The price of oil products and Period of the concession


From “Oil Nationalisation and Managerial Disclosure: The Case of Anglo-Iranian Oil Company, 1933-1951”

Chapter 4: Profit distribution by the AIOC

AUTHOR : NEVEEN ABDELREHIM | THE UNIVERSITY OF YORK

In view of the importance of cheap fuel in the economic life of Iran, it was
necessary that the sale price of petrol in Persia should not be more than to the British Admiralty or to the American companies. As a result, the Memorandum highlighted the importance of reaching a decision in regards to the price of marketing of petroleum products within Iran[605]. The Iranian government representatives maintained their objection and continued to press for some formula which would ensure reduced prices to all Iranian consumers[606]. Moreover, Razmara said that their retail prices in Iran were too high and should not exceed the rates that are charged to the British Admiralty or the Royal Air Force[607]. Gass was aware of the Iranian attitude and was fairly sure that this objection was one that that Razmara hoped to announce to the Majlis, but he feared that this sort of
price adjustment could cost the company a huge sum of money per annum[608]. The AIOC countered, in the Memorandum, with claims that the company‟s intention under the concession was to ensure the sale of oil in Iran to yield to the suppliers a reasonable commercial return[609]. Meanwhile, the company argued that there were mutual benefits to buyer and seller to be obtained from concluding long term, largescale contracts and by accepting a reduced price in return for an assured market[610]. The dispute over the price of oil indicates convincingly that the AIOC was master
of the environment in which it operated, controlling the price of oil products to its own advantage. Because of this, there appeared to be very little opportunity for the Iranian government to control the pricing of oil.

Period of the concession
At the time of the amendment of the D‟Arcy concession two matters received the attention of the two parties more than other subjects: on the part of the Iranian government the question of royalties and on the company‟s part the question of the period of the concession. As described in Chapter 2, the AIOC claimed that the Iranian oil industry had been built up on the strength of an agreement entered into freely between the Iranian Government and the company, to last until 1993 unless it was cancelled as a consequence of default by the company in performance of the agreement[611]. The company knew that it would be of great advantage to obtain a substantial extension to the D‟Arcy concession[612]. Penrose has pointed out that it would be inconceivable for the Iranian government to extend the period of the concession Hence it is not feasible for any business firm to make a capital investment for a return on which it would have to wait 60 years where the present value of anything in 60 years would have little relevance for current investment decisions[613].
The Memorandum attached extreme importance to the negotiation of the period of the concession because the period of the D‟Arcy concession would have expired in 1962, whereas the 1933 concession laid down that it should be valid for 60 years from that date. Another point which the Iranians were willing to consider was that, with the D‟Arcy concession, all the property and establishments of the company anywhere in the world would, on the expiry of the concession, revert to Iran but under the 1933 concession, this right was limited to the company‟s properties in Iran[614]. The AIOC was aware of the injustice that was facing Iran in respect of the period of the concession. In order to defend the company against such an accusation, Gass claimed: That it seemed to be improper to compare the relative merits
of two concession agreements, one of which had replaced the other by mutual agreement[615].
Moreover, the company argued that extending the period of the existing
concession certainly meant that the company would be able to draw on Iranian petroleum reserves for a further thirty years which would not be carried out free of charge but in return for payments which had been agreed between the company and the Iranian government[616]. The AIOC thus sought to remain in control of Iranian oil resources by planning to extend the period of the existing concession. Clearly, the AIOC was not prepared to give up any of its control and share power with the Iranians and as a consequence the company justified its position by arguing that its presence in Iran was not free of charge.


References
605. Gidel Memorandum, 2.

606. BP 126407, Report on visit to Tehran 31st August to 26th October 1948, 40.

607. BP 126347, Reference number 318, Northcroft to Rice, 29th July 1950, 6.

608. BP 126407, Report on visit to Tehran 31st August to 26th October 1948, 41.

609. Gidel Memorandum, 15.

610. Ibid, 9.

611. BP 126353, Reference No.728, Rice to Northcroft on 2nd March 1951.

612. BP 71074, document sent to cabinet by government directors, c. September 1928, 2.

613. Penrose, The large International firm in developing countries, 199.

614. Gidel Memorandum, 4.

615. BP 126407, Report on visit to Tehran 31st August to 26th October 1948, 22.

616. Gidel Memorandum, 20.

 

 

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