2018-2019 Fall İzmir: IKC-MH-27 History of Petroleum (3-0) 3

PETE
IKC-MH-27
History of Petroleum(3-0)3
2018-2019 Fall
İzmir
Chapter-07
Cornerstone Concessions
Dr. Tuna Eren
16/Nov/2018
IKC-MH-27 (History of Petroleum) 1
PETE
Course Content
QR (Quick Response) Code
https://drive.google.com/open?id=1Bed7w-_irHlfytz2pm2dLxP_Nh6YaCuO

PETE
Course Content
Course Content
Week Topics
1 Introduction to the history of petroleum on [28/09/2018]
2 Petroleum (General Information) on [05/10/2018]
3 Hydrocarbon accumulation on [12/10/2018]
4 Petroleum exploration (part-I) on [19/10/2018]
5 Petroleum exploration (part-II) [26/10/2018]
6 Drilling preliminaries [02/11/2018]
7 Cornerstone concessions [16/11/2018]
8 Big bang and the growth of the markets (1950-1973) [23/11/2018]
9 Fixing the crude oil price structure
10 The growth of competition (1950-1970)
11 Enter OPEC: The early years (1960-1968)
12 The Tehran and Tripoli Agreements (1971)
13 The struggle for control (1971-1973)

PETE
The Concessionary System
The international oil industry expanded quickly after the

Second World War, largely from the base of the low-cost oil
reserves discovered in Venezuela and a handful of countries
in the Middle East, by a handful of US and European
companies, later dubbed "The Seven Sisters" by Enrico
Mattei, head of Italy‘s national oil company, AGIP.

PETE
The legal basis on which these reserves were to be

developed had been established well before 1950 in the form
of concession agreements, some dating back to the twenties
and thirties.
For the most part, they worked well until the mid-1970s,
and then, within a period of a few years, were swept away
in all the major producing countries.

PETE
Outside the United States and parts of Canada, subsurface

mineral rights are universally the property of the state.
The government must either explore for and develop the

minerals itself (in this case hydrocarbons) or make an
agreement for a company to do so.

PETE
Until the 1970s, the important producers outside the Third

World could be counted on the fingers of one hand: the US,
Canada, the then Soviet Union and, stretching a point
perhaps, China.
A dozen others, notably Australia and West Germany,

produced amounts which, though important domestically,
were marginal on the international scale.

PETE
In the 1950s, it was just the tiny group of six core

developing countries-Indonesia, Iran, Iraq, Kuwait, Saudi
Arabia and Venezuela-that provided much of the raw material
base for the huge growth of the world petroleum industry in
the 1950s.

PETE
They were poor, economically backward, and sparsely

populated (except for Indonesia), had little infrastructure
or capital that could contribute to the development of the
industry, and few human resources. But they owned the oil
in the ground.

PETE
The seven major companies undertaking

the world expansion felt some
insecurity about their raw material
base.
Five of the seven majors were

American:
Chevron,
Exxon (Esso),
Gulf,
Mobil,
Texaco.
One was
wholly British (British
Petroleum),
one Anglo-Dutch,
RoyalDutch/Shell.

PETE
Seven major companies were joined in some of their Middle

Eastern concessions by the French company, Compagnie
Française des Petroles (CFP).
They had already lost, to nationalization, Mexico, Russia

and Romania as sources of supply, and had been in danger of
losing Iran in the 1930s.
Nor is it surprising that those importing industrialized

countries that were not a home base for the companies, felt
uneasy about their double jeopardy: dependence on a few
foreign companies, albeit from friendly countries, who were
in turn dependent on the smooth functioning of oil
concessions in a few politically unstable and not-so-
friendly countries.

PETE
Relations among the seven major companies plus CFP fueled

fears of their clearly oligopolistic potential.
In the Middle East, in Indonesia and, to a much lesser extent,

in Venezuela, producing operations were conducted by diverse
groupings of partnerships between the companies.
For Iran, where the Anglo Iranian Oil Company (AIOC, later BP)
reigned supreme (though shortly to yield), the principal
concessions in the Middle East were all held by various
combinations of the seven majors in 1950.
Oligopoly: a state of limited competition, in which a market is shared by a small

number of producers or sellers.
Reign: rule as a monarch.

PETE
In addition, the minor concessions in Bahrein and Qatar were

similarly held; and the "Red Line" agreement of 1928 among
the Iraq Petroleum Company (IPC) (partners-ninety-five
percent majors) prevented any of them from seeking
concessions independently of the others within the area of
the former Ottoman Empire (meaning most of the Arabian
Peninsula, including Saudi Arabia, but excluding Kuwait).

PETE
None of these partnerships (the partnerships between the

Majors) had been formed primarily for the purpose of
suppressing or restraining competition.
Their historic origins were diverse and the web-like

organizational structure that emerged to dominate the
industry during the 1950s and 1960s almost fortuitous.
Fortuitous: happening by chance rather than design

PETE
The IPC (Iraq Petroleum Company) group, operating in Iraq
and elsewhere, emerged from the division of the spoils of
the First World War among the victorious Allies as they
dismembered the Turkish Ottoman Empire;
the joint BP/Gulf concession in Kuwait, not part of the "Red

Line" agreement, was the result of a shotgun wedding forced
on the British by the Americans' "open-door" policy; and in
Saudi Arabia, the Arabian American Oil Company (Aramco)
partnership that eventually emerged among four US companies
was a result, first, of the need for capital and markets of
the original concessionaire, Standard of California (later
Chevron), causing it to invite The Texas Company (later
Texaco) in;
then of the further need for capital, markets and political

clout for these two to invite in Standard Oil of NewJersey
(later Exxon) and Socony (later Mobil), both of whom
promptly repudiated the "Red Line" agreement.
repudiate: refuse to accept or be associated with

PETE
The partnerships had far-reaching though unintended

consequences, not least in their effect on competition.
In order to develop the concessions, the various partners

had to agree on investment plans and targets, notably
production targets, and these in turn depended on each
company's individual requirements as well as its
alternative sources of supply.
Companies short of crude relative to their refineries'

requirements wanted to develop production faster than
those who were long on crude.
The result was a compromise under which the crude-short

companies purchased oil at a special price (e.g., half
way, or a quarter way, between cost and the companies'
publicly posted, or "shop-window", price) from the crude-
long companies.

PETE
Thus, no company could race aggressively ahead in the markets

without paying the laggards off, and so making discounted
sales less attractive for the laggards.
The result was the restraint of supply in a manner that pre-

empted the need for production quotas, price-fixing and other
accoutrements of a formal cartel.
It was far too clever to have been designed as one.

PETE
Concession Characteristics
The term concession is now and has for some years been
considered politically incorrect because it smacks of rights
reluctantly or corruptly granted by governments to foreign
companies, under some kind of duress; or because the
concessions stem from a time when now-independent states were
mere colonies or protectorates.
duress: threats, violence, etc. used to coerce (persuade an unwilling person) a

person into doing something.

PETE
The term (concession) has been replaced by the more neutral

one exploration and production (E&P) agreements which
embraces the largely cosmetic nomenclature adopted in
various countries, such as production-sharing agreements,
risk contracts, etc., that came later, though their
financial and economic effects might not in principle be
significantly different from the historically older
concessions, however much their legal structure may differ.

PETE
Concessions (or E&P agreements) in developing countries
vary vastly and significantly in content, but all of them
have essential features in common:
The government grants the company an exclusive right to carry

out exploration, development and hydrocarbon production
operations in a defined area for a limited period of time;
The company acquires title to the hydrocarbons and is almost

always free to dispose (get rid of) of them without further
restriction;
The company bears the financial and commercial risks

associated with the undertaking;
The company agrees to make certain payments (signature bonus,

surface taxes, royalties, production taxes, etc.) to the
government in return;
The concessions are contracts with the state, though this

does not in itself imply insulation from the state's general
power to pass legislation overriding the terms of the
contract.

PETE
In industrial countries, exploration and production

arrangements are usually called licenses, sometimes leases.
They almost always have contractual as well as regulatory

elements, but even when the contractual element and form
appear to predominate (as in the United Kingdom), the
licensee cannot always rely on the terms of the license.

PETE
Choice of law other than the national law of the host

country, combined with arbitration, effectively lifted the
Middle East (and other) concessions out of the jurisdiction
of the host country and conferred a high degree of legal
security on the concessionaire.
There was no way that his concession could be legally

modified without his consent (short of outright
nationalization, which some of the concessions also sought
to make illegal) .

PETE
The concession agreements were of extraordinary longevity and

size.
As of 1950, their validity stretched to 1983-84 in Venezuela

and 2020 in Kuwait, other countries in the Middle East being
intermediate.
They covered vast areas: three concessions, all owned by the

same group of companies, covered the whole of Iraq; another
single one took all of the southern half of Iran onshore;
another one, all of Kuwait onshore; another, much of Saudi
Arabia; and another single one, all of the emirates (Qatar,
Abu Dhabi, etc.) onshore each owned by a varying combination
of the major companies. (See Appendix 1-1.)
They were, in retrospect, grotesque-but brought undreamt of

revenues to the host countries at the time.
grotesque: shockingly incongruous or inappropriate.

PETE

PETE
As a conclusion four countries: Iran, Iraq, Kuwait and Saudi

Arabia, which among them could for all practical purposes
provide unlimited amounts of crude oil producible at a
derisory operating cost.
Like Iran after 1954, Iraq, Kuwait and Saudi Arabia were
securely tied down by long-term agreements which could not
be revised, which regulated virtually every aspect of
relations between the concessionaire companies and the
government, including tax rates; which were taken out of the
country's legal system by choice-of-law clauses and
compulsory arbitration provisions; and in which the
government had no say whatsoever on any matter of substance.
derisory: ridiculously small or inadequate.

PETE
The host governments were reduced to mere landlord; and were

not notably unhappy in that role, with the exception of Iraq
after the overthrow of the monarchy in 1958, until the early
1970s. However, by the late 196Os, there was a considerable
groundswell of opinion budding up in favor of a more active
role for governments.

PETE
In the meantime, total revenues were increasing rapidly as

production rose and the governments were in any event
blissfully unaware of what was going on in the world of oil
outside (and to a large extent, inside) their own boundaries.
They received only the most summary company accounts, were

not permitted to audit them (they were given the external
auditors' approval letters), did not know where their oil was
being shipped to, had no idea of real market prices, did not
know how much the companies were making, and did not even
think in terms of competitive fuels.
blissful: extremely happy; full of joy.

PETE
They had no operating or international marketing capability,

and little contact either with each other or the oil world
outside, at least until the formation of OPEC in 1960.
They were well-paid.
Even OPEC's first ten years were largely confined to

assisting in the negotiation of minor upward revisions in the
tax base.
But at least it was a beginning to an understanding of what

they were involved in and at the heart of.

PETE
Thanks
Questions
:)

2018-2019 Fall İzmir: IKC-MH-27 History of Petroleum (3-0) 3

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

2018-2019 Fall İzmir: IKC-MH-27 History of Petroleum (3-0) 3

Uploaded by

Copyright:

Available Formats

PETE

QR (Quick Response) Code

IKC-MH-27 (History of Petroleum) 2

IKC-MH-27 (History of Petroleum) 3

The international oil industry expanded quickly after the

IKC-MH-27 (History of Petroleum) 4

The legal basis on which these reserves were to be

IKC-MH-27 (History of Petroleum) 5

Outside the United States and parts of Canada, subsurface

The government must either explore for and develop the

IKC-MH-27 (History of Petroleum) 6

Until the 1970s, the important producers outside the Third

A dozen others, notably Australia and West Germany,

IKC-MH-27 (History of Petroleum) 7

In the 1950s, it was just the tiny group of six core

IKC-MH-27 (History of Petroleum) 8

They were poor, economically backward, and sparsely

IKC-MH-27 (History of Petroleum) 9

The seven major companies undertaking

Five of the seven majors were

IKC-MH-27 (History of Petroleum) 10

Seven major companies were joined in some of their Middle

They had already lost, to nationalization, Mexico, Russia

Nor is it surprising that those importing industrialized

IKC-MH-27 (History of Petroleum) 11

Relations among the seven major companies plus CFP fueled

In the Middle East, in Indonesia and, to a much lesser extent,

Oligopoly: a state of limited competition, in which a market is shared by a small

Reign: rule as a monarch.

IKC-MH-27 (History of Petroleum) 12

In addition, the minor concessions in Bahrein and Qatar were

IKC-MH-27 (History of Petroleum) 13

None of these partnerships (the partnerships between the

Their historic origins were diverse and the web-like

Fortuitous: happening by chance rather than design

IKC-MH-27 (History of Petroleum) 14

the joint BP/Gulf concession in Kuwait, not part of the "Red

then of the further need for capital, markets and political

repudiate: refuse to accept or be associated with

The partnerships had far-reaching though unintended

In order to develop the concessions, the various partners

Companies short of crude relative to their refineries'

The result was a compromise under which the crude-short

IKC-MH-27 (History of Petroleum) 16

Thus, no company could race aggressively ahead in the markets

The result was the restraint of supply in a manner that pre-

It was far too clever to have been designed as one.

IKC-MH-27 (History of Petroleum) 17

duress: threats, violence, etc. used to coerce (persuade an unwilling person) a

IKC-MH-27 (History of Petroleum) 18

The term (concession) has been replaced by the more neutral

IKC-MH-27 (History of Petroleum) 19

The government grants the company an exclusive right to carry

The company acquires title to the hydrocarbons and is almost

The company bears the financial and commercial risks

The company agrees to make certain payments (signature bonus,

The concessions are contracts with the state, though this

IKC-MH-27 (History of Petroleum) 20

In industrial countries, exploration and production

They almost always have contractual as well as regulatory

IKC-MH-27 (History of Petroleum) 21

Choice of law other than the national law of the host

There was no way that his concession could be legally