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The story
Founded by Deutsche Bank in 1914.1
Turkish Petroleum Company
The forerunner of the Iraq Petroleum Company (IPC) was the Turkish Petroleum Company (TPC), which was established in the early 20th century in the belief that Mesopotamia (Iraq and parts of Syria) contained substantial reservoirs of oil. It was created by Calouste Gulbenkian, a British-Armenian oil magnate.
Since Mesopotamia was an Ottoman possession, early negotiations for an oil concession centered in the empire's capital, Constantinople. The first interest was shown by Imperial German banks and companies, already involved in building the Berlin-Baghdad railway. On January 31, 1911, in an attempt to bring together the competing British and German interests in the region, a British company known as African and Eastern Concessions Ltd, was formed in which Deutsche Bank held 25% in exchange for their railway concessions and Gulbenkian held 40%. Germans working on the Berlin-Baghdad Railway had struck some oil prior to World War I and the wells were afterwards operated by the British military in a very limited capacity.
On October 23, 1912, this company became the Turkish Petroleum Company (TPC). The owners were:
Deutsche Bank: 25%
National Bank of Turkey (British-owned): 50%
Anglo-Saxon Petroleum Co. (Royal Dutch-Shell): 25%
Gulbenkian: 15% (held by National Bank of Turkey)
The Royal Navy under First Lord of the Admiralty Winston Churchill was in the process of switching from coal (available in abundance in the United Kingdom) to fuel oil, but wanted to remain in control of the production of its fuel. It undertook to acquire a controlling interest in The Anglo-Persian Oil Company, which had been in possession of the D'Arcy Concession in Persia since 1909 and was the only producer of crude oil (Masjed Soleyman oil field) and refined products (Abadan Refinery) in the Middle East outside of Egypt (which had a fledgling, but small scale oil industry). With the weight of the British government behind the enterprise, the TPC felt that it was necessary (or perhaps beneficial) to concede to the demands of these rival interests to become part of TPC. On March 19, 1914, at the British Foreign Office, an agreement was adopted, with Gulbenkian's share reduced to 5%, taken care of equally by Shell (22.5%) and APOC (47.5%), leaving 25% to Deutsche Bank. The capital was increased from 80,000 to 160,000 £1 ordinary shares, the new shares were purchased by APOC, while those of the National Bank of Turkey were distributed among the remaining two parties. The Board now had 8 members (APOC: 4, Deutsche: 2, Shell: 2). Gulbenkian's interest, from which he was entitled to reap all financial benefits, was nonvoting and his shares held in custody by APOC and Shell. In clause 10 of this agreement was formulated in short form the Red Line Agreement of 1928. The investment decision of the British government in APOC was ratified in the House of Commons on June 17, 1914, in a 254–18 vote, after a long debate in which the Turkish Petroleum Co. was apparently not even mentioned.
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Deutsche Bank brought a concession granted to the Anatolian Railway Company to explore for minerals and oil along a 40 km (25 mi)-wide strip on either side of its proposed railway in Mesopotamia. On 28 June 1914, the Turkish grand vizier confirmed the promise of a concession to TPC, but the outbreak of World War I ended TPC's plans.
When the Ottoman Empire was broken up in the aftermath of the war, the question of shareholding in TPC became a major issue at the 1920 San Remo conference, where the future of all non-Turkish and Arab-majority areas of the former Ottoman Empire were mostly decided with the creation of the League of Nations mandates for Palestine, Syria and Mesopotamia. A rising demand for petroleum during the war had demonstrated to the big powers the importance of having their own sources of oil. Since one of the original partners of TPC had been German, the French demanded this share as the spoils of war. This was agreed upon by the San Remo Oil Agreement, much to the annoyance of the Americans, who felt excluded from Middle Eastern oil and demanded an open door. After prolonged diplomatic exchanges, U.S. oil companies were permitted to buy into the TPC, but it would take several years until the negotiations were completed.
During the 1920s the Naft Khana field was discovered and brought into commercial operation by the Anglo-Persian Oil Co. in lands covered by the 1901 d'Arcy concession, including some 20 miles of pipeline to a refinery at Khanaqin on the Iraq-Iran border northeast of Baghdad. Oil production from this first commercial field and first refinery in Iraq was just a fraction of what Kirkuk was going to produce.
The 1925 concession and the policy of the Open Door
By 1925 a consortium of six American oil companies were allowed entry into TPC: Mexican Petroleum, Gulf Refining, Atlantic Refining, Sinclair Consolidated Oil, Standard Oil of NJ, Standard Oil of NY. The American group, the French, Shell and APOC each held a 25% interest, but with an overriding 10% oil royalty payable by TPC to the British APOC. The concession signed in Baghdad on March 14, 1925 (full text:) covered the provinces of Mosul (35,130 square miles) and Baghdad (54,540), but excluded the Basra province (53,580) and ran for 75 years. Gulbenkian was left out, no agreement had been reached on his share and it was to be decided at a later date. The composition of TPC in 1925 was from the outset a preliminary one.
Under the terms of the concession TPC was to conduct a comprehensive survey beginning within 8 months of March 14, and make the findings available to any future interested party. Within 32 month, TPC had to choose 24 blocks of 8 square miles each for exclusive exploitation and begin drilling within 3 years. Another 12 months later and from thereon in intervals of 1 year, an auction was to be held in which 24 new blocks were to be awarded to any interested party, which would then enter into a sub-lease agreement with the TPC. The TPC would be the recipient of the sale proceeds of these auctions. All sub-leases were under a predefined set of conditions, including a 4 shilling ($0.96) royalty per ton payable to the Iraq government and subject to a future adjustment peg to world oil market prices; the obligation to drill (in each block) 1,500 feet in the first 3 years and 500 feet in subsequent years until a block had been fully tested. The same conditions applied to TPC on their blocks and their royalty obligations. Additionally, TPC was obliged to reserve 30% of pipeline capacity for sublessees and then on a day-by-day basis buy oil from producers in a competitive market to fill that shared capacity. In 1927 the deadline for TPC's selection of its 24 blocks was extended by one year to November 14, 1928, after ongoing border disputes had caused disruptions to the geological survey parties.
Secondary Iraqi interests that were safeguarded by other clauses included: the right to appoint one government official to serve on the TPC board of directors, the obligation to TPC to employ Iraqi citizens to the extent practically possible and to also train them towards becoming capable of employment. Whenever new shares were to be issued by TPC, Iraqi interests were to be given the first right to purchase them on 20% of the new stock. These terms specifically resulted in the strongest official criticism of a generally unpopular government decision. The ministers of Justice and Education resigned over the successful refusal of TPC to honor the clause of the San Remo Oil Agreement that granted local national interests a general right to acquire 20% participation in TPC, not limited to only new shares issued.
The American group got an open door and were invited to join TPC. They managed to influence TPC policy and created an open door for further participation. But this policy was weak. Since IPC received the auction proceeds and the procedure used sealed bids which IPC processed, IPC could shut out any competitor at zero upfront cost for the lease to itself. In any event, in the revision of the 1925 concession signed in 1931 IPC was granted a blanket concession for the territory east of the Tigris and no block auction ever took place.
Oil found in 1927
The first 30 geologists were on the ground in Iraq in September 1925.
In 1925 the IRR Eastern Line meter-gauge railway extension from Eskikifri was completed via Tuz Khurmatu to Kirkuk. The headquarters for the exploration effort were erected at Tuz Khurmatu. At Qarah Tappah and at Sulaiman Beg 1,000 ft railroad sidings were laid. From Qarah Tappah 26 miles of road were built to a new road junction from which 5 miles of road were built to the drill site at Khashm Al Ahmar and 9 miles to the Injanah site. From Qarah Tappah 36 miles of 3-inch fuel pipe were laid. At Umr Mandan a 270 ft timber bridge was built. From Umr Mandan, 14.25 miles of mixed 3 and 4-inch water pipe were laid to Khashm Al Ahmar. From the siding at Sulaiman Beg 5 miles of road were built to the Palkhanah drill site. Seven miles of mixed 3 and 4-inch water pipe led from Tuz Khurmatu to Palkhanah. At a conference held in London on September 2, 1926, 10 drilling locations were selected. The road and pipe construction was carried out in the second half of 1926, 50 British company men directed a workforce of 2,500 Iraqis. (further activities of infrastructure construction in 1927 are not covered by the above cited sources). Sharqat, on the banks of the Tigris, was at the time the northern terminus of an isolated standard-gauge stretch to Baghdad of the Berlin-Baghdad railway, but was not yet connected to the main portion ending at Nusaybin on the Turkish border, because World War I had put an end to the German-led effort.
TPC planned to drill 8 holes with rotary drills to a maximum depth of 4,500 feet widely spaced east of the Tigris and 2 holes with cable-tool rigs, near the Tigris, to a maximum depth of 1,500 feet. The drilling crews were from California.
Geologist J. M. Muir located the well at Baba Gurgur, just north of Kirkuk. Drilling commenced, and on October 14, 1927, oil was struck at a depth of 1,521 feet. The initial uncontrolled gushing spilled many tons of oil, but the oil field was soon brought under control and proved to be extensive.
TPC drilled a total of 14,646 feet in 1927 and 17,781 feet in 1928.
Red Line Agreement and the creation of IPC
The discovery hastened the negotiations over the composition of TPC, and on 31 July 1928 the shareholders signed a formal partnership agreement to include the Near East Development Corporation (NEDC).
The final composition of the Turkish Petroleum Company was thus:
23.75% Anglo-Persian Oil Company (APOC)
23.75% Royal Dutch/Shell
23.75% the Compagnie Française des Pétroles (CFP)
23.75% Near East Development Corporation (NEDC)
5% Calouste Gulbenkian.
TPC was to be organized as a nonprofit company, registered in Britain, that produced crude oil for a fee for its parent companies, based on their shares. The company itself was only allowed to refine and sell to Iraq's internal market, in order to prevent any competition with the parent companies. Gulbenkian, who did not own a refinery, signed a separate agreement with CFP on or around July 31, 1928 in which CFP took on the obligation to buy his share of oil at a fair price, i.e. reasonably close to the market value at the point of shipment. The obligation had no real downside to CFP who were eager to obtain sources of supply.
The Near East Development Corporation consisted of five large US oil companies:
Standard Oil of New Jersey: 25% (41+2⁄3% after 1931, 50% after 1934)
Standard Oil of New York: 25% (41+2⁄3% after 1932, 50% after 1934)
Pan American Petroleum & Transport Co.: 16+2⁄3% (shares sold in 1931 to Standard of NJ)
Atlantic Refining Co.: 16+2⁄3% (shares sold in 1932 to Standard of NY)
Gulf Oil: 16+2⁄3% (sold shares to the remaining two in 1934)
The Mexican Petroleum Company, Texaco and the Sinclair Consolidated Oil Corp. were originally in the group of companies attempting to gain access to the TPC, but dropped out along the way. (Mexican Petroleum was a >95% owned subsidiary of Pan American Petroleum & Transport since ca. 1923 with a controlling interest dating back to 1916). In April 1926, at the start of geological survey operations in Iraq, the 5 companies making up the "American group" were already the same as those initially interested in the NEDC.
The agreement, known as Red Line Agreement after a red line drawn around the former boundaries of the Ottoman Empire (with the exception of Kuwait), effectively bound the partners to act together within the red line. The writer Stephen Hemsley Longrigg, a former IPC employee, noted, "[T]he Red Line Agreement, variously assessed as a sad case of wrongful cartelization or as an enlightened example of international co‑operation and fair-sharing, was to hold the field for twenty years and in large measure determined the pattern and tempo of oil development over a large part of the Middle East". The Agreement lasted until 1948 when two of the American partners broke free. During the period, IPC monopolized oil exploration inside the Red Line; excluding Saudi Arabia and Bahrain, where Aramco and the Bahrain Petroleum Company obtained concessions.
On June 8, 1929, the TPC was renamed the Iraq Petroleum Company Limited.
Delayed production start
The original concession of 14 March 1925 covered all of Iraq, but IPC was reluctant to develop it quickly and production was restricted to fields constituting only one-half of 1 percent of the country's total area. During the Great Depression, the world was awash with oil and greater output from Iraq would simply have driven the price down to even lower levels. Delaying tactics were employed not only in actual drilling and development, but also in conducting negotiations on such matters as pipeline rights-of-way.
The owners of IPC had conflicting interests: the Anglo-Persian Oil Company, Royal Dutch/Shell and Standard Oil had access to major sources of crude oil outside Iraq, and therefore wanted to hold the Iraqi concessions in reserve, whilst CFP and the other companies pushed for rapid development of Iraqi oil as they had limited crude oil supplies. These competing interests delayed the development of the Iraqi fields, and IPC's concession eventually expired because the companies failed to meet certain performance requirements, such as the construction of pipelines and shipping terminals. The concession was renegotiated in 1931, however, giving the company a 70-year concession on an enlarged 83,200 square kilometres (32,100 sq mi) area east of the Tigris River. In return, the Iraqi government demanded, and received, additional payments and loans, as well as the promise that IPC would complete two oil pipelines to the Mediterranean by 1935—something CFP had demanded for a long time, in order to get its share of the oil quickly to France.
Different routes and terminal locations on the Mediterranean coast were sought by the French, who favored a northern route through Syria and Lebanon terminating at the city of Tripoli on the Lebanese coast, and the British and the Iraqis who preferred a southern route, terminating at Haifa, in what then was Palestine. The issue was settled by a compromise which provided for the construction of two pipelines, each with a throughput capacity of 2,000,000 tons a year. The length of the Northern line would be 532 miles (856 km), that of the Southern line 620 miles (1,000 km).
The pipeline materializes
The pipeline was built in 2 years between the summer of 1932 and 1934, oil first arrived in Tripoli on July 14, 1934, and in Haifa on October 14, 1934 (seven years to the day after oil was first struck at the Baba Gurgur No. 1 well). Only in 1936, nine years after the discovery, did IPC export oil at the full capacity of the system.
The Kirkuk production averaged 4 million tons per year until World War II, when restricted shipping in the Mediterranean, Iraqi (Allied) hands on the valve that supplied (Axis) Tripoli, then Axis fingers on the Iraqi valve briefly during May 1941 and the unavailability of refinery capacity in occupied France, forced down the production sharply. Although the Iraq Government tried to open up the country to competition, the company taking up the new concession was bought out by IPC and, under the name of the Mosul Petroleum Company, was duly gathered into the IPC 'family' of associated companies (see below). The company also got the concession rights to southern Iraq in 1938, and founded the Basrah Petroleum Company (BPC) as their wholly owned subsidiary to develop the southern region of Iraq.
IPC partner disputes
Three issues caused protracted negotiations among the partner groups of IPC:
Revision of the Anglo-Iranian royalty: when the Iraq concession of 1925 was revised in March 1931, and IPC was granted a blanket concession over 32,000 square miles (83,000 km2) of territory east of the Tigris River, the question arose as to whether Anglo-Persian's 10 percent royalty should be extended to include the new area. After lengthy negotiations the groups arrived at a compromise settlement in November 1934, which stipulated that D'Arcy Exploration (Anglo-Iranian) would be entitled to a 7.5-percent royalty on such oil as was produced from the 32,000 square miles (83,000 km2) covered by the revised Iraq concession, the oil to be delivered free of cost at the field, with IPC paying the royalty due the Iraq Government.
Tax matters: since IPC was a British-chartered company, the British groups would not have been subject to double taxation. The non-British groups, however, did not relish the idea of having the earnings of IPC taxed once by the British Government and again by their own governments. Eventually the groups agreed to transfer all pipeline operations to IPC, and price crude to the groups on the basis of management's estimate of British income tax cost plus 1 shilling profit per ton. Under this plan IPC's profits were nominal and its tax liability to the British Government was relatively small.
From Wikipedia’s article on Iraq Petroleum Company, shared under CC BY-SA 4.0.4