Source: J.H. Bamberg, The History of the British Petroleum Company, Volume 2: The Anglo-Iranian Years, 1928-1954 (Cambridge: Cambridge University Press, 1994), pp. 528-34.
Note: This is a draft by the Anglo-Iranian (BP) Company. The final agreement was signed on 17 September 1928. According to Bamberg: "So far as can be ascertained, the wording [of the final agreement] was the very same as the document of 18 August....", p. 110
Certain politicians, with the support of a portion of the press, have endeavoured to create in the public mind the opinion that the petroleum industry operates solely under a policy of greed and has itself initiated methods of wanton extravagance. This contention is absolutely unjustified, ignoring as it does the problem of the oil industry.
Since its inception the oil industry has looked forward with apprehension to the gradual depletion and final exhaustion of its supplies of crude oil. The temporary shortage of supplies that existed in certain countries during the great war further accentuated this fear and caused vast sums of good money to be expended to locate and develop reserves in all parts of the world where petroleum potentialities appeared, as well as in accumulating large reserve stocks above ground.
Now the situation has changed. An adequate supply for a long time to come is assured. This is the result of the application of science to the petroleum industry. More effective methods of handling crude have been developed so that the yield of gasoline from a given amount of crude has been enormously increased. On the other hand, methods of consumption are being made more economical; high compression motors are being developed; diesel engines take the place of steam engines and fuel oil is being utilized more efficiently and more economically. All of these developments will have a marked tendency to slow down the rate of increase in consumption.
Excessive competition has resulted in the tremendous overproduction of to-day, when over the world the shut-in production amounts to approximately 60% of the production actually going into consumption. In other branches of the business, over-competition has had a similar result, so that it may be fairly said that money has been poured into manufacturing and marketing facilities so prodigally that those now available are far in excess of those required to handle efficiently the present world's consumption.
Up to the present each large unit has tried to take care of its own overproduction and tried to increase its sales at the expense of someone else. The effect has been destructive rather than constructive competition, resulting in much higher operating costs. Certainly no company can expect to obtain an increased outlet for its own production when all companies have a surplus for which they are desirous of securing a market. Naturally each is determined to hold his share of the business, and the result is non-compensatory returns. There is only a certain consumption to be supplied.
The petroleum industry has not of late years earned a return on its investment sufficient to enable it to continue to carry in the future the burden and responsibilities placed upon it in the public's interest, and it would seem impossible that it can do so unless present conditions are changed. Recognizing this, economies must be effected, waste must be eliminated, the expensive duplication of facilities curtailed, and the following sets out the more important principles for bringing this about in all countries other than the domestic market in the U.S. and imports into the U.S. --
1. The acceptance by the units of their present volume of business and their proportion of any future increase in consumption.
2. As existing facilities are amply sufficient to meet the present consumption these should be made available to producers on terms which shall be based on the principle of paying for the use of these facilities an amount which shall be less than that which it would have cost such producer had he created these facilities for his exclusive use, but not less than the demonstrated costs to the owner of the facilities.
3. Only such facilities to be added as are necessary to supply the public with its increased requirements of petroleum products in the most efficient manner. The procedure now prevailing of producers duplicating facilities to enable them to offer their own products regardless of the fact that such duplication is neither necessary to supply consumption nor creates an increase in consumption should be abandoned.
4. Production shall retain the advantage of its geographical situation, it being recognized that the value[s] of the basic products of uniform specification are the same at all points of origin or shipment and that this gives to each producing area an advantage in supplying consumption in the territory geographically tributary thereto, which should be retained by the production in that area.
5. With the object of securing maximum efficiency and economy in transportation, supplies shall be drawn from the nearest producing area.
6. To the extent that production is in excess of the consumption in its geographical area then such excess becomes surplus production which can only be dealt with in one of two ways; either the producer to shut in such surplus production, or offer it at a price which will make it competitive with production from another geographical area.
7. The best interests of the public as well as the petroleum industry will be served through the discouragement of the adoption of any measures the effect of which would be to materially increase costs with consequent reduction in consumption.
8. If these principles are followed, the result will be a stabilization of the world's market outside of the U.S. domestic market which will be in the interest of all.
To give effect to the above it will be necessary for the groups to adopt a uniform policy, which in each country of production will have to be considered separately based on the particular conditions existing in such country. The policy to be followed for all exports from countries of production shall be broadly on the following lines:--
1. An arrangement to cover all exports of petroleum and its products, with the exception of lubricating oils, paraffin wax and specialty products, which shall be the subject of further consideration, and excepting all exports made to the U.S.
2. A proportion of the exports of each group to be ascertained on the following basis:--
(a) The quantities of each product the groups have delivered in each country during the period from to shall be added, and the proportion of each group's deliveries of the total shall be ascertained for each product and each country. The proportion of the total deliveries of each product so ascertained for each group shall be the quota each group shall be entitled to suppiy of the total imports of all groups in the country in question.
(b) The percentage shall furthermore be ascertained which the total of each group's deliveries in all countries bears for each product to the total of all of the groups' deliveries.
(c) If during any one year the total of all the quantities supplied by a group as under (a) is less than the quantity based on the group's percentage of the total supplies of all groups as under (b), then the group shall have the right to offer to the over-supplying groups the difference, and the over-supplying groups shall be obliged to purchase from the under-supplying group the quantity of a product so offered in proportion to their over-supply, at the Gulf price basis.
Assume that groups X, Y and Z had in the countries I, II, III and IV the following basic deliveries for the computation of their quota as under the arrangement:
X Y Z Country I 20 380 0 Country II 0 0 100 Country III 200 25 0 Country IV 50 60 10 270 465 110
then the groups' percentages as under (b) above would be:
X - 270/845 or 32%
Y - 465/845 or 55%
Z - 110/845 or 13%
Now, assume that in country "I" consumption increased by 100%; in country "II" by 200%; in "III" it remained stable and in country "IV" it increased by l0%. Then we should have the following picture of the deliveries of the various groups in these countries:--
X Y Z Country I 40 760 0 Country II 0 0 300 Country III 200 25 0 Country IV 55 66 11
The groups would have delivered the following quantities...
295 851 311
The quantity based on the percentage as under (b) above would have been of the total of 1,457.
For X 32% 466 X actually delivered 295 and therefore under-supplied 171 For Y 55% 801 Y actually delivered 851 and therefore under-supplied 50 For Z 13% 190 Z actually delivered 311 and therefore under-supplied 121
Following the above example, "Y" and "Z" would be obliged to purchase from "X" in proportion to their over-supply a quantity of 171 at the Gulf price basis.
3. If an under-supplying group does not exercise its right to offer to the over-supplying group or groups on the basis of (b) of No. 2 the undersupplied quantities, then this group shall forfeit the right to do so thereafter, under the arrangement.
4. Any group that does not supply its full quota as under (a) of No. 2 through force majeure shall forfeit its right to supply a quota proportion equal to the proportion of its under-supplies, this forfeit to last after the case of force majeure ceased to exist for a period equal to that during which the party under-supplied.
5. Any party that does not supply for a period of six months its full quota as under (a) of No. 2 for any reason but force majeure shall lose of its quota right, as under (a) and (b) above, the same proportion as it under-supplied and this part of its proportion shall be allotted to the other group or groups in proportion to their quota.
6. The groups to agree on a standardization of quality for the various products.
(Note: it will be necessary to work out detailed specifications therefor.)
7. For the practical carrying out of the arrangement, the groups will form an association in which each group shall be interested in proportion to its quota as under (a) of No. 2, and which shall be managed by a working representative of each group, and each group shall have the right to recall at any time its representative, replacing same by another. Each representative shall have the right to name a substitute in his stead.
8. The Association shall make arrangements with the marketing organisations owned by each group or by each member of each group and/or with the parent companies that have agreements with marketing organizations, such arrangements to provide that each marketing organization shall maintain its quota of deliveries irrespective of source of supply and obligate itself to purchase from the groups exclusively all its imports of petroleum products that fall under the scope of the arrangement. Such arrangements furthermore to provide that each marketing organization keep the Association currently informed of the demand it expects to have of each product. The Association will obligate itself to supply the demand of the marketing organizations and not to sell and deliver to others in the countries in which the marketing organizations operate at prices below those quoted at the time to the marketing organizations.
9. The Association will inform the groups as far in advance as possible and keep the groups currently informed of the total demand for the various products it will have as under No. 8.
10. The Association will allocate to each group its quota of each product and will direct shipments to the geographically most favorably situated area.
11. Each group shall have the right to transport the quantities to which its quota entitled it, to the ports allocated to same as under No. 10, by its own vessels. Transportation facilities for quantities a group cannot so transport or may elect not to so transport shall be furnished by the Association and not by the group, and before chartering outside tonnage for such purpose the Association shall charter from the other groups tonnage owned by them which they may offer to the Association at freight rates at which the Association is able to charter outside tonnage.
12. The Association shall prepare for six months in advance, on the basis of current freight rates, statements of relative freight rates from each port of shipment to each port of import.
13. Each group shall be paid f. o. b. port of shipment for each product on the basis of the Gulf price; or, if the goods are supplied c. i. f. port of import, the marketing organizations shall pay to each group this price plus the freight rate scheduled for the port of import under the statement prepared by the Association.
(Note: The U.S. Gulf prices shall be the basis until further notice by the Association).
14. Any group having a surplus of any product or products on hand and desirous of selling such surplus over and above the quantities which it is entitled to supply under its quota shall offer same to the other groups at a price below that posted by the Association for the product or products in question. Each of the groups shall then have the right to purchase the quantities so offered in proportion to their quota and if one group declines to so purchase and the other be willing to purchase then the willing group may purchase all of the quantities so offered. The quantities so purchased shall then be supplied by the purchasing group or groups under this agreement at the posted price against their quota.
Let us assume AP is entitled to supply 100,000 tons, and this quantity is shipped from Persia to Italy instead of from Persia to the AP's own marketing organisation in Great Britain, this marketing organisation receiving instead 100,000 tons from the Shell from the U.S. Then, assuming other figures, we would have the following picture:
1. AP's selling organisation in Great Britain is supplied by the Shell with 100,000 tons from the U.S., paying therefor to Shell l0c per gallon and
2. AP's selling organisation realises from the sale and delivery of these 100,000 tons a return of £150,000.
3. AP supplies to Italy 100,000 tons and receives therefor l0c per gallon and a freight rate of 18/- per ton.
Then, AP has realised for its 100,000 tons of products a net return of £150,000, less local marketing expenses in Great Britain, less cost of transportation from U.S. to Great Britain instead of realising for this quantity 50,000 less the same marketing expenses and less cost of transportation from Persia to Great Britain. Consequently AP saves the difference in cost between transportation from U.S. to Great Britain as against transportation from Persia to Great Britain.
The fact that AP's marketing organisation may have paid to the Shell a higher freight rate for the transportation of the 100,000 tons from the U.S. to Great Britain than self cost does not in the least change this, since AP will receive for the transportation from Persia to Italy a proportionately equally higher freight rate. Whatever excess it may have paid over self cost through its British marketing organisation for Atlantic maritime transportation to Great Britain will be returned to AP by the proportionately equally high excess over self cost AP will receive for the transportation from Persia to Italy. On the other hand, if the Shell sells through its Italian marketing organisation the 100,000 tons of products supplied by AP to Italy then the Shell will realise for the 100,000 tons supplied to AP in Great Britain the Italian price less the freight from Persia to Italy instead of the Italian price less the freight from the United States to Italy, thereby making an additional profit by saving the difference in freight from Persia to Italy as against U.S. to Italy.
Source: BP 106331. (Note: Emphases and style as in original.)
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