Lit Review: Business Conflict Model — Case Study: Iran and Oil
Petroleum production did not exist in Iran before the British expressed interest in obtaining the rights to explore in the late-nineteenth century. Despite the size and scope of the British Empire, petroleum was not found anywhere in the empire until much later (Elwell-Sutton, 1976). Thus, British exploration for hydrocarbons required external sources. In 1872, Baron Paul Julius de Reuter, a British entrepreneur, attempted to receive sweeping concessions for exclusive rights to all rail and waterway construction; irrigation, forestry, and new agricultural development; management of a new bank and public works program; and management of all non-precious stone and metal mining operations in Iran (Elwell-Sutton, 1976). Due to intense domestic and international public outcry, the concession was dropped at the time although it would be revived later in 1889 (Elwell-Sutton, 1976).
The Baron was granted a new concession that provided him with a bank and the exclusive management of non-precious stone and metal mining, which he used to quickly buy up the first British petroleum exploration endeavor in Iran from 1884 (Elwell-Sutton, 1976). The endeavor, and others under the Baron’s management, also did not meet with success, and operations were subsequently closed after only a decade though the bank continued operations until the mid-twentieth century when its lease ended (Elwell-Sutton, 1976). Just after the turn of the century, the infamous D’Arcy Concession was signed in 1901, providing exclusive exploration, extraction, production, and exportation rights to William Knox D’Arcy for the entire country, excluding certain provinces that bordered the Russian Empire, until 1961 (Abrahamian, 2013). Petroleum was discovered seven years later in 1908 in the southwestern Khuzestan region at what is now the Masjed Soleyman oil field — the first petroleum discovery in the Middle East (Abrahamian, 2013).
Management of the integrated petroleum operations in Iran was handled by the Burmah Oil Company, renamed the Anglo-Persian Oil Company (APOC) in 1909 (Abrahamian, 2013). The British government intervened on behalf of the APOC to lobby one of the local tribal chiefs to lease Abadan, an island located at the estuary formed by the Tigris and Euphrates rivers at the northern end of the Persian Gulf, in order to build a refinery (Abrahamian, 2013). The British government subsequently obtained majority ownership of the APOC, with the Royal Navy holding considerable influence on firm operations (Abrahamian, 2013). In 1914, the Royal Navy secured a thirty-year contract with the APOC for fuel at reduced rates, keeping both the Iranian and firm shareholders in the dark (Elwell-Sutton, 1976).
During the First World War, the British invaded Iran to preserve its hydrocarbon interests, an action it repeated during the Second World War. The rationale for invasion during the Second World War was not officially for petroleum, but in response to “German activities in Iran,” which were later officially noted by Winston Churchill as directed at Abadan and the hydrocarbon industry (Abrahamian, 2013, p. 11). In the interwar period, the British financially supported the 1921 coup d’état that brought Reza Shah Pahlavi to power despite the stated coup objectives of dispelling foreign interference and influence in Iranian society (Abrahamian, 2013; Elwell-Suttin, 1976). Reza Shah canceled the D’Arcy Concession in 1932 and negotiated a new concession the next year, in 1933, that extended concessions for sixty years, to 1993, and provided the APOC with promises to not unilaterally renege on the agreement (Abrahamian, 1993). Reza Shah abdicated the throne in 1941 following the British invasion during the Second World War, resulting in Mohammed Reza Shah, his son, ascending to the throne.
The British dominance of the Iranian hydrocarbon sector pushed the APOC, renamed the Anglo-Iranian Oil Corporation (AIOC) in 1935, to become one of the leaders of global hydrocarbon production. These leaders were referred to as the “Seven Sisters” and included Gulf Oil, Royal Dutch Shell, Socony-Vacuum, the Standard Oils of California and New Jersey, and Texaco (Abrahamian, 2013, p. 11). The Seven Sisters operated as a cartel and dictated global energy prices as they controlled most global petroleum tankers by the 1950s and 85% of total global production by 1973 (Abrahamian, 2013; Mann, 2010). Near the close of the Second World War, the Seven Sisters were engaged in lobbying for new concessions under Mohammed Reza Shah, with U.S. interests in Iran holding significant importance for U.S. foreign policy due to existing U.S. investment in the region (Abrahamian, 2013).
The United States feared that any change in concessions for foreign firms would have a ripple effect across the region — disrupting existing U.S. operations — which would be amplified if Soviet interests gained a foothold in the industry (Abrahamian, 2013). By the war’s end, the British, aligned with the United States, were engaged in the first Cold War conflict in the region as it lobbied to prevent the Soviet Union from establishing a joint venture agreement for hydrocarbon exploration in northern Iran (Abrahamian, 2013). The negotiations ultimately failed due to domestic sentiment around national sovereignty and control of resources (Abrahamian, 2013), but the mutual Anglo-American interest in influencing domestic affairs to protect and bolster their respective energy interests put the domestic sentiment on a collision course with the Seven Sisters by the end of the 1940s.
The Iranian government began talks in 1947 to renegotiate the 1933 agreement and demanded a 50/50 split deal, which was supported by the United States, which understood the implications for nationalization for its own interests (Abrahamian, 2013; Bayandor, 2010). In Venezuela, Socony-Vacuum and the Standard Oil Company of New Jersey operated under a 50/50 agreement (Bayandor, 2010). The British refused, instead offering increases in royalties, and the power disparity that existed between the British and the Iranians forced negotiations in the AIOC’s favor, resulting in the Gass-Saed (Supplemental) Agreement in 1949 (Abrahamian, 2013). The Supplemental Agreement was resoundingly refused by the Iranian parliament. In 1950, Socony-Vacuum, the Standard Oil Companies of California and New Jersey, and Texaco, operating as the Arabian American Oil Company (Aramco) in Saudi Arabia, signed an agreement to split profits with the Saudi government on a 50/50 basis (Abrahamian, 2013). The British government noted that this agreement “killed” their Supplementary Agreement, forcing negotiations to restart “from scratch” on a 50/50 split deal (Abrahamian, 2013, p. 62).
This change of heart came too late, though, as the Oil Committee in the Iranian Parliament, led by Dr. Muhammad Mossadegh, voted to reject the Supplementary Agreement unanimously, and on March 14, 1951, the Iranian Parliament voted overwhelmingly to nationalize the hydrocarbon industry through a one-article bill that declared:
For the happiness and prosperity of the Iranian nation and for the purpose of securing world peace, it is hereby resolved that the oil industry throughout all parts of the country, without exception, be nationalized; that is to say, all operations of exploration, extraction, and exploitation shall be carried out by the government (Abrahamian, 2013, p. 63).
The AIOC did not heed the legislative authority of the Iranian Parliament, and continued operations in the country. A week after the passage of the nationalization bill, the AIOC dramatically reduced rental allowances for Iranian workers, which led to protests that quickly turned violent (Abrahamian 2013). The AIOC was gripped by a general strike that lasted from April 21 to April 25 — when the AIOC promised to restore rental allowances, raise wages, and pay workers who went on strike (Abrahamian, 2013). It was too late, however, as Dr. Mossadegh introduced detailed legislation into the Iranian Parliament that offer a legal path forward for nationalization; after he became Prime Minister on April 28, the lower house approved full nationalization of the petroleum industry by a margin of 79 to 12, followed unanimously by the upper house on April 30 (Abrahamian, 2013; Elwell-Sutton, 1976). Mohammad Reza Shah signed the legislation into law on May 1, and on June 10, 1951, the Iranian flag was raised above the former AIOC headquarters, signaling the establishment of the National Iranian Oil Company (NIOC) and the completion of the nationalization of the Iranian petroleum industry (Abrahamian, 2013).
The response by the British was swift. The Royal Navy amassed warships offshore in the Persian Gulf, and the AIOC pressured the other Seven Sisters to institute an embargo of Iranian hydrocarbons (Abrahamian, 2013). U.S. companies increased output to stabilize prices in the face of the embargo, and they were supported by the Truman administration, which provided legal immunity from antitrust prosecution (Bayandor, 2010). U.S. firms feared the nationalization would impact their own regional and global interests if they did not support the AIOC’s embargo and cause, and they were supported by the U.S. government in this endeavor as well by being instructed to not open business discussions with Iran while the existing AIOC-NIOC dispute was ongoing (Bayandow, 2010). George McGhee, the Assistant Secretary of State for Near Eastern, South Asian, and African Affairs, assured U.S. firms that full nationalization would not be accepted by the United States due to the “adverse consequences” it would bring elsewhere, to which Gulf Oil responded that it was preferable for Iran to become a satellite of the Soviet Union than for Prime Minister Mossadegh to succeed in nationalization (Abrahamian, 2013, p. 92).
The United States simultaneously sought to play the role of a mediator between the British and Iranians, but to no avail. The British brought the issue to the International Court of Justice but was resoundingly defeated in a 9–5 ruling (Bayandor, 2010). The Truman administration, however, was able to convince the British that seizure of the Abadan facility was not a beneficial idea, although it supported covert efforts to remove Mossadegh from power (Bayandor, 2010). Mossadegh resigned in mid-July of 1952, but the Truman administration’s attempt to pay off a political leader to install a more pro-British prime minister backfired spectacularly in the July Uprising, which swept Mossadegh back into office just five days later with expanded powers, including control of the military and oversight of the monarchy (Abrahamian, 2013). It was at this point that the United States agreed with the British that the only way to resolve the nationalization issue and to protect its petroleum interests was to fully remove Mossadegh from power by a coup d’état (Abrahamian, 2013).
In late-1952, formal relations with the British were broken off by the Iranians (Bayandor, 2010), and Dwight D. Eisenhower was elected president of the United States. Eisenhower’s election hailed a more interventionist U.S. policy, as has been noted previously through the influence of internationalists on the administration. U.S. hydrocarbon firms have traditionally belonged to internationalist coalitions, and their affiliation under the Eisenhower administration was no different. The administration continued to press for a diplomatic resolution until Prime Minister Mossadegh withdrew from the negotiations on May 9, 1953 (Bayandor, 2010). Eisenhower noted that any unilateral action by the United States would not succeed, observing that any agreement made with Mossadegh would “not be worth the paper on which it is written” (Bayandor, 2010, p. 73).
While the CIA had met with MI6 prior to Eisenhower’s election to discuss the Iranian situation, the first official request for a coup d’état by the State Department and the Foreign Office did not emerge until November 1952 (Abrahamian, 2013). The first plan for the coup was drafted in April 1953 in the United States, expanded on later that month in Cyprus, fine-tuned in June in Lebanon, and finalized at the end of June in the United Kingdom (Abrahamian, 2013). The Secretary of State and Foreign Minister signed off on the plan on July 1, and President Eisenhower and Prime Minister Churchill approved the coup d’état on July 11, 1953, for implementation in the middle of August (Abrahamian, 2013).
The economic turmoil caused by the embargo enforced by the Seven Sisters created the background for the coup to be realized (Bayandor, 2010). The CIA and MI6 funneled US$11,000 each week to buy off foreign reporters, Iranian politicians, Iranian chieftains, a “terrorist group”, opposition parties, and religious leaders and local gangs (Abrahamian, 2013, pp. 177–178). The planted stories included allegations that Iranian leaders were homosexuals, converts to Christianity, and were of Jewish ancestry (Abrahamian, 2013). Foreign newspapers openly propagated anti-communist tropes about the Iranian leadership despite their falsities, and MI6 participated in the kidnapping, torture, and murder of a leading Iranian general (Abrahamian, 2013). With the Shah’s full support, and thereby that of the military, the coup went ahead as planned on August 15, 1953, although it initially failed (Abrahamian 1953). Despite this early setback, the coup took place on August 19, only four days later. After CIA and MI6-backed groups began to march through the streets with pro-Shah chants, pro-Shah and pro-Mossadegh rioters clashed, with the military mobilizing to join the pro-Shah camp in an assault on Mossadegh’s residence (Bayandor, 2010). By early evening, Mossadegh had attempted to surrender, but upon coming under increased assault, fled, and was detained later that evening (Abrahamian, 2013).
Immediately after the coup d’état, shares in the AIOC rose by 10 points to 142, one-and-a-half times their value at the time of nationalization two years prior, and by early 1954, they had reached 190 points, double that of their value during nationalization (Elwell-Sutton, 1976). The United States rushed to provide billions in foreign aid to the Iranian government, and the Seven Sisters divided up the 50/50 sharing agreement with the NIOC through an international consortium — with 40% control to the AIOC, now named British Petroleum (BP); 14% to Royal Dutch Shell; 8% each to Gulf Oil, Socony-Vacuum, the Standard Oils of California and New Jersey, and Texaco; and 6% to Compagnie française des pétroles (Abrahamian, 2013; Elwell-Sutton, 1976). With the agreement finalized in mid-1954, BP’s shares tripled in value, and the firm was able to distribute £80 million in dividends (Abrahamian, 2013).
The Seven Sisters had won: They had been able to overpower the democratically elected government of Dr. Mohammad Mossadegh in order to denationalize and seize control of the Iranian petroleum industry by coordinating with their national governments, which directly intervened in the domestic affairs of the Iranian state. Observers are quick to note that the role of the CIA in the coup influenced the decision to intervene elsewhere in the world — such as in Guatemala, as was previously discussed under Eisenhower — and in Chile (Abrahamian, 2013). The relationship to the coup d’état in Chile is especially interesting because one of the CIA’s Iranian operatives, Colonel Abbas Farzandegan, received specialized training in covert operations in 1952 and was later placed on the board of International Telephone and Telegraph Corporation (ITT) (Abrahamian, 2013). ITT would go on to play a key role in the Chilean coup d’état.
References:
Abrahamian, E. (2013). The coup: 1953, the CIA, and the roots of modern U.S.-Iranian relations. The New Press.
Bayandor, D. (2010). Iran and the CIA: The fall of Mosaddeq revisited. Palgrave McMillan.
Elwell-Sutton, L. P. (1976). Persian oil: A study in power politics (2nd ed.). Lawrence and Wishart, Ltd.
