Second section, pp. 84-112
ADDITIONAL IPC CONCESSIONS
The. failure of IPC to secure concessions in Bahrein and Saudi Arabia should not obscure tile fact that elsewhere in the Middle East the compaiiv was successful in closing the open door to outsiders. The principal competitors for concessions were British Oil Development Co., Ltd., and Standard Oil Co. of Califorina. When these companies became interested in concessions in Iraq and other Middle East countries, IPC sought to exclude them by the simple device of buying up concessions within the red-line area. So successful were its efforts that by the end of 1944 1PC was operating in over 467,055 square miles of territory in various parts of the area. The Company had extended its operations by exploration permits and concession agreements over an area larger in size than the states of Texas, Oklahoma, Arkansas, and Louisiana combined. 76 In addition, IPC attempted, though without success, to extend further its area of control by seeking concessions or exploration permits in Turkey and in the neutral zones of Kuwait and Saudi Arabia.
The operations carried on by IPC are conducted through a series of subsidiary and affiliated companies, which are named on chart 20. This section describes the scope of IPC operations, both within and outside Iraq, in its own name and through its various subsidiary and affiliated companies.
Iraq Petroleum Co., Ltd.--This is both the parent holding company and an operating company. As has been noted, IPC secured its first concession in Iraq in 1925, Which was originably limited to a total area of 192 square miles (24 plots of 8 square miles each). In 1931, the original concession was revised, and IPC was given an exclusive concession over the whole area in Iraq east of the Tigris River except a small area held by the Anglo-Iranian Oil Co. on the Iranian border. 77 This is the only concession which IPC holds directly. All others are controlled by subsidiary and affiliated companies.
It is from the area east of the Tigris that IPC has obtained most of its oil. The Kirkuk field is located here and is connected by a system of pipelines to the Mediterranean, with terminals at Tripoli and Haifa.
Mosul Petroleum Co., Ltd.--In addition to the area east of the Tigris River, the IPC group, through an affiliate, Mosul Petroleum Co., Ltd., holds a concession over all of the lands of Iraq west of the Tigris River and north of the thirty-third parallel of latitude. This concession dates from April 20, 1932, when the British Oil Development Co., Ltd. (BOD), obtained a 75-year lease of these lands. BOD was first formed by British and Italian interests, but later included some German and Swiss capital. On November 23, 1932, control of BOD passed to Mosul Oil Fields, Ltd., a corporation set up by Italian, British, and Gernian interests for the purpose of acquring BOD's shares. 78
IPC had long been disturbed because this concession was held by an outsider. On October 14, 1938, IPC formed Mosul Holdings, Ltd., to acquire the shares of Mosul Oil Fields, Ltd. By 1937, practically all the shares had been acquired. In 1941, IPC changed. the name of Mosul Holdings, Ltd., to Mosul Petroleum Co., Ltd. The latter is wholly owned by the owners of IPC, and now holds the oil concession for all the territory west of the Tigris River formerly held by BOD. In 1944, BOD and Mosul Oil Fields were dissolved. 79
Before the discovery of the Kirkuk fields, the concession held by Mosul Petroleum Co., Ltd., was considered one of the more desirable oil prospecting areas in Iraq. Although more than 140 wells have been drilled and a considerable amount of oil has been found, most of the oil is so heavy and sulfurous that its commercial possibilities are questionable. There is one field which produces a crude comparable to Kirkuk crude; but, as of 1950, this area has not been sufficiently developed to produce oil in commercial quantities. Ultimate reserves of the whole concession have been estimated by the same unofficial sources mentioned above at 5 billion barrels.
Basrah Petroleum Co., Ltd.--On July 29, 1938, another IPC affiliate, Basrah Petroleum Co., Ltd., obtained a concession over the last remaining free portion of Iraq; namely, the Basrah area which lies at the head of the Persian Gulf. This concession is for 75 years and covers all the lands in Iraq not already granted to TPC, Mosul Petroleum Co.. Ltd., or Anglo-Iranian Oil Co. (AIOC). 80
The Basrah area is considered to be particularly attractive because of its proximity to the productive Burghan field in Kuwait. Since World War II, several productive wells have apparently been completed; for by early 1951 a 72-mile 12-inch pipeline had been constructed from Zubair, the oil-producing center, to Fao, a shipping point on the Persian Gulf. 81 The ultimate potential of the Basrah area has been unofficially estimated to be 20 billion barrels. 82
Outside of Iraq proper, but still within the red-line area, the IPC groups hold many concessions and exploration permits through a holding company, Petroleum Concessions, Ltd., which was formed in October 1935. This company and its subsidiaries were organized by IPC to operate in the red-line area outside of Iraq because of the fact that IPC had on its board of directors a representative of the Iraq Government, and it was considered inadvisable for a member of that Government to participate in the negotiations and decisions concerning Middle East countries over which Iraq has no jurisdiction. 83 All the provisions of the red-line agreement were made applicable to the operations of Petroleum Concessions, Ltd., and its subsidiaries.
In 1944, the total area held outside of Iraq for exploration by Petroleum Concessions, Ltd., and its subsidiaries was more than 186,000 square miles. The numerous concession rights and exploration permits thus held in the various countries of the Middle East are discussed below.
Petroleum Concessions, Ltd. --Although this company is primarily a holding company, it nevertheless holds directly an exploration permit over Hadhramautt, in the Aden Protectorate, which is an area lying in the southern part of Saudi Arabia adjacent to the Gulf of Aden. This exploration permit was first granted on November 19, 1938, and has been extended on five occasions, each for a period of 2 years, beginning in January 12, 1940. 84 By April 1940, aerial and geological surveys of some 100,000 square miles of the area had been completed but no oil had been discovered. As of 1950, official sources had not indicated any discoveries of oil in the area.
Petroleum Development (Qatar), Ltd.--This company is a subsidiary of Petroleum Concessions, Ltd., and holds a 75-year concession over all of Qatar (about. 4,100 square miles, or 2,600,000 acres).
Interest by IPC groups in Qatar dates from September 1932, when Anglo-Persian obtained an exclusive license for a 2-year geological examination of the Qatar Peninsula, largely as a preclusive measure in order to keep the area out of the hands of Standard Oil Co. of California. This independent act by Anglo-Persian was a violation of the self-denying clause of the red-line agreement. However, since Anglo-Persian had acted in the interest of IPC and without any intent of personal benefit, the groups agreed that Anglo-Persian should not be penalized and that the Qatar license should remain in Anglo-Persian's name as the nominee of IPC.
In 1933, when a geological survey showed Qatar to have favorable oil prospects, IPC authorized Anglo-Persian to negotiate a concession with the Sheikh of Qatar. On May 17, 1935, the company was granted a 75-year concession. IPC then formed Petroleum Development (Qatar), Ltd., which took over the concession from Anglo-Persian on February 5, 1937, in accordance with the provisions of the red-line agreement. Drilling began in October 1938, and a year later considerable quantities of oil were discovered. The first well came in with a showing of 2,500 barrels daily, and by 1940, after further production tests, its estimated flow was about 4 ,000 barrels of 34° API crude per day. Operations at Qatar were disrupted with the war. Drilling stopped and all wells were plugged as a defensive measure. After the war, development was pushed rapidly. Additional wells were drilled, and a 51-mile pipeline was completed to the east coast of the peninsula. 85 By 1930, Qatar was producing an average of 33,800 barrels of crude per day. 86 The ultimate reserves of Qatar have been tentatively estimated by an IPC group to be 3 billion barrels, which is considerably in excess of published estimates of proven reserves. 87
Petroleum Development (Western Arabia), Ltd.--This subsidiary of Petroleum Concessions, Ltd., was formed in 1936 to take over a 60-year concession in an area of about 55,000 square miles extending along the western coastal area of Saudi Arabia from Yemen to Transjordan. After a geological examination, it was decided that the area had practically no oil-bearing possibilities, and in March 1941, the concession was surrendered. 88
Other Middle Eaat areas.--IPC also holds oil rights in other Middle East areas, which thus far have proved to be unproductive.
Through Petroleum Development (Trucial Coast), Ltd., it holds concessions and exploration permits covering several of the small sheikdoms along the Trucial Coast, including Umm-al-Quwain, Dubi, Sharjar, Ras al Khaimah, Abu Dhabi, and Ajman. All of these sheikdoms lie along the Persian Gulf and border on Saudi Arabia. In September 1936, IPC formed Petroleum Development (Trucial Coast), Ltd., a subsidiary of Petroleum Concessions, Ltd., to hold these various concessions and permits. 89 As of 1950 no oil had been discovered in any of the Trucial Coast sheikdoms.
Another subsidiary of Petroleum Concessions, Ltd., Petroleum Development (Oman and Dhofar), Ltd., was incorporated in 1937 for the purpose of conducting operations in leased areas of Oman and Dhofar, which had been obtained on June 24, 1937, by agreements between the Sultanate of Muscat and Oman and Petroleum Concessions, Ltd. 90 As of 1950, no crude oil had been discovered in Oman or Dhofar, and IPC has considered abandoning these areas.
In February 1938, Syria Petroleum Co., Ltd., also a subsidiary of Petroleum Concessions, Ltd., was awarded a 75-year concession over about 60,000 square miles of Syrian territory. This grant was ratified by the Syrian High Commissioner on March 25, 1940. 91 Before World War II, a number of shallow wells and a few deep test wells were drilled in Syria, but all were nonproducers. During the war all drilling and geological work was suspended. In 1943, a moratorium agreement was signed by the company and the Syrian Government. It relieved the company of all obligations under the concession agreement, except annual rental payments, until 2 years after the signing of an armistice between Great Britain and Germany. 92
Petroleum Development (Cyprus), Ltd., another subsidiary of Petroleum Concessions,
Ltd., obtained, in April 193S, a 2-year exploration permit. applicable to about
20,000 square miles of the island of Cyprus. The permit was renewable every
yeni' and was continued until 1948. But when geological surveys and field work
indicated that oil possibilities were remote, the company announced, in December
1948, its intention to abandon operations in Cyprus and not to seek a further
renewal of its exploration permit.93
Petroleum Development (Palestine), Ltd., also a subsidiary of Petroleum Concessions, Ltd., held at the close of 1950 some 20 prospecting licenses applicable to more than 5,000 square miles of territory in Palestine. 94 The company ceased all activity in this area during the war because of the impossibility of performance, but operations were subsequently resumed. The company started drilling a test well near Gaza sometime in 1947. Drilling was suspended in February 1948, when political disturbances made it difficult and dangerous to carry on. Apparently the licenses are still in effect. 96
It took IPC several years to get a foothold in Transjordan. In February 1938,
IPC formed Petroleum Development (Transjordan), Ltd., a subsidiary of Petroleum
Concessions, Ltd., to apply for prospecting licenses in Transjordan. Thirty-seven
licenses were applied for but none was granted. In May 1947, the company obtained
a 75-year concession in Transjordan. Although some geological and geophysical
work have been performed there, no wells have been drilled. 96 Transjordan is
apparently not a promising oil-producing area, for in 1949 IPC considered abandoning
its concession. 97 But by early 1950 no final action had been taken. 98
IPC also obtained an oil exploration permit from the Lebanese Republic in March 1938, covering an area of five contiguous squares whose sides were 10 kilometers long. The permit was originally held by Petroleum Concessions (Syria and Lebanon), Ltd., a subsidiary of Petroleum Concessions, Ltd. Some drilling was done in Lebanon in 1948, but without results, and the general manager of IPC indicated that he would recommend abandonment of the area. 99
Miscellaneous subsidiaries and affiliates.--In addition to holding concessions and oil exploration permits, IPC has formed subsidiaries to conduct air transportation (Iraq Petroleum Transport Co., Ltd., and Transports du Proche Orient); to administer a pension program (Iraq Petroleum Pensions, Ltd.); and to manufacture asphalt in Syria (Societe Industrielle des Asphaltes et Petroles de Lattique). 1
SOME OPERATING POLICIES, PROBLEMS AND RESULTS
As IPC extended its area of operations inside and outside Iraq it was confronted with a variety of quasi-political and financial problems, particularly problems with the Iraq Government. The way these problems were resolved, the operating policies established, and the results stemming therefrom give historical perspective and insight into the internal operations of IPC. They also reveal something about the underlying philosophy which guided IPC, the first joint venture in the international oil business.
Revision of the Anglo-Iranian royalty.--When the American group secured its 23.75 percent interest in IPC, the D'Arcy or Anglo-Persian group (later Anglo-Iranian) relinquished one-half of its share interest in IPC (TPC at that time) and in return was granted 10 percent overriding royalty on all crude obtained from the 24 plots of 8 square miles each which TPC could select under the Iraq concession agreement of March 14, 1925. 2 In other words, D'Arcy was entitled to 10 percent of the oil found in these areas, free of cost at the gathering stations in the field, and would have to pay only the cost of handling and transportation to seaboard.
As previously noted, the Iraq concession of 1925 was revised in March 1931, and IPC was granted a blanket concession over 32,000 square miles of territory east of the Tigris River. 3 There then arose the question whether Anglo-Persian's 10 percent royalty should continue to apply to only the 24 plots or should he extended to the entire area covered by the revised agreement. The royalty question also arose in connection with IPC's interest in other concessions within the red-line area. After lengthy negotiations the groups arrived at a compromise settlement in November 1934, which stipulated that D'Arcy would be entitled to a 7.5-percent royalty on such oil as was produced from the 32,000 square miles covered by the revised Iraq concession of March 24, 1931, the oil to be delivered free of cost at the field, with 1PC paying the royalty due the Iraq Government. 4
Tax matters.--Taxes were an early and continuing problem to the groups in IPC. As has been previously noted, tax considerations influenced the groups' decision to give each owner his proportionate share of the crude produced rather than to operate IPC primarily for profit. 5 Since IPC was a British-chartered company, the British groups would not have been subject to double taxation. The non-British groups, however, did not relish the idea of having the earnings of IPC taxed once by the British Government and again by their own governments. As a result, the non-British groups spent considerable time investigating various plans for minimizing tax payments. The profits of IPC would obviously have to he held to a nominal figure if large taxes on its operations were to be avoided. Eventually, in March 1934, IPC obtained the consent of the British Board of Inland Revenue to sell IPO crude to the groups at less than market prices without running the risk of increasing its income-tax liability. 6 There then followed an agreement by IPC to price crude to the groups at a level sufficient to cover British income tax cost plus 1 shilling profit.
But the income tax-cost pricing scheme was not made effective immediately. Three of the groups (NEDC, Anglo-Persian, and Shell) wanted to use it as a bargaining point in their negotiations with the French in regard to the exclusion of Bahrein and Saudi Arabia from the Red line. Moreover, the groups could not reach an agreement concerning depreciation and prices. The groups had chartered a Canadian corporation, Mediterranean Pipelines, Ltd., to construct and operate the pipeline to the Mediterranean. Thus, if they adopted the British income tax price scheme, they could not include in IPC's costs sufficient charges to cover depreciation and a return on their investment in the pipeline. On the other hand, if they increased the depreciation charges on the pipeline and permitted the pipeline company to charge rates sufficient to cover the additional depreciation plus a return on investment, they ran the risk of having to pay substantial taxes to the Canadian Government. 7 In addition to these obstacles, the Big Three, at least for a time, did not want to adopt any plan which did not result in a relatively high price for crude. 8 As a solution to this dilemma, the general manager of IPC, J. Skliros, offered a three-point compromise: (1) that IPC operate the crude producing fields; (2) that Mediterranean Pipelines, Ltd., be made a British cornpany and (3) thaI a third company (Hyde Park) be registered in the Channel Islands to buy the crude from IPC at income tax cost and sell it to the groups at group agreement cost. In support of his plan Mr. Skliros commented as follows:
With three such companies, and with three sets of accounts, it might be possible so to adjust figures as to render the non-British groups liable to a minimum of British taxation. Such a triple string can maintain crude prices to a sound businesslike level: refining and marketing profits can be kept at figures that will not excite the cupidity of Government Exchequers: the low price of Iraq crude need not be blatantly advertised; and if the Hyde Park Co. does return an unconscionable dividend to its shareholders, I suppose that the only comment that can be made thereon is one entirely flattering to the business acumen of those shareholders for investing their money in such a venturesome concern as the Hyde Park Co. 9
Despite his eloquence and reasoning, the groups did not accept Mr. Skliros' compromise, but rather, made a decision in favor of low taxation as against a high price for crude. They agreed to liquidate the pipeline company, transfer all pipeline operations to IPC, and price crude to the groups on the basis of management's estimate of British income tax cost plus 1 shilling profit per ton. Under this plan IPC's profits would, of course, be nominal and its tax liability to the British Government would be relatively small.
As would be expected, Gulbenkian was also interested in minimizing his tax liability. In 1931, when IPC chartered Mediterranean Pipelines, Ltd., in Canada, Gulbenkian requested, and the groups agreed to, the establishment of Participations and Investments (Newfoundland), Ltd., to hold Gulbenkian's shares in the pipeline company. Gulbenkian's shares in IPC were held by Participations and Investments (Canada), Ltd. At that time he apparently thought that most of the profit of the IPC venture would be deposited with the pipeline company. In view of the new income tax that was coming into effect in Canada, Gulbenkian concluded that he would receive better tax treatment if he let the Newfoundland corporation rather than the Canadian company hold his interest in the pipeline company. 10
Again in 1935, when it appeared that Canada might subject his Canadian company (Participations and Investments, Ltd.) to a substantial increase in taxes, Gulbenkian formed a new company. Participations and Investments (Monaco), in the Principality of Monaco, France, to purchase at a small or no profit the crude received from IPC by Gulbenkjan's Canadian company. The Monaco company then took the place of the Canadian company, with the result that the profits from Gulbenkian's crude were obtained primarily by the Monaco corporation, which was liable to relatively small taxes. 11 In 1938, Gulbenkian changed the name of his Monaco corporation to Participations and Estates (Monaco), Ltd. 12
Royalty problems with the Iraq Government.--The matter of royalties was perennially discussed between IPC and the Iraq Government. The vague wording of the Iraq convention of 1925 promoted disputes regarding future royalty payments.
The Iraq Convention of March 1925, and as revised in 1931, provided that IPC should pay a royalty of £400,000 (gold) per year until such time as regular exports of crude commenced. Thereafter the royalty was to be 4 shillings (gold) per ton on the quantity of petroleum produced annually, with total annual payments to be not less than £400,000 (gold). This tonnage royalty of 4 shillings was to be effective for a period extending 20 years beyond the completion of a pipeline and the initiation of export shipments, i. e., from 1934 to 1954. For each 10-year period thereafter the 4-shilling rate was to be increased or reduced by a percentage figure. This was the percentage by which the profit or loss of IPC during the last 5 years of the 20-year base period was greater or less than during the first 15 years of the base period. 13 The minimum rate of royalty was specified to be 2 shillings (gold) and the maximum rate 6 shillings (gold). 14
The purpose of this royalty provision was to enable the Iraq Government to obtain a higher royalty if the profits of IPC increased, while the company would be favored by having smaller royalty payments if profits declined. However, it was practically impossible to obtain a workable definition of the terms included in the royalty provision in view of the manner in which IPC was operated. As has beeti noted, the crude produced in Iraq was sold to the IPC groups at an arbitrary price; the crude was then refined by the respective groups, and the profits obtained from the refined products were retained by the transporting, refining, and marketing affiliates operated by the respective owners of IPC. Therefore, most of the profits from IPC's operations were obtained by the groups themselves, and the nominal profits earned by IPC could not be used as a basis for adjusting royalty payments. Moreover, IPC could not supply data on costs and prices of refined products; these could be obtained only from the records of the refining and marketing subsidiaries of the groups.
Inquiries as to how the royalty provision would be administered began in early 1935, following the beginning of export shipments late in 1934. For these shipments, the groups arbitrarily set 18 shillings per ton as the price at which Iraq crude would sold to the respective groups. In February 1935, the Iraq Government wrote IPC as follows:
The decision of the hoard of directors of your company regarding the sale price of crude oil from seaboard to "shareholders" has an important relation with the application of article 10 of your company's convention in respect of specifying the royalty. We request you, therefore, to give us detailed information us to the actual average pnce per ton, no matter where the selling place may be, together with the average expenses per ton, and to explain the reasons for its being fixed at 18 shillings.15
The groups were in a quandary as to how to answer this inquiry. The Iraq Government had been dissatisfied with the royalty provisions of the agreement prior to its signing in 1931. Some persons in IPC believed that the inquiry of February 1935 was an attempt to reopen the subject. As explained by one official, the Iraq Government's objection to the royalty provision was based on the ability of IPC to fix the average market price at will by selling crude at arbitrary prices, ignoring market values of the refined products. Under such circumstances there was nothing to prevent IPC from adjusting prices during the base period following the completion of the pipeline so as to bring down the royalty payable 20 years thereafter to the minimum of 2 shillings gold for the following 10 years. 16
IPC answered the Iraq Government's inquiry by saying that the price of 18 shillings per ton for Iraq crude during 1935 was a purely arbitrary price and had no relation either to average cost or to average market price as referred to in article 10 of the agreement. It expressed willingness to meet with the Iraq Government to formulate practical methods of obtaining the data which would be needed in 1954 for fixing the rate of royalty. 17
On May 14, 1935, the Iraq Government replied, requesting IPC to make specific suggestions relating to the application of article 10 of the company's convention. 18 The question what to do about the Iraq royalty provision was thoroughly discussed at a group meeting on July 1, 1935. The French (CFP) suggested that the Iraq Governinent should be informed that the royalty provision was unsatisfactory. and that the rate of royalty should not be modified according to the company's profit and loss account, as the account could be altered from time to time according to the company's inclination. They held that it would be far more preferable from every point of view to base the royalty on market price, which was not within the company's control. 19 Instead of adopting CFP's suggestion, the groups decided to postpone action. It was agreed that the managing director should inform the Iraq Government that the general manager who was then in the Near East, would shortly be returning and that on his return the managing director would take up with him the company's proposal for discussions with the Iraq Government. 20
But the Iraq Government was not satisfied with this postponement. They wrote IPC on July 23, 1935:
It. was our desire to know your proposals in writing on the subject of applying a formula for the revision of the rate of royalty in the year 1954 before the return of the general manager of your cornpany--who is now on leave--in order to enable us to study your proposals before discussing the subject with him. 21
The royalty question was discussed at various times in 1935 and 1936; but little, if any, progress was made toward a settlement. In 1937, the Iraq Government asked IPC to submit the accounts and information as required by article 10 of the convention. The accounts were to be based on the actual market prices for the oil products. and were to contain, among other things, the prices obtained from the sale of the crude-oil products, the weight of such products (which would enable the Iraq Government to compare the prices with the prevailing world prices), and the cost of transporting, producing, refining, and distributing Iraq crude oil only. 22 The lraq Government had previously been informed that IPC could not supply such data. They had been told that IPC disposed of Iraq crude to its own constituents, who mixed the Iraq crude with the crudes of different countries, and that the only figure IPC could furnish was the "average cost per ton," including costs of production and transportation to points where the oil ceased to be IPC's property. The Iraq Government had also been informed that it was not feasible to ascertain the profits made by the buyers of Iraq crude on their sale of refined products containing a percentage of Iraq crude. Nonetheless, the Iraq Government still inisisted that IPC had offered to "formulate practical methods of ascertaining the necessary data which niav be needed in 1954 for fixing the rate of royalty. 23
In September 1937, the royalty problem was discussed at another group meeting. It. was agreed that the shareholding companies would nominate experts in marketing matters to assist the managing director of IPC in preparing a formula for possible submission to the Iraq Government. 24 The members of the committee met several times to work out a formula. In November 1937, it was reported that a formula under consideration by the committee provided that the yearly market price of Iraq crude should be the price f.o.b. Mediterranean terminal, if such a price existed; and, if not., it should be a fair market price as determined by an independent expert selected by the Government and the company. Cost was to be the cost of delivery f.o.b. Mediterranean terminal as certified by the company's auditors. 25 In December 1937, the board of directors of 1PC decided that the managing director should discuss this formula with the Iraq Government on his forthcoming visit to Iraq.
It is not clear what sort of arrangement. 1PC made with the Iraq Government between 1937 and 1947. It is apparent, however, that no final settlement was reached in 1937, for in April 1947 the Iraq Government requested IPC to supply figures on the cost price of crude at the Iraq frontier and to submit such additional data as would apply under the royalty clause of the convention agreement. 27 In April 1948, at a meeting of the board of directors, the managing director of IPC referred to the need for a revision of the formula, since under article 10 of the convention the rate of royalty would come up for revision in 1954. Since, in his view, the existing formula could not be operated because of the impossibility of collecting the required data, he felt that a revision was the only solution. 28 But. no revision of the royalty rate was made at that time. On March 18, 1949, almost a year later, the Iraq Government suggested an immediate revision of article 10 of the IPC convention, instead of waiting until 1954. It appears that the Iraq Government was willing to discuss new royalty terms based on a sliding scale and on world market prices. 29 As recently as June 1950, however, the groups in IPC were still carrying on discussions with the Iraq Government regarding the royalty to be paid. 30
Prices charged Iraq consumers for petroleum products supplied by IPC.--Under the Iraq convention of March 1931 IPC was required to supply Iraq's local requirements for petrol, kerosene, and fuel oil. Until March 14, 1955, the price in bulk for these products was to be the equivalent in Iraq currency of 10.68 pence per Imperial gallon for petrol, 7 pence per Imperial gallon for kerosene, and 2.25 pence per Imperial gallon for fuel oil. 31 These base prices, however, were to be increased or decreased from time to time in accordance with variations in world prices and in any distribution costs or other working expenses outside the control of IPC. 32
In order to make the pricing provisions workable, it was, of course, necessary to conic to some agreement as to the manner in which prices of oil products sold in Iraq were to be increased or decreased in accordance with variations in world prices. The Iraq Government and IPC solved this problem by agreeing upon the following procedure:
* * * that prices shall he increased or decreased by the amount of any variations in world prices as expressed by the published prices for cargo lots of gasoline, kerosene, and Diesel oil, respectively, f.o.b. United States ports in the Gulf of Mexico (hereinafter called "Gulf Prices"). The method * * * for ascertaining such variations is to determine for each product the difference between the average of the Gulf prices on the second Wednesdav of each of the 12 months preceding the 1st of July of each year, and the average of Gulf prices which obtained for that product on the second Wednesday of each of the 12 months preceding the 1st of July 1931 * * *. The published prices for cargo lots of gasoline, kerosene, and Diesel oil, respectively, shall be those published in Platt's Oilgram, a journal of the city of New York, U. S. A., under the heading of "Gulf export market" * * * 33
The fact that prices in Iraq were thus linked to United States Gulf prices led to a controversy in 1933 between IPC and the Iraq Government. Following the devaluation of gold in the United states in 1933, export prices of petroleum products increased at the United States Gulf and, in accordance with the formula, prices charged Iraq consumers for petroleum products were also increased. The Iraq Government immediately protested, insisting that the high prices were causing undue hardship and that it was not equitable for Iraq consumers to have to pay prices which they considered higher than the prices being charged for the same products in other parts of the world. 34 The Iraq Government asked that there be an alteration in the formula for computing local petroleum product prices, but IPC was unwilling to consider such a modification without regard to other changes in the agreement.
Apparently consumers in Iraq continued to be charged prices based upon quotations at the United States Gulf, regardless of the facts that (a) the crude is produced in Iraq, (b) it is produced at low cost, (c) it is refined in a nearby refinery, and (d) the products are marketed by a local company. 35
Financial results of IPC.--Although data on the financial operations of IPC are fragmentary, those that are available indicate that IPC was a highly profitable venture. In February 1937 Standard Oil Co. (New Jersey) estimated that its properties in the red-line area were worth between $119,000,000 and $143,000,000, exclusive of the value of the Basrah concession, the discovery of light oil in the BOD (Mosul) concession, and the discovery of oil at Qatar. This is to be compared with a total investment by Standard Oil Co. (New Jersey) of approximately $13,940,000 in the red line area at the end of l939. 36 Thus, for every dollar of investment Jersey Standard had obtained about $10 of capital value.
The profits realized from Iraq crude were also satisfactory. Standard Oil Co. (New Jersey) realized an average profit of about 52 cents per barrel on its share of Iraq crude (produced and purchased) over the period 1934-39--more than double the approximate 25 cents per barrel paid to the Iraq Government in 1938 for royalty and taxes. 37
To the end of 1937 total profits earned on sales of Iraq crude by Standard Oil Co. (New Jersey), through its subsidiary Standard Oil Co. of New Jersey amounted to $10,400,000, while total investment at the end of 1939 was only S13,940,000. At the 1938 rate of profits it would have taken only about one more year of operation for Standard Oil Co. (New Jersey) to have recouped its total investment in IPC. 38
Although the above data relate to only one company and cover only the early years of IPC's operations, there is no reason to believe that the operations of the other owners of IPC were less profitable than those of Standard Oil Co. (New Jersey). A Standard Oil Co. (New Jersey) official stated in 1940:
If the Iraq pipe line capacity is increased, Jersey's profits should increase at a corresponding rate, assuming that other factors remain the same * * * 39
WORLD WAR II AND POSTWAR DEVELOPMENTS
After the outbreak of World War II in 1939, it became increasingly difficult for IPC to continue its operations. Its activities were upset by the normal disruptions of the war such as the sabotage of pipelines, the rebellion in Iraq in 1941 and the subsequent occupation of Iraq by British troops, the negotiations of moratoriums on concession agreements with Iraq and other governments, the inability to carry out pipeline expansion plans, and so forth. But these disruptions had little direct bearing upon the problems which are of central interest in this report.
What is important from the point of view of this report was the disruption of the red line agreement and the subsequent maneuvers and improvisations of the groups. CFP and Gulbenkian were dcdared enemies and could not participate in IPC affairs; NEDC claimed the war dissolved the red-line agreement but CFP and Gulbenkian denied this was so; CFP took the mattee to court when Jersey Standard and Socony refused to permit any group to have a share in Standard and Socony's interest in Arabian American Oil Co., and, after 2 years of negotiation but before the court action came to trial, the groups concurred on a new agreement eliminating most of the restrictive provisions of the red-line agreement. These are time principal issues upon which attention will be focused in this section.
Effects of war upon IPC operations
Shipments disrupted.--Shortly after the outbreak of war in 1939, the British and French Governments, which possessed mandatory powers over Palestine and Syria, respectively, prohibited shipments from Haifa and Tripoli (IPC's Mediterranean terminals) to destinations outside the British and French Empires. But this restriction did not result in any reduction in IPC production, for the British and French required all possible oil from this source. However, with the entry of Italy into the war in June 1940, the Mediterranean was closed to Allied shipping and it was impossible to export from Haifa and Tripoli. From that time on until the Mediterranean was opened to Allied shipping, IPC could produce only such oil as could be processed locally at the refineries at Haifa a and Tripoli. 40
In 1939, Consolidated Refineries. Ltd., a company owned 50-50 by Anglo-Iranian and Royal Dutch-Shell, constructed a refinery at Haifa and in 1940 the French High Commissioner of Syria constructed a small refinery at Tripoli. Under an agreement with IPC, the French High Commissioner was to own and operate the Tripoli refinery during hostilities but it was to be turned back to IPC at the end of the war and the crude which IPC agreed to supply was to be considered as payment for the refinery. Until the Mediterranean was freed for allied shipping, the Haifa and Tripoli refineries were the only outlets for Iraq crude, and consequently production during this period was sharply curtailed. 41
(2) Red-line arrangement for sharing crude is frustrated.--By disrupting shipments the war prevented the groups from taking their proportionate shares of crude under the red-line agreement. When the Mediterranean was closed to Allied shipping, Standard Oil Co. (New Jersey) could no longer send tankers to lift crude or products at Haifa or Tripoli. For a considerable period during the war, CFP and Gulbenkian also were unable to take their proportionate shares of IPC's production. When the French capitulated to the German army in July 1940 the British Government ruled that French companies and persons residing in Occupied France were enemy aliens, and since CFP and Gulbenkian 42 both fell within this category, it was illegal for the groups in IPC even to communicate with these enemy groups. Orders were issued vesting the rights of CFP and Gulbenkian in IPC in the British Custodian of Enemy Property. Gulbenkian's enemy status was revoked in 1943 and CFP's in 1945; but during their periods of enemy status neither of these groups could receive any return from IPC operations, Socony-Vacuum, however, executed an agreement with Consolidated Refineries, Ltd., on June 30, 1939, for a throughput privilege equivalent to 15 percent of the capacity of the Haifa refinery. This enabled Socony to continue to take refined products derived from Iraq crude. 43 Thus, there was a period when the only groups who could share in Iraq's production were Anglo-Iranian, Royal Dutch-Shell and Socony-Vacuum.
(3) Ad hoc arrangements in lieu of red-line agreement. --With Gulbenkian's and CFP's interests in the hands of the British custodian, it was clear that the red-line agreement could not be fully effective, particularly the provisions relating to pricing and sharing of crude (clause 13). After consulting English counsel and the custodian of enemy property, it was decided that Iraq crude would be sold at a reasonable price to such groups as could take it, and crude would be produced to the extent that the groups were able to take delivery. 44
This ad hoc arrangement was called a supplemental group agreement; but in order to give substance to the agreement, the groups had to come to some decision with respect to what was a fair and reasonable price for Iraq crude. This question was temporarily resolved by an agreement that for the period October 17, 1940, to March 31, 1941, Iraq crude would be sold to the groups, f.o.b. or delivered at the Haifa refinery, at the free market price for east Texas crude f.o.b. United States Gulf, less a differential for quality of 24 United States cents per United States barrel. 45 An American oil broker, Mr. Riddell, was selected by the groups to ascertain, certify, and report the month-by-month average price of east Texas crude. 46 In the language of the trade this price, which reflected the United States Gulf price, came to be called the "Riddell price."
As has been noted, under the red-line agreement the practice had been to base the price for Iraq crude, not on the United States Gulf price, but on United Kingdom income tax cost, plus 1 shilling per ton profit. However, during the year 1940 when production of crude was curtailed because of shipping restrictions, the cost of production and transportation of Iraq crude increased to such an extent that costs exceeded the world market price, with IPC for a time operating at a loss. It was then decided, as a general principle, to sell IPC crude to the groups at the world market price, i. e., the "Riddell price," or at the United Kingdom income tax cost price plus 1 shilling per ton profit, whichever was lower.
At first glance it would appear that this new arrangement would have had no direct effect. whatever upon the price question. Since at the time the "Riddell" or Gulf price was well below the income tax price, the groups wider the compromise would have been required to continue using the Gulf price. Presumably this would have meant that instead of being able to use a price which at least covered IPC's costs (the United Kingdom income tax cost price), they would have to continue using a price on the basis of which the IPC was losing money.
But it should be remembered that the British and American members had long followed a policy of making their profits from Iraq oil, not from the operations of IPC itself, but from the margin or difference between, on one hand, the cost to them of the Iraq crude and on the other the price which they could secure on their sales of refined products. Thus, a low price for Iraq crude, while resulting in losses to IPC itself, was in the traditional policy of the British and American groups.
The effect of this new arrangement was to bring about a low price for Iraq crude under all conditions. During periods of reduced output, when IPC's costs were high. it could be expected that time Gulf price would be below the United Kingdom income tax price, that it would thus govern the IPC price, and that the British-American groups would be able to secure the Iraq crude at a low price. Conversely, when Iraq production was high and its costs were low, it could be expected that the United Kingdom income tax price (which was essentially a "cost-plus" formula price) would be lower than the Gulf price, thus again assuring the British-American groups of Iraq crude at a low price.
As would be expected, the French (CFP) and Gulbenkian, who had traditionally sought to obtain their profits from the direct operation of IPC itself, rather than from the margin between Iraq crude and refined products prices, objected violently through their agents to this new arrangement. In their opposition, they were joined by the British Custodian of Enemy Property. These three parties were all agreed that the pricing formula worked to the disadvantage of CFP and Gulbenkian. 47 They contended that the general principle of pricing on the basis of the world market price or United Kingdom income-tax cost plus 1 shilling per ton profit, whichever was less, meant that in the years when production increased, and costs reduced, the groups that could take crude would buy at United Kingdom income-tax cost price and thereby benefit; but when production was low, as it was in 1940-41, crude would be sold at the world market price (Riddell price) and any IPC losses resulting therefrom would be shared by all groups regardless of whether they were able to take crude and share in the benefits. The Custodian did not believe that when the group agreement was signed the groups contemplated that the benefits of cheap oil should accrue to some at the expense of others, and the fact that the trading losses of IPC in 1940 were carried over into 1941 brought forth caustic remarks and complaints from the Custodian.
As would he expected. the British and American groups rejected the view of the Custodian. But, in order to satisfy him and the agents of CFP and Gulbenkian, the British-American groups agreed to pay an additional price or surcharge above the regularly established price so that at the end of 1941 the loss incurred in 1940 would be wiped out. Apparently, calculations under the Riddell or Gulf price formula were reported over a period of several years. 48 However, it was the governing price only for the years 1940-41, when IPC production was drastically curtailed. In subsequent years, production was large enough that a price based on United Kingdom income-tax cost plus 1 shilling profit was below the Gulf market price, asid therefore governed IPC operations.
GFP and Gulbenkian reinstated in IPC and war claims settled.--In July 1943, Gulbenkian's rights as a shareholder in IPC were restored by the Custodian of Enemy Property, and Gulbenkian resumed his position as a director of IPC with the right to receive his proportionate share of Iraq crude and products. There arose immediately the problem of settling with Gulbenkian for the crude and products which he had been unable to lift. Gulbenkian denied that he had ever been an enemy, strongly maintaining that his position was very different from that of CFP. 48 [note--there are two footnotes numbered 48]
Various proposals and counterproposals were passed back and forth between Gulbenkian and the other groups in IPC regarding the compensation which Gulbenkian should receive. For a time, it appeared that Gulbenkian might resort to litigation, but eventually on May 23, 1945, Anglo-Iranian, Shell, and NEDC settled Gulbenkian's war claims by paying him £547,000. 49 In consideration of this payment, Gulbenkian released the groups from all claims arising out of or in connection with any acts concerning crude oil or products produced in the red-line area up to February 9, 1945. 50
The American member's (NEDC) share of the lump-sum settlement was 103,498 pounds sterling and was paid by Jersey Standard and Socony in proportions agreed upon between them. 51
CFP was not reinstated into the good graces of IPC until February 1945. 52 Like Gulbenkian, it also presented claims against the groups for compensation for the crude and products which CFP was unable to take during the period of its enemy status. CFP vigorously and continuously pressed its claim, contending that the groups who were in a position to take crude during the war profited at the expense of CFP because IPC's profits were either nonexistent (when the Gulf price governed ICP's price) or only nominal, i. e., 1 shilling per ton (when the United Kingdom income-tax price governed IPC's price). Yet at the time, the British-American groups were making large profits from their marketing and refining organizations by purchasing crude at a low price and selling their refined products at a relatively high price. 53 In 1946, CFP presented a claim against NEDC, Shell, and Anglo-Iranian for 2,425,000 pounds sterling. 54 The British-American groups replied by stating there was no legal basis for CFP's claim. 55
Although CFP continued to press the matter, no settlement had been reached by November 1948 at which time it was agreed that time CFP claims should be submitted to arbitration. [note--there is no footnote 56] 57 However, the companies concerned could not agree on a form of submission to arbitration, and CFP threatened to take the matter to court. A settlement was finally reached through negotiation in February 1950 with Shell, Anglo-Iranian, and NEDC agreeing to pay CFP £500,000. In general, the CFP payment was made by the groups on the basis of the takings, by each group, of oil which might have come from the French share during the period between the liberation of Paris and the restoration of the CFP's rights in February 1945. 58 Insofar as NEDC was concerned, the major part of the CFP payment was made by Socony-Vacuum because it had been able to lift crude at a time when Standard Oil Co. (New Jersey) was unable to do so. Standard Oil Co. of New Jersey's part of the settlement amounted to only £1,17O. 59
The American group declare the red-line agreement dissolved.--In October 1946, the American group, acting individually through Standard of New Jersey and Socony-Vacuum and collectively through NEDC, declared the red-line agreement to be dissolved. This was not an abrupt and spontaneous decision, but was arrived at in a series of progressive steps.
In 1941, when the groups were discussing with the British Custodian of Enemy Property the question of whether or not the group agreement should remain in effect, they concluded after consulting legal counsel, that the group agreement should remain in full force and effect except for the provision relating to the sharing of oil. It is to be noted that at that time NEDC took no exception to the validity of the group agreement. 60 But in 1945, after CFP and Gulbenkian had been reinstated in IPC, the American group's position with respect to the validity of the red-line agreement became somewhat uncertain. In fact, NEDC was "not convinced that action should be taken on reaffirmation of the group agreement but they did consider it important that offers of oil under the agreement should be resumed immediately." 61
In October 1945, NEDC notified the groups that it would not admit an obligation to report any red-line purchase of products, but only crude. 62 It will be recalled that under the red-line agreement the groups were clearly prohibited from making independent purchases of crude within the red-line area. But the question of whether or not the red-line agreement prohibited the purchase of products derived from crude produced within the red-line area was by no means clear. 63
Why this complete reversal of position regarding the red line etween 1941 and 1945? Standard of New Jersey had an explanation. In 1946, the president of CFP visited the United States, and among other things discussed with Jersey Standard CFP's claim for compensation for oil which CFP had been unable to lift during the war. At that time, Standard advised CFP that it had refused to reaffirm the red-line agreement. In indicating the reason for its position, Mr. Holman, president of Standard Oil Co (New Jersey), stated that:
There had been a substantial change in the attitude of the American public and governrnent toward restrictive agreements and, under current conditions, reaffirmation of the agreement seemed inadvisable. 64
In response to a question as to why Standard was now taking the position that purchases of petroleum products within the red-line area were permitted by the red-line agreement, Mr. Holman stated that:
The question had not arisen before as such purchases were not necessary. However, as there had been a substantial change as a result of the war, the need now exists and it is for this reason that Jersey has requested legal opinion as to its rights under the agreement to make such purchases. 65
In point of fact, the question of the rights of the groups to make purchases of products within the red-line area had previously arisen. The record indicates that this question was discussed at length by all the groups before the war, particularly in regard to the efforts to obtain an agreeslient with Standard Oil Co. of California with respect to the purchase of Bahrein petroleum. It is difficult to escape the conclusion that Jersey Standard was preparing a legal basis for defending the agreement which Jersey Standard and Socony-Vacuum were then trying to make with Standard Oil Co. of California and the Texas Co. for the purchase of a share interest in Arabian American Oil Co.'s (Aramco) concession in Saudi Arabia.
This interpretation by NEDC of the red-line agreement and the failure of the groups to report purchases made in the red-line area became matters of great concern to Gulbenkian and CFP. In May 1946, Gulbenkian suggested that the matter should be brought into the open at an appropriate meeting. 66 In response to Gulbenkian's demands, NEDC stated it had been advised by English counsel that the prohibition in the group agreement to purchases within the red line applied only to crude and not to refined products. 67 CFP viewed NEDC's position as being an entirely new and unofficial one which had never been previously advanced, even though the problem had been discussed for more than 2 years. 68 Shell and Anglo-Iranian also believed the groups should abide by the red line, but they never vigorously contested NEDC's position. 69
The American group, however, was anxious to expand in the Middle East and was not easily deterred. Armed with substantial legal support that some parts of the red-line rgreernent were no longer legally binding, Jersey Standard and Socony (the NEDC owners) began negotiations with Standard Oil Co. of California and the Texas Co. for an interest in Aramco's concession in Saudi Arabia. Although an agreement in principle was not reached until December 1946, the executive committee of Jersey Standard concluded 5 months earlier that the red-line agreement was dissolved and that the other groups in IPC should be so informed. 70 Formal notices to the effect that Standard Oil Co. (New Jersey), Socony-Vacuum Oil Co., Inc., and Near East Development Corp. considered the group agreement dissolved were drafted as of October 3, 1946, and were delivered to the other IPC groups in December 1946. 71
CFP takes the matter to court--CFP and Gulbeukian denied that the red-line agreement was dissolved and counsel for these groups lost no time in protesting the American group's action. In November 1946, Gulbenkian's counsel informed NEDC's legal representative on IPC (M. Piesse and Sons) that he disagreed with the American group's position and that their actions seriously threatened the interests of Gulbenkian. He stated, however, that no member of the group desired litigation "which would necessarily disclose to the world a divided front and open up the affairs of the group to public discussion," and that Gulbenkian would endeavor to formulate a friendly arrangement affording protection for his legitimate interests. 72
CFP, likewise, did not agree with the position taken by the American group. In December 1946, Standard (New Jersey) and Socony had reached an agreement in principle with Standard of California and the Texas Co., and notices to that effect had been reported in the press. Attorneys for CFP immediately notified the legal representatives of the American group that if the press reports concerning these negotiations were true, the transaction resulting from such negotiations would constitute a breach of the red-line agreement. 73 CFP's attorneys further advised that unless they had assurances that the press reports were erroneous and that Standard and Socony had not purchased an interest in Arabian American Oil Co. (Aramco), it would be necessary for CFP to take immediate steps to protect its interests under the red-line agreement. 74 They also accused the American group of using the Sherman Act as an "excuse upon which to hang" the breach of the "red line" resulting from the Aramco deal. 75
But CFP did not resort to court action as their first counter move. In their notice of dissolution of the red line agreement, Standard, Socony, and NEDC had indicated that although some of the provisions of the red-line agreement, particularly the restrictive provisions, were inappropriate, they were desirous of negotiating the terms of a new agreement which would exclude the restrictive clauses. The groups took hope from this statement and engaged in discussions for several months regarding various aspects of a new agreement. CFP and Gulbenkian, however, wanted a share of any interest which the American group obtained in Aramco--a concession which the American group refused to make. In January 1947, Standard and Socony officially advised the CFP that they could not agree to give CFP or any of the IPC partners a participation in the Arabian-American arrangements. 75 Shortly thereafter, in February 1947, CFP brought suit in the British courts against NEDC and the other groups in IPC. In this action, CFP sought a declaration that the 1928 group agreement was valid, that NEDC, Standard Oil Co. (New Jersey), and Socony-Vacuum were not free to obtain or be interested in any oil concession in the red-line area or in the purchase of any such oil otherwise than through IPC, and that any interest which NEDC, Standard, or Socony obtained in Aramco should be held in trust for the benefit of the other groups of IPC. In addition, CFP asked for an injunction restraining NEDC, Stanclard, and Socony from acting otherwise than through IPC. 76 Gulbenkian supported CFP's action as both were demanding some type of compensation for the alleged breach of the red-line agreement. 77
NEDC files a counter suit.--Jersey Standard and Socony-Vacuum, joint owners of NEDC, filed a statement of claim with the British High Court of Justice in June 1947 denying many of the allegations made by CFP. CFP's suit, supported by Gulbenkian, had alleged that an acquisition by NEDC of an interest in Arabian American Oil Co. would constitute a breach of the group agreement and/or the declaration at the end of the group agreement. NEDC, in its statement, countered this allegation by saying that:
* * * any agreement contained in the said declaration was in restraint of trade and contrary to public policy and void and unenforcible in law. 78
Thus, Standard and Socony followed the red-line agreement for almost 20 years without making any serious objections, but when they wished to obtain an interest in Aramco, they described the agreement as one:
* * * in restraint of trade and contrary to public policy and void and unenforcible in law.
The president of Jersey Standard explained his company's position in 1946 when he stated that:
There had been a substantial change in the attitude of the American public and Government toward restrictive agreements and under current conditions, reaffirmation of the agreement seemed inadvisable. 79
On the other hand, it may be recalled that CFP's attorney had in effect accused the American group of using the Sherman Act as a ruse to get into Aramco. 80
Revised agreement negotiated and court actions withdrawn.--Irrespective of the court suits, relations were not so strained as to preclude the groups from continuing their discussion concerning a new agreement. None of the groups was desirous of having IPC's affairs aired in court. Hence, they earnestly endeavored to come to an agreement before the court suits came up for trial.
The negotiations were long and arduous, lasting almost 2 years. 81 The principals had divergent interests and were represented by numerous counsel. Gulbenkian wanted compensation for the proposed Aramco arrangement (which he considered to be a breach of the red line), adequate protection of his interests, and since he had no refining or marketing facilities, an assured market for his oil. CFP sought a settlement of its war claims, i. e., compensation for oil not lifted during its period of enemy status, and a more rapid development of IPC, including more production, pipelines, and facilities. Anglo-Iranian wanted assurances that its 7 1/2 percent royalty would be continued and a slow expansion of 1PC's production. Shell approved of some expansion of IPC's operations, but wanted it done in an orderly manner. NEDC's principal interests were to exclude the restrictive clauses in the red-line agreement, get the other groups to agree that NEDC's acquisition of an interest in Aramco would not be a breach of contract, and induce CFP to discontinue its court action.
The various interests and divergent views of the groups were reconciled to the extent that a new agreement, called Heads of Agreement and Supplemental Documents, was signed on November 3, 1948. 82 The agreement was a combination of several separate documents, prepared at different times, some before World War II, plus last minute telegrams and letters. These documents have been described by one who was intimately familiar with their development as being "in some respects monuments of complexity." 83 A summary of the major aspects of the agreement follows:
The red-line agreement was canceled and all claims arising out of it were waived. 84 In what was termed the "Aramco Release," 85 CFP was to withdraw its court suit (NEDC also was to discontinue its counter action) and Standard and Socony were free to complete their acquisition of an interest in Aramco. 86
The new agreement went a long way toward removing some of the most obvious restrictive provisions of the red-line agreement which limited the freedom of a group member to obtain concessions, purchase crude and products, and engage in refining and marketing operations within the red-line area. The restrictive provisions relating to these operations were specifically excluded from the new agreement. 87 A group could now acquire rights in the red-line area without being under obligation to share proportionately with the other groups. From the point of view of the American companies, this right to be free either to participate or stay out of any joint venture proposed by a group member was a considerable improvement over the forced sharing provisions of the red-line agreement.
Anglo-Iranian retained its right to a 7 1/2 percent royalty on all crude oil produced from the area. included in the Iraq concession on May 1, 1934. The new agreement merely restated the royalty arrangement that had existed before.
Under the new agreement, CFP's war claim was to be submitted to arbitration. Also of interest to CFP was the agreement to expand IPC's operations. 88 The groups agreed to provide the necessary additional facilities, especially pipelines, to expand the production of Iraq oil in conformance with a planned program. For the period 1952-56, each group nominated its oil requirements and these were included in schedule B in the heads of agreement.. Program requirements were to be set out by 5-year periods, and were to be prepared 5 years before the commencement of the period, i. e., in 1952 the program for the period 1957-61 must be prepared. In the formulation of programs, each group nominates its own requirements and these may be more or less than its basic share proportion, i. e., the share of oil proportionate to a group's stock ownership in the venture, but there are maximum limits to the amount of oil a group can take in any one year. All oil produced is to be offered at the United Kingdom income tax cost-plus-a-shilling price to the owning groups in accordance with their share proportions, but if a group indicates program requirements smaller than its basic proportion, then it is required to sell to those having program requirements in excess of their basic proportions. These sales are to be made at a price in sterling halfway (called "half-way" price) between the cost-plus-a-shilling price and the current world market price. 89
There were special provisions in the new agreement affecting Gulbenkian (called P and I in the agreements, abbreviation for Participations and Investments, Ltd.). During the period 1952-66, in lieu of his right to receive oil in excess of his basic proportion, Gulbenkian is entitled to receive 3,750,000 tons of what is called special allocation oil. Delivery of this oil will begin either on January 1, 1952, or on the date when deliveries of oil through the big-inch pipeline to the Mediterranean commence, whichever date is later. 90 Gulbenkian will purchase 5 percent of this oil, i. e., his basic proportion, from IPC and group companies at the cost-plus-a-shilling price and the balance (called "special over requirement" oil) at the "halfway" price. After 1966, Gulbenkian's position as regards programing and his right to receive oil will be the same as any other group, subject only to the limitation of his 5 percent share ownership. 91
In general, the groups assured Gulbenkian of an outlet for his oil. Each of the four major groups, agreed to enter into separate contracts whereby each major group would become directly responsible for taking its quota of Gulbenkian oil. The contract of each major group was considered to be a series of separate contracts in respect of each year. 92 As to his basic proportion of oil (his 5 percent share), Gulbenkian has an option of deciding whether he wants the other groups to buy. The option arises in this manner. In August or September of each year, an expert, using world market prices for the first half of the year as a basis, fixes a price which the groups are to offer Gulbenkian for his oil in the following calendar year. When this offer is made, Gulbenkian has the right to accept or reject the offer but he must treat all groups alike. 93 However, Gulbenkian's "special over requirement" oil (oil in excess of his 5 percent basic proportion), which, of course, will end in 1966, must be sold to the groups. The profit margin on this oil, which is the diflerence between the ''halfway" price (see above), and the expert's price, is to be paid to Gulbenkian in dollars. In addition, all the groups agreed to pay Gulbenkian the expert's price in dollars for his 1949 oil, and Standard and Socony further agreed to pay Gulbenkian dollars for all oil purchased from him up to the time he begins to receive "special allocation oil." 94
Altogether from the point of view of the American companies, the 1948 agreement was a substantial improvement over the red-line agreement in that many of the restrictions upon individual action were eliminated. It was likewise an improvement from the. point of view of CFP, since it could now request production of crude oil to meet its requirements even though this might be in excess of its proportionate share of IPC production. Nevertheless, the groups did not attain complete freedom of action. The limitations upon the disposal of oil have heretofore been noted. In the case of concessions owned by a group company and lost otherwise than by expiration or abandonment, if any group wished to try to recover the concession, then all groups were bound to cooperate for a period not to exceed 5 years in an endeavor to reacquire the concession, with a further extension of not more than 5 years if negotiations were interrupted by war. The parent companies and all their associated companies were bound by this provision. Also, under the new agreement (heads of agreement), IPC and its associated companies could not operate outside the red-line area. Thus, the restrictions on the growth and expansion of the joint venture were retained while, as noted above, most of the restrictions on the individual groups were removed. 96 This would appear to give an advantage to Anglo-Iranian, Shell, Standard, and Socony, who have extensive interests outside the red-line area, over CFP and Gulbenkian whose most important oil interests are the IPC venture.
SOME POSTWAR MANAGEMENT POLICIES AND PROBLEMS
Following the end of World War II, the IPC and its member groups were confronted
with a number of problems which necessitated new improvisations and adaptations
of its basic policies.
IPC operates the Tripoli refinery.--As noted previously, the French High Commissioner of Syria constructed a small refinery at Tripoli in 1941, and operated it throughout the war. IPC agreed to purchase the refinery by payment of crude with the understanding that the ownership would revert to Syria Petroleum Co., an IPC associated company, upon termination of the war. 96 But since Syria Petroleum Co. had no refining rights in Lebanon, the plant. was taken over by IPC. 97
When IPC obtained the Tripoli refinery early in 1946, the groups agreed to waive any breach of the red-line agreement that would result from the operations of the plant by IPC. 98 This appears to be the first time that IPC engaged directly in refining and marketing operations, and the price and distribution policies which it adopted are of interest in that they indicate the way in which operations of IPC were made to mesh with the policies and plans of the individual group owners. 99 Moreover, and this is perhaps more important, the price and distribution policies adopted by IPC make it unmistakably clear that the underlying motives and intentions of the IPC groups were to keep prices in line, maintain strict controls over the distribution and marketing of the products of the Tripohi refinery, and, in general, operate in accordance with cartel principles.
IPC's price policy.--After deciding to operate the Tripoli refinery, the first problem which IPC had to solve concerned the prices to be charged for surplus fuel oil and unrefined benzine. A Near East marketing committee made up of representatives of Anglo-Iranian, Shell, CFP, and Socony studied the problem and decided that the surplus production of fuel oil at Tripoli should be sold at the "low" of Platt's Oilgram quotations for C grade fuel oil f.o.b. the United States Gulf, and that a price of 3 1/2d per ton would be charged without a local freight differential. 1 As for surplus unrefined benzine, it should be sold at the "low" of Platt.'s Oilgram quotations for 60 octane gasoline f.o.b. the United States Gulf, with a deduction for quality equivalent to one-sixth of the price. 2 Apparently, these were the same prices that were charged by the Haifa refinery, for only a few months before the local managements of Socony and Shell had recommended that the prices at Tripoli be on the same basis as prices at the Haifa refinery. 3 Thus, the price policy of IPC was made to conform to the policies followed by the owning groups' marketing organizations in the Middle East..
Control over distribution.--The specific problem that IPC was confronted with was, to whom should IPC sell its products? To solve this question, the IPC groups agreed in March 1946 that a local committee was to be set up in Cairo, Egypt., consisting of representatives of the three marketing companies associated with the groups who, acting as agents for all the groups, would instruct the IPC regarding the distribution of products from the Tripoli refinery. 4 It was also agreed that a committee of group representatives should meet and draft instructions for the Cairo committee. 5
The instructions drafted were basically rules for allocating the output of the Tripoli refinery. 6 The Cairo committee, which represented the 1PC groups was given authority to withhold supplies from any marketer. This enabled the committee to exercise complete control over the prices charged, In the form letter which the committee was to send to the refinery manager at the beginning of each quarter, the names of the local marketers, a description of the product, the quantitv, and the price to be charged were all set out in four orderly columns. The instructions made it unmistakably clear that only those marketers who were approved by the committee would be permitted to obtain products from the Tripoli refinery.
The history and development of the Iraq Petroleum Co., Ltd., is a striking illustration of the evolution of joint control through common ownership. By operating through the common ownership mechanism, the major international companies were able effectively to restrain competition.
IPC was not operated as an independent profit-making company. It was essentially a partnership for producing and sharing crude oil among its owners. Its profits were kept at a nominal level as a result of the practice of charging the member groups an arbitrarily low price for crude--a practice which reduced IPC's tax liability to the British Government and permitted the refining and marketing subsidiaries of the groups to capture the major share of the profits resulting from IPC's operations.
Although the origin of IPC dates back to the early 1900's, it did not become important in world oil circles until after World War I. Restrictive arrangements came early in the life of the company, e. g., the Foreign Office agreement of 1914. For the most part, however, the significant restrictions were not developed until the midtwenties.
In the early twenties, when the American oil companies first became interested in oil concessions in the Middle East, they placed great emphasis on what was termed the "open door" policy, and, in fact, made the acceptance of this policy a sine qua non of their participation in IPC. In this, they were actively supported by the American Government. In its initial stages the "open door" policy was broadly interpreted to mean freedom for any company to obtain, without discrimination, oil concessions in mandated areas, particularly in Mesopotamia. It was designed to promote active competition among the various companies for oil concessions and to prevent the establishment of a monopoly of oil rights. However, the "open door" was gradually closed by a series of deliberate and systematic acts on the part of the owners of IPC. The first of these acts was the concession agreement between TPC (later IPC) and the Iraq Government of March 14, 1925, which made it practically impossible for a nonmember of IPC to obtain a lease or concession in the areas that were to be opened for competitive bidding. Competition for these areas was changed from public or auction bidding to sealed bidding, with IPC given the authority to open the sealed bids and make the awards. In the original "open door" plan, IPC had been prohibited from bidding on plots to be offered at public auction. This prohibition, however, was omitted from the 1925 concession agreement. Thus, IPC was enabled to outbid any outsider, since (a) under the concession agreement all proceeds from bidding were to go to IPC, and (b) IPC had the right, upon meeting any submitted bid, to award the concession to itself. Secondly, when the groups signed the redline agreement in 1928 and agreed not to be interested in the production or purchase of oil in the defined area other than through the IPC, they further closed the "open door" insofar as their own activities were concerned. Finally, the concession agreement of 1931 closed the door not only on the groups themselves, but on all others as well by eliminating all references to a selection of plots to be offered outsiders, thus giving IPC a monopoly over a large area of Iraq. The "open-door" policy which had been so strongly advanced was discarded in subsequent years without a single test of its adequacy as a practical operating principle.
During the period between 1922, when the "open door'' policy was first advanced, and 1927, when it was in the process of being discarded, radical changes took place in the world oil situation. The fears of an oil shortage which were so widespread in 1922 were drowned in a surplus of oil. lnstead of competing for the development of oil resources, the international companies turned their attention to limiting output and allocating world oil rnarkets. 8
With the admission in 1928 of the American group to a share interest in IPC, four of the large international oil companies (Anglo-Iranian, Royal Dutch-Shell, Standard Oil Co. (New Jersey), and Socony-Vacuum) were united for the first time in a joint venture. The American group, acting as a unit through the Near East Development Corp. (NEDC), along with Anglo-Iranian and Royal Dutch-Shell, comprised the three major groups necessary to control and shape the operating policies of IPC. 9
An important restrictive feature of the IPC was the red-line agreement of 1928, which prevented the member groups of IPC frommi competing with themselves and with IPC for concessions in an area which included most of the old Ottoman Empire. One writer in commenting upon the red-line agreement slated:
This agreement is 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 togethcr dominate the world market for this commodity. 10
Although the strongest proponents of the red-line agreement were the French and Gulbenkian, the Big Three were not unalterably opposed to its adoption. The American group, although opposed to the red-line when first advanced, later agreed to its adoption.
The red line gave adequate protection against independent action by the groups within IPC, as was evidenced by IPC's refusal to permit Gulf Oil Corp. from exercising its option to purchase a concession in Bahrein. However, there was a loophole in the agreement in that it did not prevent noumembers from seeking concessions within the red-line area. When an independent organization, the British Oil Development Co. (BOD), obtained a concession in the Mosul area of Iraq, and when another outsider, Standard of California, obtained concessions in Babrein and Saudi Arabia, IPC began to secure as many concessions as possible within the red-line area, principally for the purpose of keeping them out of the hands of competitors. To offset the BOD and Standard of California's encroachmnents in the red-line area, IPC subsequently obtained control of the BOD concession by secretly purchasing its shares, while the Big Three attempted to come to an understanding with Standard of California regarding the Bahrein and Saudi Arabian concessions.
But the red-line agreement proved to be a serious handicap to the Big Three in their efforts to make a deal with Standard of California. It was a handicap to the Big Three because the French and Gulbenkian were unwilling to waive their rights under the red-line agreement which entitled them to their pro rata share of any concessions, of any crude produced, or of any products derived from crude produced within the red-line area. Tile Big Three tried, either individually or collectively, for almost 7 years, to alter the red-line agreement in such a way that they would be able to neutralize the competitive effects of Standard of California's operations, with, however, only partial success. When World War II interrupted negotiations, the IPC groups had reached a temporary understanding among themselves in the form of an agency agreement for purchasing Bahrein's production. This arrangement, however, fell far short of their real objective, which was a partnership agreement with Standard of California and Texas Co. 11 covering the Arabian concession.
During the war, the red-line agreement was more or less put aside. Some of the groups, like CFP and Gulbenkian, were considered enemies and could not share in IPC's production nor actively participate in the management of the company. Others, like Standard Oil Co. (New Jersev), could not lift their share of crude because of shipping restrictions. Despite the disruptions of the war, IPC followed its established price policy which assured a low price to the groups able to take IPC crude, although such a policy was of course unfavorable to the interests of the inactive parties.
At time end of the war, CFP and Gulbenkian were reinstated and the question of reaffirming the red-line agreement became a pressing issue. The American group, instead of reaffirming the agreement, declared it dissolved because (a) some of the owners had been enemies during the war, and (b) its restrictive provisions violated the American anti-trust laws. It must also be remembered that at this time, Jersey Standard and Socony-Vacuum (the American group in IPC) were extremely anxious to purchase an interest in the Arabian American Oil Co. (Aramco), the company which held the Standard of California and Texas Co.'s concession in Saudi Arabia. It was the red-line agreement which before the war had blocked their efforts to secure a participation in these same concessions, the value of which had increased immensely during the war. It not only had been proved, but had developed into one of the world's most important oil concessions. As long as the red-line agreement hung around their necks like a mill-stone, the Big Three were placed in the role of unwilling outsiders, watching Standard of California develop this great new area, with possible disastrous effects on world price and markets.
Following declaration by the American group that the red-line agreement was dissolved, the French (CFP) filed a suit in the British courts to enforce the agreement and to obtain their proportionate share of any interest which the American group might secure in Ararnco. But in November 1948, before the court case came to trial, a new agreement was negotiated freeing the IPC groups from many of the restrictive provisions of the red-line agreement and permitting the American group to purchase an interest in Aramco. The new agreement made it somewhat easier for a member of IPC to obtain oil in excess of its pro rata share. This was of considerable benefit to CFP, which for years had desired more oil from IPC, but under the red-line agreement was permitted to take only its pro rata share of IPC's proauction, as determined by the majority of the groups.
Under the new agreement, the groups were free to engage not only in individual but also in common ownership arrangements in other sections of the red-line area. The groups continued to obtain crude at an arbitrarily low price, and the Big Three retained their position of control over IPC's policies and management.
After World War II, when the exigencies of the moment made it necessary for IPC to operate a refinery at Tripoli, the major groups in IPC concertedly acted together to control the prices and the distribution of the refinery's products in such a manner as to discriminate against outsiders and further the interests of the major groups' marketing organizations.
In summary, the fundamental purposes and objectives of IPC were described by the French in a confidential document:
The incorporation of IPC and the execution of the red-line agreement marked the beginning of a long term plan for the world control and distribution of oil in the Near East. 12
IPC was so operated as:
* * * to avoid any publicity which might jeopardize the long term plan or the private interests of the groups * * * 13
Go to The International Petroleum Cartel, Staff Report to the Federal Trade Commission, released through Subcommittee on Monopoly of Select Committee on Small Business, U.S. Senate, 83d Cong., 2nd sess (Washington, DC, 1952), Chapter 5, "Other Common Ownerships in the Middle East," pp. 113-136
76. Brief Historical Outline of Oil Developments to Date, op. cit..
77. The Anglo-Iranian Oil Co. holds the concession over a small area in Iraq which borders on Iran. This territory was, for some time, in dispute between Turkey and Persia: but, when the boundary was finally settled, the territory formerly claimed by Persia was transferred to Turkey, which had control over Mesopotamia, now Iraq. In view of claims by a subsidiary of Anglo-Iranian Oil Co., Ltd., to the Persian territory which was granted to D'Arcy in 1901, this company retained its concession rights to the territory when it was transferred from Persia to Iraq. (Memorandum from Guy Wellman to the members of the American group, January 18, 1928 and letter from Walter C. Teagle to Guy Wellman, November 6, 1924.)
78. Notes on Iraq Petroleum Co.. Ltd., and Affiliated Companies, op. cit.; and Brief Iflstorical Outline of Oil Developments to Date, op. cit.
80. Notes on Iraq Petroleum Co., Ltd., arid Affiliated Companies op. cit.
81. Minutes of Group Meeting, January 12, 1950 (Files SONJ, part 3-D), and World Oil, April 195l, p. 254.
82. Brief Historical Outline of Oil Developments to Date. op. cit.
83. Notes on Iraq Petroleum Co., Ltd., and affiliated companies, op. cit
84. Summary of Middle East Oil Developments, Arabian-American Oil Co., 2d edition, 1948 and Iraq Petroleum Co., Ltd., and associated companies, Collection of Conventions, Agreements, and Connected Documents Affecting the Operations of the Iraq Petroleum Co., Ltd., and its associated companies, compiled in the head office of the companies in London, June 1949.
85. Notes on Iraq Petroleum Co., Ltd., and Affiliated Companies. op. cit.
86. World Petroleum, January 1951, p. 481.
87. Brief Historical Outline of Oil Developments to Date. op. cit., p. 91.
Proven reserves in 1949 were estimated at 500 million barrels (DeGolyer and MacNaughton, op. cit.).
As noted heretofore, Anglo-Iranian and American groups were not always in agreement in regard to Qatar developments. The American group desired more oil in the Persian Gulf in order to supply Standard Vacuum with crude for its far-eastern markets, but Anglo-Iranian was not enthusiastic about pushing Qatar as it feared more oil in the Persian Gulf would affect adversely its interests in Iran and Kuwait.
88. Notes on Iraq Petroleum Co., Ltd., and Affiliated Companies. op. cit. Iraq Petroleum Co., Ltd., and Associated Companies. op. cit.
89. Oil concessions covering the sheikdoms of Dubar and Sarjah were obtained in Septemher 1937; the Kalbah concession covering an areas of 600square miles was secured in 1938; and in January 1 1939 a concession over the sheikdom of Abu Dhabi was granted. All three of these concessions were to run for a period of 75 years. An exploration permit covering approximately 700 square miles of the sheikdom of Ras al Khaimah was granted to Petroleum Development (Trucial Coast), Ltd., in December 1938. Similar permits covering an area of 100 square miles of Ajaman and the entire sheikdom of Umm.al-Quwain were obtained in March l939 and March 1945 respectlively. These permits were renewable and required only nominal royalty payments (Notes on Iraq Petroleum Co., Ltd., and Affiliated Companies, op. cit., and Iraq Petroleum Co., Ltd. and Associated Companies, op. cit.).
90. The agreements provided for an option period during which the company could at any time take a concession over the leased areas. On May 14, 1944, the company, Petroleum Development (Oman and Dhofar), Ltd., exercised its rights under the option and acquired a concession over the areas. This concession, like many others held by IPC, is for 75 years and gives the company the exclusive right to search for, explore, drill, produce, refine, sell, and export any crude petroleum found in the areas (Notes on Iraq Petroleum Co.. Ltd., and Affiliated Companies, op. cit., and Iraq Petroleum Co., Ltd., op. cit., and minutes of group meeting May 5, 1949, and June 9. 1949, and July 13, 1950).
91. T'he concession was to apply to all of Syria north of the parallel passing
through Damascus, except the territory of the Sandjak of Alexandretta. Two-thirds
of the initial area was to be surrendered within 25 years--one third at the
end of the third year and one-third at the end of the twenty-fifth year (Notes
on Iraq Petroleum Co., Ltd., and Affiliated Companies, op. cit.; and Iraq Petroleum
Co., Ltd., Collection of Conventions, Agreements, Documents, etc., op. cit.).
92. Notes on Iraq Petroleum Co., Ltd.. and Affiliated Companies, op. cit.
93. Ibid., and IPC Conventions, Collections, etc.. op. cit.
94. Eleven of these licenses were dated February 24. 1939, and 18 were dated July 21, 1939.
95. Notes on IPC and Affiliates, op. cit.. and IPC Conventions, Collections, etc., op. cit.
97. Minutes of group meeting, June 9, 1949.
98. Subsequent to obtaining the concession the name of Petroleum Development (Transjordan), Ltd., was changed to Transjordan Petroleum Co., Ltd.
99. Activity in Lebanon was suspended during the war. In 1948, the permit was renewed for a period of 3 years. When operations were resumed after the war, the name of Petroleum Concessions (Syria and Lebanon), Ltd., was changed to Lebanon Petroleum Co.. Ltd. (Iraq Petroleum Co., Ltd., Associated Companies, op. cit., and minutes of group meeting, October 21, 1948).
1. Notes on IPC Co. Ltd., and Affiliated Companies, op. cit., and Corporate Chart of Group's Interest in the Middle East.
2. See p. 65.
3. See p. 70.
4. Letter from Sir William Fraser to H. G. Seidel, November 13, 1934. Also Notes on Iraq Petroleum Co., Ltd. and Affiliated Companies, op. cit.
5. See p. 61.
6. Letter from John Cadman to Board of Inland Revenue, March 21, 1934, and reply by C. Gordon Spry of Board of Inland Revenue, March 23, 1934.
7. Mediterrean Pipelines, Ltd. (MPL), also presented another problem. namely, recognition by the governments of Palestine and Transjordan which could he obtained only if IPC surrendered its rights to operate pipelines. Recognition was needed in order to validate MPL's transit privileges, but if IPC gave up its right to operate pipelines, it lost unit control over MPL. Memorandum from J. Skliros to the groups. Reflections on the Group Agreement. October 23, 1933.
8. Letter from M. Piesse to Stuart Morgan, March 26, 1936.
9. Memorandum from J. Skliros to the groups, Iraq Petroleum Co., Ltd., February 4, 1935.
10. Letter from M. Piesse to Stuart Morgan, July 13, 1931.
11. Ibid. It will be recalled that Gulbenkian and CFP signed a sale of oil agreement on July 31, 1928, the terms of which provided for CFP purchasing Gulbenkian's share of IPC crude at a price fixed by an expert, and that the other three major groups (Anglo-Persian, NEDC, and Shell) signed an agreement in 1929 with CFP unknown to Gulbenkian, whereby CFP would deliver to each of the three groups one-fourth of the oil received from Gulbenkian and each of the the groups would, in turn, pay CFP for their respective shares of Gulbenkian's oil plus the cost of carrying out the Gulbenkian agreement. (See ch. III, p 63.)
12. Letter from J. Meny to T. H. Tackrah, May 30, l938.
13. "Profit or loss" was defined as the difference between the average market price per ton of the petroleum sold and the average cost per ton of producing, transporting, refining, and distributing the same. "Average markett price" per ton was defined as the total price (ascertained as closely as possible) obtained for the products divided by the total tonnage of such products, "Average cost" meant the estimated total cost of producing, transporting, refining, and distributing the said products divided by the total tonnage sold.
14. Article 10 of the Iraq Convention made the 24th day of March 1931, between the Iraq Government and the Iraq Petroleum Co., Ltd.
15. Letter of Minister of Economics and Communications, Bagdad, to Iraq Petroleum Co., Ltd., February 11, 1935.
16. Memorandum from J. Skliros to the groups, Februasry 25, 1935. In this memorandum Mr. Skliros, general manager of IPC, took the position that the company had the right to sell at 18 shillings, but it did not necessarily follow that the Iraq Government had to accept the resultant profit or loss as the basis for the first of the 20 years trading date on when to calculate subsequent royalties. "It will not help us to say that Government cannot challenge the soundness of that data now and that they must wait until 20 years of trading have elapsed."
17. Memorandum front J. Skliros to the groups, May 29, 1935.
18. Ibid. The general manager of IPC took the position that the Iraq Government had read into IPC's offer to formulate practical methods of ascertaining the necessary data as an offer to lay before them concrete proposals, and the general manager suggested that the IPC discuss the matter at a group meeting. He also informed the groups that it was his impression that the Iraq Government would require a revision of article 10 which would give an unequivocal definition of the gold content of the 4 shillings royalty, The Iraq Government apparently was greatly disturbed over the devaluation of gold in the United States.
19. From minutes of group meeting, July 1, 1935
21. From memorandum from Mr. Skliros to the groups, August 13, 1935.
22. J. Skliros' memorandum to the groups, July 30, 1937. He also notified the groups as follows: "So far we have done nothing to implement the implied promise that we would submit some practical alternative to the unworkable formula contained in the convention; this issue raise's periodical friction between the Government and the company.
24. Minutes of meeting of directors, September 16. 1937.
25. Minutes of group meeting, November 17, 1937.
26. Minutes of meeting of directors. December l6, 1937.
27. Minutes of group representatives, April 18, 1947.
28. Minutess of meeting of directors of IPC, April, 19, 1948.
29. Notes on meetings of group representatives, March 18, 1944.
30. Notes on Special group meeting, June 15, 1950.
31. After March 14, 1953, the Iraq prices were to be fixed by further agreement between the company and the Iraq Government.
32. Arts. 14 and 15 of the Iraq Convention, March 24, 1951.
33. Memorandum from J. Skliros to the groups, February 28, 1935. In a draft of the Iraq Convention dated October 10, 1930, there is a specific example of how the above-indicated formula was actually worked out.
34. Minutes of meeting of directors of IPC, July 10, 1933. For a further discussion of pricing practices and methods see ch. X.
35. Since 1932 the local rnarketing of petroleum products in Iraq has been entrusted to the Rafidain Oil Co., Ltd. (a subsidiary of the Khanaqin Oil Co., itself a subsidiary of the Anglo-Iranian Oil Co.. Ltd.) by agreement between IPC and the Anglo-Iranian Oil Co., Iraq Petroleum Co.. Ltd., and associated companies, Op. Cit., p. 71.
36. Letter from Eugene Holman to W. E. Pratt, March 18, 1940, and attached
report Review of Iraq Petroleum Co. Ltd., submitted by R. P. Bolton, March 5,
1940, to Eugene Holman.
38. Ibid. In 1938, producing costs in Iraq averared about 32.7 cents per barrel of which approximately 25 cents was in the form of royalty and tax payments to the Iraq Government. It should be noted that the 1938 producing costs were also somewhat higher than the costs of prior years.
40. Summary of IPC operations, and notes on Iraq Petroleum Co., Ltd., and affiliated companies.
42. Although Gulbenkian's company was registered in Canada, and he was an English citizen and claimed diplomatic immunity as commercial attache to Iranian Legation in Paris, he was still considered an enemy alien under the order. The groups had last heard from Gulbenkian on June 16, 1940 from Vichy. He left France In April 1942 and took up residence in Lisbon, Portugal, and in July 1943 was declared to be no longer an enemy alien.
43. Agrement between Socony-Vacuum Oil Co., Inc., and Consolidated Refineries, Ltd., June 30, 1939, exhibit No. 23.
44. Minutes of group meeting, October 2, 1940, October 17, 1940, October 31,
1940, March 20, 1941, et al.
45. Minutes of group meeting, October 17, 1940. October 11, 1940: cable from H. G. Seidel to Near East Development Corp., October 17, 1940; and memorandums from J. Skliros to the groups, November 14, 1940 and Decemher 14. 1940.
46. Minutes of group meeting, November 21, 1940.
In March 1942, the general manager of IPC reported to the groups that "Mr. Riddell had reported the present conditions in the United States of America must be expected to restrict the free movement of Texas crude and in the circumstances the f.o.b. differential could not be reliably indicated. He, Mr. Skliros, would, therefore, record the last reported f.o.b. figures of 21 1/2 cents per barrel until such time as Mr. Riddell reported a change." From minutes of group meeting, March 19, 1942.
47. Memorandum by Mr. Piesse to David Shepard dated April 21, 1944, and minutes of group meeting, November 20, 1941
48. Minutes of group meetings, December 18, 1941, January 15 and 29, 1942.
and November 12. 1942. The mechanics of the "Riddell formula" are
shown by the following statement taken from a letter dated July 12, 1944, from
H. E. W. Kirby, Auglo-Iranian Oil Co., Ltd., to Mr. Taylor of the same company.
"I am writing you to confirm my advice to you by telephone of the information we have received from New York In reply to our request that Riddell be asked to inform us regarding a fair price for East Texas crude f.o.b. the Guld and of his views as to the value, based on Gulf export prices, of the benzine which from time to time has been added to stabilize crude delivered to the Haifa Refinery.
"As regards crude oil, Riddell's advice is that he has made no f.o.b. Gulf sales of East Texas crude since December 1941; but that, as OPA ceiling prices became effective in February 1942 and crude sales are more or less under PBW allocations, he considers that any sales made during the periods with which we are concerned, would have been at posted field price plus full tariffs. As you know, during these periods the posted price of East Texas crude remained constant at $1.25 per barrel; and by the addition if 17½ cents, representing the full tariff rates for gathering pipeline and handling charges less the quantity differential on the 'Riddell formula' of 24 cents per barrel, the resultant price per ton of IPC crude worked out at 44s. 8d."
48. [note--there are two footnotes numbered 48] In support of this view, Gulbenkian stated that while he was in Paris and Vichy he was Commercial Counselor to the Iran Government and enjoyed full diplomatic immunity, both before and after the fall of France It was not until Iran broke off diplomatic relations with the Axis Powers that he was asked to leave France. Memorandum from M. Piesse to S. Morgan, August 31, 1944.
49. Apparently, Gulbenkian was not informed of the basis for settlement. A
cable from Richard Sellers and David Shepard to NEDC, May 10, 1945, reads as
" * * * the three major groups concerned have agreed with Gulbenkian for a settlement of all his claims of whatever nature up until the 9th of February 1945 for a cash payment of £547,000, upon payment of which he and P and I will release IPC and the three groups from all claims up to that date. The method by which we have arrived at this sum is not being disclosed to Gulbenkian, but we have arrived at this round figure by taking the difference between the amount paid by the groups to IPC and the MacDonald price on 5 percent of all deliveries made to Haifa refinery from April 7, 1943, the date when Gulbenkian lost his enemy status, to the 9th of February 1945, the date when CFP regained their nonenemy status, and considered also the fact that under the sale-of-oil agreement between CFP and Gulbenkian the latter was entitled to 10 percent interest on overdue payments."
50. Copy of Gulbenkian settlement agreement attached to memorandum from Stuart Morgan to E. L. Estabrook and M. Goddard. July 11, 1945.
51. Memorandum from Near East Development Co. to R. W. Sellers, May 15, 1945.
52. Copy of Order of the Board of Trade revoking the orders vesting in the Custodian of Enemy Property CFP's rights in IPC dated February 9. 1945.
53. Claim by CFP, a memorandum attached to letter from David Shepard to Stuart Morgan, August 1, 1945.
54. Memorandum prepsared by CFP on Claims for Compensation. August 1, 1946.
55. It appears that the French Government realized that CFP had no legal basis for its claim. In its appeal to the British Foreign Office for assistance in the CFP matter, the French Government indicated that it wished to support CFP's claim for compensation for loss of profits during the war on the grounds of general equity. Letter from F. R. Hoyer Miller, British Foreign Office, to J. Skliros. August 22, 1946.
57. [note--there is no footnote 56] The heads of agreement of November 3, 1948, provided that the CFP claim should be submitted to arbitration. This agreement will be discussed in more detail in subsequent sections.
58. French war claim release appended to letter from Charles F. Darlington to NEDC, February 15, 1950
59. Executive committee minutes, Standard Oil Co. (New Jersey), February 17, 1950.
60. Letter from M. Piesse to Stuart Morgan, June 30, 1941.
61. Notes on group meeting, September 13, 1945.
62. Letter from D. A. Shepard to E. E. Soubry, January 2, 1946.
63. In 1945, NEDC's representative on IPC obtained an opinion from English counsel which stated that purchases of products within the red-line area were not prohibited by the red-line agreement. NEDC then asked Shell to obtain corresponding opinion from another English counsel on the same question. Shell obtained such an opinion and since both opinions were to the effect that purchases within the red line were not prohibited, Standard was then in a position to notify the groups that it was under no obligation to report the purchase of products made within the red-line area. From letters, cables, and memoranda regarding bis subject.
64. Memorandum of conversation as reported by Mr. Holman with Messrs. de Metz and van den Perre, January 29, 1946. [Italic added.I
65. Ibid. It is not without interest that although Standard Oil Co. (New Jersey) was unable to lift its share of Iraq crude during the war, it did no more than advise IPC that it had been penalized with respect to crude deliveries during the war and that it reserved all rights. The fact that Standard presented no formal claim for compensation would appear to be an indication that it considered the red-line agreement as no longer valid and as insufficient legal basis for presenting a claim. Letter from Dave Shepard and R. W. Sellers to the directors of IPC, Anglo-Saxon Petroleum Co.. Ltd., D'Arcy Exploration Co., Ltd., Compagnie Francaise des Petroles (CFP), and Participations & Investments, Ltd., November 20, 1945.
66. Notes on board and group meeting, May 9, 1946.
67. Minutes of group meeting, May 9, 1946.
68. Draft of minutes of group meeting prepared by E. J. Brown, May 9, 1546.
69. In July 1945, the president of Standard Oil Co. (New Jersey) had discussions in England with the heads of Anglo-Iranian and Royal Dutch Shell concerning the red-line agreement and possible changes in Standard's interest in the Middle East, and at that time the two English groups believed they should follow the red line. Executive committee minutes, Standard Oil Co. (New Jersey), July 5 and August 1, 1945.
70. Executive committee minutes, Standard Oil Co. (New Jersey), May 28 and August 6, 1946.
71. Copy of unsigned letter to Sir Francis Humphries, chairman of IPC, October 4, 1946, and the executive committee minutes, Standard Oil Co. (New Jersey). December 9, 1946.
72. Copy of letter from Freshfields to Piesse & Sons, November 11, 1946.
73. Letter from Denton, Hall, and Burgin to Messrs. Piesse & Sons, December 20, 1946.
75. On January 7, 1947, the attorneys for CFP wrote to Messrs. Piesse &
Sons, counselors for NEDC as follows:
"We agree that in oral conversations since September last your clients have indicated that for reasons of domestic policy and partcularly the probable consequences of the Sherman Act they have had to consider the legal question of the consequences of war on the group agreement, and that they had received certain advice from English counsel consulted. That advice we were never able to concur in by reason of the advice we ourselves had received, but so long as the matter remained one merely of difference in juridical opinion and the group agreement in fact was operated, we were content to leave it on the plane of academic discussion.
"Matters, however, have now changed. It would appear that the Sherman Act no longer is the real course (cause?) of concern, but was merely an excuse upon which to hang a contemplated and now effected breach of the group agreement, namely, the negotiations leading up to your client's proposed acquisition of s large interest in Caltex.''
From letter from Denton, Hall, and Burgin to Messrs. Piesse & Sons, January 7, 1947.
76. Letter from Dave Shepard to Orville Harden, January 27, 1947.
77. Standard Oil Co. (New Jersey) executive committee minutes. January 9, 1947: prospectus issued by Standard Oil Co. (New Jersey), June 11, 1948, pp. 29-30, and various copies of documents relating to CFP's suit and counter claims.
78. Statement of Claim filed in High Court of Justice, Chancery Division, June 9, 1947. [Italic added]
79. See p. 262.
80. See p. 267
81. The four major groups (Anglo-Iranian, Shell, NEDC, and CFP) had reached a tentative agreement in May 1947 bsit they had to negotiate a year and a half longer (until November l948) before they could come to an agreement with Gulbenkian. At one time the groups were on the verge of signing a four party agreement and leaving Gulbenkian the choice of either signing with them or pursuing his case in court, but no one wanted IPC's troubles aired in court as long as there was any chance for a negotiated settlement. A high official of Standard Oil Co. (New Jersey) visited Gulbenkian in Lisbon in September 1947 and smoothed the way for further negotiations.
82. This agreement has no relation whatsoever to the Heads of Agreement for Distribution, 1932, which is discussed in chapter VIII.
83. Memorandam regarding IPC Group Agreement--Restrictive Provisions in Original Agreement Which Have Now Been Removed.
84. Memorandum regarding Heads of Agreement dated November 10, 1948.
85. Heads of Agreement and Supplemental Documents, p. 45.
86. Standard and Socony had made an arrangement in March 1947 for an interest in Aramco which was contingent upon the suits in the British court being settled by March 12, 1951, or if prior to that date, the litigation was determined adversely to Standard and Socony, the agreement was terminated. Thus, the Arameo release removed all obstacles to the Standard-Socony.Aramco deal. Standard Oil Co. (New Jersey) prospectus June 11, l948, p. 25.
87. Memorandum regarding Heads of Agreement, op. cit.
88. CFP's demands for an expansion of IPC production raised some interesting problems for the major groups with large refining and marketing interests in France. The nature of these problems and one official's view as to what the solutions should be are revealed in a letter dated March 29, 1947, from R. Andre, an official of Standard Francaise des Petroles (a Standard of New Jersey subsidiary which operates in France), to Orville Harden of Standard (New Jersey). Mr. Harden at that time was in London negotiating with CFP and other IPC groups regarding the new agreement. Mr. Andre had received information about CFP's position, and he was passing this on to Mr. Harden along with his own impressions of the situation. Mr. Andre wrote as follows:
" * * * it is my feeling that the establishment of a connection between the level to which the Iraq production will be brought and the outlet of CFP in France should be avoided, as this is a point on which CFP will be very touchy. As mentioned above, the CFP people feel they are entitled to dispose of their share of wealth and they do not consider it possible to be excluded from taking rank among the international companies and from being able to sell outside continental France part of the production of their refineries. This is one of the reasons why CFP are endeavoring to augment the volume of their refineries, considering this policy cannot be interpreted as constituting any danger to the position of their confreres in France. But they feel it is more advantageous for them to increase the production of their refineries in France than to erect new refineries in other parts of the world, which, in fact, might be more of a danger to international trade.
"It appears to us here rather inadvisable to adopt a policy tending to limit CFP strictly to the French market as, in that case, there would be an increasing tendency on the part of the French Government to protect this outlet by means of arbitrary measures. Such measures could not be applied to any other but the French market and it seems preferable, in the end, to be faced with a free competition on the part of CFP rather than with a competition supported directly or indirectly by the French Government for the internal market." [Italics added.]
89. Heads of Agreement and Supplemental Documents, op. cit., and memorandum regarding heads of agreement. op. cit.
90. The groups had agreed to construct a 30 to 32 inch pipeline from Kirkuk
to Banias on the Mediterranean. Delivery of pipe for this line began early in
1951 and the entire project is scheduled for completion in 1952. This large
line will be in addition to the double 12-inch lines completed in 1934, and
the double l6 inch lines
which were completed in 1949.
91. Heads of Agreement, op. cit., and memorandum regarding Heads of Agreement, op. cit.
92. Under the previous agreement,. Gulbenkian sold his oil to CFP, which in turn sold one-quarter of the oil to each of the other major groups.
93. Memorandum regarding heads of agreement, op. cit.
94. Heads of Agreement, op. cit., p. 49, and memorandum regarding Heads of Agreement, op. cit.
95. Memorandum regarding IPC group agreement, op. cit.
96. Notes on Iraq Petroleum Co., Ltd., and affiliated companies.
97. Notes on group meeting, October 11, 1945, and cable from J. Skilros to Mr. Stuckey. November 23, 1945.
98. Minutes of group meeting, January 17, 1946. The red-line agreement prohibited IPC from engaging in refining and marketing operations.
99. During the war, IPC, at the request of the British Government. converted stabilisation plants at Kirkuk into a topping plant in order to supply petroleum products to the British Army in Iraq. However, the products were sold to Anglo-Iranian which, in turn, sold them to the military authorities. IPC also supplied some fuel oil to the British Admiralty in 1943 but the oil was first sold to the groups in their basic proportions and the groups then resold it to the Admiralty. Thus, IPC had successfully evaded engaging in refining and marketing until it obtained the Tripoli plant. Notes on IPC and Affiliated Companies.
1. Notes on group meeting held March 14, 1945, and minutes of group meeting, March 14, 1946.
3. Notes on group meeting held October 14, 1945.
The Haifa refinery, as noted previously, is owned by Consolidated Refineries, Ltd., which, in turn, is owned 50-50 by Shell and Anglo-Iranian. Socony also had processing rights at the Haifa refluery.
4. Minutes of group meeting, March 14, 1946.
5. Notes on group meeting, March 14, 1945.
6. 'The letter of instruction named the members of the Cairo committee and reminded them that IPC was entitled to all the products manufactured in the Tripoli refinery. More important instructions were as follows:
"It is suggested that you and the other gentlemen above referred to should constitute yourselves an informal committee and should write a letter prior to the first day of each quarter to the refinery manager of the Iraq Petroteum Co., Ltd. at Tripoli instructing him as to the quantities of each product which he should deliver and invoice to each separate Syrian or Lebanese local marketer for the ensuinq quarter. The form of the letter which it is suggested you should address to the Tripoli refinery is attached.
"In allocating supplies from the refinery, to marketers in Syria and Lebanon you will, of course, have regard to the supplies from this source which they have hitherto respectively enjoyed, but you are not thereby precluded from admitting other marketers, to participate in the products of the refinery, if you think fit. We accorfingly authorize the committee to deal on behalf of this Company with a request of the Syrian Government (received though Lebanese Government) to admit other persons to the privilege, hitherto enjoyed only by the members of the G. P. S. L. which will be forwarded to you by IPC.
"Should the Tripoli refinery manufacture any product or products in excess of the requirements of the market, these will be disposed of by arrangements made between the Iraq Petroleum Co., Lid , and the shareholders who will issue their instructions with regard to such disposal direct to the manager of the Tripoli refinery."
Quoted from a letter from D'Arcy Exploration Co., Ltd., to D. R. Mackintosh, Shell Co. of Egypt, Ltd., June 19, 1946, [Italics added.]
7. Turkish Petroleum Co., Ltd., changed its name to Iraq Petroleum Co., Ltd. (IPC), in 1929.
8. See chs. VIII and IX.
9. Resolutions could be passed at a board meeting only if three major groups voted favorably. The other major group was CFP.
10. Mikesell and Chenery. Arabian Oil, p. 45.
11. The Texas Co. had obtained an interest in the Arabian concession in 1936.
12. From Observations, a memorandum prepared by CFP, for consideration by the major groups in relation to events arising since the war, February 27, 1947.
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