The Power Game for Iraq's Oil Part III - The Nationalisation of Iraqi Oil
(
Excerpts from the article , Middle East Oil and the Energy Crisis by Joe Stork)
Even before the revolution in Iraq in July 1958, there were many areas of conflict between the government and the Iraq Petroleum Company (IPC) consortium that controlled the country’s entire actual and potential resource base.
The initial conflicts in Iraq (as in the other producer countries) centered around the cost accounting practices of the company in calculating the profits to be shred with the government.
Kassem’s 1958 revolution temporarily interrupted contacts between the government and company representatives. Kassem hastened to assure the United States and Britain that the new regime would not nationalize the oil fields. With the new regime in power, negotiations between IPC and the government resumed in 1959.
One of the prime targets for the regime was IPC’s relinquishment of 60 percent of its total concession area so that new joint-venture deals might be worked out. Other demands including a doubling of output and the construction of refineries in Iraq.
The companies agreed in principle to doubling output “depending on market conditions,” but they also made it clear that they would NOT set up refinery installations in Iraq, nor relinquish anywhere near the entire 60 percent of the concession territory demanded by the government. They also denied the government any significant role in choosing the areas to be relinquished.
Before negotiations between IPC and Iraq resumed in the summer of 1960, another conflict emerged: a dispute over the government’s attempt to raise cargo dues in the port of Basra. IPC’s response was to halt production from one field and curtail production in another. It rationalized its decision on economic grounds, asserting that higher costs made Basra oil noncompetitive.
The government went into the August negotiations with a set of far-reaching demands. Among them was the demand that the government be given 20 percent participation in ownership of IPC and a position in the executive directorship of the company. Both of these provisions had actually been written into the old concessions but were circumvented by the companies’ tactic of maintaining the IPC as a private rather than public corporation. Negotiations continued intermittently for a year before they were finally cut off in October 1961.
While the internal stability of the regime and its open hostility to Nasser’s Egypt pushed Kassem into taking a progressively more demagogic attitude towards the company, there is little doubt that the company shared a good part of the blame for the breakdown in negotiations and the long years of hostility that ensued. The company attitude as reflected in the negotiations was one of determination to maintain full and unhampered control of every aspect of the industry in Iraq, including production, pricing industrial development, intermediate fees, and concession territories.
One is forced to conclude that company behavior indicated a decision to make an example of Iraq and that there was a strong political flavor to this decision. Although ultimately Kassem was to have little success in uniting either the Iraqi people or the Arab world, the oil companies had every incentive to insure that he did not. The companies, in addition, felt themselves to be in a position of strength owing to the world crude surplus developing over the previous years. They all held other sources of supply and any decline in Iraqi production would only help to strengthen market prices.
Kassem’s reassurances to the oil companies following his coup were strongly offset by his anti-imperialist rhetoric and Iraq’s formal withdrawal from the Baghdad Pact and simultaneous economic and technical aid agreement with the Soviet Union in 1959.
In quick succession Iraq withdrew from the sterling bloc, ordered British air force units out of the Habbaniya base, and cancelled the Point Four Agreement with the United States. Internal power plays led Kassem to give prominent, if temporary, cabinet roles to “Communist sympathizers.”
Kassem announced that the companies could continue to exploit existing wells as they wished, but went on to say:
“I am sorry to tell you that we will take the other areas according to legislation that we have prepared, so that our action will not be a surprise to you. Thank you for your presence here.” Two months later, the government issued Law 80, under which the companies were permitted an area of exploitation limited to little more than their existing facilities, or 0.5 percent of the original concessions. All previous rights in 99.5 percent of the concession area were withdrawn and assumed by the government.
The companies rejected the new law and demanded that the dispute be arbitrated. They retaliated by holding down production even though the investment and expansion program initiated in 1959 was largely completed.
By February 1963, there were indications that the regime was considering the arbitration the companies demanded, but in that month Kassem was killed by a new coup.
The new Ba’ath regime moved towards negotiation, but made it clear that Law 80 was irrevocable.
In February 1964, the Iraq National Oil Company (INOC) was established. The Iraqi government issued Law 97 in August 1967, assigning to INOC the exclusive right to develop oil in Iraqi territory except that which IPC retained under Law 80. Law 123, issued in September, reorganized INOC as the base of the national petroleum industry that would serve as a core of the country’s future industrialization.
IPC, of course, protested this new legislation as a further infringement of its rights under the old concessions and threatened to prevent the sale of any crude from the expropriated area by legal means.
The Ba’ath Party returned to power in 1968.
In June 1969, INOC entered into an agreement to develop the North Rumaila fields with the Soviet Union which, in the words of one expert “constituted the most significant development in the recent history of the Miiddle East oil industry.”
An individual country like Iraq was totally dependent on the production decisions of the companies for its main source of government and development revenue. There can be little doubt that the financial constraints caused by the small increase in production in Iraq over these years contributed to the overall political instability of the country, and certainly prevented the various regimes from more substantial undertakings in the areas of land reform and economic development. The political instability that characterized Iraq throughout the 1960s was most intense in the 1965-1967 period, including more than one attempted coup, and in 1968 a successful one.
Iraq looked mainly to France and the Soviet Union for assistance in implementing its national oil policy. In November 1967 INOC signed a contract with the French company ERAP for the development of some very promising areas (not North Rumaila) expropriated under Law 80. Under the terms of the contract, all exploration and development costs were to be put up by ERAP as a loan, repayable only after commercial production began.
To aid in the development of the North Rumaila fields, where oil had already been discovered, Iraq turned to the Soviet Union. This was due in part to IPC threats to sue any Western company involved in producing or even purchasing “their” oil. A Soviet delegation visited Iraq in late 1967 and signed a letter of intent that in July 1969 was translated into a definite program by a Soviet-Iraq agreement. This deal, combined with previous loan and barter arrangements with socialist bloc countries, represented a pronounced orientation of Iraq’s foreign economic policy towards socialist countries and a “proportionate erosion of the Western political and economic position in the country.”
Iraqi success in developing the North Rumaila fields with Soviet assistance did not make any easier the settlement of the long-simmering compensation dispute with IPC (for the 1961 Law 80 expropriation).
IPC claims on North Rumaila crude hindered Iraq’s ability to market that oil in the West. IPC undertook little or no expansion of its Kirkuk and Basra facilities, with a continued restraint on the growth of Iraqi government revenues and sought in negotiations to tie up the purchase contract. In November 1971, just months before North Rumaila came on stream, President Bakr warned IPC that Iraqi patience with their obstructionist tactics was wearing thin.
The government issued a two-week ultimatum in mid-May, insisting that IPC restore Kirkuk production to normal levels. The Revolutionary Command Council gave IPC three options: (1)hand over excess production at cost to INOC; (2)relinquish idle producing capacity to INOC; or (3)turn over the Kirkuk fields to INOC. The political essence of the dispute was confirmed when IPC refused to make a satisfactory response by the end of May. The company’s assets were nationalized – on June 1, 1972.
Iraq moved to buy Compagnie Française de Pétrole’s 23.75 percent share of the nationalized oil ( citing “the just policy pursued by France towards our Arab causes and more specifically towards the Palestinian cause.” The tactic was successful and resulted in a sharp increase of French trade and credits for Iraq as well as CFP’s serving a mediatory role in the compensation talks with IPC.
A settlement with IPC was finally worked out at the end of February 1973. Together with 25 percent participation in the remaining Basra concession, the settlement left Iraq with full control of 75 percent of its crude production, which then had a total capacity of 2.8 million b/d. Compensation to IPC for the takeover was set at $300 million, payable to crude, but was effectively offset by company payments of $345 million in back claims.
The Power Game for Iraq's Oil Part III - The Nationalisation of Iraqi Oil
(
Excerpts from the article , Middle East Oil and the Energy Crisis by Joe Stork)
Even before the revolution in Iraq in July 1958, there were many areas of conflict between the government and the Iraq Petroleum Company (IPC) consortium that controlled the country’s entire actual and potential resource base.
The initial conflicts in Iraq (as in the other producer countries) centered around the cost accounting practices of the company in calculating the profits to be shred with the government.
Kassem’s 1958 revolution temporarily interrupted contacts between the government and company representatives. Kassem hastened to assure the United States and Britain that the new regime would not nationalize the oil fields. With the new regime in power, negotiations between IPC and the government resumed in 1959.
One of the prime targets for the regime was IPC’s relinquishment of 60 percent of its total concession area so that new joint-venture deals might be worked out. Other demands including a doubling of output and the construction of refineries in Iraq.
The companies agreed in principle to doubling output “depending on market conditions,” but they also made it clear that they would NOT set up refinery installations in Iraq, nor relinquish anywhere near the entire 60 percent of the concession territory demanded by the government. They also denied the government any significant role in choosing the areas to be relinquished.
Before negotiations between IPC and Iraq resumed in the summer of 1960, another conflict emerged: a dispute over the government’s attempt to raise cargo dues in the port of Basra. IPC’s response was to halt production from one field and curtail production in another. It rationalized its decision on economic grounds, asserting that higher costs made Basra oil noncompetitive.
The government went into the August negotiations with a set of far-reaching demands. Among them was the demand that the government be given 20 percent participation in ownership of IPC and a position in the executive directorship of the company. Both of these provisions had actually been written into the old concessions but were circumvented by the companies’ tactic of maintaining the IPC as a private rather than public corporation. Negotiations continued intermittently for a year before they were finally cut off in October 1961.
While the internal stability of the regime and its open hostility to Nasser’s Egypt pushed Kassem into taking a progressively more demagogic attitude towards the company, there is little doubt that the company shared a good part of the blame for the breakdown in negotiations and the long years of hostility that ensued. The company attitude as reflected in the negotiations was one of determination to maintain full and unhampered control of every aspect of the industry in Iraq, including production, pricing industrial development, intermediate fees, and concession territories.
One is forced to conclude that company behavior indicated a decision to make an example of Iraq and that there was a strong political flavor to this decision. Although ultimately Kassem was to have little success in uniting either the Iraqi people or the Arab world, the oil companies had every incentive to insure that he did not. The companies, in addition, felt themselves to be in a position of strength owing to the world crude surplus developing over the previous years. They all held other sources of supply and any decline in Iraqi production would only help to strengthen market prices.
Kassem’s reassurances to the oil companies following his coup were strongly offset by his anti-imperialist rhetoric and Iraq’s formal withdrawal from the Baghdad Pact and simultaneous economic and technical aid agreement with the Soviet Union in 1959.
In quick succession Iraq withdrew from the sterling bloc, ordered British air force units out of the Habbaniya base, and cancelled the Point Four Agreement with the United States. Internal power plays led Kassem to give prominent, if temporary, cabinet roles to “Communist sympathizers.”
Kassem announced that the companies could continue to exploit existing wells as they wished, but went on to say:
“I am sorry to tell you that we will take the other areas according to legislation that we have prepared, so that our action will not be a surprise to you. Thank you for your presence here.” Two months later, the government issued Law 80, under which the companies were permitted an area of exploitation limited to little more than their existing facilities, or 0.5 percent of the original concessions. All previous rights in 99.5 percent of the concession area were withdrawn and assumed by the government.
The companies rejected the new law and demanded that the dispute be arbitrated. They retaliated by holding down production even though the investment and expansion program initiated in 1959 was largely completed.
By February 1963, there were indications that the regime was considering the arbitration the companies demanded, but in that month Kassem was killed by a new coup.
The new Ba’ath regime moved towards negotiation, but made it clear that Law 80 was irrevocable.
In February 1964, the Iraq National Oil Company (INOC) was established. The Iraqi government issued Law 97 in August 1967, assigning to INOC the exclusive right to develop oil in Iraqi territory except that which IPC retained under Law 80. Law 123, issued in September, reorganized INOC as the base of the national petroleum industry that would serve as a core of the country’s future industrialization.
IPC, of course, protested this new legislation as a further infringement of its rights under the old concessions and threatened to prevent the sale of any crude from the expropriated area by legal means.
The Ba’ath Party returned to power in 1968.
In June 1969, INOC entered into an agreement to develop the North Rumaila fields with the Soviet Union which, in the words of one expert “constituted the most significant development in the recent history of the Miiddle East oil industry.”
An individual country like Iraq was totally dependent on the production decisions of the companies for its main source of government and development revenue. There can be little doubt that the financial constraints caused by the small increase in production in Iraq over these years contributed to the overall political instability of the country, and certainly prevented the various regimes from more substantial undertakings in the areas of land reform and economic development. The political instability that characterized Iraq throughout the 1960s was most intense in the 1965-1967 period, including more than one attempted coup, and in 1968 a successful one.
Iraq looked mainly to France and the Soviet Union for assistance in implementing its national oil policy. In November 1967 INOC signed a contract with the French company ERAP for the development of some very promising areas (not North Rumaila) expropriated under Law 80. Under the terms of the contract, all exploration and development costs were to be put up by ERAP as a loan, repayable only after commercial production began.
To aid in the development of the North Rumaila fields, where oil had already been discovered, Iraq turned to the Soviet Union. This was due in part to IPC threats to sue any Western company involved in producing or even purchasing “their” oil. A Soviet delegation visited Iraq in late 1967 and signed a letter of intent that in July 1969 was translated into a definite program by a Soviet-Iraq agreement. This deal, combined with previous loan and barter arrangements with socialist bloc countries, represented a pronounced orientation of Iraq’s foreign economic policy towards socialist countries and a “proportionate erosion of the Western political and economic position in the country.”
Iraqi success in developing the North Rumaila fields with Soviet assistance did not make any easier the settlement of the long-simmering compensation dispute with IPC (for the 1961 Law 80 expropriation).
IPC claims on North Rumaila crude hindered Iraq’s ability to market that oil in the West. IPC undertook little or no expansion of its Kirkuk and Basra facilities, with a continued restraint on the growth of Iraqi government revenues and sought in negotiations to tie up the purchase contract. In November 1971, just months before North Rumaila came on stream, President Bakr warned IPC that Iraqi patience with their obstructionist tactics was wearing thin.
The government issued a two-week ultimatum in mid-May, insisting that IPC restore Kirkuk production to normal levels. The Revolutionary Command Council gave IPC three options: (1)hand over excess production at cost to INOC; (2)relinquish idle producing capacity to INOC; or (3)turn over the Kirkuk fields to INOC. The political essence of the dispute was confirmed when IPC refused to make a satisfactory response by the end of May. The company’s assets were nationalized – on June 1, 1972.
Iraq moved to buy Compagnie Française de Pétrole’s 23.75 percent share of the nationalized oil ( citing “the just policy pursued by France towards our Arab causes and more specifically towards the Palestinian cause.” The tactic was successful and resulted in a sharp increase of French trade and credits for Iraq as well as CFP’s serving a mediatory role in the compensation talks with IPC.
A settlement with IPC was finally worked out at the end of February 1973. Together with 25 percent participation in the remaining Basra concession, the settlement left Iraq with full control of 75 percent of its crude production, which then had a total capacity of 2.8 million b/d. Compensation to IPC for the takeover was set at $300 million, payable to crude, but was effectively offset by company payments of $345 million in back claims.
