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CHAPTER 1
Oil Nationalization
Never had so few lost so much so stupidly in so short a time.
— Dean Acheson on the AIOC
Origins
The history of oil in Iran begins with the famous — or, rather, notorious — D'Arcy Concession. In 1901, William Knox D'Arcy, a British gold speculator turned oil entrepreneur from Australia, bought from the shah the exclusive sixty-year rights to explore, extract, refine, and export all petroleum products across the whole length and breadth of the country — with the exception of the provinces bordering Russia. In return, he gave £50,000 in cash to the shah, issued £20,000 in shares to other prominent figures, and promised the government royalties totaling 16 percent of net annual profits. He seemed to be following King Leopold's famous dictum that "treaties must be as brief as possible, and the natives must grant us everything in a couple of articles." A company chairman later ranked D'Arcy among the greatest imperial heroes of all time — along with Cecil Rhodes, Benjamin Disraeli, and Winston Churchill.
Oil was struck in 1908 at Masjed-e Suleiman in the southwestern province of Arabestan — later renamed Khuzestan. D'Arcy soon sold his rights to the Burmah Oil Company, which had little success in Burma but had been encouraged by the First Lord Admiral, John Fisher, to take an active interest in Iran. Fisher, known as the "oil maniac," was determined to convert the British Navy from coal to petroleum. A year later Burmah became the Anglo-Persian Oil Company (APOC). Meanwhile, the British government persuaded Sheikh Kha'zal, chief of the main Arab-speaking tribe in the southwest, to lease to the company his island of Abadan for the construction of an oil refinery. Abadan, although desolate, was strategically situated at the northern tip of the Persian Gulf on the estuary of the Tigris and Euphrates Rivers. The British government also obtained dominant say in the oil company — 52.5 percent voting rights and two ex-officio directors with one chosen directly by the admiralty. These two directors had the right to veto resolutions passed by the board of directors. The government also privately reserved the right to change the board of directors if necessary. Churchill, the succeeding First Lord Admiral who completed the process of converting the Navy from coal to oil, told members of Parliament that the government needed to have guaranteed control over oil resources but assured them that the state would not actually interfere in the financial running of the private company. He later boasted: "This brought us a prize from fairyland far beyond our brightest dreams."
Once World War I broke out, the British government dispatched troops first to southwest Iran and then across the border into southern Mesopotamia to protect the oil installations from the Ottoman armies as well as from local tribes allied to the Central Powers. Similarly, in World War II, Britain invaded Iran and Iraq primarily to secure this vital industry. Christopher Hill, the great historian, in his lectures on historiography, would warn students not to believe everything they read in government documents. As an example he would give the 1941 British explanation for invading Iran. There, he would remark, you will find no mention of oil. But, he would add, the main reason was oil. How did he know? He knew because he, as a Foreign Office hand, had drafted that same declaration. Churchill, in his history of World War II, later admitted that the 1941 invasion had been necessitated by German activities in Iran as well as in Iraq that were directed at the oil industry in Abadan.
By the time World War II ended, the Anglo-Iranian Oil Company — which had changed its name in 1935 to conform to the government decree substituting Iran for Persia — was vital to the British Empire in more ways than one. With six new oil fields near Masjed-e Suleiman — at Agha Jari, Gach Seran, Naft-e Sefid, Lali, Qasr-e Shirin, and Haft Kel — the largest outside Texas, the AIOC produced more than 357,000 barrels a day. It ranked among the other so-called Seven Sisters dominating the world market — the others being Royal Dutch Shell, Gulf Oil, Texas (later named Texaco), Standard Oil of New York (known as Socony and later Mobil), Standard Oil of New Jersey (later Exxon), and Standard Oil of California (later Chevron), as well as the often overlooked Compagnie Française des Pétroles.
The AIOC provided steady sums to the British Treasury — more than £24 million a year in taxes and £92 million in foreign exchange. These were substantial sums, especially in the years of post–World War II austerity. The Ministry of Fuel and Power calculated that the Abadan refinery alone gave the sterling area more than $347 million a year. The company regularly gave its shareholders — mostly British citizens — dividends as high as 30 percent. Its Iran operations contributed as much as 75 percent of the company's overall profits — much of which went not only to shareholders in Britain but also to other oil ventures throughout the world. AIOC owned 50 percent of Kuwait Oil, 23 percent of Iraqi Petroleum, 23 percent of Qatar Petroleum, 34 percent of Anglo-Egyptian Oil, and 55 percent of Consolidated Refineries Ltd. in Israel. It built refineries in Britain, France, and Australia, as well as carrying out extensive oil explorations as far afield as Trinidad, Nigeria, Sicily, and Papua.
Its oil reserves in Iran were estimated to be the third largest in the world. Its production in Iran was the largest in the Middle East and the fourth largest in the world — after that of the United States, USSR, and Venezuela. Its exports of crude were the second largest in the world — after those of Venezuela. Its Abadan refinery was the very largest in the world, covering three square miles and producing 24 million tons a year. It also built a much smaller refinery in Kermanshah to take care of Iranian needs. The Abadan refinery met 85 percent of the fuel needs of the Royal Navy and the Royal Air Force in Asia. The company docked as many as two hundred tankers a month at Abadan, and owned more than three hundred ocean-going tankers throughout the world. Refined oil was exported directly from Abadan; crude oil was piped some 150 miles from the main fields directly to the new port of Bandar Mashur. Not surprisingly, company scientists, geologists, engineers, and field managers were proud of their accomplishments. They boasted they had "made the desert bloom."
What is more, the company was by far the largest industrial employer in Iran. It employed more than 63,000: 2,700 senior staff — mostly Britons; 4,700 junior staff — 1,500 of whom were Indians, Pakistanis, and "Palestinians"; and more than 53,000 — mostly artisans, skilled, semi-skilled, and unskilled workers — in the refinery, oil fields, and the docks. The fields alone employed more than 21,000. The company also used more than 14,000 contract laborers — almost all unskilled — for seasonal work, especially for road construction. Abadan, with a population of 115,000, contained 30,000 company employees. Another 10,000 earned their living indirectly through the company — as repairmen, shopkeepers, and small businessmen.
This dramatic growth did not necessarily endear the company to the public. On the contrary, over the years the public accumulated an ever-increasing list of grievances against the company. It suspected the company of irregular bookkeeping since it refused to both publish proper annual accounts and define what it meant by royalties based on "net profits." Instead, it calculated royalties in an opaque manner — 4 shillings per ton of oil exported (equivalent to 20–25 cents a barrel), plus 20 percent of dividends distributed to "ordinary shareholders" — after taking deductions for taxes to the British government and for sums put in reserve for future investments. The Foreign Office admitted the company was "reluctant to divulge even to us the profit element per barrel in Persian operations much less the basis on which it is calculated." It also admitted in 1949 that it was in the dark as to whether the 20 percent was on gross or net profits — that is, before or after tax and other deductions. Either way, the sum was deemed grossly unfair, especially after 1943, when Venezuela signed the first of the 50/50 deals receiving half of annual profits. Mexico had gone even further in 1938–40, nationalizing the local British and American–owned oil company. Mexico had been lucky in its timing, since America and Britain could hardly afford another major crisis right on the eve of World War II. They had no choice but to accept "fair compensation" — a term much favored later by Mossadeq. Iranian complaints against the AIOC became more vociferous in 1950 when Aramco — the American oil company in the Persian Gulf — signed 50/50 deals with both Kuwait and Saudi Arabia. Daniel Yergin describes these 50/50 deals as a "watershed" — even a "revolution" — in the history of world petroleum.
By the late 1940s, Iranian newspapers — even establishment ones such as Ettela'at — frequently pointed out that over the years the AIOC had given Iran a measly £105 million in royalties, but as much as £170 million in taxes to the British government, £115 million in dividends to British shareholders, and invested more than £500 million in its operations outside Iran. An internal AIOC memo shows that in 1949 alone, the company paid the British government £22.8 million in taxes, distributed £7.1 million in dividends to shareholders, and put £18.4 million in reserve, but gave Iran only £13.5 million in royalties. Another internal memo admitted that the company had shortchanged royalties by putting large sums into reserve. Of course, all royalties were paid in sterling, thus binding Iran firmly into the sterling area and thus making it vulnerable to the vagaries of the British pound. A confidential Foreign Office memorandum in 1949 advised that Iran should be discouraged from buying goods from the United States, since such purchases would require dollars, thus draining sterling: "A point to bear in mind," the memo explained, "is that any excessive purchases in the Western hemisphere create a new dollar drain for us so that it is dangerous for us to encourage more than absolutely essential dollar purchases by Persia." Some also suspected the company sold oil to America at discount to diminish the wartime debt owed by Britain to the United States. It is not for naught that the Persian word este'mar (colonialism-imperialism) is derived from the Arabic term estesmar (economic exploitation).
Grievances were not limited to royalties. The company ran a tight ship from Britannic House in London. It treated geological explorations as well as annual accounts as state secret — especially from the Iranian government. It sold fuel to local consumers at world prices, but to the British Navy and Air Force at undisclosed discount rates warding off all inquiries by claiming these valuable customers could turn elsewhere. It burned natural gas instead of piping it to urban centers. It avoided customs dues on imported goods — even on such household goods as refrigerators, watches, furniture, and musical instruments. It caused massive ecological damage by cutting down trees for roads and pipelines. It was rumored its well across the border in Iraq siphoned off oil from Qasr-e Shirin. It struck deals with local tribal chiefs, signed separate oil concessions with the Bakhtiyari khans, and extended political protection to Sheikh Kha'zal of the Ka'ab tribe. What is more, the company lobbied hard to place friendly officials in crucial positions — in Tehran as well as in the local administration. Its field officers, helped by British consuls throughout Khuzestan, did their very best to influence the choice of provincial governors, police chiefs, local mayors, and even tribal leaders. Such forms of meddling were so sensitive that the company continues to keep them classified even to the present day. One of the very first books on the oil industry published in Persian was aptly titled Black Gold or Iran's Calamity. Long before others, Iranians — at least, some Iranians — had begun to depict oil as a curse rather than a blessing.
The company further alienated the public in other ways. It restricted the number of Iranians promoted to managerial positions. For years, it imported semiskilled labor from India and Palestine. It preferred to hire temporary contract laborers — especially from the local Arab tribes — rather than give job security to full-time Persian-speaking workers. It failed to provide decent housing for native employees: many refinery workers lived in shantytowns; oil-field workers in desert tents. It ran Abadan as a company town with each grade of employee allocated to special districts and facilities. It was rumored — in this case falsely — that British facilities displayed signs warning DOGS AND IRANIANS TO KEEP OUT. In 1949, a group of British employees sent a confidential letter to the Foreign Office complaining that management harbored "racist" attitudes, discriminated in housing, and in the last fifteen years had hired few Iranians while doubling its European staff. MI6 warned the British ambassador that the company was highly unpopular since it considered "everyone east of Calais to be a wog." The ambassador replied that such complaints should be addressed to the commercial attaché. Professor Laurence Elwell-Sutton, who had worked for the company before entering the Foreign Office, wrote in his classic work entitled Persian Oil that the AIOC resembled a typical "colonial" enterprise — its newspapers ignored the host country, its officials rarely ventured outside its own installations, and its rules and regulations tended to encourage "a racial bar." "Segregation," he wrote, "was almost complete, whether in major matters like employment or accommodation, or in the use of buses, cinemas, and clubs":
The distinction was emphasized by trivialities such as nomenclature borrowed from India — the Britons were "sahibs," their wives "memsahibs," terms that excluded even those Persians who had the same grade as their British colleagues. ... The rarity was the Briton who made a genuine attempt to mix with Persians on his own, and he was regarded as wrong in the head. Even to meet a senior grade Persian was odd; and as for calling on a Persian of lower grade, that was unheard of. The most tragic were a few English girls who had married Persian students in England and now found themselves virtually ostracized by their British compatriots. ...
With this attitude towards Persians who were nominally their social equal (some would say superior), it is not difficult to imagine the prevailing British view of the workers, the 50,000 wage-earners with whom they were in contact every day of their lives. They were, it seemed, a race apart, "wogs," "bastards," "lousy — s." The only way to handle them, so one was told, was to browbeat them, to cow them into submission. ... This racial antipathy is to be found even among quite intelligent people here.
Not surprisingly, the company's dealings with labor were wrought with difficulties that periodically erupted into spectacular general strikes. On May Day, 1929, 11,000 refinery workers — coordinated by the underground Communist Party — struck, demanding the eight-hour day, better wages and housing, union recognition, equal pay for Iranian and Indian employees, and paid annual holidays including May Day. Strikers chased the governor and the police chief into the city fire station. The British rushed gun boats to Abadan. Order was not restored until the government declared martial law, dispatched Army reinforcements, and arrested twenty-nine ringleaders. Another 500 workers were fired. The British government thanked the shah for his "speedy and effective handling" of the situation. The company, meanwhile, blamed office workers and "Armenian agitators," even though most of the arrested were foremen, fitters, and carpenters with impeccable Muslim names. Five remained incarcerated until 1941.
An even more spectacular crisis broke out in 1946 — this time coordinated by the Tudeh (Masses) Party, the heir to the Communist Party. It began on May Day when a rally of 80,000 in Abadan repeated the 1929 demands, adding pay for Friday — the Muslim day of rest — and the strict implementation of the country's recently passed Labor Law. One woman speaker denounced the company for spending more on dog food than on wages and demanded the takeover of the oil industry: "Oh brothers, the production of oil in our land is like jewels. We must try to get these jewels back. If we don't we are worthless." This was probably the first call for nationalization heard in public.
(Continues…)
Excerpted from "The Coup"
by .
Copyright © 2013 Ervand Abrahamian.
Excerpted by permission of The New Press.
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