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Iraq - Post World War Ii Through the 1970s
Post-world war ii through the 1970s
With the end of World War II, IPC and its affiliates undertook repair and development of facilities in Iraq as rapidly as financing and materials became available. Exploration and drilling were pressed, particularly in the Basra and the Mosul areas, to meet concession terms. Although considered a priority, the elimination of transport constraints was set back when a larger second, nearly completed pipeline to Haifa was abandoned in 1948 as a result of the first Arab-Israeli war. Use of the existing Haifa line was also discontinued. In 1951, however, commercial exports by the BPC of good quality crude began via a new pipeline to Al Faw, on the Persian Gulf. Exports were boosted further with the completion in 1952 of a thirty-inch pipeline linking the Kirkuk fields to the Syrian port of Baniyas, which had a throughput capacity of 13 million tons per year. In that year, production from Basra and Mosul approached 2.5 million tons while the Kirkuk fields increased production to more than 15 million tons. In the space of a year (1951-52), total Iraqi oil production had doubled to almost 20 million tons.
Iraqi officials still harbored ambitions, dating back to the 1920 San Remo Conference, to take control of their nation's oil resources. The elimination of transportation bottlenecks and the subsequent rapid growth of exports encouraged Iraqi assertiveness. IPC's costly, irretrievable investments in Iraq's oil infrastructure gave the government even greater leverage.
One particularly sore point among the Iraqis concerned IPC's contractual obligation to meet Iraq's domestic requirements for gasoline and other petroleum products. An IPC subsidiary operated a small refinery and distribution company based near Kirkuk that supplied two-thirds of Iraq's needs. But IPC imported the remaining third from a large refinery in Abadan, Iran. Iraq considered this arrangement politically imprudent, a judgment that was vindicated when, in the early 1950s, Iranian production was cut during that country's oil industry nationalization crisis. In 1951 the Iraqi government took over, with compensation, the small Kirkuk refinery and hired a United States contractor to build a refinery near Baghdad. This represented Iraq's first concrete step toward taking control of the oil industry.
In 1952 Iraq followed the examples of Venezuela and of Saudi Arabia by demanding and receiving a 50 percent tax on all oil company profits made in the country. The tax more than doubled Iraqi profits per ton on exported oil.
The 1958 Iraqi revolution had little effect at first on the government's attitude toward IPC. The government needed the oil revenues generated by IPC; moreover, Iran's experience when it nationalized its oil industry was a vivid reminder to the Iraqis of the power the oil companies still wielded. In 1959 and in 1960, surpluses led the international oil companies to reduce the posted price for Middle Eastern oil unilaterally, which reduced government revenues significantly. IPC's policy of exploiting and developing only .5 percent of the total concessions it held in Iraq, and of holding the remainder in reserve also reduced Iraqi revenues. Perhaps in response to the general situation, Iraq convened a meeting in Baghdad of the major oil-producing nations, which resulted in the September 1960 formation of the Organization of Petroleum Exporting Countries (OPEC). In December 1961, the Iraqi government enacted Law No. 80, which resulted in the expropriation of all of the IPC group's concession area that was not in production. The expropriation locked the government and the oil companies in a controversy that was not resolved for more than a decade. The companies had two paramount objectives in seeking to mitigate the law's effect. One was to regain control of the concession to the North Rumaylah field in southern Iraq, which was expected to be a major source of oil. In particular, the companies did not want competitors to gain access to it. The companies' second major objective was to limit the impact of Iraq's actions on IPC concession agreements in other oil- exporting nations.
In February 1964, the government established the state-owned Iraq National Oil Company (INOC) to develop the concession areas taken over from IPC. INOC was eventually granted exclusive rights by law to develop Iraq's oil reserves; granting concessions to other oil companies was forbidden, although INOC could permit IPC and other foreign companies to participate in the further development of existing concessions. Nevertheless, IPC continued to lift the bulk of Iraqi oil from the Kirkuk field that it had retained, and, more important, to export and to market it. IPC therefore remained the arbiter of existing, if not potential, Iraqi oil production.
Iraq's disillusionment with newly formed OPEC began just after the enactment of Law 80. Iraq applied pressure on OPEC to adopt a unified negotiating stance vis-a-vis the oil companies. Instead, OPEC members negotiated separately. This allowed the oil companies to extract concessions that permitted them to switch production away from Iraq and therefore to pressure Iraq with the prospect of lower oil revenues. Iraq's relationship with IPC was further aggravated in 1966 when Syria raised transit fees on the pipeline that carried two-thirds of Iraqi oil to port and demanded retroactive payments from IPC. When IPC refused to pay, Syria closed the pipeline for several months, an action that cost the Iraqi government much revenue.
The eight-year shutdown of the Suez Canal that followed the June 1967 Arab-Israeli War increased the importance of Mediterranean oil producers because of their proximity to European markets. In 1970 Libya took advantage of this situation to win higher prices for its oil. Iraq, which was in the unusual position of exporting oil through both the Gulf and the Mediterranean, demanded that it be paid for its oil at the Libyan price. IPC countered that Iraqi oil, because of its higher sulfur content, was inferior to Libyan oil. Meanwhile, exports of Iraqi oil via the Mediterranean began to decline, which IPC attributed to falling tanker rates that made Gulf oil more competitive. Iraq, however, interpreted the declining exports as pressure from the oil companies. In general, Iraq believed that IPC was intentionally undercharging customers for oil it sold on behalf of Iraq and was cutting back Iraqi production to force Iraq to restore the nationalized concession areas. In response, Iraq attempted to make INOC a viable substitute for IPC. The INOC chairman of the board was given cabinet rank and greater authority, but INOC's activities were hampered by lack of experience and expertise. Iraq therefore sought assistance from countries considered immune to potential IPC sanctions and to retaliation. In 1967 INOC concluded a service agreement with Entreprise des Recherches et des Activites Petrolieres (ERAP)--a company owned by the French government--covering exploration and development of a large segment of southern Iraq, including offshore areas. Some foreign observers doubted that the terms of the arrangement were more favorable than IPC's terms, but more important from Iraq's point of view, the ERAP agreement left control in Iraqi hands. By 1976 ERAP started pumping the oil it had discovered, at which point INOC took over operation of the fields and began delivering the oil to ERAP.
In 1967 INOC tapped the Soviet Union for assistance in developing the North Rumaylah field. The Soviet Union provided more than US$500 million worth of tied aid for drilling rigs, pumps, pipelines, a deep-water port on the Persian Gulf, tankers, and a large contingent of technicians. In 1972, the North Rumaylah field started production and produced nearly 4 million tons of crude.
In the same period, Iraq obtained aid from French, Italian, Japanese, Indian, and Brazilian oil companies under service contracts modeled on the 1967 ERAP agreement. The service contracts, which Iraq did not regard as concessions, allowed the foreign oil companies to explore and to develop areas in exchange for bearing the full costs and the risks of development. If oil were discovered, the companies would turn their operations over to INOC, which would sell them the oil at a discounted rate.
Iraq's increasing ability to manage its petroleum resources finally induced IPC to negotiate. In 1972 IPC promised to increase its production in Iraq and to raise the price it paid for Iraqi oil to the Libyan level. In return, IPC sought compensation for its lost concession areas. Iraq rejected this offer and, on June 1, 1972, nationalized IPC's remaining holdings in Iraq, the original Kirkuk fields. A state-owned company, the Iraqi Company for Oil Operations (ICOO), was established to take over IPC facilities. BPC was allowed to continue its operations.
In February 1973, Iraq and IPC settled their claims and counterclaims. IPC acknowledged Iraq's right to nationalize and agreed to pay the equivalent of nearly US$350 million to Iraq as compensation for revenue lost to Iraq over the years when IPC was selling Iraqi oil. In return, the government agreed to provide to IPC, free of charge, 15 million tons of Kirkuk crude, valued at the time at over US$300 million, in final settlement of IPC claims. Some observers believed that IPC had received a liberal settlement.
The October 1973 Arab-Israeli War impelled the Iraqis to take complete control of their oil resources, and Iraq became one of the strongest proponents of an Arab oil boycott of Israel's supporters. Although Iraq was subsequently criticized by other Arab countries for not adhering to the agreed-upon production cutbacks, Iraq nationalized United States and Dutch interests in BPC. By 1975 all remaining foreign interests were nationalized. Fifty-three years after the humiliating San Remo agreement, Iraq had finally gained complete sovereignty over its most valuable natural resource.
Throughout the mid- to late-1970s, increases in the price of oil caused Iraqi oil revenues to skyrocket even as production fluctuated. Iraq funneled much of this revenue into expanding the oil industry infrastructure. Refinery capacity was doubled, and in 1977 a key pipeline was completed from the Kirkuk fields across Turkey to a Mediterranean terminal at Dortyol.
In 1976, the structure of the Iraqi oil industry was revamped. A new Ministry of Oil was established to direct planning and construction in the petroleum sector and to be responsible for oil refining, gas processing, and internal marketing of gas products through several subsidiary organizations. INOC would be responsible for the production, transport, and sale of crude oil and gas. Some of its operations were contracted out to foreign service companies. The State Organization for Northern Oil (SONO), subordinate to INOC, replaced ICOO as the operating company in the northern fields. In subsequent reorganizations, SONO was renamed the Northern Petroleum Organization (NPO), and a Central Petroleum Organization (CPO), as well as a Southern Petroleum Organization (SPO) were also established. The State Organization of Oil Projects (SOOP) took over responsibility for infrastructure from INOC, and the State Organization for Marketing Oil (SOMO) assumed responsibility for oil sales, leaving INOC free to oversee oil production.
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