First section, pp. 47-84
CHAPTER IV
JOINT CONTROL THROUGH COMMON OWNERSHIP--THE IRAQ PETROLEUM CO., LTD.
The Iraq Petroleum Co., Ltd., was the first joint venture in which important American and foreign oil companies were united in one operation. In the words of one of its founders, IPC "is a unique company born of prolonged and arduous diplomatic and economic negotiations." 1 The history of IPC, which is probably more tangled and dramatic than that of any other oil company, reveals that restrictive influences were at work from its inception. IPC was not organized and operated as an independent corporate entity; rather its policies and management were determined by and made to serve the mutual interests of the major international oil companies which jointly owned the majority of its shares.
HISTORY AND EARLY DEVELOPMENT
The history of IPC dates back to the last decade of the nineteenth century when C. S. Gulbenkian, an Armenian, made a comprehensive report on the oil possibilities of Mesopotarnia, which attracted the attention of the Turkish Sultan's Minister of the Liste Civile 2 and the Minister of Mines. Gulbenkian's report prompted the Turkish Sultan, Abdul Hainid, in 1904 to transfer the ownership of immense tracts of land in Mesopotamia from the Ministry of Mines to the Liste Civile. This, in fact, was a transfer from the government to his private account.
Interest in oil concessions in the Near East was growing, and competition between British and German interests for oil and railroad concessions was especially keen.3 Around 1890, the Germans, through the: Deutsche Bank, secured a concession in Mesopotamia for the Bagdad Railway, which included mining rights extending 20 kilometers on both sides of the projected railway.4 The Germans were anxious to enlarge the claims of the Bagdad Railway but were hampered by the shift in ownership from the Turkish Government to the Liste Civile. Whereas their concession had been granted by the former, it was the latter which now owned the lands. Not only were the Germans unable to obtain concurrent mining rights in the same region; it was even deemed inadvisable to press the Turkish Governinent for concessions on lands held by the Liste. The German interests did, however, obtain a letter from the Turkish Government which promised preferential treatment regarding mining rights.5
At about the same time, British interests were also bargaining with the Turks for an oil concession. In 1901, William K. D'Arcy 6 obtained a 60-year oil concession from the Shah of Persia covering 500,000 square miles, or five-sixths of the Persian Empire (now Iran). 7 Mr. D'Arcy, anxious to extend his concession into Mesopotamia, sent representatives to negotiate with the Minister of the Turkish Liste Civile in 1901 and again in 1903. But the nearest thing to a concession which he obtained was a letter from the Grand Vizier promising that the Sultan would confirm the arrangement for oil rights in Mesopotamia. 8
In 1904, after a visit to Constantinople by the Kaiser, the German-owned Anatolian Railway Co. obtained a concession from the Sultan's Liste Civile to explore for oil within a radius of 20 kilometers on both sides of the proposed right-of-way in the Vilayets 9 of Mosul and Bagdad. The concession contract provided that if certain development work were not performed within a stipulated period, the concession would become null and void and that the Liste Civile was to reimburse the concessionaires for all expenditures. 10
Mr. D'Arcy again entered the bargaining in 1904. Although be was again unable to obtain confirmation of the Sultan's promise, as a result of his efforts the Sultan informed the Germans that their rights under their concession had expired because of nonperformance. The Germans filed a claim with the Liste Civile for £20.000, covering expenditures made for geological work performed, but the claim was never paid and the Germans, therefore, took the position that the concession was never invalidated. 11
From 1904 to 1912 many attempts were made by both the Germans and the British to obtain confirmation of their claims to Mesopotainia oil, with only the negative result that each was successful in blocking the other's efforts. In 1908, D'Arcy incorporated as D'Arcy Exploration Co. 12 and transferred all his oil claims in Mesopotamia and Persia to Anglo-Persian Oil Co., Ltd. In the spring of 1909, he was about to close a deal with the Turks when the Young Turk Revolution swept Sultan Abdul Hamid out of power. The Young Turk Government was pro-British; and in 1910, a new institution, the National Bank of Turkey, was founded to support British enterprise in Turkey. All the capital was held by British citizens, and C. S. Gulbenkian was nominated a director and a member of its executive committee. Mr. Gulbenkian apparently believed that a satisfactory solution to the Mesopotamia oil claims could be attained only by cooperation with the German interests. Accordingly, overtures were made and an agreement was reached between the National Bank of Turkey and the Deutsche Bank, which controlled the Anatolian and Bagdad railways, to form a British limited-liability company in which the Deutsche Bank would hold a 25-percent interest. Thus there was formed on January 31, 1911, African and Eastern Concessions Limited, which on October 23, 1912, became the Turkish Petroleum Co. (with a capital of £80,000); and in April 1929, became the Iraq Petroleum Co., Ltd. 13 Ownership of the shares of the Turkish Petroleum Co.(hereafter called TPC) was distributed as follows:
| Percent | |
| Deutsche Bank | 25 |
| National Bank of Turkey (15 percent was held for Mr. Gulbenkian) | 50 |
| Anglo-Saxon Petroleum Co., Ltd.13a (Subsidiary of Royal Dutch-Shell) | 25 |
The most important feature of the new corporation was an agreement by the parties not to compete with the company in obtaining concessions and not to hold any concessions independently of the company. 14 The Deutsche Bank, in return for a 25-percent interest in the Turkish Petroleum Co., conceded to the company the claims held by the Anatolian and Bagdad railways.
Although one group of British interests owned part of the Turkish Petroleum Co. through the National Bank of Turkey, the D'Arcy group found itself excluded. It pressed vigorously for an interest in the company. The D'Arcy interests themselves were taken over in 1909 by a new firm, Anglo-Persian Oil Co., the name of which was later changed to Anglo-Iranian Oil Co.
During the period 1904-14, when the British and Germans were competing for oil concessions in the Middle East, the British Government was considering the possibility of converting the British Navy from coal to oil. On March 3, 1913, the British Royal Commission which had been appointed to study the problem reported that the British Navy should fuel with oil, which, of course, had to come from abroad, instead of coal, which the British Isles produced in abundance. 15 Winston Churchill, then First Lord of the Admiralty, announced the Admiralty's oil policy in a speech before the House of Commons on July 17, 1913, in the following words:
Our ultimate policy is that the Admiralty should become the independent owner and producer of its own supplies of liquid fuel. * * * We must become the owners, or at any late the controllers at the source, of at least a proportion of the supply of natura1 oil which we require 16
The policy led to the purchase of a controlling stock interest in Anglo-Persian Oil Co. 17 by the British Government in May 1914. The British Government also obtained the power to appoint two directors of the company. Although these directors were supposed to have no part in the ordinary commercial management of the business, they had the power to veto any proposal made by the other directors. 18
Despite these various maneuvers, neither D'Arcy's group, now held by Anglo-Persian, nor the Turkish Petroleum Co. had yet been able to obtain an actual concession agreement for Middle East oil. With the British Government actively engaged in pushing Anglo-Persian's interest, the owners of the rival Turkish Petroleum Co. felt that steps were necessary to remove the opposition of Anglo-Persian. Accordingly, a conference was held in 1914 at the British Foreign Office, and the Foreign Office agreement of March 19, 1914, was adopted. Parties to the agreement were representatives of the German and British Governments, the National Bank of Turkey, Royal Dutch-Shell through the Anglo-Saxon Petroleum Co., Ltd., the D'Arcy group, and the Deutsche Bank. This agreement provided for a fusion of interest in Turkish Petroleum concessions. Specifically it was agreed that the D'Arcy group (acting for Anglo-Persian) should obtain a 50-percent stock interest in Turkish Petroleum Co., while the Deutsche Bank and Anglo-Saxon Petroleum Co. were each to hold a 25-percent stock interest. A 5-percent beneficiary interest for Mr. C. S. Gulbenkian was to be contributed equally by the D'Arcy and Anglo-Saxon groups out of their respective holdings, and, in the event of Gulbenkian's death, the D'Arcy group and Anglo-Saxon were to have the option of purchasing his interest in their names. Aside from admitting the D'Arcy group into Turkish Petroleum Co., the Foreign Office agreement also provided that---
the three groups participating in the Turkish Petroleum Co. shall give undertakings on their own behalf and on behalf of the companies associated with them not to he interested directly or indirectly in the production or manufacture of crude oil in the Ottoman Empire in Europe and Asia, except in that part which is under the administration of the Egyptian Government or the Sheikh of Koweit or in the transferred territories on the Turco-Persian frontier, 19 otherwise than through the Turkish Petroleum Co. 20
This provision and Gulbenkian's 5-percent share became important factors in subsequent negotiations.
Following the adoption of the Foreign Office agreement, the Turkish Petroleum Co., prompted by the British and German Ambassadors, 21 continued to press for a. concession agreement with the Turkish Government. On May 18, 1914, the German and British Ambassadors handed to the Turkish Government the draft of a convention covering the oil rights in Mosul and Bagdad. On June 28, 1914, the Grand Vizier agreed to lease the rights to the Turkish Petroleum Co., stating:
The Minister of Finance, which has taken over from the civil list matters concerning petroleum deposits already discovered or to be discovered in the vilayets of Mosul and Bagdad, agrees to lease them to the Turkish Petroleum Co., and reserves the right later on to fix its own share as well as the general terms of the agreement 22
This was a promise for a concession, but the war interrupted negotiations before an agreement was reached, and the operations of Turkish Petroleum Co. remained suspended until 1918. The statement by the Grand Vizier, however, was one on which the Turkish Petroleum Co. relied heavily for its claims to Mesopotamian oil after World War I.
All negotiations for an oil concession in the Middle East ceased with the outbreak of war in 1914. The stock interest of the Deutsche Bank in Turkish Petroleum Co. was taken over by the British Alien Property Custodian and held throughout the war. After the arrnistice of 1918, however, negotiations between the English and French were undertaken, resulting in the signing of the San Remo agreement on April 24, 1920. 23 This agreement awarded the Deutsche Bank's 25-percent share in Turkish Petroleum Co. to the French Government. In return, the French consented to the construction of pipelines and the transportation of oil through French spheres of influence from Mesopotamia to the Mediterranean. Another provision of the San Remo agreement provided for the granting to the native government of Mesopotamia of a 20-percent interest in any private petroleum company that was set up to exploit the oil lands of that country. The French and British, under the agreement, were to support their respective nationals in any common negotiations for oil concessions in Rumania or Russia.
AMERICAN-BRITISH DISPUTE OVER MESOPOTAMIA AND THE "OPEN DOOR"
The alleged British oil monopoly in British mandated territories and the signing of the San Remo agreement led to a heated and prolonged diplomatic dispute between American and British Governments over the oil resources of the Middle East. The Ajnerican Government, under Secretary of State Colby and later under Secretary of State Hughes, waged a determined diplomatic battle with the British regarding the rights of American oil companies to participate in the development of Middle East oil resources. 24
Before World War I, Mesopotamia (now Iraq) had been a part of the old Ottoman Empire under Turkish control, but, at the close of the war, Mesopotamia became a mandated area under British control. 25 In 1919, when the British refused to permit American oil companies to send exploration parties into Mesopotainia, a diplomatic dispute arose which resulted in a long series of diplomatic notes and protests being exchanged between the American and British Governments. Between the two Governments, the dispute was over the principles which should apply in mandated regions (thus including the San Remo agreement). Underlying this issue, however, was a struggle between the major oil companies of the United States and Great Britain, actively supported by their respective Governments, over the oil resources of the Middle East.
The American position in the dispute was essentially the "open door" policy, the important provisions of which were (1) that the nationals of all nations be subject, in all mandated territories, to equal treatment in law, (2) that no economic concessions in any mandated region be so large as to be exclusive, and (3) that no monopolistic concession relating to any commodity be granted. The United states Government maintained that the war had been won by the Allied and Associated Powers fighting together, and that, consequently, any benefit, whether in oil interests or otherwise, should be available to the nationals of all the Allied Powers, and should not be seized by those of any one particular power. Moreover, the United States asserted that the San Remo agreement discriminated against the rights of American nationals, that no oil rights in Iraq were vested in the Turkish Petroleum Co., and that no valid concessions could come into existence except through the government of the people of the territory. The British point of view was that British nationals had "acquired rights," that these rights must be respected, and that, although the United States had been an Allied Power, this fact gave its nationals no right to trespass upon "acquired rights." The term "acquired rights" referred to the rights held by the Turkish Petroleum Co. and the rights promised to that company by the Ottoman Grand Vizier, as evidenced by his letter of June 28, 1914, to the British and German Ambassadors. 26 The controversy between the British and American Governments continued until the partners of the Turkish Petroleum Co. consented to discuss with representatives of the American oil industry a basis for American patricipation in the Turkish Petroleuni Co. The resultant negotiation revolved around the State Department's "open door" policy. It will be discussed in detail in a subsequent section.
Early efforts of American oil companies to obtain a foothold in Mesopotamia..--During the dispute between the British and American Governments, the American oil companies, working through official channels, were continuing their own efforts to gain a foothold in the Middle East. In the summer of 1919, Standard Oil Co. (New Jersey), indicated an interest in the oil fields of Mesopotamia, and the problem was discussed with the United States Government. Standard was advised that the efforts of any single company to obtain concessions in Mesopotainia would not be supported, but that the Government would act in behalf of the entire American petroleum industry. Later in 1919, the American Petroleum Institute adopted a resolution in which it expressed the fear that American oil companies might be excluded from participation in Mesopotamian oil and asked that the State Department take appropriate action. In November 1919, Walter C. Teagle, president of Standard Oil Co. (New Jersey), working through the United States Bureau of Mines, asked permission to send a geological survey party into Mesopotamia. He was advised, however, that the State Department had already taken up the Mesopotamian question with the British Government and had been informed that no oil reconnaissance parties would be permitted until the status of Mesopotamia was finally decided.
In November 1921, a group of seven American companies notified the State Department that they were prepared to send a party of geologists and engineers to Mesopotamia for a reconnaissance survey. 27 After petitioning the Secretary of State for permission to make the indicated survey, they were advised that "as soon as this Department learns that permission for prospecting in Mesopotamia is being or may be granted by the authorities in that territory, you will be promptly informed." 28
While the American oil companies directed most of their efforts through official channels, they also investigated the possibility of secretly purchasing the claims to concession rights in Mesopotamia held by the Deutsche Bank. As previously noted, these claims had been granted to the Bagdad and Anatolian railways, and were turned over to the Turkish Petroleum Co. in 1912. 29 After a full investigation, however, it was decided that, because of the many political complexities involved, a better procedure would be to continue the efforts to obtain participation in Turkish Petroleum Co.
It should be remembered that during the period of these negotiations, the United States was the most important supplier of oil in the world. The American oil industry produced in 1921 about 65 percent of the world's oil supplies, and purchased about 17 percent of the remainder (mostly from Mexico). After satisfying all American needs, the industry exported about 58 percent of total foreign requirements. 30 Anglo-American Oil Co., a former subsidiary of Standard Oil Co. (New Jersey), controlled over 50 percent. of the total business of the United Kingdom. 31 Thus, the American oil companies were in a strong bargaining position. It is not known if they actually used their bargaining strength to the extent of threatening to withdraw from the export market, but the ability was discussed by officials of Standard Oil Co. (New Jersey).32
Negotiations with the Turkish Petroleum Co. (TPC), 1922-28.--A definite improvement in the tense relations between the American and British-Dutch oil companies and their respective governments occurred in June 1922 when Sir Charles Greenway, chairman of the Anglo-Persian Oil Co., cabled A. C. Bedford of the Standard Oil Co. (New Jersey), suggesting that a representative be sent to meet with the Turkish Petroleum Co. at the earliest possible moment. 33 The matter was discussed with Secretary of State Hughes, and on June 26, 1922, Mr. Bedford informed Sir Charles Greenway that he had conferred with the State Department and obtained its consent to discuss a basis for American participation in the Turkish Petroleum Co., provided (1) that the principle of the "open door'' in mandated territories be maintained, (2) that the State Department not withdraw its views respecting the validity of the Turkish Petroleum Co. claims in Mesopotamia, and (3) that any arrangement of practical questions involved should be on a tentative basis and subject to acceptance by time State Department. 34 Sir Charles replied that any discussion would be without prejudice to existing conditions or to the rights on either side and to the approval of their respective governments. 35
The seven American oil companies that had been interested in Mesopotamian oil selected W. C. Teagle and W. D. Asche, president and vice president, respectively, of the Standard Oil Co. (New Jersey) to represent the American companies in the negotiations with TPC. Negotiations began in July 1922 and continued for 6 years until l928, when the American group's share interest in TPC was finally settled.
In order to enable the American companies to come to a group decision and to keep up with the negotiations, frequent meetings of the group were held in this country throughout the period 1922-28. Early in the negotiations, the Texas Co. indicated that it no longer desired to obtain an interest in TPC. Later, Sinclair also dropped out. When negotiations were completed on July 31, 1928, only five American companies participated in the Near-East Development Co., the corporation established to hold the American group's interest in TPC. Standard Oil Co. (New Jersey) and Standard Oil Co. (New York) each received a 25-percent interest, while each of the three remaining companies was allotted a 16-percent share.35
The negotiations between the TPC and the American group expressed not only private but also governmental interests. It will be recalled that the British Government owned a controlling stock interest in the Anglo-Persian Oil Co. whose subsidiary, D'Arcy Exploration Co., held a 50-percent interest in TPC. Royal Dutch-Shell, whose 25-percent interest in TPC was held by Anglo-Saxon, was owned by both English and Dutch capital, and both Governments were interested in its affairs. The French Government formed a quasi-governmental corporation, Compagnie Francaise des Petroles (CFP), to hold its 25-percent share interest in TPC. 37 The American group had the official support of the United States Government. The only private owner who participated in the negotiations without governmental support was Mr. Gulbenkian, and he held a claim to only a 5-percent beneficial share interest in TPC. Throughout the prolonged negotiations, the United States, British, and French Governments were kept continuously informed of developments, and the interested companies were never at a loss for official sanction or advice on any particular point at issue.
No attempt will be made in this report to discuss or analyze the political considerations that may have influenced the decisions of the respective interested groups. Moreover, it is not necessary to discuss many aspects of the struggle for commercial as distinct from political advantage. Attention will be focused upon the central issues upon which the groups had to agree before the American group could be admitted as a shareholder in TPC. The major points which the groups interested in TPC had to settle and which consumed most of the time of the negotiators were: 38
The "open door" plan;
The self-denying clause;
The working agreement;
The controversy with Gulbenkian;
The Anglo-Persian Oil Co.'s overriding royalty; and
The American group's share interest in TPC.
The "open door plan" is proposed.--When discussions with the TPC representatives began in 1922, the American group proposed the adoption of the "open door" policy. The policy had been enunciated by the State Department in the diplomatic dispute with the British, and its adoption was made a sine qua non of American participation in TPC. In their first attempt to reach a workable basis, the American group proposed a plan for effecting the "open door" patterned along the lines followed by the United States Department of the Interior in the sale of Osage Indian lands. Under the plan, TPC,. within 2 years from the date of confirmation of a concession by the Iraq Government, would have selected for its own exploitation a total. area not to exceed 12 blocks, the area of each block not to exceed 16 square miles. The balance of the concession, totaling some 150,000 square miles, would then have been open for subleasing by any responsible individual or corporation that might be interested in the development of oil production in Iraq. TPC would not have been a bidder on any of the subleases, but the owners of TPC, acting on their own initiative, would have been free to obtain subleases, as would any other American oil company that might have been interested in Mesopotamian oil. 39 Thus, as originally proposed, the "open door" would have been open to any and all companies interested in oil concessions in this area.
The "open door" is partially closed.--Early in their discussions with the American group, the partners in TPC admitted that it would be impossible to undertake any development work in Iraq until TPC's questionable claims to a concession were confirmed by the Iraq Government. The American group from the beginning had maintained that TPC claims were invalid. In 1923, TPC began active negotiatlons with the Iraq Government for a concession agreement which would validate TPC's claim. Throughout these discussions, the American group insisted that the convention with the Iraq Governmerit include provisions giving effect to the "open door" policy. The convention, concluded on March 14, 1925, included a number of provisions relating to the "open door" plan which, however, differed considerably from the original American proposals.
Under article 5 of the agreement of March 14, 1925, TPC was to select, within 32 months from the date of the agreement., 24 rectangular plots of 8 square miles each, total area of 192 square miles, for the company's exclusive exploitation. With respect to the remaining part of the concession, described as "outside areas," article 6 of the agreement provided that the Iraq Government, within 4 years from the date of the signing of the concession agreement and annually thereafter, was to select not less than 24 rectangular plots of 8 square miles each and offer them for competition under sealed bid to any responsible corporation, firm, or individual that desired to lease them. 40
The "open door" provisions in the Iraq convention made major modifications in the "open door" plan as originally proposed. First, the Government instead of the company would offer the areas. Second, the competition for outside areas was to be through sealed tender rather than through public oor open bidding. Third, the company (TPC) reserved the right, as the Government's agent, to advertise the plots, to open the tenders, and to make decisions about them in the presence of an authorized representative of the Government. Fourth, the prohibition against bidding by the company on outside offerings was omitted. These changes went a long way toward closing the "open door." The fact that the plan for submitting bids was changed from public auction with oral bids to sealed bids, with TPC acting substantially as awarding authority, gave the company effective veto power over all bids. Furthermore, since TI'C could also offer bids, any prospective lessee could be outbid at no cost to TPC, since the proceeds from the sale would be returned to the company (TPC).
The American group was opposed to these changes in the "open door" plan. In commenting upon the change from auction to sealed bids, one American oil-company representative stated that he "personally deplored this change because it undoubtedly opens the door to chicanery and fraud, assuming the management of the Turkish Petroleum Co. would practice it." 41 He proposed that an independent commission be selected to handle the bids on outside areas, but nothing came of his suggestion. 42
The "open door" is closed by the "self-denying clause."---Another question which the groups discussed at great length and which bore directly upon the "open door" plan was known as the "restrictive provision" or the "self-denying clause." This proviso was a carry-over from earlier agreements entered into by TPC, including, as noted earlier, the Foreign Office agreement of 1914. The Foreign Office agreement contained a proviso prohibiting the individual owners of TPC from being interested directly or indirectly in the production or manufacture of crude oil in the Ottoman Empire in Europe and Asia 43"other than through TPC.'' 44 All the groups except the Americans had been parties to this agreement, and when the American group began negotiations in 1922 with TPC they were informed that this restrictive proviso would also apply to their activities. Thus, in a confidential memorandum of negotiations with the Turkish Petroleum Co. prepared by W. C. Teagle of Standard Oil Co. (New Jersey), there is the following statement:
It was irnpressed upon me that if a participation by the American group is arranged, the group as a whole, as well as each individual company, would be required to undertake to be interested in this area only as shareholders in the Turkish Petroleum Co.
The American group, led by Standard Oil Co. (New York), opposed this proposed restriction on their freedom to compete for concessions,. and during the early stages of the negotiations made various attempts to revise or eliminate the provision from the agenda. As originally proposed, the American group thought the "restrictive provisions" or "self-denying clause" applied only to production. But in 1923, when they discovered that marketing was also to be restricted, Standard Oil Co. (New York), made a vigorous protest on the grounds that it was an established and growing concern in all of what was formerly the Ottoman Empire, including Turkey in Europe and Asia, Syria, Palestine, and Mesopotamia, and that it had beeti established in these markets for many years prior to the formation of the Turkish Petroleum Co. It was willing to transfer its concessions in Palestine to the Turkish Petroleum Co. on some equitable basis, but it could not agree to refrain from seeking concessions in the future or to do anything that would imperil its established marketing organizatiuns and existing rights in the affected territories.45
In July 1923, the board of directors of Standard Oil Co. (New York), discussed the possibility of eliminating altogether the proposed restrictive provisions which had been injected into the TPC negotiations. One official was of the opinion that his company (Standard of New York), would be injured in Turkey if it entered into any agreement not to be interested in production or refining other than through the TPC. 46
Again, in August 1923, the American group rejected a proposal of the French that all participants in TPC share all future concessions obtained by any of them. 47 In commenting upon the French proposal and the reasons for its rejection, W. C. Teagle of Standard Oil Co. (New Jersey) expressed the view that agreement by the American group to such a proposal might be construed as "in violation of some of our antitrust laws." 48
In July 1924, the owners of TPC suggested to the American group that the parties interested in TPC agree not to be interested in the production or refining of crude oil in Iraq otherwise than as shareholders in TPC or as sublessees under the "open door" plan. 49 This proposal was also rejected by the American group.
The American group continued to oppose any self-denying clause that would limit their freedom to act independently with respect to production or marketing in the area under the exclusive control of TPC or in the "outside areas" which were to be available for subleasing, 50 but as negotiations dragged along, opposition by the American group to any and all restrictive policies began to weaken. It will be recalled that in March 1925 TPC had signed a concession agreement with the Iraq Government validating the claims of TPC. This action reduced the bargaining position of the American group since they could no longer threaten to go into Iraq, obtain a concession on their own, and thereby cut the ground from underneath TPC. 51 Also, there was less incentive for the American companies to oppose the seif-denying clause. Production had more than doubled from 1918 to 1925, Venezuela was developing as an important oil-producing country, and all talk of an oil shortage in the United States had disappeared. 52
During 1925 and 1926 negotiations between the parties had reached an impasse. Gulbenkian and the French (CFP), had raised issues which the parties could not readily reconcile. However, in October 1926 the geologist of Standard Oil Co. (New Jersey), who had been making explorations in Iraq, rendered a very optimistic report regarding the oil possibilities there. Standard then began a new effort to reach a settlement.
This was not an easy accomplishment, however, because of certain frictions which had arisen between the various parties. Thus, a wide breach had developed in the relations between the French (CFP), and the British groups. Royal Dutch-Shell had taken the position that the prewar Foreign Office agreement of 1914 was not binding on the groups and had obtained a concession in the Farsan Islands, 53 which, in view of the French, were within the area covered by the self-denying clause of the Foreign Office agreement of 1914. The French contended that this concession should be held by TPC for the benefit of all the groups, and brought suit in the English courts to enforce the demand. There had also been a definite break in relations between Gulbenkian and Sir Henri Deterding, 54 which made it still more difficult for the parties to reach an agreement.
The insistence upon the inclusion of a self-denying clause in the agreement came principally from the French and Mr. Gulbenkian. The French group (CFP) and Gulbenkian insisted that all the parties in TPC be bound by the Foreign Office agreement of 1914, and that this agreement cover not only the former Ottoman Empire but also the "outside areas" under the TPC concession with the Iraq Government. The "outside areas" were concession areas that were not reserved for exclusive exploitation by TFC, but were to be opened for competitive bidding. The French and Gulbenkian maintained that no shareholder in the TPC could be interested in any of the "outside areas" under the Iraq convention except through TPC. The French also contended that the limitation of TPC's exclusive exploitation rights to only 24 plots of 8 square miles each was not in compliance with the San Remo agreement, which gave them rights to 25 percent of all crude oil that might be produced in Mesopotamia. However, they were willing to compromise this point in return for a self-denying clause similar to the one included in the Foreign Office agreement of 1914.
Offers and counteroffers passed back and forth, with the American group taking the position that the self-denying clause, as demanded by the French, would nullify the "open door" scheme. 55 However, the French, who had the support of the French Cabinet, were insistent that all groups accept a self-denying clause. Behind this attitude was the realization that they could not afford to be put in the position of standing alone in the competitive bidding for any "outside areas" covered by the concession. Moreover, they anticipated reeeiving enough oil from Iraq to become independent of all other supplies. 56
The persistence of the French and Gulbenkian, coupled witli a weakening of the opposition by the American and British groups, eventually led to a compromise which retained most of the force of the self-denying clause. Specifically, this clause was not to apply to the American group or its members, insofar as "outside areas," i. e., areas within the TPC concession that were open for competitive bidding, were concerned, but would apply to the American group in other territories that were formerly in the Ottoman Empire. Along these lines, an agreement was finally reached. 57
In October 1927, the French presented a map of the Middle East on which they had outlined in red the area they considered to be the former Ottoman Ernpire--the area to which the self-denying clause should apply. 58 Although the British groups did not regard the map as historically accurate, they were willing to accept it for the purpose of un agreement between the parties. The American group also accepted, with Gulf entering a reservation as to whether the American group, and particularly Gulf, might not obtain more oil in the Ottoman Empire if the self-denying ordinance were omitted. Standard Oil Co. (New Jersey), however, thought that it was a case of take it or leave it, and that if additional production were found outside of Iraq, the self-denying clause would benefit rather than harm the interests of the American group. 59 Moreover, the Americans were also now beginning to recognize that if all other groups were bound under a self-denying clause while they were left free, the other groups would be able to outbid the Americans for outside areas, since, under the TPO agreement, "they would lose only one-fourth of the amount paid for a plot and the balance would be returned to them by TPC. 60
The acceptance of this slightly-qualified self-denying clause went a long way toward closing the "open door." In fact, for the participating companies, the "open door" was completely closed, not only in the Iraq concession area but in the whole Ottoman Empire. With respect to "outside areas," the American group did get a special provision inserted in the group agreement permitting them to apply for sub-leases on "outside areas" and, if obtained, the plots could be operated or disposed of for their own account. 62 But. this was more or less a gesture since, before the Americans could select a plot, they had to give 30-days notice to TPC of their intention to apply and then wait 10 days to see if any of the other groups in TPC proposed to make a tender on the plot. Thus, the other groups were in a position, either individually or collectively, to outbid the Americans and otherwise make it quite difficult to obtain plots independent of TPC control. Moreover, since the TPC would handle both the bids and the granting of awards, TPC became judge and jury with regard to concessions in the outside areas. Hence, when the American group, after 6 years of negotiations, took up its share in TPC in July 1928, the "open door" was, for all practical purposes, closed to the partners of TPC. In reality, they could now act only through TPC--a joint venture in every sense of the word. 63
The working agreement and the Gulbenkian controversy.--As a condition for participation in TPC, the American group insisted that a "working agreement" be adopted which would control the internal policics and operations of TPC. The American group presented a general outline of the working agreement when negotiations with TPC first began in 1922. Thereafter, and until the group agreement of 1928 was signed, the working agreement was one of the unsettled issues which had to be resolved by the parties interested in TPC.
Two basic considerations led the American group to formulate the working agreement. First, the Americans did not want TPC to compete with existing oil companies, 64 and second, they wanted to avoid payment of taxes to the American and British Governments on the earnings of TPC. 65 These objectives could best be accomplished by the operation of TPC as a non-profit-making company. Hence, the draft working agreement provided that TPC should be a non-profit-making enterprise, with each shareholder taking its pro rata share of the crude oil produced at a price sufficient only to cover cost of production, transportation, and a nominal profit--the profit to be limited to a reasonable return on investment. 66
This proposed agreement ran up against an unexpected barrier in the person of Mr. Gulbenkian. Throughout the early stages of their negotiations with TPC, the American group had not been greatly concerned about Gulbenkian's 5 percent interest in the company. 67 It was believed that a settlement could be arranged with him on an equitable basis. Under these circumstances, the American group was somewhat surprised to find in July 1924, at a time when they were practically ready to sign a convention agreement. with the Iraq Government, that Gulbenkian was an obstacle to carrying out the working agreement. Gulbenkian's position was based upon the simple fact that he had no refining or marketing facilities or any type of organization to handle crude, and hence was not interested in having his pro rata share of crude produced at a nominal profit by TPC. Rather, he wanted TPC to be operated for maximum profits.
In their desire for the working agreement, the Americans were supported by the French (CFP), who wanted to obtain as much crude as possible and become independent of the large oil companies. The British groups, Anglo-Persian and Anglo-Saxon, were indifferent to the working agreement because they would be liable for British income taxes in any event, and the working agreement was of no real advantage to them. All the proposed shareholders except Gulbenkian were, however, in a position to take the crude produced by TPC into their integrated refining and marketing organizations and obtain profits from transportation, refining, and marketing. Thus, the working agreement was viewed by Gulbenkian as a means devised by the large oil companies to deprive him of the benefits of his share interest in TPC.
Many offers and counteroffers were made in an attempt to reach an agreement with Gulbenkian which would permit the American group to participate in TPC and adopt the working agreement. In 1924, Gulbenkian threatened to obtain an injunction to restrain TPC from putting into operation the working agreement, which he alleged was a fraud upon his minority interests. 68 The American and British groups attempted to have their respective Governments bring diplomatic pressure upon Gulbenkian, but to no avail. 69 Gulbenkian countered with an offer to accept arbitration by a high British official, and from that time onward until an agreement was reached, the negotiations were conducted on the basis of reaching an agreement with Gulbenkian rather than eliminating him from TPC.
In addition to a refining profit from the operations of TPC, Guibenkian wanted a share in any outside plots which were to be subleased. Under the "open door" provision applicable to the outside areas, the benefits of Gulbenkian's 5-percent interest would have been limited to the 24 plots reserved for the exclusive exploitation by TPC under the Iraq Convention. Thus, Gulbenkian became a strong advocate of the self-denying clause in order to extend the area from which lie would be able to enjoy the benefits of his 5-percent interest. Moreover, he insisted from time to time that the word "manufacture" be included in the self-denying clause so that all refining operations would be conducted by TPC, thus enabling him to obtain refining profits. He also contended that if he sold his crude, he should get a price which would include a refining profit.
At one time, the Americans believed that they had reached an impasse and threatened to withdraw from negotiations with Turkish Petroleum Co. unless the British groups were able to induce Gulbenkian to agree to the working agreement. Later, however, the Americans agreed to join rrpc without the working agreement but the French were not willing to admit the Americans on this basis. After various moves and countermoves, the French (CFP) induced Gulbenkian to agree in 1927 to adopt the working agreement provided the French would purchase Gulbenkian's pro rata share of the crude produced by TPC. 70 The French asked the other three major groups to join them in purchasing Gulbenkian's oil. The Americans were at first reluctant to do so, but finally the British and American groups secretly agreed with CFP to share the purchase. 71 The settlement with Gulbenkian made in July 1928, with the signing of the group agreement, included all the provisions of the working agreement that made TPC a nonprofit company.
Anglo-Persian's overriding royalty and the American group's share interest in TPC.--To become a partner in TPC, the American group had to receive a portion of the stock of TPC. The question of how much this share should be and from whom it should be obtained, arose early in the discussions between the Americans and the original owners of TPC. In the ensuing negotiations, the proposed solution, an overriding royalty for the principal shareholder, Anglo-Persian, was directly related to the American group's share participation.
When the American representatives held their first meetings with the owners of TPC in 1922, they stated that the minimum participation acceptable to them would be 25 percent. In general, they held that their participating share should at least be equal to that held by the French (CFP), and Anglo-Saxon (Royal Dutch-Shell). As a compromise proposal to the American group's demands, Sir Henri Deterding, of Royal Dutch-Shell, proposed that Anglo-Persian cede to the American group one-half of its 50-percent participation, and thereby equalize the holdings of all groups at 25 percent each. As compensation, Anglo-Persian would be granted an overriding royalty not to exceed 6 shillings per ton. 72 In this way, the American share participation in TPC became linked to an overriding royalty for Anglo-Persian. But Anglo-Persian rejected Deterding's proposal on. the grounds (1) that the compensation was inadequate for relinquishing one-half of their holdings and (2) that they were more interested in obtaining crude oil than in a money payment.
Shortly thereafter, a counterproposal was made by Anglo-Persian which provided that the Americans would be offered a 20-percent participation, to be obtained by a pro rata reduction in the holdings of the three large shareholding groups in TPC. Under this proposal, Anglo-Persian's interest would have been reduced from 50 percent to 40, and the French (CFP), and Anglo-Saxon (Shell), interests from 25 to 20 percent each. This proposal, however, was not acceptable either to Shell or the French (CFP). The French (CFP), took the position that it would be hard for the French people to understand why their participation, awarded under the San Remo agreement, should be reduced. Subsequently, the three owners of TPC, Anglo-Persian, Anglo-Saxon (Shell), and the French (CFP), informed the American group that the absolute maximum of participation which they could cede to the Americans was 12 percent. This offer was flatly rejected by the Americans as unacceptable, and for a few months negotiations were practically at a standstill.
Late in 1922, the question was reopened by another offer to the American group from the partners in TPC. Under this proposal, each of the major partners of TPC--Anglo-Persian Shell, CFP, and the American group--were to have a 24-percent interest, while Guibeiikian would hold a 4-percent nonvoting interest. As consideration for the reduction of its shareholdings, Anglo-Persian was to receive a royalty of 10 percent of the crude oil produced from the concessions, delivered into the pipeline free of all cost. 73 The American group questioned the 10 percent overriding royalty and also the reduction of the American share to make allowance for Gulbenkian's interest. The British groups (Shell and Anglo-Persian), insisted that the American group accept pro rata responsibility for Gulbenkian's holdings, but the Americans rejected this on the ground that under the Foreign Office agreement, Anglo-Persian and Anglo-Saxon (Shell), were responsible for Gulbenkian's share interest in TPC. The American group was also concerned about the area to which the 10 percent overriding royalty would apply. Was it to apply to the oil from the entire concession, including "the outside areas," or only to the crude oil produced by TPC on the 24 plots?
When the parties became entangled in the long discussion with Gulbenkian in 1923-26, the respective share interests of the various parties and the size of the Anglo-Persian royalty became issues for negotiation. Gulbenkian was opposed to the 10-percent overriding royalty, which he believed was a contribution to Anglo-Persian for which he would receive no benefit. Later, however, Gulbenkian agreed to let Anglo-Persian have the 10 percent of free oil if, in return, Anglo-Persian and Royal Dutch-Shell would accept the Foreign Office agreement of 1914. The French were also reluctant to agree to Anglo-Persian's 10-percent overriding royalty. CFP at first attempted to obtain a one-half percent royalty from Shell in return for a 1 1/4 percent share interest in TPC. Shell rejected the CFP request. When the parties agreed to accept the self-denying clause of the Foreign Office agreement of 1914, CFP gave up its demands for a royalty.
In the final settlement, all.parties agreed to give Anglo-Persian a 10 percent overriding royalty on all oil obtained from the 24 plots which were reserved for exclusive exploitation by TPC. Tue American group obtained a 23.75 percent interest in TPC, and Anglo-Persian, and Royal Dutch-Shell agreed to he responsible for Gulbenkian's 5 percent interest, 74 which reduced Anglo-Persian's interest to 23.75 percent and Royal Dutch-Shell's interest to 22.50 percent. CFP then agreed to give a 1 1/4 percent share in TPC to Royal Dutch-Shell (thus equalizing the American, French, Ang1o-Persian, and Shell's interest at 23.75 percent each), and to purchase Gulbenkian's share of TPC oil. Such was the division of the share interests effected by the group agreement of July 31, 1928.
THE SCOPE OF THE RESTRICTIVE PROVISIONS OF THE GROUP (RED LINE), AGREEMENT OF 1928
The group or "red line" agreement of July 31, 1928, which was thus worked out, constituted a partnership under which TPC became "a brotherhood of oil merchants." 75 The production, offering, dividing, and selling of crude oil was carried on by TPC at a price to cover its cost. Hence, profits accrued to the partners, and not to TPC. 76 The agreement was essentially a compact between the owners of TPC and the corporation itself, but most of its provisions concerned the interrelations of the component groups. Each of the parties (owners), was in contract with each other, 77 and each owner was bound to see that any associated companies which were controlled directly or indirectly by the respective owners, observed the agreement. 78
The agreement compromised most of the principal issues which had existed among the different groups. Thus, it admitted the Americans to TPC as a full partner along with Anglo-Persian, Royal-Dutch-Shell, and CFP;79 it put into effect the working agreement which made TPC a nonprofit crude oil distributing company; 80 it gave Anglo-Persian a 10 percent overriding royalty on all crude produced from the 24 plots to be selected in accordance with the Iraq concession agreement of March 14, 1925; it required TPC to construct a pipeline to the Mediterranean as soon as sufficient oil had been secured to justify a pipeline.
The agreement wove around the groups a web of restrictive provisions that made it impossible, for all practical purposes, to compete in production, refining, or securing concessions in the "defined area," an area which encompassed most of the old Ottoman Empire. Indeed, the prevention of competition was the sole purpose of many of the principal provisions. Thus the TPC was to have the sole right to obtain oil concessions in the defined area, and the owners as well as their associated companies, i. e., subsidiaries controlled by the owners, were not to be interested, directly or indirectly, in the production or purchase of any oil in the "defined area" otherwise than through TPC.
Article 10 of the agreement regarding production and concessions is as follows:
All the parties hereto agree that the Turkish Company or a nominee of the Turkish Company shall, except as hereinafter mentioned, have the sole right to seek for or obtain oil concessions within the defined area, and each of the Groups hereby covenants and agrees with the Turkish Company and with the other Groups that excepting only as herein provided or authorized such Group will not nor will any of its Associated Companies either personally or through the intermediary of any person, firm, company, or corporation seek for or obtain or be interested, directly or indirectly, in any such oil concession or be interested, directly or indirectly, in the production of oil within the defined area or in the purchase of any such oil otherwise than through the Turkish Company or an Operating Company under the Turkish Company.
The legal rigidity of this comprehensive restriction on the freedom of the groups to obtain concessions was slightly softened by two provisions. The first dealt with plots offered for competition (sublease) under article 6 of the Iraq concession, 82 and the second related to concessions in all other areas. If the groups unanimously agreed, a nominee on behalf of the groups was permitted to tender a bid for a lease on plots offered under article 6 of the Iraq convention, but if the nominee were successful in acquiring the lease then each partner (group), was entitled to be offered its proportionate share in the concession. 83 On the other hand, if the groups were not unanimously in favor of tendering a bid, the group or groups favoring such action were free to bid, but if they obtained the concession, it was to be transferred immediately to a company in which each of the groups would he offered its proportionate share interest. A similar rule applied to all concession areas other than those under article 6 of the Iraq concession. If TPC did not wish to apply for a concession but two groups thought otherwise, then TPC would permit the groups to bid for the concession, but if the bid was successful, each of the other groups was to be offered its proportionate interest. 84
Only under these limited circumstances could the groups bid for concessions independently of TPC. The practical effect of these escape clauses was negligible because the "share and share alike" provisos offset most of the advantage that might be obtained by independent action.
The freedom of the groups to perform refining operations independently was restricted in much the same manner as their right to seek concessions and engage in production. Under the Iraq concession, TPC was obligated to refine or supply oil to meet the local needs of the Iraq Government. In regard to this point, the red-line agreement provided that only TPC should refine oil in Iraq and that the quantity should not be in excess of Iraq consumption. 85 There was to be no surplus for export. Moreover, the groups were permitted to erect and operate refineries at seaboard terminals only if all the major groups gave their consent in writing, and then only for the purposes of (1) refining such Iraq oil as the groups did not purchase or (2) refining oil on account for any or all groups. In the latter instance, each would be entitled to have its proportionate share of the oil refined while in the former, the refined products obtained from Iraq crude had to be shared on equal terms in the "basic proportions." 86
It should be noted, however, that the red-line agreement was concerned principally with protection of supply rather than marketing. Its marketing provisions were concerned principally with limiting the operations of TPC rather than the operations of the groups. TPC had the exclusive right to market oil in Iraq (sufficient for local needs), but it could not be interested, directly or indirectly, in the marketing of oil in any other area except to fulfill an obligation under a concession agreement. 87 Marketing outside of Iraq was, therefore, left free for the groups, and TPC was not to compete with the marketing organizations of the owners of TPC.
From the above analysis of restrictive provisions, it will be seen that the red-line agreement went a long way toward granting TPC an exclusive monopoly of the oil concession and production rights in Iraq; it eliminated competition between the owners of TPC for concessions in a much larger area; and in effect, it closed the "open door."
One oil company official has called the red-line agreement "one of the outstanding instances of international sharing and cooperation." 88 The agreement has also been described as "an outstanding example of a restrictive combination for the control of a large portion of the world's oil supply by a group of companies which together dominate the world market for this commodity" 89 However characterized, it did not carry out the oil policy for Mespotamia which had been vigorously advocated by the American oil companies and the State Department in 1922.
OPERATIONS WITHIN THE RED-LINE AREA, 1922-39
The signing of the red-line agreement in July 1928 admitted the American group as an active participant in TPC's operations. Although this agreement was the culmination of 6 years of negotiations, it did not end the differences between the various owners of TPC. In 1927, oil had been discovered in substantial quantities. Hence, the partners were now confronted with two questions:
How rapidly should TPC develop the Iraq concession, and how far should they go in closing the "open door"?
The Iraq concession of March 24, 1931 .--As noted heretofore, the "open door" had been virtually closed in 1925. Of the original "open door" plan proposed by the American group, the only part which remained that could be of any practical value was the proviso in the Iraq concession agreement permitting parties, not members of TPC, to bid for leases on plots selected by the Iraq Government, i. e., the "outside areas." But no plots were even submitted for competitive bidding, and within a few years after the red-line agreement was signed, the "open door" seemed to have been finally closed.
Under the Iraq concession agreement of March 14, 1925, it was necessary for TPC and the Iraq Government to make their selection of plots before any party seeking a concession under the "open door" plan could tender bids. TPC was required to make its selection of 24 plots of 8 square miles each for its exclusive exploitation within 32 months from the date of the concession, and the Iraq Government was given 4 years in which to select the 21 plots to be offered for competition by sealed bids. Thus, TPC was to have made its selection by November 14, 1927, while the Iraq Government had until March 14, 1929, to make its selection.
Instead of selecting its plots, as the concession agreement provided, TPC asked for more time. In August 1927 the Iraq Government agreed to grant TPC, as well as itself, a 1-year extension of the time limit for the selection of plots. 90 But no selections were forthcoming since negotiations between the groups and TPC were still in progress. In April or May 1928 TPC began to negotiate with the Iraq Government for a 5-year extension of the time limitation. The King of Iraq agreed to the extension but, because of a new competitive development, was reluctant to place it before the Iraq Parliament for approval. This new factor was an independent British-Italian syndicate, the British Oil Development Sy ndicate (BOD), 91 which had indicated to the King that it was interested in obtaining oil leases on the "outside areas" to be selected for subleasing under the Iraq concession. Thus the King had a bargaining point with TPC, and of course, the BOD Syndicate endeavored to induce the King to withhold the presentation of the extension agreement to the Iraq Parliament. 92 BOD's greatest bargaining power was derived from its offer to construct a transdesert railway from Bagdad to the Mediterranean. In return, BOD desired to select 24 plots which, if approved by TPC, the Iraq Government would then put up for bid under the "open door" plan. 93 Under this procedure, BOD hoped to purchase the plots and gain access to Iraq oil.
As a countermove, TPC agreed "to accept the principle of assisting in the guarantee of a railway in return for additional concessions and/or modifications in existing concessions." 94 The Iraq Government rejected several proposals which TPC placed before it and finally informed TPC that it must have a definite guaranty for the railway before the agreement for the time extension would be placed before the Iraq Parliament. In view of the offer received from BOD, the Iraq Government was of the opinion that it had to have some offer from TPC regarding the railway in order even to reject BOD's proposal. 95 TPC then offered to make a survey for the pipe-line and railway to the Mediterranean in return for a time extension of 2 years, with a further proviso that if a new concession agreement were made, a further 5-year extension would be made. 96
Although TPC continued to be interested in obtaining an extension of time within which to make its selection of plots, by the middle of 1928, officials closely connected with TPC were beginning to intimate that the Iraq concession agreement should be modified to bring the "outside areas" under TPC's control and thereby eliminate the auction plan, i. e., what was left of the "open door.'' 97
In April 1929 Sir John Cadman, chairman of TPC and formerly with the Anglo-Persian Oil Co., in reporting on a visit which lie had made to Iraq, lauded the prospects for oil development there, but also indicated his concern over the limitations on the total number of plots which could be taken up by TPC. He stated:
I must frankly state, however, that the predominant consideration in my mind--and one which grows steadily in importance the more I reflect the future of the company--is the inadequacy of the aggregate area to be definitely conceded to the company * * * when regard is had to the formidable character of the financial commitments immediately resulting from the selection. 98 [Italics added.]
Sir John went on to suggest. to the TPC board that it should make a complete review of the problems of whether the Iraq Government should not be approached on the whole subject of the concession area, the auction system, and other related questions. 99 When in June 1929 TPC 1 was informed that the Iraq Government would be pleased to discuss a modification of the agreement, 2 negotiations with the Iraq Government were expanded to include a complete revision of the 1928 agreement, and IPC prepared to make a more or less tentative selection of its 24 plots in order to comply with the old agreement and eliminate from the area of discussion the question of an extension of time.
Although, because of differences between the owners of IPC, 3 the negotiations were subject to many delays, a new agreement was finally signed by IPC and the Iraq Government on March 24, 1931, under which IPC was freed from all provisions referring to an "open door" plan. Instead of having a concession of 192 square miles, IPC now had a concession comprising all lands situated in the vilayets of Bagdad and Mosul east of the Tigris River, comprising approximately 32,000 square miles as compared with 192 square miles under the previous agreement. All provisions referring to subleasing and auctioning of plots were deleted from the agreement, and IPC was also relieved of all drilling obligations, present or future, and was given a completely free hand in developing the concession. 4
In return for the concession, IPC was to construct a pipeline with a capacity of not less than 3 million tons of oil a year. The line was to be constructed "with due diligence" and to be completed not later than December 31, 1935. IPC was to pay the Iraq Government an annual royalty of not less than £400,000 gold, one-half of which was to be recoverable by the company in subsequent years by deductions from the fixed royalty. IPC was also given permission to construct and operate such railways as were necessary for the purpose of constructing the pipeline but was not bound to build a railway. Finally, the Iraq Government was to be supplied by the company with petroleum products at base prices which were, specified in the agreement. These base prices were to vary in accordance with world market prices, and were varied annually in accordance with changes in export prices at the United States Gulf.
Contemporary records show that the American group did not vigorously defend the "open door" but acquiesced in closing it. One official stated that--
* * * so far as the Near East and the members of the American group are concerned, their position must, I feel, always be consistently maintained for the operation of the open-door plan as proposed through the offering of outside areas. 5
But he went on to say:
Considering the position of the Turkish Petroleum Co. * * * and also considering the position of the Government of Iraq * * * it is quite possible to understand that the business aspects of their respective problems might very well lead to a decision to eliminate the provision for offering outside areas and to treat the so-called outside areas as a definite part of the territory leased to the exclusive operation of the Turkish Petroleum Co. 6
This rationalization for a new agreement which would eliminate the "open door" provision was later followed by a stronger statement by W. C. Teagle of Standard Oil Co. (N. J.), who stated:
* * * it is our feeling that the desired modification in the concession should, if at all possible, he secured before November, when, under the present convention, the Iraq Government can ask the company to start putting up tracts for auction. 7
The following appears in the May 28, 1931, minutes of meeting of the IPC directors:
Mr. Seidel communicated to the board a resolution dated 13th May passed by the board of the Near East Development Corp. expressing their full approval of the new agreements. 8
Inasmuch as Mr. Seidel was the Near East Development Corp.'s director on the IPC board, this would appear to indicate that the American group approved the new agreement.
Effect of restrictive provisions of the 1928 group agreement.--The various provisions in the group agreement designed to limit the indivdual freedom of action of the partners in IPC have been noted in previous sections. Attention will now be directed to the effects and applications of these restrictive provisions in specific areas.
Gulf Oil Corp.'s option on Bahrein.--On December 2, 1925, the Eastern and General Syndicate (a British firm headed by Maj. Frank Holmes), acquired from the Sheik of Bahrein an oil concession over an area of about 100,000 acres, with the exclusive right to develop the area. Shortly thereafter, the concession was extended to include all of the island of Bahrein and the islands adjacent thereto under the jurisdiction of the Sheik of Bahrein. Subsequently, on November 30, 1927, Eastern Gulf Oil Co., a subsidiary of Gulf Oil Corp., entered into an option contract to purchase Eastern and General Syndicate's concession rights in Bahrein. Gulf was given until January 1, 1929, to exercise its option. 9
In May 1928, before the American group had signed the group agreement, Gulf confidentially advised the other members of the American group of the option contract with the Eastern and General Syndicate, but the American group held the matter in abeyance until they became members of TPC under the group agreement. 10 As one of the American signatories, Gulf was bound by its restrictive provisions.
In October 1928, the proposal was presented to the board of directors of TPC. Gulf had not decided whether or not it desired to exercise its option but wanted clarification from the TPC board before pursuing the matter further. The specific question before the board was whether Gulf's contract came within the provisions of article 10 of the red-line agreement. 11 Under article 10, it was possible for the TPC board to make one of three rulings: (1) it could decide that Bahrein was not within the defined area, as indicated by the map in the red-line agreement, and thus permit Gulf to act independently with respect to its option; (2) it could rule that Bahrein was within the red-line agreement and transfer Gulf's rights under the option contract to itself (TPC); or (3) it could rule that Bahrein was within the red line agreement and refuse to take over Gulf's option contract. In its presentation to the board, Gulf indicated that if it were covered by article 10 of the group agreement it would endeavor to get the option transferred to TPC. But the TPC board ruled that it would not accept the offer of the option and that if Gulf should decide to develop the concessions it would be bound by the terms of the group agreement. 12 In effect, this meant that, if Gulf exercised its option, any oil that it developed in Bahrein would have to be shared with TPC. Furthermore, by its ruling, the TPC board indicated that it did not want to assume any of Gulf's obligations under the option agreement.
Contractually speaking, Gulf was effectively precluded from further activity in Bahrein. On December 21, 1928, it, transferred the Bahrein option contract to the Standard Oil Co. of California, thus providing the first illustration of the use of the group agreement to limit independent action by companies participating in IPC operations.
Negotiations regarding Standard Oil Co. of California's Bahrein and Saudi Arabian concessions.--The restrictions on individual activity in the red-line agreement also hampered and embarrassed the participants in dealing with the important discoveries of oil during the 1930's by the Standard Oil Co. of California in its concessions in Balirein Island and Saudi Arabia. These important additions to known Middle East oil resources promised to disturb existing Middle East oil relationships and to upset market arrangements and unstabihze prices in Europe and the Far East. Alarmed by these discoveries, the three major groups--Anglo-Iranian, Shell, and NEDC--attempted to bring these fresh supplies of oil under some form of control. Their efforts, however, were enormously complicated by the restrictions in the red-line agreement itself, since CFP and Gulbenkian were determined to safeguard their own interests in any arrangement that could be made with Standard of California. The resulting negotiations among the group members of TPC and between them and Standard of California were extremely tedious and reached no definite conclusion up to the outreak of World War II in 1939. 13
It is interesting to note that, had the individual members been able to operate freely and independently, it is possible that a partnership arrangement would have been effected with Standard Oil Co. of California before World War II. The fundamental reason for the provisions in the red-line agreement restricting the individual activities of the participants was to prevent the groups in IPC from competing with each other. But when the IPC groups were confronted with outside competition which they wished to neutralize, they found themselves almost completely shackled by the provisions which they had originally approved for their own mutual protection.
The discovery of oil in Bahrein alarms Anglo-Persian. --The Standard Oil Co. of California obtained Gulf's option contract. to the Balirein concession. In 1928 and thereupon it immediately took steps to exercise the option.n By early 1930 negotiations were completed. Standard of California then organized the Bahrein Petroleum Co., Ltd., to hold the Bahrein concession, and exploration work began immediately. Oil was discovered in 1932, and rapid development followed.
The IPC, and particularly Anglo-Persian, 15 regarded the discovery of oil in Bahrein as a distinct threat to their interests. Previously, Anglo-Persian had controlled the only important source of crude oil in the Persian Gulf. In fact, outside of IPC, Anglo-Persian's Iran concession had been the only important source of crude in the Middle East. Moreover, Bahrein crude was low-cost crude: the discovery well came in under its own pressure at 2,008 feet. with a potential output of several thousand barrels per day; and only 12 miles of pipeline were required to get the crude to a tanker-loading terminal on the Persian Gulf. 16 Thus Bahrein was a more direct threat to Anglo-Persian than to any of the other IPC groups. The chairman of IPC (formerly with Anglo-Persian) lost no time in discussing the Bahrein problem with tIle president of Standard Oil Co. of California, but apparently without any positive results. 17
As a countermove, Anglo-Persian tried to obtain some 70,000 acres in Bahrein which was not included in the concession held by Standard of California. In 1933. Sir William Fraser, of Anglo-Persian, suggested at a meeting of the IPC groups that a concession on parts of Bahrein was of potential interest, and directed attention to the danger which the groups ran of losing concessions by the delay involved in having every step discussed by the groups before any action would be taken. He suggested that Anglo-Persian be permitted to conclude negotiations for the areas still available in Bahrein on the understanding that if none of the groups were willing to participate Anglo-Persian should be permitted to take up the concession by itself: 18 Although NEDC opposed the suggestion, 19 Anglo-Persian was eventually permitted to negotiate for a concession in Bahrein provided (a) that the terms of the offer had the concurrence of one other group, in this case Anglo-Saxon (Shell), and (b) that if the concession were obtained participation would be offered to the other groups in accordance with the group agreement. If Anglo-Persian could not obtain the concurrence of Anglo-Saxon before it concluded the deal, Anglo-Persian would then have to secure the consent of one of the other groups. 20
Despite the pressure from the British representative in IPC, Anglo-Persian was never able to obtain an interest in Bahrein, and Standard of California's concession was extended in 1940 to cover the entire island of Bahrein. 21 Had the red-line agreement not prevented Anglo-Persian from negotiating independently of the other IPC members, it is possible that Anglo-Persian would have secured a concession in Bahrein and perhaps sought an agreement with Standard of California.
Standard Oil Co. of California and IPC compete for Saudi Arabia but IPC
withdraws.--The discovery of oil in Bahrein stimulated interest in the entire
mainland of Arabia as a potential source of oil. IPC and Standard Oil Co. of
California were soon actively competing for a concession in Saudi Arabia.
There was talk of IPC forming a partnership with Standard of California, but
some groups thought this would give the American companies too large a share
in IPC. 22 Although IPC was interested in obtaining the concession, it appears
that the terms asked by the Saudi Arabian Government were not acceptable. 23
On May 5, 1933. the directors of IPC "decided that it was not desirable
that the 1PC should apply for an oil concession over El Hasa. 24"
Regardless of IPC's decision, Anglo-Persian continued its effort to obtain a concession in Saudi Arabia. As has been noted, under the red-line agreement it was necessary for Anglo-Persian to get one of the other major groups in IPC to join with it in applying for the concession. 25 Hence, in order to conform to the agreement, Anglo-Persian, on May 6, 1933, invited the American group to join in the venture. 26 It is not known whether the American group favored such a plan, but in any event the attempt failed. On May 29, 1933, Standard Oil Co. of California was granted a concession in the El Hasa area in eastern Saudi Arabia, covering about 56,000 square miles. 27
The Big Three attempt to reduce the red-line area.--With Standard of California now holding concessions in Saudi Arabia as well as in Bahrein, the Big Three (Anglo-Persian, Shell, and NEDC) were faced with a large potential competitor at their back door who was not a parent in their world-wide plan to stabilize crude oil production. 28
Confronted with a fait accompli, their next move was to try to reduce the area covered by the red line, thereby enlarging the area for which the members could negotiate independently. In 1934 Shell, Anglo-Persian, and the American group made several unsuccessful attempts to induce the French and Gulbenkian to agree to alter the red-line agreement, so as to exclude Bahrein and Arabia from the red-line area. This would have given the three groups a free hand to negotiate an agreement with Standard of California for a share in the Bahrein and Arabian concessions without having to give the French and Gulbenkian their proportionate share, as required by the red-line agreement. 29
But the French and Gulbenkian would not agree to any such proposal. It appears that the Big Three asked too much, and thus led the French to believe that an attempt was being made to eliminate them from a very large area covered by the red-line agreement. 30
Attempts to work out a compromise with the French and Gulbenkian.--Failing in their first attempt to obtain a realinement of the Red Line, the Big Three next attempted to work out a compromise with the French and Gulbenkian which would permit them (a) to acquire the Bahrein and Arabian concessions, or (b) to eliminate these concessions from the red-line area, or (c) to purchase the petroleum produced from these concessions. On July 9, 1934, NEDC (the American group), with the support of D'Arcy Exploration Co. (Anglo-Persian), was empowered by the IPC groups to negotiate and close an agreement with Standard Oil Co. of California for the acquisition of its concessions in Bahrein and El Hasa "and/or the purchase of any production of oil from these concessions or to effect with that company such other exploitation understanding as may be advisable." 31 In the event an arrangement was made with Standard of California, participation was to be offered to the other groups on the basis of their basic proportions as provided under the red-line agreement, with the qualification that CFP (the French) and Participations & Investments, Ltd. (Gulbenkian) would not participate in the first 400,000 tons of production obtained from these concessions. In addition it was agreed that if the French decided to participate and wanted to market this oil, its marketing activities would be restricted. CFP would be bound to offer their share of this additional oil to the other three major groups until such time as CFP were able to develop an eastern market which would presumably be large enough to absorb the oil acquired from the Standard of California concessions. 32
NEDC opened negotiations with the French by pointing out that adherence to the red line resulted in unfortunate repercussion for some of the groups--
* * * in that as long as California would not sell and were not in a position to trade with any of the Iraq partners now interested in selling products in the Far Fast, the would he obliged to become competitive and in forcing an entry into these markets, would adversely affect the price structure in those markets.33
In these circumstances NEDC hoped, as did Shell, that the French--
* * * could see their way clear to remove the Red Line from the concessions now held by the California company.34
The French, however, were concerned about time price at which crude oil was being delivered to them under the red-line agreement and attempted to use the price question as a bargaining point.35 Basically, the difference between the parties was that Shell, Anglo-Persian, and NEDC wanted a high price for IPC crude, which meant that they could amortize expenses and earn a return on capital With a relatively smaller output, while the French were interested in a low price for oil and a long period for depreciating and amortizing expenses, which would have the effect of inducing a larger production from IPC in order to cover expenses and a return on investment. The three major groups were also afraid that if Iraq crude were delivered at a low price the French might use the low price for Iraq oil as a means of influencing product prices in France.
Although recognizing that a satisfactory solution to the price question would be difficult, NEDC (the American group) was glad to have this opportunity to negotiate for the Standard of California concession. 36 Wishing to make the most of this opportunity, NEDC, as a conciliatory act, agreed to do what it could about the price question if the French, in return, could see their way clear to alleviate the red-line problem. 37
The next problem was to get NEDC, Shell, and Anglo-Persian to agree among themselves on the price question and on the changes that should be made in the red-line agreement, so that a joint proposal on these matters could be made to the French. Shell was insistent that they should try to remove the French from Arabia entirely, change the red line to run from Basrah to Suez, and compensate the French for any loss of oil by replacing barrel for barrel on the Mediterranean any oil produced by the groups east of the red line. 38 NEDC contended, however, that the French would not accept such a proposal. After a lengthy discussion the Big Three agreed to propose merely that the red line should be redrawn so as to exclude the concessions held by the Standard Oil Co. of California in Bahrein and Arabia. 39 Also, to assure action through the IPC itself, it was agreed that as among the Big Three, the provisions of the red-line agreement restricting individual action would still apply to the Standard Oil Co. of California concessions. In short, the proposal agreed upon was to exclude these concessions from the red-line area so that the Big Three would be free to negotiate with Standard of California while retaining the restrictions on individual action by the Big Three. 40 Anglo-Persian and Shell also agreed to a solution of the price question, which was necessary if the groups were to get the French to support changes in the red line. 41
Like the previous proposal, this attempted compromise also foundered on the rocks of French resistance, principally because the Big Three would not accede to the price terms demanded by the French. 42 Moreover, Gulbenkian entered the negotiations with demands to preserve his interests in the red-line area in the event a deal was made with Standard of California. 43 The Big Three negotiated for some time with the French and Gulbenkian in an attempt to work out a solution, but no satisfactory arrangement could be devised. The French continued to insist upon a revision of the method used to price IPC crude. They also resented the group's attempt to exclude such a large area from the red-line agreement thereby preventing France from participating in oil produced in the excluded areas. To compound the delays, Shell, NEDC, and Anglo-Persian, were making little progress in their discussions in New York with Standard of Cahfornia. 44
Big Three forced to meet demands of French and Gulbenkian on price question.--By the end of 1935, the French (CFP) demands for a reduction in the price at which Iraq crude was sold to the groups could no longer be evaded. The French circulated a letter criticizing the groups for not putting into effect their so-called income tax price scheme which had been approved in July 1935. 45 They insisted the IPC decisions could no longer be delayed--
* * * because negotiations with Standard Oil Co. of California have come to no conclusion. 46
The reactions of NEDC officials were summarized as follows:
* * * it is our feeling that since the negotiations with Socal in America have not progressed materially, and since the proposals negotiated with the French and Gulbenkian groups were not acceptable, that before conceding the price basis as demanded by the French group, we should at least try to obtain the exclusion of Bahrein Island from any restrictions of the group agreement, at the same time securing, if possible, the continued agreement of the French and Gulbenkian groups to negotiate arid eventually conclude an agreement with the California Company for the El Hasa concession in Arabia. In view of the previous assurances given us by Colonel Mercier and the French group, we felt there was a reasonable chance for securing a settlement on this basis, and while this would not materially facilitate an agreement with the California Co., at least it would have excluded a considerable potential production from the present restrictions, and to this end would be of help to the Standard-Vacuum Co., in the protection of its eastern markets.47
Although hesitant to accept the price demands of the French, Shell subsequently concurred. In February 1936, a resolution was unanimously passed providing that the price of IPC oil to the groups should be fixed at a price which would represent the estimated United Kingdom income tax cost plus 1 shilling. 48 NEDC regretted the price concession, as it was their chief bargaining point with the French and Gulbenkian. One NEDC official wrote:
* * * we have been jockeyed into the position of giving up our trump card for securing French group and Gulbenkian agreement for any early settlement of the Bahrein-El Hasa question. Although I emphasized to the French group that in view of the settlement of these questions we would look to them for their friendly assistance in the solution of the Bahrein-El Hasa problem, the fact remains that today's meeting has not unproved our position for negotiating this question. 49
Big Three permitted to continue negotiations with Standard of California but Gulbenkian blocks a group arrangement.--As partial compensation for comprising on the price question, the French and Gulbenkian agreed to permit the Big Three to conduct further negotiations with Standard of California. 50 But freedom to negotiate was only the first step, for the groups first had to agree among themselves regarding the alterations they were willing to make in the red-line agreement before any effective arrangement could he worked out with an outside company.
By May 7, 1937, the groups reached an understanding among themselves. 51 They agreed to depart from the red-line agreement so that some or all of them could, under specified conditions, purchase crude and refined products from Standard of California without being subjected to penalties and restrictions. This proposed arrangement permitted the groups to purchase refined products. It appears that up to the end of 1935, the groups had hopes of purchasing the Bahrein crude 52 but when it became clear that Standard of California and the IPC groups could not reach an understanding with respect to Bahrein crude, Standard of California began to plan for the construction of a refinery at Bahrein, and by 1937 this refinery was practically completed. Moreover, in 1936, Standard of California sold a one-half interest in its Bahrein and Saudi Arabian concessions to Texas Co., and in return received a one-half interest in Texas Co.'s, marketing facilities, which extended throughout the Far East. A new company, the California-Texas Co. (Caltex) was formed to conduct Bahrein's marketing operations. Thus, in 1937, Caltex was prepared not only to produce but also to refine and market. 53
Under the, proposed arrangement, the Big Three were conceding to the French (CFP) and Gulbenkian the right to take their proportionate share of any purchases made from Caltex. In addition, the French were granted permission to construct a refinery at the terminus of the pipeline. 54 There also were collateral provisions and supplementary arrangements which were included primarily to induce the French and Gulbenkian to agree to the Bahrein deal. 55
However, on July 18, 1937, Gulbenkian notified the groups that in order to make the Bahrein agreement acceptable an additional paragraph would have to be added. This paragraph would, in effect, state specifically that he was to be offered the same terms and condttions as were offered the French; that if any arrangements were made between the French group and any of the other major groups arising out of the proposed agreement about Bahrein oil, Gulbenkian should be offered a share in such arrangements that bore the same ratio to the share of the French in these arrangements as that of their respective proportions in the IPC. 55 This reservation was not acceptable to any of the groups. The French contended it did not refer equally to all the groups and that it tended to restrict the free trading by any group of its share of oil once the oil had been delivered. The other groups considered the clause wrong in principle as it would give Gulbenkian a right in connection with Bahrein oil that he did not possess with respect to Iraq oil. 58 Negotiations thus became dead-locked and, although all the groups, including the French, tried to work out a satisfactory compromise with Gulbenkian, their efforts were of no avail. 58 Early in 1938 one official wrote:
We have been working for some time for a solution of the difficulty presented by Caltex in Bahrein and Arabia, and wherever a solution seems possible something has always been injected by one party or another preventing a settlement of this problem. 59
The agency agreement.--As negotiations dragged on the Big Three became increasingly impatient. In February 1938, Shell suggested that if an agreement were not reached the chairman of IPC should appoint each of the four major groups in IPC as agent to purchase Bahrein crude or refined products on behalf of the company. 60 Under Shell's proposal, which was called the agency agreement Gulbenkian would not have been an agent. Since the purchases made by each agent would, so Sheil contended, not be subject to the limitations of the red-line agreement. Gulbenkian would have been deprived of his share of any purchases made by the major groups. Gulbenkian immediately cabled his representative on the IPC board that:
No intimidation or clever legal scheme will persuade me unless tested by court that IPC can be used by majority to support their price control prevention of competition and monopolistic schemes of groups solely for their own benefit to detriment company and minority. 61
The groups were now faced with a dilemma. One official stated:
* * * the situation has developed into a most complex problem allowing one of two alternatives, namely, to test the interpretation in court or try to effect. a compromise covering at least the present situation. 62
He also stated:
* * * to test our rights as we interpret them in the court implies a disclosure of the 1928 agreement and may open a series of disclosures which, in our business interests, we might wish to avoid. 63
Some were of the opinion that a satisfactory settlement could be had only after a court definition of certain sections of the red-line agreement. While all the groups clearly understood that under the red-line agreement purchases of crude oil produced within the red-line area would have to be made through the IPC, there was a. question as to whether this restriction also applied to refined products derived from the crude produced within the area. 64 IPC lawyers and other counsel retained by the company could not agree on their interpretation of the agreement. 65
After prolonged discussions the groups decided to compromise rather than risk court action. By May 1938 the groups had, in principle, reached an agreement whereby all parties to the red-line agreement., including Gulbenkian, could act as agents for IPC and receive their basic proportions of any crude oil and products purchased in the red-line area, which, of course, included Bahrein. 66 In July 1938, although no agreement had yet been signed, an expert was appointed to determine the price of Bahrein crude or products that the French (CFP) might be eventually required to take from Gulbenkian. 67 The prices applicable to deliveries made in 1939 for Bahrein crude and refined products were determined by the expert and communicated to the groups on Septcmber 14, 1938. 68 It is not known if the groups made many purchases of Bahrein crude or products in 1939. It appears however, that they did purchase some residuum--the residual oil left after time distillation of crude petroleum--for in May 1939 Gulbenkian wrote to CFP regarding the expert's price that--
* * * he should make an award as to the price payable to us by yourselves for the residuum produced by the Bahrein Co. and purchased by the groups for delivery in 1939 * * *69
It is also noteworthy that in September 1939, the expert fixed a full schedule of prices for Bahrein crude and products applicable to deliveries in 1940. 70 Even as early as November 1938 one official wrote:
It is * * * the understanding between the groups that the agreement is operative, although it had not yet been signed.71
Thus, it appears that, temporarily at least, the agency agreement permitting the groups in 1PC to purchase or off-take Bahrein crude and its products was placed in operation even though the formal documents were not signed. 72
Big Three continue to seek a better deal with Caltex, but war ends negotiations.--Even though the agency agreement was approved in principle and appears to have been operative for a time, it was never officially signed and was continually changed until the war ended negotiations late in 1939. Moreover, the agency agreement was far short of what the major groups desired in the way of a partnership arrangement with Caltex. In March 1939--
the groups in Iraq Petroleum Co. unanimously decided to try and negotiate a partnership agreement with the California company or Caltex covering concessions remaining in Ibn Saud's territory and the neutral zone in Arabia.73
A similar statement indicating the intentions of the groups was reiterated in April 1939.
All the groups * * * were of the opinion that in principle an attempt should be made to work out a deal with Caltex whereby each company would set aside and retain definitely explored areas or a mutually agreed to area and treat the balance of the Arabian Peninsula, including neutral zones, as areas to be pooled and operated for joint account.74
But the French (CFP) would not accept such a broad partnership arrangement and the war terminated negotiations before the groups could come to an understanding among themselves and with Caltex. 75
Summary.--Standard of California's discovery of oil in Bahrein in 1932 and its acquisition of a large oil concession in Saudi Arabia in 1933 aroused considerable dismay among the three major groups in IPC--Anglo-Persian, Shell, and NEDC. Anglo-Persian was alarmed because Bahrein and Saudi Arabia were adjacent to Anglo-Persian's extensive oil interests in Iran. Any production inside the red line that was not controlled by IPC was considered by Anglo-Persian to be a threat to its Iranian interests. Shell and NEDC were concerned because they feared that "uncontrolled'' oil from Bahrein or Saudi Arabia would force its way into the markets of Europe and the Far East, thereby unstabilizing prices and upsetting existing marketing arrangements. For a period of almost 7 years (l932-39) these three companies carried on negotiations, either individually or collectively, with the other groups in IPC, trying to work out a plan which would permit them either to share in the concessions or to have some voice in the disposition of the oil. But, in spite of the extended negotiations, the Big Three were unable during this period to work out a satisfactory arrangement either with the other groups in IPC or with Standard of California. Their failure can be attributed in a large part to the red-line agreement, which prevented them from dealing directly with Standard Oil of California.
In 1932 and 1933, when Anglo-Persian was desirous of obtaining concessions
in both Bahrein and Saudi Arabia as countermeasures against Standard of California,
the red-line agreement prevented Anglo-Persian from acting independently. Hence
Standard of California obtained a large concession in Saudi Arabia and later
extended its concession area in Bahrein. With Standard Oil of California now
in possession of important concessions within the red-line area, the Big Three
in 1934 sought to alter the red-line agreement in such a way as to eliminate
Bahrein and a large part of Saudi Arabia. This would have given the Big Three
a free hand to negotiate with Standard of California. However, the French and
Gulbenkian regarded the red-line agreement as their legal safeguard in IPC and
did not wish to see such a large area eliminated from red-line territory without
receiving satisfactory compensation. The proposed alteration of the red line
would have deprived the French and Gulbenkian of the opportunity to obtain their
proportionate share of any oil taken from the excluded area. Unless granted
an acceptable quid pro quo, they were unwilling to accept such a proposal. The
quid pro quo which they sought was a lower price for Iraq crude. The Big Three,
however, wanted a high price, fearing that the French would use a low price
as a club to reduce product prices in France, where the Big Three were important
marketers. In February 1936, they agreed to
lower the price of Iraq crude, while the French and also Gulbenkian consented
to permit the Big Three to continue further negatiations with Standard of California.
At time same time that the Big Three were trying to come to an agreement with the French on the price question, they were also conducting negotiations with Standard of California. These negotiationis appear to have been initially unsuccessful.
Following the compromise on the price question, the Big Three tried to reach an agreement which would permit them to purchase Bahrein's oil without sharing their purchases with the other groups in IPC. The French and Gulbenkian demanded their proportionate share of any purchases. To further complicate matters, the groups could not agree among themselves on whether the red-line agreement applied to products refined from crude produced in two red-line areas. Hence by the end of 1937 negotiations were deadlocked. Also, Standard of New Jersey was not anxious to negotiate a waiver of the red line until it could see more clearly what the outcome would be. Standard of California had a refinery almost completed at Bahrein; it had purchased a one-half interest in the marketing facilities of Texas Co. east of Suez (for which Texas received a one-half interest in the Bahrein and Saudi Arabian concession) ; and Jersev Standard understood that the new California-Texas Co. had plans for entering the Indian market.
In 1938, Shell suggested that IPC appoint all groups as agents, except Gulbenkian, with power to purchase Bahrein crude and products on behalf of IPC. Gulbenkian, however, vigorously objected and threatened a test of the matter in court, which, to the embarrassment of the groups, would have disclosed the red-line agreement. Rather than risk a court test, the groups agreed in May 1938 to make all parties, including Gulbenkian, agents of IPC, thereby permiting all groups to receive their basic proportions of oil purchased from Bahrein. Any group was free to make purshases providing all other groups were notified. Apparently this agreement, called the agency agreement, was in effect during 1938 and 1939, although no formal documents were signed. The agency agreement, however, was far short of what the Big Three wanted, and they were in the process of working out a new arrangement when World War II ended discussions late in 1939. Thus, in the end, the red-line agreement, which was adopted for the purpose of limiting competition among the groups in IPC, backfired when the groups wanted to forestall competition by a nonmember.
Footnotes
1. From Memoirs of Calouste Sarkis Gulbenkian With Particular Reference to the Origins and Foundation of the Iraq Petroleum Co., Ltd., Lisbon, September 16. 1941.
2 "Liste Civile" means the Ministry of the Privy Purse, sometimes known as the Private Purse of the Sultan.
3. An American, retired Rear Adm. Colby M. Chester, was also negotiating for oil concessions in the Near East, but his activities had little direct relation to the founding of the Iraq Petroleum Co., Ltd.
4. Gulbenkian Memoirs, op. cit.
5. Ibid.
6. D'Arcy, who had been a speculator in mining ventures in Australia and elsewhere, is chiefly known as a pioneer oil prospector and diplomat in the Middle East.
7. This is the concession now held in Iran by the Anglo-Iranian Oil Co.. Ltd.
8. W. C. Teagle, Confidential Memorandum of Negotiations with the Turkish Petroleum Co.. Ltd..
9. Turkish provinces.
10. History of the IPC and Mr. Gulbenkian's Part In Its Foundation, also letter from H. Riedemann to W. C. Teagle, October 10. 1920.
11. Teagle, op. cit.
12. Davenport and Cooke, op. cit., p. 24.
13. Minutes of Meeting of Directors, April 25. 1929.
13a. Anglo-Saxon was and is owned by Royal Dutch-Shell. Mr. Gulbenkian had been in partnership with Royal Dutch-Shell in many business ventures, and when Turkish Petroleum Co. was founded, he offered Royal Dutch 20,000 shares, or a 25-percent interest in the company Gulbenkian's interest in African and Eastern Concessions, Ltd., had been 40 percent.
14. History of IPC, op. cit.
15. Davenport and Cooke, op. cit., pp. 16-21. Also reprinted In American Petroleum Interests in Foreign Countries.
16. Statement to House of Commons July 17, 1913.
17. Anglo-Persian, which is now Anglo-Iranian Oil Co., Ltd., is owned 56 percent by the Bntish Government, 22 percent by Burmah Oil, and 22 percent by the British public.
18. Davenport and Cooke, op. cit., p. 23.
19. These were small areas transferred by Iran to Iraq as a result of an early agreement between Persia (Iran) and the Turkish Empire made in 1913. The oil concessions in this area are now held by Anglo-Iranian Oil Co.
20. Sec. 10, Foreign Office agreement. March 19. 1914.
21. History of the IPC and Mr. Gulbenkian's Part in Its Foundation, April 1944.
22. History of the IPC, op. cit., p. 9.
23. The San Remo agreement was includcd as exhibit 14, p. 103, in a Report on Foreign Ownership in the Petroleum industry, op. cit.
24. For a more complete and detailed explanation of the British-American dispute over the oil resources of Mesopotamia and the Middle East, cf. Herbert Feis, Petroleum and American Foreign Policy. Stanford University, March 1944: Diplomatic Protection of American Petroleum Interests in Mesopotamia, Netherlands East Indies, and Mexico. S. Doc. No. 43, 79th Cong., 1st sess.: and Davenport and Cooke, op. cit.
25. It will be recalled that under the peace treaty of August 10, 1920, signed between Turkey and the principal Allied powers, Turkey renounced her rights and titles to certain territories she formerly held in the Ottoman Empire. The renounced territories included Mesopotamia, Palestine, Syria, and Lebanon. Although the peace treaty was not signed until August 1920, the allied conference at San Remo in April 1920 allocated Mesopotamia and Palestine to Great Britain, and Syria and Lebanon to France. These associated territories thus became mandates of Britain and France, respectively.
26. See p. 50.
27. Companies which first indicated an interest were: Mexican Petroleum Co., thc Texas Co., the Gulf Refining Co., the Atltntic Refinng Co., Sinclair Consolidated Oil Corp., Standard Oil Co. (New York), Standard Oil Co. (New Jersey).
28. History of Negotiations Leading to Participation of American Companies in IPC.
29. See p. 49.
30. Data published in Davenport & Cooke, op. cit., p. 69, and were prepared
by the Department of Commerce
31. Letter from F. E. Powell to F. D. Asche, May 14, 1920.
American Oil Co., Ltd. was a wholly owned subsidiary of Standard Oil Co. (New
Jersey) until the dissolution decree of May 1911. It was reacquired by Standard
in 1930. See footnote 1, p. 552.
32. Ibid.
33. The cable from Sir Charles Greenway to Mr. Bedford read as follows:
"As all mandates are to be considered by special session of Council of League of Nations not later than July 15, I shall be unable to induce our Government to delay reply to American note much longer. Therefore, if you wish to follow up idea discussed with me, it is of the utmost importance that no time be lost and you should send representative to meet Turkish company earliest moment."
Apparently, Sir Charles Greenway wanted to open negotiations with the American companies prior to the date when the British Government would have to reply to the last American note concerning the Mesopotamian oil problem.
34. Cable from A. C. Bedford, New York, to Sir Charles Greenway, London, June 26, 1922.
35. Cable from Greenway to A. C. Bedford, June 27, 1922.
36. The 5 companies were: Standard Oil Co. (New Jersey), Standard Oil Co. (New
York), Gulf Refining Co., Atlantic Refining Co., and Mexican Petroleum Co. The
Pan American Petroleum & Transport Co. replaced the Mexican Petroleum Co.
in February 1927 when Sinclair dropped out.
In 1931, Standard Oil Co. (New York) merged with Vacuum Oil Co. Its name was
changed to Socony Vacuum Corp. and, in 1934. to Socony.Vacuum Oil Co., Inc.
Around 1930 Socony-Vacuum and Standard Oil Co. (New Jersey) purchased the share
interests in NEDC held by Pan-American and Atlantic Refining.
Thus, at the end of 1931, there were 3 American oil companies holding shares
in IPC through NEDC in the following proportions:
|
|
Percent of IPC stock
|
Percent of NEDC stock
|
| Standard Oil Co. (New Jersey |
9.8958
|
41.6667
|
| Socony-Vacuum Corp |
9.8958
|
41.6667
|
| Gulf Oil Corp. |
3.9584
|
16.6666
|
|
23.75
|
100
|
In 1934. Gulf sold its interest to Standard and Socony-Vacuum, leaving the entire American interest in Iraq to 2 companies, as compared to 7 that. were originally interested.
37. Compagnie Francaise des Petroles was organized in 1923 by the leading French
banks and by the marketing and refining subsidiaries of the international oil
companies. Early in 1921, CFP concluded an agreement with the French Government
whereby CFP received the sole rights to the French share of Iraq oil. Subsequently,
in 1929, the French Government took a quarter-share interest in CFP which in
1931 was increased to 35 percent with a 40-percent control of the company. See
the Petroleum Times, May 3. 1930, p. 802: January 17, 1931, p. 27: and April
4, 1931. p. 501.
It should be noted that the British and American groups interested in TPC owned
indirectly a share interest in I IC by the fact that their French subsidiaries
held shares in CFP. In 1927, Standard Oil Co. (New Jersey) had 4 French subsidiaries
that held a 9-percent interest in CFP which gave Standard an indirect interest
in TPC of a little more than 2 percent. Source, interoffice memoranda from Guy
Wellman to W. C. Teagle, March 25 and 28, 1927.
38.Although it was not a major issue in the negotfations, the groups discussed
at some length the question of whether TPC should be permitted to erect a refinery
at seaboard.
The British group (Shell and Anglo-Persian), especially Royal Dutch-Shell, wanted
the TPC to have the privilege of erecting a refinery outside of Iraq for the
purpose of refining such oil as the partners in TPC refused to take. The Arnerican
group, and particularly Standard Oil Co. (New York), was opposed to TPC
operating a refinery outside Iraq. In this connection, it should be noted that
in the early 1920's, the standard interests were the world's principal suppliers
of refined products, and it was not to their interest to permit the construction
of a potentially competitive refinery. In the final compromise, it was provided
that TPC could erect a refinery for the purposes indicated, but only if all
the major groups gave their consent In writing. Thus, the American group, in
effect, won.
39. Memorandum of negotiation with Turkish Petroleum Co., Ltd.
40. Turkish Petroleum Co.. Ltd. Convention with the Government of Iraq. March 14, 1925.
41. Quoted from memorandum by Guy Wellman to W. C. Teagle. March 21, 1928.
42. Ibid.
43. Except in Kuwait and the "transferred territories."
44. The three groups which at that time owned the Turkish Petroleum Co. were
the D'Arcy eroup, acting for Anglo-Persian Oil Co., the Deutsche Bank, and Anglo-Saxon
Petroleum Co., representing Royal Dutch-Shell.
45. "From memorandum dated December 14. 1922.
46. Memo from Guy Wellman to W. C. Teagle, July 25, 1923.
47. Letter From H. E. Nichols to W. C. Teagle, July 25. 1923.
48. In a letter from W. C. Teagle to Mr. Finaly dated September 5, 1923, Mr. Teagle wrote as follows:
'This request was not acceptable to either of the British partners and was
impossible of acceptance by the American group for the reason that the group,
as you know, is composed by a half dozen independent American oil companies
who have agreed to act as a unit in Mesopotamia, but with absolutely no agreement
in
regard to joint cooperation in any other area. To accede to this request would
have meant that the interest of the various members of the American group, in
producing properties outside of the United States, would have to be pooled,
which, even though it had been agreeable to all the members of the group, would,
I am
afraid, have been impossible of accomplishment from the standpoint of the possibility
of its being construed as in violation of some of our antitrust laws.''
49. Letter to H. F. Nichols to W. C. Teagle dated July 28, 1934. The proposal was as follows: "The signatories shall not be interested in the production of crude oil in the area at present administered by the Iraq government otherwise than as shareholders or as sublessees in the open-door plan of the Turkish Petroleum Co. and shall not be interested in the refining of oils within the same area otherwise than as shareholders of the Turkish Petroleum Co. provided that this restriction shall not apply to the transferred territories and shall not apply to the refining of any product which the Turkish Petroleum Co. is not at that time in a position to refine."
50. The position of the American group with respect to the self-denying clause in November 6, 1924, is shown by the following quotation from a letter from W. C. Teagle to Mr. Guy Wellman, London. Mr. Teagle wrote as follows: "You will have in mind that the American group not only have declined up to date to take up their share interest in the Turkish Petroleum Co. pending the definite grant of a concession by the Iraq Government, but what is of even more importance, have not up to date agreed to the self-denying ordinance. In other words, insofar as the American group is concerned they have not, as yet, agreed to restrict their operations in what was formerly Turkey in Asia exclusively to the Turkish Petroleum Co., and, therefore, their position in this regard is entirely different from that of the existing shareholders in the Turkish Petroleum Co. who are already bound by the self-denying ordinance contained in the articles of association of that company."
51. That the American group considered the possibility of an independent concession in Iraq is indicated by the following quotation from a cable sent by Heinrich Riedemann and Guy Wellman to W. C. Teagle on November 10, 1924: "We do not believe American group has any chance at this late hour to obtain independent concession * * * in view of political situation in Iraq."
52. An indication that the American position was weakened in regard to the adoption of a self-denying clause indicated by the general tone of the correspondence between the representatives of Stanuard Oil Co. (New Jersey), who were primarily responsible for conducting the negotiations with TPC. Mr. Guy Wellman, in commenting upon the proposal to adopt a self-denying clause, stated in a memorandum to the members of the American group in July 1925 that the principal reason for having such a provision was as much in the interest of international peace as in the economic interests of any group." It was his view that if there was an international scramble between France, the United States, and Great Britain for oil concessions in Turkey, it would revive much of the danger which developed through the debates in Congress and in the press regarding tbe "open door" in Mesopotamia, and if the groups in TPC cooperated, that danger would be avoided. He also believed that the selfish interests of the American group would be served by joining TPC with a self-denying clause because the French and the British would stand a better chance of getting any desirable oil concessions in Turkey than the Arnericans.
53. These islands are located in the Red Sea off the coast of Yemen.
54. The intense ill feeling which developed between Sir Henri Deterding and
Gulbenkian appears to have arisen over a dispute regarding Gulbenkian's interest
in Venezuelan Oil Concessions, Ltd., a Shell subsidiary. Gulbenkian charged
that Royal Dutch-Shell was attempting to defraud him as a minority stockholder
of Venezuelan Oil Concessions.
55. "A further indicatton of the softening of the American opposition to
the adoption of a self-denying clause is shown by a memorandum from Guy Wellman
to the American group dated March 31, 1927. Mr. Wellman, who was assistant general
counsel of Standard (New Jersey), and one of the principal negotiators for the
American group, expressed the view that "From the standpoint of the 'open
door,' the pooling by the four groups of the outside areas would not be an essential
modification," the reason being that other American nationals would be
free to bid for outside areas as though this arrangement were not in effect;
moreover, that such an arrangement would be more economical than if scattered
areas were operated by different companies. Mr. Wellman indicated that he had
privately favored for some time the essence of the self-denying ordinance.
56. Letter from M. Piesse toW. C. Teagle. July 5, 1927.
57 A significant development which undoubtedly acted as a powerful incentive
toward a reconciliation of differences between the groups was the bringing in,
on October 15, 1927, of an oil well in Iraq which flowed at the rate of from
50,000 to 100,000 barrels per day for several days. There was a plentiful supply
of oil everywhere, and the potentially large new supply that now loomed in Iraq
may have been an added inducement for the parties to give up some of their independence
and try to reach an agreement, not only in respect to TPC, but also in respect
to problems in India and elsewhere. In 1927, Standard Oil Co. (New York) and
Royal Dutch-Shell were engaged in a price war in India and there was intense
feeling between Sir Henri Deterding and the officers of Standard Oil Co. (New
York). Some indication of the nature of the problem is indicated by a letter
dated October 10, 1927. from Sir Henri Deterding to Heinrich Riedemann, Standard
Oil Co.'s (New Jersey) European representative. Mr. Deterding wrote as follows:
"The Turkish Petroleum Co. struck it rather rich, or better, exceedingly
rich; namely the first deep well has come in with 50,000 barrels per day! Now
that the Jersey Co. is to become our partner in this venture, I hope Teagle
will arrange shortly that the Jersey company will look after her own production
and selling arrangements, instead of leaving it to the New York company who
is more concerned to satisfy the temper of Meyer than to do justice to her shareholders
and protect the interest of her principals for whom she is supposed to sell
oil at the best price, although in fact (Dutch Indies) she purposely sells the
Jersey products (from Palembang field) at a low price as a retaliation of the
low prices in British lndia.
"There is another and perhaps more serious matter to consider. The new
production will give rise and opportunity to discussions involving big views
and principles. * * * We are facing now such enormous events that the Jersey
Co. should settle these things herself.* * * "
58. This was the area bordered in red on the map inserted after this page.
59. Letter from Guy Wellman to Montague Piesse, March 22, 1928.
60. Cable, Guy Wellman to Montague Piesse, August 25, l927. This was so because under the TPC Convention, the money paid by successful bidders for any outside area would he received by TPC which would distribute it to its shareholders. The other three groups, therefore, could outbid the Americans if they remained outside the self-denying clause, with the knowledge that the sum they paid to TPC would be divided four ways, i. e., three-fourths of the money would be returned to the three of them, while one-fourth would he paid or lost to the Americans. On the other hand, if the Americans were the successful bidders, only one-fourth of the money paid would he returned to them and the balance, three-fourths, would be lost to the other three groups. Thus, under the mechanics of the TPC convention, the Americans, if they alone remained outside the self-denying clause, could be outbid on every occasion by the others.
61. Article 6 of the Iraq convention of March 14, 1925, contained the following provision with respect to the "open door:"
"The Government shall, not later than 4 years after the date of this Convention, and annually thereafter, select not less than 24 rectangular plots, each in an area of 8 square miles, and the Government shall offer the same for coinpetitton, by sealed tender, between all responsible corporations, firms, and individuals, without distinction of nationality, who desire leases. Both the company and any such prospective lessee may indicate any plots * * * to be offered among such 24 and the same shall be offered accordingly by the Government."
62. The special provision was as follows:
"The American Company and any of its Associated Companies shall as regards any plot offered for competition under Article 6 of the Iraq Concession be entitled to apply for and obtain a lease thereof and if successfull it shall * * * not be bound to transfer such plot to an Operating Company, but shall be entitled to retain and develop or dispose of the same for its own account. But the American Company or any of its Associated Companies before so acting shall thirty day before the date fixed for the leasing of the tenders give notice in writing to the Turkish Company that it intends to avail itself of the provisions of this clause and shall then within ten days thereafter be entitled to receive similar notice from such of the other Groups as propose to put in tenders pursuant to clause 10 hereof.'' From article 11 of the group agreement of July 31, 1928.
63. There is some basis for believing that in the later stages of the discussion with TPC, the American group's insistence upon the "open door" policy did not reflect a conviction that prartical commercial benefits would a