Coup in 1953 and NIOC

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

Chapter 2: AIOC History, oil and Iranian politics.

After the 1953 CIA’s coup against the democratic government of Mossadegh, he was court-martialed and sentenced to house arrest for life. (PHOTO: AP)

The years preceding nationalisation witnessed a series of failed proposals on the one hand, and a succession of Iranian governments and institutional changes on the other, reflecting the increasing influence of political organisations opposed to the AIOC.
These were years of dual sovereignty in Iranian politics from which the country did not fully recover even after the end of the CIA sponsored coup to remove Musaddiq in 1953 and the return to power of the Shah. This period was marked by political instability due to a complex set of factors related to both internal social changes which had taken place in Iranian society and external interventions[311]. The strong nationalist sentiment in Iran against the British monopoly over Iran‟s oil resources coincided with the United States‟ desire to reorganise the geographic distribution of world oil markets. The British plan was to allocate designated Middle East exports among various oil exporting countries and not to restructure the oil industry towards increased concessionary access for US oil companies[312]. Even during the British oil embargo of 1952-53 when all foreign revenues to Iran originated from non-oil exports, trade remained in surplus. Interestingly, while the British government encouraged non-oil exports during the embargo, it was only concerned about weathering the temporary foreign exchange shortages and did not pursue it as a long term strategy. Turning once again to Musaddiq, British observers believed that if he remained in power it would eventually lead to a communist takeover and not necessarily through British intervention. As Musaddiq himself suggested it would be through intervention by a country other than Britain. We may gather, then, that there were behind-the-scenes mysterious forces working in Iran with many anti-Musaddiq elements who received their support, including cash, from Britain, and it was these elements which helped to bring Musaddiq down[313]. In the end, the US government, with British support, organised a well-structured coup, a task which was passed on to the CIA in Washington with the aim of forcing Musaddiq out of office and restoring the Shah to power[314]. In the aftermath of the 1953 coup, oil revenues recovered and imports sharply increased to the extent that Iran developed a large trade deficit and started borrowing from abroad[315]. Oil production increased, with the result that the AIOC‟s crude production recovered more rapidly from the Iranian crisis than did its refinery runs. Meanwhile, greater reliance needed to be placed on processing contracts with other companies[316]. The policy of the AIOC in exporting crude oil was more flexible now that it did not depend on refining a large proportion of the output within the area[317]. One of the most important functions of any firm is the coordination of various activities encompassing all stages of production from exploration to the delivery of the end products[318]. The fact that Iran could export its oil in crude form made it more attractive to different consumers who preferred to have the refining done at home for political, financial and economic reasons[319]. Much was learned from the nationalisation crisis. First, from a political perspective, the nationalisation crisis showed that it was much easier for certain countries to develop alternative markets for crude oil than to build new refineries[320]. Second, from a financial and economic perspective, most consuming countries sought to reduce their foreign exchange disbursements on petroleum by refining at home, which would in turn open new opportunities for domestic investment and create new jobs for the nationals[321]. It is worth bearing in mind however that oil companies continued to concentrate their exploration activities around the Persian Gulf so that they could keep their transport costs to a minimum by the construction of shorter pipelines to the sea terminals[322]. So we see that vertical integration[323] in the AIOC was a major issue for its efficient operation and performance. This was achievable because the company was closely associated, through the joint ownership of affiliates, in the exploration and production of crude oil, in refining and sometimes in marketing and distribution of finished product to the final consumer[324]. Vertical integration was profitable to the AIOC because various advantages would be offered, such as assured outlets for crude, secure and efficient operation of refineries, maintaining efficient output and avoiding change in prices which would raise costs to both producers and customers[325]. Similar to many other oil companies, AIOC was vertically integrated but it still produced more oil than it refined[326]. It should be mentioned at this point that the defeat of nationalisation and the CIAinitiated coup of 1953 led to the formation of a new international consortium in 1954. On 20 December 1954, the AIOC, which was formed at the beginning of the century to exploit the oil resources of Persia was renamed British Petroleum with a market capitalisation of £480m. It was a stock market leader then and has been, ever since[327]. Fraser was eventually reconciled to the fact that the AIOC could no longer retain the monopoly of Iranian oil which the British had enjoyed for forty years because the future security of Iran then rested more in American hands – through diplomacy[328]. The consortium was set up after protracted negotiations and severe political damage to ensure that the Iranian government received half of the net profits attributed to its crude oil production[329]. Further the Iranian government had pressed the consortium of oil companies to restore Iran‟s traditional position and to increase the capacity of crude oil production[330]. The agreement covered almost all the areas previously under the concession of the AIOC whilst applying the principle of nationalisation and turning over the assets of the AIOC in Iran to the NIOC[331]. As previously mentioned, the company was renamed British Petroleum (BP) and it now held 40% of its previously exclusive concession. BP‟s demands for compensation were satisfied and the company would be paid directly from the Iranians and indirectly through other consortium members[332]. In this respect, Iran agreed to pay a sum of £76 million, of which £51 million was paid in cash and the balance of £25 million was to be paid in ten yearly installments of £2.5 million each. This was meant as compensation for the company‟s assets in Iran and also to settle the claims and counter claims of both parties[333]. The Iranian Government refused, however, to consider the company‟s suggestion to set up a company with mixed Iranian and British directors to operate in Iran on behalf of NIOC. The NIOC offered employment to British staff but this was not accepted. The Prime Minister of Iran also insisted on his Anti-Sabotage Bill as a measure designed to convict the British in case of any misadventure in future at Abadan[334]. Subsequently, the NIOC, faced with an increasing demand for oil in Iran, embarked on the construction of a network of pipelines from the southern refineries to the northern centres of oil consumption to market its oil products[335]. In theory, the NIOC was in charge, but the consortium of foreign companies managing oil production rapidly took control of production and distribution of Iranian oil, passing 50 percent of the profits to Iran.


Notes & References

311. Ibid.

312. Ibid, 85.

313. Sampson, The Seven Sisters: The Great Oil Companies and the world they made, 126.

314. Ibid, 127.

315. Esfahani andPesaran, Iranian Economy in the Twentieth Century: A global perspective, 12.

316. Penrose, The large International firm in developing countries, 114.

317. Issawi and Yeganeh, The Economics of Middle Eastern Oil, 79.

318. Penrose, The large International firm in developing countries, 153.

319. Issawi and Yeganeh, The Economics of Middle Eastern Oil, 81.

320. Ibid.

321. Ibid.

322. Issawi and Yeganeh, The Economics of Middle Eastern Oil, 20.

323. Vertical integration describes companies in a supply chain that are united through a common owner.

324. Penrose, The large International firm in developing countries, 46.

325. Ibid.

326. Ibid, 112.

327. Littlewood, The Stock Market: 50 years of capitalism at work, 89.

328. Sampson, The Seven Sisters: The Great Oil Companies and the world they made, 128.

329. Penrose, The large International firm in developing countries, 66.

330. Issawi and Yeganeh, The Economics of Middle Eastern Oil, 9.

331. Ibid, 27.

332. Ibid, 27.

333. Ibid, 46.

334. Ibid, 46.

335. Ibid, 19.

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