Middle East Economic Survey
VOL. LII
No 1
Iran’s Oil Century – Reviewing Oil And Gas Operations
By Manouchehr Takin
This paper was presented to the ‘100th Year of Oil and Iran’ international conference at Tehran University, 9-10 November 2008. Dr Takin is Senior Petroleum Upstream Analyst at London’s Centre for Global Energy Studies (CGES), and can be contacted at takin@cges.co.uk. The views expressed here are those of the author.
The Early Decades
Iran’s ‘Oil Century’ began when the first Middle East discovery was made at 4.00am on 26 May 1908 in Masjed-e-Suleyman, southwestern Iran. Oil was struck at a depth of 1,180ft and shot 50ft into the sky. Commercial production began in 1913 and was more than 664,000 b/d in 1950.
The first half of the ‘Oil Century’ was dominated by the concession to the Anglo Persian Oil Company – later the Anglo Iranian Oil Company (AIOC) and presently the British Petroleum Company. The unfair terms of that concession and the political interference in Iran have been well documented and analyzed by others beyond rhetoric, emotion or xenophobia. For example, the taxes paid by the company to the British government were more than two or three times the payments to Iran. In addition, the company acted almost as a state within a state, partly as an arm of the British Foreign Office and intelligent services, influencing Iran’s domestic affairs, public policies, the main government appointments, and even changes of government.
The nationalization of the oil industry in 1951 was only partially successful. Iran faced global restrictions and political pressure. With the 1953 coup d’état instigated by the CIA and British authorities, the Prime Minister Dr Mosaddegh was removed from power. A new oil agreement was made in 1954, establishing an international consortium operating in the south and southwest of Iran (the Agreement Area). The consortium included almost all of the major international oil companies of the time, as well as several US independents. The deal still involved an unfair revenue split and unfavorable terms for Iran, loss of Iran’s rights to 20% of AIOC’s worldwide profits and many other aspects. In 1992 Elm1 noted that the consortium deal was “the transition from an all-British monopoly to one in which US companies owned a major share.” Again these have been well studied by others. The newly-established National Iranian Oil Company (NIOC) had the nominal ownership of Iranian oil industry assets, but the consortium remained independent in its policy and operating decisions. In particular, the agreement put the production volume and “Iran’s oil income at the mercy of the consortium.” Furthermore, under the secret deal among the participating companies Iran’s production was to be in line with the level of production in the other oil producing countries. This was part of the companies’ monopolistic control of the production and the price of oil in the world market.
A few years later, the Iranian government made a number of agreements with other major and independent oil companies and with some national oil companies. These Affiliated Companies worked in onshore and offshore parts of Iran outside the consortium’s areas of operation. The terms of these agreements were much more favorable to Iran than those of the consortium – some were even considered to be revolutionary considering the global control by the ‘Seven Sisters’ at the time. The consortium agreement was also modified into an oil service agreement in the early 1970s.
In parallel with these developments, NIOC was strengthened to expand its activities. However, the exploration and production operations of NIOC were limited to those parts of the country outside the operating areas of the oil consortium and of the other companies. Yet NIOC did discover natural gas and oil in spite of the lower prospects in its areas of operation. NIOC also made other great achievements, for example in the international marketing of crude oil, the supervision of the foreign companies’ operations in Iran, as well as refining and distribution.
Oil Industry Expansion
A point that has to be emphasized here is that through the field activities of the consortium, the affiliated companies and NIOC, exploration and production operations expanded rapidly in all parts of Iran in the late 1950s, the 1960s and the 1970s. Major discoveries were made and the country’s crude oil production increased from 500,000 b/d to about 6mn b/d. National companies were established for Iran’s natural gas and petrochemicals, employing Iranian and expatriate staff. Operations expanded rapidly with impressive achievements.
A large number of Iranians worked within the technical departments of the consortium and the affiliated companies. The scale of the operations was unique and the industrial experience gained by the Iranian staff was invaluable. Many Iranians became responsible for major operations and complicated projects in all disciplines within oil, gas and petrochemical industries, including exploration, field development, refining, construction and the operation of major installations and processing plants, transportation network, storage, loading and exports. The smooth running of such operations was a unique achievement at the time. NIOC paid great attention to education, training and staff development for itself and also made the foreign companies undertake these measures systematically and on a very large scale. In addition, there were concerted efforts at ‘Iranianization’ in all branches of the petroleum industry run by the foreign companies.
These positive comments on the technical operations and on staff development do not imply that all policies and operations of the hydrocarbon industry were perfect. There were many cases in which the foreign companies’ short-term preferences were not compatible with the long-term priorities and the heavy investments required for Iran’s hydrocarbon industry. For example, the consortium tried to evade accepting the advantages of gas injection into the fractured limestone reservoirs in Iranian oil fields. It prepared reports and technical analyses to support water injection, mainly because it was less costly. However, as noted above, NIOC’s professional supervision and independent analyses made the consortium accept the advantages of gas injection. It is worth noting that actually gas injection began to be implemented when the consortium agreement was converted to an oil service agreement and the investments were undertaken by Iran!
One could further criticize the details of the terms of the agreement, the split of revenues, the remuneration of the foreign companies and many other points. However, as noted above, these are not the subject of this article and have been covered by more qualified experts. The Islamic Revolution in 1979 highlighted many of these shortcomings. Some were documented through the protracted negotiations, legal proceedings and the arbitrations in The Hague that lasted for many years after 1979.
Operations Since 1979
Evaluation of the performance of Iran’s oil industry operations since 1979 is not a simple undertaking. With emotional views in favor or against the Islamic Revolution, there is a danger of losing objectivity in attempting an evaluation. A certain degree of conservatism and self censorship could also affect this exercise. Nevertheless, it is worth making such an attempt, no matter how imperfect it might be.
One has to acknowledge that Iran’s hydrocarbon industry suffered major disruptions due to the Islamic Revolution, in particular from extensive personnel changes and staff departures. These were not unexpected considering the change of government and more importantly, the paradigm shift in the country’s politics and value system. It was reasonable that some at oil industry’s very top echelons had to be replaced by new appointees. One could also accept some degree of political consideration in these changes. However, the actual outcome was that many of the new appointments were almost purely political. Worse still, these political appointments extended down to the lowest levels of the hydrocarbon industry’s organization. With the wisdom of hindsight one could say that political considerations had gone too far and one could not justify the purge and widespread changes of technical and operational personnel. Moreover the limited experience of the political appointees and their poor decisions resulted in the resignations of more experienced technical staff working under their leadership. One could say, though, that these were probably unavoidable because of political emotions and that the momentum of the revolution had taken over. One could add that, though regrettable, opportunism and petty office politics also contributed to the personnel departures and the new appointments.
However, the greatest disruption in Iran’s hydrocarbon industry occurred during the eight-year war when the Islamic Republic was defending the country against Saddam Husain’s military attack. The Iraqi leader benefited from the full support of many countries in the form of huge financial aid, modern sophisticated weaponry, intelligence information, news and media support such as ignoring Saddam’s use of chemical weapons on Iranian soldiers and on Iraqi citizens. The tragic loss of life and the sufferings of Iranian and Iraqi people have been well documented. One should remember that most of Iran’s producing oil and gas fields, refineries and export facilities were physically within the battle fields. Some installations were completely destroyed and many suffered extensive damage.
Furthermore, for almost a decade after the revolution the hydrocarbon industry suffered from under-investment. With the country under attack, investment in the oil industry had a lower priority than defense, especially when capital was scarce and sanctions and unfair international pressure were imposed on the country. In addition to under-investment, the critical conditions of war led to ‘crisis management’ for Iran’s oil industry operations that had to respond to missile and mortar attacks and aerial bombardments. Many long-term projects were postponed or cancelled.
Yet the industry survived with the hard work and great sacrifice of its staff. In spite of the departure of hundreds of expatriate staff and many of the Iranian personnel, oil and gas production did not cease – though this had been forecast by most international industry observers. Average oil production was about 2mn b/d over the 1980-88 period. The achievements were most impressive and demonstrated the value of systematic training, personnel development and industry experience gained by the Iranian staff in the different operating companies during the previous decades. The remaining pool of such technical staff made these achievements possible. Soon after the ceasefire, Iran’s oil production was raised to nearly 4mn b/d.
The staff showed great commitment and dedication in continuing to work under those dangerous situations and many were martyred. A positive outcome from the tragedies of war was that the oil/gas industry staff gained unique experiences through ‘learning by doing’ while attending to emergencies and undertaking numerous major repairs and field operations.
Another negative impact of the eight-year war was that the Iranian staff had insufficient interaction with oil industry professionals outside the country and had only limited participation in industry refresher courses. Iranian geologists and petroleum engineers were competent in conventional technology and field operations, but had not been able to keep up-to-date with all the latest sophisticated techniques during the war. In addition, systematic recruitment, training and personnel development had suffered badly. Moreover, due to the inevitable aging and departure of staff, the industry was facing a shortage of experienced technical personnel after the 1988 ceasefire. These problems became more critical when Iran began the huge task of post-war reconstruction and expansion of the country’s hydrocarbon sector. As an example and quoting Iran’s oil authorities, the limited number of experienced petroleum engineers was in no way sufficient even for maintaining the 4mn b/d of oil production at the time. Obviously, the shortage was more critical when trying to expand Iran’s oil production capacity. No wonder that Iranian oil production has remained at about 4mn b/d since 1989 in spite of repeated announcements of 5-6mn b/d production target in the five-year development plans and in the statements by industry leaders.
Final Remarks
The main conclusion from the above discussions could be summarized as the negative impact of ‘politicization’ on Iran’s hydrocarbon industry since the 1979 Islamic Revolution. Politicization was most acute in the first few years after the revolution. Since the early 1990s the Iranian government and the industry authorities have been consciously trying to depoliticize the industry and emphasize meritocracy, especially in the operating divisions. Nevertheless, there have been ups and downs in this effort. Government changes have often led to a series of new appointments in Iran’s hydrocarbon industry. Though not as extensive as the post-Revolution years, one could argue that personnel changes had gone too far. It is encouraging that public awareness has led to criticism of such trends, as noted in the statements by members of parliament (Iran’s Islamic Assembly ‒ the Majlis) and the opposition press.
To end this article with a positive note on Iran’s oil and gas operations, it is gratifying that in the last few years several hundred employees have been sent abroad for post-graduate courses and Masters and PhD degrees in technical fields. Considerable efforts have also been made in recruitment, further education and training. In addition, one should emphasize that a valuable pool of knowledge and experience from the past, as well as those built up during the war years, is still contributing to Iran’s hydrocarbon industry operations. Most of those who had left the industry or had gone into retirement have joined the private sector and continue working for the industry as consultants and contractors.
Another point not often highlighted by the observers of Iran’s oil scene is that the ‘private sector’ has gradually developed and has expanded in Iran’s hydrocarbon sector. Many Iranian graduates have joined existing private companies or have set up their own private firms rather than looking for employment with the public oil and gas sector. Such entrepreneurial tendencies have made great contributions and have resulted in major improvements in the technical operations of Iran’s hydrocarbon sector. Hopefully these positive trends will continue.
Note:
1. Mostafa Elm (1992), ‘Oil, Power and Principle – Iran’s Oil Nationalization and its Aftermath’, Syracuse University Press.