History of Iran

Oil in Iran between the Two World Wars
By: Dr. Mohammad Malek

It was on May 28th, 1901 that Mozafar'od - Din Shah (of Qajar) granted the British subject William K. D'Arcy a 60-year oil concession on all areas of the country except the five northern provinces bordering Russia. The concession provided its holder the exclusive privilege to explore, exploit and export petroleum. Article 2 (of the concession) granted the holder the sole right of transportation of oil the area of the concession. Article 10 stipulated a royalty of 16% of the net profits on all operations to the Iranian government.

Oil was discovered in commercial quantities in the southwest of the country in late May 1908. The Anglo - Persian Oil Company (Anglo- Iranian Oil Company from 1935) was formed in London in April 1909. It was formed with an initial capital of 2 million pounds to assume all the D'Arcy's rights and responsibilities. The first royalty in 1913.

On 20 May 1914, an agreement was signed between the British government and the APOC by which the British government became the major shareholder of APOC owning 51% of the shares. The agreement gave the British government the right to appoint two directors on the Board who would have the power of veto on any questions relating to British national interests. Also on the same day, a contract was signed between APOC and the British Admiralty by which APOC guaranteed the supply of oil to the Admiralty for 30 years at fixed prices.[1] The contract would really affect the relations between Tehran and APOC in so far as the royalties were concerned. Tehran did not protest until August 25th, 1920 when it ordered its financial advisor (Sydney Armitage-Smith) to negotiate with APOC on royalties.[2] Talks started in London and an agreement was signed on 22 December 1920 as result of which APOC paid one million pounds in settlement of Iran's claims on royalties.

The Pahlavi dynasty replaced the Qajar dynasty in late 1925 and started talks on the revision of the concession in London in late July 1928. But before the talks started, the new regime strongly attacked the legality of the 1920 agreement on the basis that it had never passed the Majles.[3] In London, the Court Minister Abdol-Hoseyn Teymurtash told Sir John Cadman (the APOC's chairman) that the Iranian government would grant APOC a new 60- year concession if, in return, APOC would agree -to reduce the area of the concession, -with a complete cancellation of the exclusive right of transportaion, -to give the Iranian government a substantial block of the shares,[4] -to register itself in Tehran as well London, -to be exempted from tax by both governments.[5]

The talks continued in Lausanne in August 1928. In Lausanne, Teymurtash made it clear that his government should be given 25% of the APOC's total shares. "If this had been a new concession, the Persian Government would have insisted not on 25% but on a 50-50 basis", he said.[6] He also demanded a minimum guaranteed interest of 12.5% on dividends out of the shares plus 2s for per ton of oil produced. Also he specified that 50 to 60% of the existing area should be relinquished at the time of the ratification of the new concession, and 60% of the remaining area should be reduced in three years. Cadman viewed Teymurtash's demands as extravagant but promised that he would examine them with his company's major shareholder, the British government.

In order to consolidate his position in any further talks with the British, Teymurtash took action soon after he returned to Tehran. He decided that Iran needed to demonstrate that it was in absolute control over the southwest where the APOC's operations and installations had been centered. He also decided that the shah, Prime Minister and the press should criticise D'Arcy concession. So he took the shah, all Cabinet Ministers, along with the Majles deputies accompanied by hundreds of other civil servants, high ranking military officials and journalists to inaugurate the newly constructed road to the southwest and to visit oilfields and the APOC's installations. In Ahwaz, the capital of the southwest province of Khuzestan, the shah showed his anger towards APOC and the concession by refusing to make a visit to the installations and by sending the following message to Cadman in London:

"the authorities of the company must know that neither the Iranian government nor the Iranian people agree with the D'Arcy concession. … Now, I explicitly notify the authorities of the company that they must rectify the matter and if they do not give it due attention, they will be responsible for any action which might result. No more can Iran tolerate the enormous profits from its oil going into pockets of foreigners while at the same time being dispossessed of its oil wealth".[7]

Teymurtash himself threatened that if by the following spring he found his demands made in London and Lausanne had not been met, he would then turn against APOC and fight it.[8]

In its meeting of 20 November 1928, the British Cabinet agreed with 20% of the shares for Iran. Cadman, who had attended this meeting, was told of the following principles as the basis for any further talks with Teymurtash.
-Under a new prolonged concession, an extension of the contract between APOC and the British Admiralty should be guaranteed.
-The controlling position of the British government in the shares should be maintained.
-Shares to the Iranian government should be inalienable.

Cadman arrived in Tehran on 18 February 1929. To Teymurtash, Cadman specified that APOC would agree with 20% of the shares only. Furthermore, he stated that APOC would not guarantee the interest on the shares being exempted from taxation in London.[9] Having had realised that the British would never agree to his demand for 25% of the shares, Teymurtash stated that in a new 60-year concession, both Iran and APOC should have the right to cancel the concession at the expiry date of the D'Arcy concession. Cadman left Tehran empty-handed with no agreement whatsoever.

From the talks in London, Lausanne and Tehran, it is well understood that Teymurtash had been planning to push APOC to the southwest of the country making it possible for his government to develop any possible oilfields outside southwest by non-British. Also, he had been planning to limit the influence of the British government over APOC as much as possible.

In 1930, Teymurtash adopted a policy to extract more money from APOC, this by levying it on its operation inside Iran. Nothing had been worded in the concession to prevent him from doing so. He submitted a bill to the Majles by which APOC would pay a tax of 4% on its profits earned in Iran, as from 22 March 1930. The bill passed the Majles on the same day, i.e. April 1st, 1930. APOC offered a guaranteed consolidated payment of "145.000 pounds per annum" for 10 years, or "150.000 pounds" for 8 years" in return for immunity from any tax.[10] Teymurtash did not agree. "The Company must show the amount of its profits earned in Persia".[11]

Tehran was under extreme financial pressure in March 1931. The inflation rate had risen to nearly 45% and the shah needed a huge sum to go further with his railway and the army. In such a situation, APOC requested a new longer concession in return for a royalty of 4s per ton plus 10% of the net profits. Teymurtash was irreconcilable. He was entirely against the idea of a new longer concession. "The D' Arcy concession is a law … it is a sacred document … [It] resembles an old and sick father who cannot be got rid of. We have to wait until he dies", he said to Jacks.[12]

Preparing for a visit to Europe during which he was to enroll the crown prince in a school in Switzerland, Teymurtash let it be known that he would be happy to deal with Cadman on the two questions of tax and royalties while in Europe.[13]

The talks started in Paris and continued in London in November 1931. The main concern for both sides was to find the real amount that would cover all the claims relating to the royalties and tax in the past. On these talks, Cadman writes that Teymurtash gave him "a piece of paper showing that, according to his calculation, the amount due to the Persian Government was 3.250.000 pounds, from which he made a deduction of three quarter of a million, putting in the bill at 2.5 millions". Cadman was prepared to pay only a "round sum of 500.000 pounds to cover everything, tax included".[14] He finally offered one million pounds. He stated that his company would pay 20% i.e. 16% as royalties plus 4% as tax for the financial year 1931 and thereafter. Teymurtash agreed[15] and the Iranian Cabinet approved. The Finance Minister Taqizadeh asked APOC to pay his government a temporary "200.000 pounds against its receipts". Refusing the request, APOC indicated that it should first receive a letter from the Iranian government that it would accept the APOC's offer of 1 million pounds as the final settlement of all difficulties in the past.[16] The shah was waiting to receive the final draft of the agreement. Iran's oil commissioner Feiz was discussing with the APOC's officials a clearly worded version of it in English. Teymurtash telegraphed Feiz to send it without delay. "If discussions with the Company are not finished yet, please finish at once and send the text to Tehran, His Imperial Majesty admits no delay and the business must terminated immediately".[17]

The draft agreement was in Tehran on 29 May 1932 but the shah did not agree with it. Cadman's estimation of the royalties for the year 1931 (306.872 pounds, made on 2 June 1932) was responsible.[18] The royalties for 1931 was to compare extremely unfavorably with 1.437.000 pounds and 1.288.312 pounds for the years 1929 and 1930 respectively. Tehran officially refused to accept its royalties. Press attacked APOC and the D'Arcy concession. Teymurtash asked APOC to increase the royalties and prepared himself to "offer to overcome year 1929 differences". It was and abortive move because APOC responded that it could not see any other possible arrangement except what had been "provided in the draft Agreement".[19]

On 18 August 1932, Jacks reported that all talks with APOC would be handled by "the Minister of Finance, and not as hitherto by the Minister of Court".[20] Taqizadeh informed APOC that the shah wanted his government "at all cost to force the Company to reopen negotiations for a complete revision". Nothing happened until November 26th 1932 when the shah cancelled the D'Arcy concession.[21] But in its cancellation announcement, Tehran did not close the door to APOC as it stated that it would not "refuse to grant a new concession to that Company".[22]

Both APOC and the British government asked Tehran to immediately withdraw the cancellation announcement. Tehran did not agree and the British government referred it to the Permanent Court of International Justice, "as a matter of urgency" and threatened that it would regard itself "as entitled to take all such measures as the situation may demand for that Company's protection."[23] Tehran refused the Court's competence to examine a dispute between itself and APOC and London took the dispute to the League of Nations on 14 December 1932 followed by Tehran three days later. The shah dismissed Teymurtash and sent his delegation to the League on 23 December 1932.

In the Security Council of the League on February 3rd 1933, the Rapporteur Edvard Benes, Foreign Secretary of Czechoslovakia proposed that both Iran and APOC to negotiate a new concession, which was accepted by both parties.[24]

Talks started in Tehran in April 1933. One week passed but Taqizadeh put nothing on the table. Cadmam met the shah on April 11th and realised that the shah had no wish to go back to the League. Under the shah's pressure, Taqizadeh deployed his demands a summary of which is as follows:
  • The area should be reduced to 15% of the area of the D'Arcy concession
  • The exclusive right of transportation should be completely cancelled
  • APOC should give 20% of its total shares, free of charge, to the Iranian government
  • A royalty of 4s (gold) per ton of the oil produced should be paid to Iran
  • Iran should enjoy the right of veto in the board
  • APOC should attempt to minimise the number of its non-Iranian employees
  • The new concession would not be longer that the rest of the D'Arcy concession (28 years).[25]
As it became clear that Taqizadeh and his colleagues would not agree to a new 60- year concession, Cadman, on 23 April 1933, stated that he and his colleagues would leave Iran as soon as possible. This meant that the dispute over the cancellation would, once again, be taken before the League of Nations.

The shah asked Cadman to see him in the palace. In the palace, the shah told Cadman that he would not let the APOC's officials leave Iran until a new concession had been reached. If the shah did not want to withdraw the cancellation announcement, then, the only solution for not facing confrontation concession. Two meeting were held in the palace on April 24th and 26th, 1933, and the shah agreed with a new 60- year concession in return for:
  1. A minimum guaranteed payment (of 750.000 pounds annually) plus a royalty of 4s (gold) per ton of oil produced.
  2. 4% as tax to Iran (with a minimum guaranteed tax of 230.000 pounds annually).
  3. Iran's representation on the board.
  4. Payment of one million pounds (by APOC) as settlement of all past claims.
  5. Investment by APOC on Iranians so that this would minimise dependency on skilled foreign employees.
  6. Reduction of the area to 100.000 square miles.
  7. Full cancellation of the exclusive right of transportation of oil.
  8. 20% of the share to Iran.
  9. Cheaper oil for Iranians.[26]
The great achievement on the reduction of the area and the cancellation of the exclusive right of transportation provided the opportunity for the shah to develop possible oilfields out of the southwest in the hands of non-British. Germany showed interest in acquiring an oil concession.[27] The Germans might have had the technology, money and the equipment needed, but the Americans were seen as politically an altogether better proposition. Talks with Americans started and resulted to a concession in mid-January 1937. Americans were granted a 60- year oil concession on 100.000 square miles in the east leaving a huge buffer zone between them and the British. They were also granted the right to build a pipeline to the Sea of Oman. This concession was similar to that of the 1933 concession for the British.[28] No progress was made until July 1938 when Americans notified that they had lost interest on their concession. They had acquired more beneficial concessions in the Arab countries, which meant for easier transportation to the Persian Gulf.

It is noteworthy that there were disputes between Tehran and AIOC on their new concession in the years followed until 1941 when the shah was abdicated. Those are as follows:

A. The dispute on the Iranianisation process of the company's technical staff.
The APOC's foreign technical staff numbered 2050, i.e. 8% of the total employees, in 1933. According to Part III of Article 16, APOC should "recruit its artisans as well as its technical and commercial staff from among Persian national". But Part I of the same article had stipulated that both parties "accept as the principle … the supreme necessity … of maintaining the highest degree of the efficiency and of economy in the administration and the operations of the company in Persia". They negotiated their difference on Article 16 as a result of which an agreement was made on 2 April 1936. By this agreement, APOC (now AIOC) promised to replace its "foreign artisans, technical and commercial staff by Iranian" in a progressive manner insofar as this would be "compatible with the attainment of the highest degree of efficiency". The company's foreign staff decreased in percentage in accordance with the 1936 agreement, this from 14.84% in 1936 to 11.36% in 1941, but increased in numbers from 2050 in 1936 to 2457 in 1941.

B. The dispute on the oil exports.
The oil export increased to its highest level of 10.16 million tons with the highest royalties of 3.54 million pounds in 1937. It dropped in 1938 and the shah wrote to Cadman as follows: "You will of course agree how unpleasant it for a progressive country like Iran, which must administer its affairs according to a definite programme [of modernisation]". To go further with his army and railway, the shah had turned to London for a loan of 5 million pounds (in October and November 1938) and expected AIOC helping to overcome his financial difficulties. Disregarding the shah's expectations, Cadman replied that the drop was due to over - production of oil by Americans and Russian.[29] Dissatisfied with Cadman's argument, the shah responded: "the explanation tendered is a mere repetition of the ordinary given by the Company" and that he would "abstain from direct discussion" with Cadman.[30] Cadman sent a special envoy to Tehran on 11 February 1939. In Tehran, Gass confronted a strong attack on AIOC in the press and failed to meet the shah who had refused to see anybody else from the company but its chairman. Gass reported that the shah might have been suspicious that the company was acting on recommendations from the British government to obstruct his programme of modernisation. "The accusation is made and was mentioned to me by both the Prime Minister and the Minister of Finance that the Company has deliberately curtailed its production… to impede the national economy of the country by restricting the revenue which is so vital for the internal development [in Tehran and the shah would probably] go to any length, regardless of consequences, to try to get it in order that the development scheme shall not be interrupted".[31] Cadman left for Tehran and met the shah on 29 May and 3 June 1939. To avoid any possibility of a request by the shah to borrow from AIOC, Cadman stated that AIOC would spend all its 16 million pounds cash available on the oil industry in Iran. He further stated that he could arrange 5 million pounds from the British government in a manner that it would be liquidated out of the future royalties. The shah agreed.[32] Talks were undertaken by the two governments in London and resulted in an agreement on 16 February 1940. Tehran cancelled this agreement in July as a result of another drop in oil exports.

The outbreak of the big War in Europe resulted in the drop of the oil exports from Iran in March 1940. In response, the shah made an unplanned journey to the southwest. In Abadan, he stated "People from outside the country are coming and taking all the profits and goodness of the oil away and doing nothing to help the Iranians". The drop was compounded by London established an official rate for gold lower than the rate in the free market. Based on the free market, royalties would be 2.703.689 pounds for the year 1939 and not 3.379.611 pounds - a substantial difference of 675.922 pounds.[33] Tehran protested in mid-April 1940. The situation in Tehran was so that the AIOC's officials expressed: "Local rumours include immediate cancellation of the concession."[34] Tehran demanded that a difference be paid between whatever the royalty was to be and a sum of 4 million pounds for the loss brought by both the drop and the rate "otherwise the Iranian Government will revise the oil Concession fundamentally".[35] To avoid confrontation at a very crucial moment when German troops had advanced as near as possible to the British mainland, AIOC agreed to pay the difference demanded.

  1. For further details on these agreement and contract, see Marlin, J., "The Purchase of the British Government's shares in the British Petroleum Company, 1912-1914", Past and present, Vol. 39, April/1968, pp. 139-68.
  2. For the full text to the Cabinet authorizing Armitage- Smith to enter into talks with APOC, see Farmanfarmaiyan (1994), pp. 133-5.
  3. For the full text of this letter, dated 9 May 1928, see League of Nations. Official Journal (LNOJ), 1933, pp. 292-3. The question would remain as why the Iranian government accepted the 1 million pounds as settlement of its claims on royalties, before the agreement had passed the Majles. It should be remembered that the Majles was in recess from 1915 and, at the same time, the government's treasury was empty. The Cabinet had constantly been urging Herman C. Norman (the British Minister in Tehran) to induce the Imperial Bank of Persia to grant it "a monthly credit of 30.000 tomans [around 10.000 pounds] for three or four months only". Tehran "was in desperate need of money. The Gendermerie has been unpaid for two months and even Cossaks at the front have not received all that is due to them". Norman to Curzon, 21/Sep./1920. See also, Norman to Curzon, 2/December/1928, DBEP, 1919- 1939, First Series, Vol. 13, p. 650.
  4. "Give the Persian Government a share in the business. Let them feel that they are real partners in whose interest it is to further the Company's development and progress in the country." Teymurtash said to Cadman. To grant a substantial block of shares to the Iranian government, Cadman was under pressure. Sir John Lloyd, one of the two British government's directors on the board, had told that "any paritcipation given [to the Iranian government] must not impair government's voting preponderance." Lloyd to Cadman, 21/August/1928, in BP H16/20.
  5. For the full detail of those talks in London, see "The memorandum on talks between Teimurtash and Sir John Cadman, dated 28/July/1928, in BP H16/20.
  6. A record of the discussion held at Lausanne, BP H16/20.
  7. For the full text of this message, see Fateh (1979), p. 586.
  8. See Jacks to Cadman, 15 November 1928, BP H16/100 (B). In the Majles, Prime Minister Hedayat criticised the concession. If any "assistance from the Government" was needed, APOC should realize that it must "revise and amend the terms of the concession" to those offered to it in London and Lausanne. For a summary of this speech, see Clive to Chamberlain, 6 December 1928, PRO, FO 416/83, pp. 137-8.
  9. See Teymurtash's draft of March 30, 1929, BP H16/21. See also, Teymurtash to Feiz, not dated, in Fateh (1979), pp. 287-8. See also Cadman to Teymurtash, 30 March 1929, BP H16/21.
  10. See the report of the meeting of Jacks with Teymurtash in Sa'd -Abad, on 11 July 1931, BP H10/1748.
  11. See the Meeting of Jacks and Fateh with Teymurtash, held on 22 March 1930, BP H10/174A.
  12. See Report of the meeting held in Sa'd-Abad on August 30, 1931, dated 5 September 1931, BP H10/174B.
  13. See Report of the meeting held in Sa'd-Abad on August 30, 1931, dated 5 September 1931, BP H10/174B.
  14. Cadman to Jacks, 17 February 1932, BP H10/175.
  15. Cadman to Teymurtash, 11 January 1932, and Teymurtash to Feiz, 17 January 1932, BP H10/175.
  16. Cadman to Jacks, 17 March 1932, BP H10/175.
  17. Teymurtash to Feiz, 8 May 1932, BP H16/50.
  18. See Cadman to Jacks (telegraph), 2 June 1932, BP H10/176.
  19. Jacks to Cadman, 17 July 1932 and 19 July 1932, BP H10/176.
  20. Jacks to Cadman, 18 August 1932, BP H10/176.
  21. For the full text of the cancellation announcement of November 27th, 1932, see LNOJ (1932), p. 2301.
  22. See Jacks to Lloyd, 29 August 1932, BP H10/176.
  23. See the Biritsh government's note of December 8, 1932, in LNOJ (1932), p. 2303.
  24. For the full report of this meeting, see LNOJ (1933), pp. 197-253.
  25. See Cadman's diaries, dated April 19, April 22 and April 23, 1933, all in BP 96659.
  26. See Cadman's diary on both the meetings, in BP 96659. The new concession was ratified on 28 May 1933 and the formal liquidation of the dispute between the two governments was announced in December 1933.
  27. With this in mind, Dr. Hjalmar Schacht, the German Minister of Economics, visited Tehran. See Aruzi, A. R., Khaterate-e 'Abo' 1-Hasan Ebtehaj, Tehran, 1371/1993, p.66.
  28. For a summary of the different terms of the oil concession for Americans, see Memorandum by Raymond A. Hare (of the Division of Near Eastern Affairs), dated 5 April 1937, FRUS, 1937, Vol.2,pp.744-7.
  29. The shah to Cadman, 18 December 1938, and Cadman to the shah, 5 January 1939, in BP 84881.
  30. The shah to Cadman, 25 January 1939, BP 84881.
  31. Memorandum by Gass, 16 May 1939, BP 85905.
  32. See 'Cadman's visit to Tehran, May/June 1939', in BP 84881.
  33. Gass to Forde, 28 May 1940, BP 69457.
  34. Telegraph from AIOC in Tehran to AIOC in London, 2 July 1940, BP 69457.
  35. See Telegraph from AIOC in Tehran to AIOC in London, 16 July 1940, BP 69457.