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Figure 8. Petroleum Industry, 1988

In 1912, several rival groups banded together to establish the Turkish Petroleum Company (TPC), which would seek a concession to explore for Iraqi oil. The original purpose of the TPC was to eliminate rivalry among the partners and to outflank American concession seekers. The TPC's guiding hand was Calouste Gulbenkian, who had been hired by British banking interests because of his knowledge and his ability to influence the decisions of the Turkish government. His 5 percent holdings in TPC reputedly made him the richest individual in the world for many years, and were the source of his nickname, "Mr. Five Percent."

Establishment of the TPC did not eliminate the rivalry among the shareholders representing various national interests. Britain had a long-standing strategic interest in Mesopotamia because of its location in relation to Britain's military and commercial routes to India. The British government's decision before World War I to convert its naval fleet from coal to oil increased the importance of the area. By 1914, the British-government- controlled Anglo-Persian Oil Company had bought 50 percent of the shares of TPC and was exerting pressure on the Turkish government to grant the Anglo-Persian Oil Company a concession, but World War I delayed negotiations.

World War I demonstrated to the major powers the importance of securing their own sources of oil. The British-French San Remo Conference of 1920 provided for permanent British control of any company established to develop Mesopotamian oil, but allocated Iraqi interests 20 percent if they chose to invest. France claimed the German shares of TPC that had been seized as enemy property and formed the CFP to hold the French shares in TPC. The Italian and United States governments protested their exclusion. After prolonged and sharp diplomatic exchanges, American oil companies were permitted to buy into TPC, although negotiations were not completed until 1928.

Although Iraq became a British mandate in 1920, that did not guarantee TPC an exclusive concession. Using the promise of a concession from the prewar Turkish government, TPC began negotiating for one in 1921. A major point of contention was Iraq's 20 percent share of any oil development company, a condition stipulated at the San Remo Conference. By the early 1920s, TPC consisted almost entirely of oil companies that did not want Iraq's representation or its interference in the management of TPC. They successfully resisted Iraqi efforts to participate despite pressure by the British government to accept Iraqi shareholders.

A concession was granted to TPC in March 1925. Many Iraqis felt cheated from the beginning of the concession. Its term was for seventy-five years, and it covered twenty-four plots selected by TPC. The Iraqi government was to receive royalties at a flat fee per ton to be paid in English pounds sterling, but with a gold clause to guard against devaluation of the pound. Royalty payments were linked to oil company profits, but this claus 1000 se became effective only after twenty years. The Iraqi government had the right to tax TPC at the same rate levied on other industrial concerns. TPC was to build a refinery to meet Iraq's domestic needs and a pipeline for the export of crude oil. The Iraqi government had the right to lease other plots for oil exploration and development, and TPC was not excluded from bidding on these additional plots.

TPC began exploratory drilling after the concession was ratified by the Iraqi government. Oil was discovered just north of Kirkuk on October 15, 1927. Many tons of oil were spilled before the gushing well was brought under control. This indication of a large, valuable field soon proved well-founded.

The discovery of oil hastened negotiations over the composition and the functions of TPC. The shareholders signed a formal agreement in July 1928. The Anglo-Persian Oil Company, the Dutch Shell Group, the CFP, and the Near East Development Corporation (which represented the interests of five large American oil companies) each held 23.7 percent of the shares, and Gulbenkian the remaining, but nonvoting, 5 percent. TPC was organized as a nonprofit company registered in Britain that produced crude oil for a fee for its parent companies, based on their shares. TPC was limited to refining and marketing for Iraq's internal needs to prevent any competition with the parent companies. The Anglo-Persian Oil Company was awarded a 10 percent royalty on the oil produced, as compensation for its reduced share in TPC.

A major obstacle facing United States firms had been a clause in the 1914 reorganization of the TPC that stipulated that any oil activity in the Ottoman Empire by any shareholder would be shared by all partners. Gulbenkian had insisted on the clause so that the oil companies could not circumvent his interests by establishing other companies without him. This arrangement, continued in the 1928 reorganization, came to be known as the Red Line Agreement because the TPC partners were forbidden to act independently within the boundaries of the now-defunct Ottoman Empire. This "red line" effectively precluded the United States and other TPC partners from concession hunting and from oil development in much of the Persian Gulf region until after World War II.

In 1929 the TPC was renamed the Iraq Petroleum Company (IPC). IPC represented oil companies that had diverse and sometimes conflicting interests. The Anglo-Persian Oil Company and Standard Oil of New Jersey (also known as Esso and subsequently known as Exxon), for example, had access to major sources of crude oil outside Iraq, and they therefore wished to hold the Iraqi concessions in reserve. CFP and other companies, in contrast, pushed for rapid development of Iraqi oil to augment their short crude oil supplies.

IPC's parent companies delayed development of the Iraqi fields, and IPC's concession expired because the companies failed to meet certain performance requirements, such as the construction of pipelines and of shipping terminals. IPC's concession was renegotiated in 1931. The new contract gave IPC a seventy-year concession on an enlarged 83,200-square-kilometer area, all east of the Tigris River. In return, however, the Iraqi government demanded and received additional payments and loans as well as the promise that IPC would complete two oil pipelines to the Mediterranean by 1935.

Iraqi politicians remained suspicious of IPC's motives. Many Iraqis believed that IPC was deliberately withholding Iraqi crude from the market to boost the price of the parent companies' oil produced elsewhere. In 1932 Iraq granted a seventy-five-year concession to the British Oil Development Company (BODC), created by a group of Italian and British interests, to 120,000 square kilometers west of the Tigris River. The terms were more favorable to the Iraqi government than those of earlier agreements. BODC financing was insufficient, however, and the company was bought out by IPC in 1941 and was renamed the Mosul Petroleum Company (MPC). IPC shareholders asserted their 7b7 monopololy position again when they won the concession rights to southern Iraq and in 1938 founded the Basrah Petroleum Company (BPC) as their wholly owned subsidiary to develop the region.

Transport remained the main obstacle to the efficient export of Iraqi oil. When France joined IPC after World War I, it wanted the Iraqi pipeline to transit its mandate in Syria to a coastal terminal at Tripoli, Lebanon. The Iraqis and the British preferred a terminal at Haifa, in Palestine. In 1934, a pipeline was completed from the Kirkuk fields to Al Hadithah, where it divided, one branch going to Tripoli (the Tripoli branch was closed by Syria--which supported Iran--in 1982 after the outbreak of the Iran-Iraq War in 1980) and the other to Haifa (the Haifa line was closed in 1948). In 1938, nine years after the discovery of oil, Iraq began to export oil in significant quantities. Iraqi production averaged 4 million tons per year until World War II, when restricted shipping in the Mediterranean forced production down sharply (see fig. 8).

Data as of May 1988