Iranian Oil Sector pre-1979

=D'Arcy's Concession and Anglo-Iranian Oil= Oil was first discovered in commercial quantities in Iran in the Masjid-e–Solaiman area in the southwest of the country in May 1908. This came seven years after Mozaffar ad-Din Shah, the Shah of Persia, had granted British subject William K. D'Arcy a 60-year oil concession in all areas of the country except the five northern provinces bordering Russia, granting him exclusive privilege to explore, exploit, transport and export any petroleum found. In return, the Persian Government was to receive £20,000 in cash, £20,000 in paid upshares, and annually a sum equal to 16 percent of the net profit of all operations.

The following year, in April 1909, the Anglo-Persian Oil Company (APOC), the predecessor to BP, was formed in London with an initial capital of £2 million; all of D'Arcy's concessionary rights were transferred to the new company. Anglo-Persian was producing oil by 1911, marking the beginning of the oil industry in Iran. The first Iranian crude oil cargo was lifted for export in 1912 and by 1914, there were altogether 30 oil wells drilled in Masjid-e-Solaiman. In May 1914, APOC and the British government signed an agreement by which the government became the major shareholder of the company, controlling 56% of its shares. Persia gradually became dissatisfied with the low royalty rate it received from APOC in exchange for the exploitation of its subsoil resources, and in December 1920 the company paid the Iranian government £1 million as settlement for all of its claims.

=Pahlavi era 1925-1979=

Rising discontent with APOC
The coronation of Reza Khan as Shah of Iran in 1925 marked the end of the Qajar and the beginning of the Pahlavi dynasty in Iran. The new regime called into question the legality of the 1920 agreement on the basis that it had never passed the Iranian parliament, or Majles. Talks on a revision of the D'Arcy concession began in London in late July 1928, and after nearly five years of protracted negotiations, Reza Shah granted APOC a new 60-year concession, with improved terms for for Iran. These terms included: A minimum guaranteed payment (of £750,000 annually) plus a royalty of 4 scruples of gold (or 0.16 ounces) per ton of oil produced; 4% as tax to Iran; Iranian representation on the company's board; reduction of the concession area to 100,000 square miles; a cancellation of APOC's exclusive right to the transportation of oil; and 20% of the share of oil extracted to Iran.

In Reza Shah's national policies, two main features stood out: nationalism and modernisation. The revision of the original D'Arcy concession in 1933 served to some degree to satisfy both of these facets of the Shah's policy aims. Disputes between Tehran and APOC, which became the Anglo-Iranian Oil Company (AIOC) in 1935, continued after the revision of the concession until the Shah was abdicated in 1941. The two biggest issues concerned the number of Iranian staff employed by AIOC and the issue of declining oil exports. AIOC's oil exports in Iran reached their highest level, 10.16 million tons (with royalties of £3.54 million paid to Iran) in 1937, but the export figures dropped subsequently. The Iranian government suggested that the company had "deliberately curtailed" production to deprive Iran of revenues critical to its modernisation program. Exports dropped further with the outbreak of the Second World War in 1939, and Iranian dissatisfaction with the company grew, with the Shah stating in March 1940: "People from outside the country are coming and taking all the profits and goodness of the oil away and doing nothing to help the Iranians".

Abdication of Reza Shah and nationalisation of the industry
Already by the mid-1930s, Reza Shah's dictatorial style of rule had stirred discontent among Iranians, particularly among religious and intellectual elites. Additionally, because many of his development projects required foreign technical expertise, his decision to rely on assistance from Germany, Italy and other European countries created suspicions in the part of Britain and the USSR after the outbreak of war. In August 1941, allies Britain and the USSR invaded Iran, took control of Iran's communications networks and coveted railroads, arrested and exiled Reza Shah, and placed his son, Mohammad Reza Shah, on the throne in his place.

In 1949, the Majles approved the First Development Plan (1948-55), which called for comprehensive agricultural and industrial development of the country. This was to be financed in large part from oil revenues. Aware that the British government derived more revenue from taxing AIOC than Iran derived from royalties, the oil issue figured prominently in the parliamentary elections of 1949. The nationalists in the new Majles, led by an eccentric European-educated lawyer named Mohammad Mossadegh, was intent on renegotiating the 1933 AIOC concession. Negotiations with the AIOC failed, in part because the company did not initially agree to the 50-50 profit-sharing provision that common with other new Persian Gulf oil concessions, and the Majles voted to nationalise the oil industry in March 1951.

Despite the excitement generated by nationalisation, oil production came to a virtual stand-still and the economy began to suffer from the loss of foreign exchange and oil revenues. Efforts by the British and the Americans to negotiate new terms to exploit Iran's oil reserves failed, in part because of the unwillingness of Mossadegh to compromise toward favorable terms. A joint Anglo-American operation instigated a military coup d'etat that overthrew Mossadegh in 1953, and the Iranian government restored diplomatic relations with Britain in December 1953, and agreed to a new oil deal the following year.

The oil consortium and the petroleum laws of 1957 and 1974
The agreement was between the government in Tehran and a consortium with seven major US companies and AIOC, by now British Petroleum (BP), as its shareholders. Iran was denied its share in the consortium, and ownership of the oil was transferred to the consortium once the oil reached wellhead – effectively making the Iranian government an owner with no rights. Based on Article 28 of the agreement, the consortium was exempted of all custom tariffs and taxation. Again, the agreement provided far more favorable terms for one party - the foreign oil companies - than for the other - the owner of the reserves under the soil, the Iranian government.

The first petroleum law in Iranian history was drafted four years after the Consortium agreement, in 1957. It did not address the territories already granted to the Consortium, but it did provide a legal background for attracting much-needed investment and technology from other international oil companies (IOCs) in territories outside the Consortium area. In effect, the 1957 petroleum law brought two parallel contractual regimes into play: one that was unaffected by legislation - the Consortium - and a separate legislative framework for areas outside of the Consortium territories. In 1974, the Majles passed Iran' second petroleum law, abolishing the 1957 law. For more on the 1957 and 1974 petroleum laws, please see the article on the topic.

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