1947 negotiations and the Supplemental Agreement

From “Oil Nationalisation and Managerial Disclosure: The Case of Anglo-Iranian Oil Company, 1933-1951”

Chapter 2: AIOC History, oil and Iranian politics.


Workingwomen at the Anglo-Iranian Oil Company Administration Office 1940s, Image: British Petroleum (BP)
Working women at the Anglo-Iranian Oil Company Administration Office 1940s, Image: British Petroleum (BP)

Attempts to resolve the disagreements between the Iranian government and the company failed and the company was renamed the Anglo Iranian Oil Company (AIOC). The Iranian government itself wished to undertake the exploration of oil in its territory and consequently was not willing to grant any concession to foreigners, for the exploitation of oil. The Iranian government proclaimed the 1933 Agreement to be null and void and announced that “no concession would be granted to any foreigner whatsoever to regain the Iranian national rights in respect of the country‟s natural resources whether underground or otherwise and necessary steps should be taken in order to restore Iranian national rights”[155]. The Iranian government believed that the previous concession was ratified by the Majlis (the Iranian Parliament) during a despotic regime and the deputies at the time possessed no powers of free debate or of expressing the public will and the benefits granted to the company were sold too cheaply[156]. These factors gave momentum to nationalist demands for increased shares of the profits.

In October 1947, the Majlis reconsidered the way oil should be exploited by Britain and started negotiations with the British government to re-examine the oil concession granted to the AIOC in 1933[157]. The Iranian government‟s dissatisfaction was to some extent the result of the British Government‟s insistence on dividend limitations, since Iranian royalties depended in part on the level of profit distribution[158]. Furthermore, there was “sharp inflation experienced by the Middle East during the war, which resulted in an increase in the price of petroleum between 1939 and 1948. This in turn greatly reduced the real value of payments to the Iranian government since payments to the government continued to be made on a fixed royalty basis”[159]. The Iranians felt that the company‟s wealth had been amassed on their soil, but they had no share in its wider advantages.

In 1948, the Iranian government reconsidered the way oil should be exploited by the AIOC and initiated negotiations with the British government for a better concession. As part of the negotiations, a fifty-page Memorandum was issued by Gilbert Gidel, a French Law Professor, to revise the 1933 Agreement and to discuss specific points with the AIOC, in the hope of starting a new chapter in the relationship between the government and the company[160]. The full version of the Memorandum initially occupied fifty pages which seemed to astonish Gass, the AIOC negotiator, who immediately asked to postpone the meeting so that the full text could be translated and studied[161]. The Memorandum made a number of essential points. Firstly, it claimed that the AIOC deprived Iran of the profits of its operations overseas. Secondly, by considering the gold guarantee[162], it was found that the royalty figure represented would be less in 1947[163]. Also, the Memorandum highlighted that the company had consistently resisted Iran‟s demands to inspect its books in order to ascertain whether the Iranian government received its proper royalties[164]. Finally, the Memorandum pointed out that the AIOC had not improved the working conditions of the Iranian work force and they remained in unskilled jobs. We can clearly infer from the latter that that the AIOC was not willing to let Iranians hold technical jobs, fearing that they might become more skilled in the technical aspects of oil operations[165]. As a consequence of these Iranian disagreements, the AIOC provisionally agreed a Supplemental Oil Agreement with the Iranian government which was handed by Fraser on May 1949 to Mohammad Sa‟ed (Iranian Prime Minister 1948-50)[166]. On 17 July 1949, when the Supplemental Agreement reached the floor of the Majlis, it was not ratified because it was successfully opposed by Musaddiq‟s National Front party[167]. Following the failure of ratification of the Supplemental Agreement, the Shah and the British needed a prime minister with a strong enough determination to face down Musaddiq and the National Front and force the Majlis to approve the Supplemental Agreement[168]. As a result, Razmara became the Iranian Prime Minister (1950-51) because he was seen as an “intelligent and well trained general, an able and sophisticated political tactician and a skilful diplomatic negotiator”[169]. Razmara argued that he could win approval for the Supplemental Agreement provided the AIOC opened its books to Iranian auditors. There were two other requests contained in the Supplemental Agreement: more training of Iranians for managerial jobs and to make some advance payment of royalties. As these other two points were implicitly accommodated in past agreements and subsequent behaviour, it can only have been the Iranian request for open accountability that stirred Shepherd to reject Razmara‟s proposals – to the accompaniment of another undiplomatic outburst[170]. Following a great deal of discussion, the Supplemental Agreement was modified on 1st of October 1950 because the Shah had taken the opportunity to put pressure on Razmara to make a move regarding the oil question. The Iranian government afterwards demanded a fifty-fifty division of the company‟s total profits, but the proposal was rejected as a result of the AIOC‟s insistence that only Iranian profits should be divided[171]. Fraser therefore rejected the Iranian government‟s demand and asserted that the Supplemental Agreement was “eminently reasonable to both parties” and rejected the request for an increase in the payment to Iran[172]. Early in 1951, the U.S government, as a precaution, urged on the British the wisdom of conceding the fifty-fifty share in the company‟s profits to the Iranian government[173]. In this context, the Foreign Office informed Francis Shepherd, British Ambassador to Iran (1950-2), to disclose to the Iranian government their willingness to accept a fifty-fifty agreement, but not under the threat of nationalisation[174]. Thus, the AIOC tried to meet the mounting opposition and, in February 1951, was finally prepared to accept an agreement for equal sharing of profits[175]. Razmara maintained the closest secrecy regarding the Fifty-Fifty Agreement because his objective was to avoid a conflict with the British. He held the genuine belief that the present time was not opportune for securing the ratification of the Supplemental Agreement and he feared that the Majlis would not carry the ratification because public opinion was not in favour of anything less than nationalisation[176]. However, Razmara‟s royalist political objective was not achieved because the AIOC‟s activities had stirred nationalist sentiment to an extent unparalleled in any other Middle Eastern country. Although a great deal has been written by non-Iranian historians about the Iranian and AIOC dispute, there are still important gaps which will be addressed in this research. For instance, there are unresolved questions about AIOC treatment of its Iranian employees. Furthermore, the sharing of oil proceeds with the Iranian government has not been fully investigated, notwithstanding their importance in the dispute between the AIOC and Iranian nationalist politicians. Moreover, the relative bargaining power of the AIOC‟s management and Musaddiq‟s government has not been assessed with reference to nationalisation and other major political events.


Notes & References
155. Issawi and Yeganeh, The Economics of Middle Eastern Oil, 133.

156. Ibid, 10. 157 Marsh, Anglo-American Crude Diplomacy, 27.

158. Iranian production royalties were computed for the most part at 4s per ton, but were augmented by the right to receive a sum equivalent to 20% of any distribution in excess of £671k (for an explanatory note on this aspect of profit sharing, see AIOC, Annual Report and Accounts, 1950, 14).

159. Issawi and Yeganeh, The Economics of Middle Eastern Oil, 132.

160. Elm, Oil, Power, and Principle: Iran’s oil nationalisation and its aftermath, 53.

161. Elwell-Sutton, Persian Oil, A study in power politics, 170.

162. The gold clause specified within the AIOC concession allowed the Iranian government the option to receive payment in gold or gold equivalent.

163. Ibid.

164. Ibid.

165. Ibid.

166. Elm, Oil, Power, and principle: Iran’s oil nationalisation and its aftermath, 54.

167. AIOC, Annual Report and Accounts, 1950, 12-13.

168. Kinzer, All the Shah’s Men: An American coup and the roots of Middle East terror.

169. Katouzian, The Political economy of Modern Iran 1926-1979, 158.

170. Shepherd stated the only concession the Company would consider „was perhaps free medical treatment of certain hysterical deputies who continued to denounce the Supplemental Agreement.‟ FO
371/91512, cited in Kinzer, All the Shah’s Men, 73.

171. Brumberg and Ahram, The National Iranian Oil Company, 10.

172. Elm, Oil, Power, and principle: Iran’s oil nationalisation and its aftermath, 56.

173. Louis and Robinson, The Imperialism of Decolonization, 474.

174. Cited in Elm, Oil, Power, and principle: Iran’s oil nationalisation and its aftermath, 78; FO371/91522, F.O. to British Embassy, Tehran, Feb.23, 1951.

175. Mansoor, State-Centered vs. Class-Centered Perspectives on International Politics: The case of U.S. and British Participation in the 1953 coup against premier Mosaddeq in Iran.

176. Ansari, Modern Iran since 1921, 111.




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