Oil in troubled waters

Unintended or not, the choice to go to war (a controversy beyond the scope of this column) has focused attention on the story of Iran’s massive energy resources, now under threat like never before. Its estimated 206 billion barrels are considered to be the third largest oil reserves in the world. Its gas reserves are also top-ranked, taking into account its South Pars field in the Persian Gulf connected to Qatar’s North Dome. The combined fields (total reserves of 1800 trillion cu ft of gas across 9700 km2) are independently produced, with roughly two-thirds being in the Qatar sector. While Iran’s South Pars production has been impaired by sanctions and abandoned by the international industry, oil majors and others have ploughed billions into making Qatar one of the top three LNG producers in the world, alongside the US and Australia. The vulnerability of these two fields in a military conflict has already been demonstrated.

Even more strategic is Kharg Island (8 km x 4 km), 25 km from the Iranian mainland, its very existence in the balance at the time of writing. One of the largest oil terminals in the world, its deep water available for docking very large crude carriers (VLCCs) has been responsible for at least 90% of Iran’s oil exports supplied by onshore and offshore pipelines, with a storage capacity of 34 million barrels. 

Energy vulnerability is nothing new for Iran. It experienced a major assault on its oil industry facilities in 1980 when the Abadan refinery was effectively destroyed during the early stages of the Iraq-Iran war.

Almost from its first oil discovery, Iran has been a model example of the turmoil that oil wealth can bring, often referred to as the resource curse or paradox of plenty. This is when the country’s economic growth becomes over-dependent on its oil production revenue, often associated with corruption and the development of autocratic regimes, of which Venezuela is another classic example.

Iran’s starting point for the finding of oil riches in the early 1900s was hardly auspicious. Long forgotten was its glorious past as one of the longest continuous civilisations, ruler of the geographically enormous Achaemenid Empire, under the legendary ‘king of kings’ Cyrus I (c. 559–530 BCE) and Darius I (522–486 BCE). By the 19th century Persia was a multi-ethnic, virtually bankrupt nation under the Qajar shahs, who basically enriched themselves at the expense of the population. A low point was the Great Famine of 1870-72: the death toll is disputed but likely to have caused a 20% decline in the population. (History would repeat itself with a catastrophic famine in 1917-1919 and again in 1942-43, these attributable to the country’s plight as a strategic territory in both the First and Second World Wars.)

'Iran’s starting point for finding oil was hardly auspicious'

Persia’s fate in the 19th century was to be the pawn in the so-called Great Game between Russia and Great Britain. Historians note, however, that the country escaped actual colonisation. Russia sought to win access to warmer ports, expand its markets in Central Asia and contain British power in the region. Britain was mainly obsessed with protecting the trade routes to India, the Jewel in the Crown, for example, constantly worried about possible Russian intrusion via Afghanistan. Early on in the century Persia ceded significant territory in the Caucasus and Kazakhstan in the Russo-Persian wars. Later Britain would take advantage of the bankrupt government to win major economic concessions, even including the establishment of the Imperial Bank of Persia, allowing Britain major influence over the country’s finances and monetary policy.

The final humiliation for Persia in this period was the Anglo-Russian Agreement of 1907. It effectively ended the Great Game. Both countries were more concerned with containing the threat of emerging German imperialism. Without any say, Persia was arbitrarily divided into three zones of protection — Russia in the north, Britain in the south, and a small neutral area sandwiched in between — all under the rule of a shah who was governing with a newly created parliament (in 1906) forced upon him following civilian unrest. 

In 1908, a British geologist George Bernard Reynolds found the first oil at the Masjed Solyman in the southwest. It would initiate momentous changes in the country’s destiny and global geopolitics. Reynolds was working for a team of investors headed by British-born William Knox D’Arcy, who had made a fortune in Australia. The so-called D’Arcy Concession was signed on his behalf in 1901 with the ruler Mozaffar ad-Din Shah Qajar (weirdly, D’Arcy himself never visited the country). The heavily indebted Shah entered a 60-year exploration rights agreement in exchange for 16% of the oil company’s profits, the wisdom of which would haunt successive rulers. 

In 1908, money had been running out for D’Arcy, his syndicate now working in collaboration with Bumah Oil. With no success, Reynolds had been ordered home by the investors when, in a final foray against orders, he struck oil. Things took off pretty quickly thereafter. The Anglo-Persian Oil Company (APOC) was founded in 1909 with Burmah providing the financing. By 1912, APOC was producing oil and shipping it to a newly built refinery on the island of Abadan, with a capacity of around 2500 barrels per day. Then the onset of the First World War changed everything.

Winston Churchill, then First Lord of the Admiralty, brought forward legislation in which the government would spend £2.2 million on acquiring a controlling interest in APOC and a 20-year contract guaranteeing the British Royal Navy a reliable flow of oil at significantly reduced price. This reflected Churchill’s determination to eliminate coal from warships and reduce dependence on American Standard Oil and Royal Dutch Shell. He famously boasted how ‘Fortune brought us a prize from fairyland beyond our wildest dreams. Mastery itself was the prize of the venture’. Production surged from a total annual production of 120,000 to 1 million tons by 1918 despite attempted disruption by Russian military and by Germany through Persian tribes. The Bolshevik revolution temporarily reduced Russian interest and holdings in Persia but by example lent weight to nationalist objections to the oil deal. A coup d'état in 1921 was engineered by an army officer, Reza Khan, who eventually became ruler in 1925 with a radical change programme.

Khan (later Reza Shah Pahlavi) instituted a rack of reforms to create a more modern Iran (as it became in 1935) but implemented with increasing authoritarian force. By 1940 Iran’s oil production was the fourth largest in the world but a lightning rod for unrest at home. A renegotiation of the oil agreement in 1933 created the Anglo-Iranian Oil Company (AIOC) but still extended substantial benefits to Britain, fomenting resentment at the special treatment and perceived lifestyle of foreign oil workers.

At the outbreak of the Second World War, so vital was the oil asset in Iran that Britain and Russia between them occupied the country. In 1941 they forced Khan to abdicate, said to be too close to Germany, and installed his more compliant son, Mohammad Reza Pahlavi. He would rule more or less uninterrupted until the 1979 revolution. The immediate postwar period witnessed the rise of Mohammad Mossadegh, an aristocratic populist from the pre-Shah Qajar elite, whose mantra was constitutional rule and the end of AIOC’s control over Iran’s oil. He was prime minister for a little over two years from April 1951, swept into office on a ‘nationalise oil’ platform. To the bemusement of many, he was famous for his theatrical oratory, often openly weeping, and for conducting diplomacy at home in his pyjamas affecting the impression of a dying man. Mossadegh did technically take over AIOC by passing legislation in Iran’s parliament. But a sweeping British blockade of the Abadan refinery and sanctioning of Iran’s oil and assets worldwide took its toll on the country’s economy and on Mossadegh’s support, deserted domestically by, among others, the religious establishment (the mullahs) which regarded him as too secular. 

Operation Ajax, a notorious coup orchestrated mainly by the US CIA (engineered in Tehran by a grandson of President Theodore Roosevelt) restored the Shah’s authority in 1953. He would go on to rule until 1979. To appease nationalist sentiment, in 1954, the Shah signed off on a consortium agreement with an international group in which BP (previously AIOC) was a 40% partner with five American companies (40%), Royal Dutch Shell (14%) and Total (6%), which still had exclusive E&P and refinery rights. The big difference was that it was now a 50-50 profit share, providing revenue enabling the Shah to transform the country into a military and economic powerhouse, championing domestic reform, and emerging as a founding member of OPEC pushing for high oil prices. The dark side was repression of opposition by the SAVAK intelligence and national security operations, and the Shah’s notorious extravagance and unpopular courting of Western interests. 

Ironically, it was in 1976 that Iranian oil production reached its peak of 6.67 million barrels per day. Under popular pressure, the Shah between 1973 and 1976 had forced international oil companies to cede operations, assets, and facilities to the National Iranian Oil Company. It was not enough to keep him in power. Despised by many sectors of Iran’s population, he and many followers fled the country, leaving Ayatollah Ruhollah Khomeini to return from exile in Paris to lead the Islamic Revolution and find managing oil as troublesome as ever. That story is still playing out. In the meantime, we may reflect on the words of Persian poet Rumi, ‘Raise your words, not voice. It is the rain that grows flowers, not thunder.’

'Ironically, Iranian oil production reached its peak in 1976'

Views expressed in Crosstalk are solely those of the author, who can be contacted at andrew@andrewmcbarnet.com.