percent of the output at preferential rates.

In a further move, the Iraqi government signed an agreement with the Soviet Union in June 1969.

The Soviets agreed to supply Iraq with equipment, technical assistance and loans for development of its oil reserves. In return, the Iraqi government agreed to repay the Soviets in the form of oil deliveries.

The agreement with the Soviet Union was a clear_ indication that the Iraqis were seeking alternatives to the West for aid, and it also demonstrated that the Soviet Union was capable of offering technical help in the oil industry.

In the summer of 1968, Arif's regime was overthrown by a military coup led by two officers from the Ba'ath party, Ahmad al-Bakr and Saddam Hussein. Before the Ba'ath came to power in 1968, they had called for nationalization of the oil industry.

Ever since Nasser had nationalized the Suez Canal in 1956, nationalization of oil had become a popular demand in the Arab World. The Ba'ath party had repeatedly emphasized its intentions to nationalize the oil industry.

Once in power, the Ba'ath began to realize the oil industry's complexity and the difficulties involved in nationalization. Consequently, they decided to proceed step by step towards their objective of nationalizing IPC.

Between 1969 and 1972, Iraq signed agreements with several foreign countries in order to provide Iraq with the capital and the know-how needed for oil exploration. In 1972, the Iraqi Oil Tankers Company (IPTC) was established to deliver oil to countries that entered into agreements to purchase oil from Iraq.

These agreements, which relieved Iraq from dependence on foreign companies, made it possible for foreign countries to purchase oil directly from Iraq. Despite its success, the Iraqi government did not nationalize IPC and decided to enter into a series of negotiations.

In 1971, IPC produced all of Iraq's oil with an output of 83.7 million tons. Meanwhile by 1972, the concept of participation had become very popular in the Middle East. Sheikh Yemeni was negotiating with the oil companies on behalf of the Gulf States.

The negotiations culminated with the 1972 participation agreement which provided the Gulf States with an immediate 25 percent ownership of oil operations.

In Iraq, however, negotiations between Iraq and IPC became deadlocked over several issues.

The Iraqis sought higher revenues, participation in the concession and higher production levels.

They also charged that the companies were restricting production in order to punish Iraq for the laws it had introduced in the 1960s.

In May 1972, the IPC offered to raise production from 1.2 million barrels a day in 1972 to 1.7 million barrels a day in 1973, 2.0, in 1974, and 3.0 in 1977. IPC also included claims for compensation terms under which it would receive 7 percent of all oil produced by INOC on the fields nationalized in 1961. The Iraqi government rejected this offer on the grounds that it did not respond. to Iraq's minimum legitimate claims.

On June 1, 1972, President Bakr of Iraq announced the nationalization of IPC's oil concession and installations. However, no mention was made of the two IPC associates, BPC and MPC. The Iraqi government explained their decision not to nationalize BPC and MPC by stating that it was not in Iraq's national interest to nationalize all foreign oil holdings at once.

Thus the 1972 nationalization measures affected only the Kirkuk field. IPC was legally responsible for Kirkuk production which amounted to 2.3 million barrels a day in early 1972, and which supplied oil to its Mediterranean terminals at Tripoli (Lebanon) and Banias (Syria).

The other major Iraqi oil fields, the Basrah field (production of 675,000 barrels a day), operated by BPC and the Mosul field (production of 25,000 barrel a day), operated by MPC, and were not included in the nationalization measures.

The instrument of nationalization was "law 69" of June 1, 1972. The Law stated that the nationalization covered the areas delineated by "law 80" of December 1961, and established a new state company, the Iraqi Company for Oil Operations, to take charge of the management of funds, assets and rights of IPC.

The Syrian government also announced on June 1, 1972, that it had nationalized the IPC's pipeline and terminal installations on its territory and a new Syrian Company, the Syrian Company for Oil Transport, was established to manage the facilities.

The British government, which had no diplomatic relations at the time with either country, regretted the nationalization measures and asked both governments to compensate IPC for its nationalized interests. That was as much as the British could do.

The days of foreign control, exemplified by the case of Mossadeq in 1951 (the prime minister who nationalized Iran's oil industry and was. then overthrown by an American-sponsored coup), had long ended.

The oil producing countries demonstrated their independence decisively by creating nationalized companies which could hold their own in the oil business.

At the time of nationalization, Britain depended on Iraq for 3.5 percent of her oil. Europe depended on Iraq for 9 percent of its supplies. France however imported 14 percent of her total crude oil supplies from Iraq, and CFP depended on Iraq for 19 million tons of oil each year.

In recognition of France's sympathetic stand on the Arab-Israeli issue since 1967, the Iraqi government agreed to allow the French company CFP to take its usual share of the nationalized oil. During the oil shortage, the Iraqis decided to play the French against the majors.

The oil producing countries demonstrated their independence decisively by creating nationalized companies which could hold their own in the oil business.

On June 12, 1972, an Iraqi delegation arrived in Paris for talks with CFP and ELF-ERAP. In an agreement, reached on the 18th of June, Iraq agreed to sell oil to GFP over a ten-year period in quantities equivalent to the 23.75 share which the French company had previously held in IPC, and at those prices which had prevailed prior to nationalization.

Iraq also agreed to continue its agreement with ELF-ERAP. Iraq's agreement with the French was a clear indication that the "majors" no longer held together, and that foreign governments were interested in unilateral agreements in order to guarantee, their oil supplies.

In similar fashion, the Iraqis concluded other agreements with the Soviet Union, Italy and Brazil.

In a meeting in Beirut on June 9-10, OPEC fully supported Iraq's takeover of IPC. On June 20, the OPEC finance ministers met in Baghdad and agreed to grant Iraq and Syria loans of 53.9 million and 6.8 million pounds respectively to help them meet the foreign exchange shortages that had been caused by the loss of revenues from IPC.

When the fourth Arab-Israeli war broke out in 1973, Iraq took another step towards nationalizing the foreign oil interests on her soil.

Since the United States and Holland were considered the greatest supporters of Israel, Iraq nationalized the concessionary right of the two American companies (Exxon and Mobil) in BPC, and the Royal Dutch Oil Company which possessed 60 percent of Shell Oil Company in the BPC. In 1975, the Iraqi government nationalized the remaining foreign interests in BPC.

This measure was taken because Iraq had no problems marketing her oil due to the high demand in world markets at that time.

In late 1974 and early 1975, world production of oil exceeded demand by around 1.3-3.0 million barrels a day. Iraq was the only OPEC country to raise its production by 20 percent; however, it had to lower its prices from US$11.75 to US$10.75 per barrel.

Despite the considerable criticism this move elicited, Iraq decided to raise production levels because of internal problems that necessitated cash flow.

First; Iraq was fighting the Kurds, a task which absorbed a large portion of her GNP. Second, Iraq was considering constructing alternative pipeline routes because its conflict with Syria made use of the Syrian pipline precarious.

And, third, Iraq was enhancing its military strength to counter the growing military capabilities of the Shah of Iran.

Iraq's production for the years 1975-80, amounted respectively to 110.9, 112.2, 122, 127, 170 and 175 million tons (3.5 million barrels a day for the first three quarters of 1980).

Iraq's estimated reserves are at 35 billion barrels - fourth in OPEC after Saudi-Arabia, Kuwait and Iran. The international Energy Agency analysts estimate that Iraq can produce 4 million barrels a day and that the production rate will double in the next decade.

Its great economic resources were partly responsible for drawing Iraq into its current embroglio with Iran. Its surplus of US$14 billion in the year 1980 was one of the factors that enabled it to undertake a short war effort. Whether that economic potential will survive the by now four-year-old war is a topic for future study.

From above:

excerpt:

Thus immediately the door was open for foreign companies to compete with IPC, and negotiations with French and Soviet delegations began in early 1968.

The prospecting rights were for a period of six years, followed by a 20 year exploitation period during which half of any discoveries would be retained by Iraq.

When commercial production began, INOC would assume complete control of operations and the French company would assist INOC with marketing.

In return, ELF-ERAP would be permitted to purchase 30 percent of the output at preferential rates.

In a further move, the Iraqi government signed an agreement with the Soviet Union in June 1969.

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http://www.freerepublic.com/focus/f-bloggers/1622229/posts
Declassified Iraqi Intel Documents Reveal Ties to French State Owned Oil Company

excerpt:

In 1994, under the leadership of Loik Le Floch-Prigent, the French oil company negotiated lucrative contracts with Iraqi Oil Minister Safa al-Habobi, giving Elf-Acquitaine exclusive rights to the Majnoon oil fields on the border with Iran. Another French government owned company, Total SA--which would later merge with Elf-Acquitaine--was given rights to another oil field. The contracts were worth $100 billion over seven years but were conditioned on the U.N. sanctions being lifted. The major share of oil pumped during the oil-for food regime was done by the now merged Elf-Total SA & Russia's Gazprom.

http://www.freerepublic.com/focus/f-bloggers/1622229/posts?page=10#10

excerpt:

In 1976 Elf-ERAP became Société National Elf Aquitaine (SNEA), later Elf Aquitaine. Elf Aquitaine was listed on the NYSE in 1991. In 1996 the French government sold its stake, retaining a Golden Share. In 2000 Elf Aquitaine merged with Total Fina to form TotalFinaElf, which changed its name to Total in 2003. In 1993 Elf was awarded the exclusive contract to the Iraqi Oil Fields by then Iraqi leader Saddam Hussein. This has come under fire pre-Iraqi 2003 war. This also dissproves many conspiracy theories about Haliburton's involvement with Iraqi Oil fields.

"The biggest fraud inquiry in Europe since World War II"

The Elf scandal in France was, according to The Guardian, "the biggest fraud inquiry in Europe since the Second World War. Elf became a private bank for its executives who spent £200 million on political favours, mistresses, jewellery, fine art, villas and apartments".

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