As a result, during 1957 and 1958 the NIOC signed two agreements, with
an Italian and an American company, with 50 per cent NIOC participation in each one of them. They set up two companies called Societe Iranio- Italienne des Petroles (SIRIP) and the Iran-Pan American Company (IPAC).
In each case, with NIOC's 50 percent participation share and 50 per cent Government tax on the profits made by the foreign partners, Iran's
total share amounted to 75 percent This resulted in what became
known as the "75-25" percent agreement in favour of Iran.^ Undoubtedly, the agreement, the first of its kind in the world, was an important
achievement in itself. It provided a basis for the Shah's rhetorical comment that it marked the beginning of the end for the 50-50 formula, which characterised Iran's agreement with the Consortium. He considered the agreement a result "... of more than 17 years of agony and adversities"
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of his regime. Moreover, he stressed that although he did not want to challenge or "kill any goose [foreign oil company] which lays golden eggs that benefit my country ... we intend to regulate each goose's
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behaviour in the public interest". In this way the Shah's regime attempted to imply that it was not happy with the 1954 agreement
and was working towards achieving complete nationalisation, while at the same time it was trying to gain some domestic and regional support
for the regime and its current oil policy stance.
In practical terms, however, the agreement neither resulted in
substantial economic benefit for Iran nor did it affect Iran's relationship with the Consortium companies as defined by the 1954 agreement. While the NIOC controlled only about 10 per cent of the resource area outside that of the Consortium, the SIRIP and IPAC were very small ventures operating in a very limited area. Furthermore, the two ventures did not start production until 1961-64, and even their full production levels were negligible in comparison with that of the Consortium companies. The agreements, consequently, had more symbolic than practical value. They underlined the desire of the Shah's regime to strengthen the NIOC
and its hold on the area under its control/ as well as to achieve better deals for resources outside Consortium control so that it could boost/ to some extent, its own position in possible future bargaining with the Consortium companies. It was, however, clear that the future of Iran's attempts to maximise the benefits it was to derive from its oil potential greatly depended on the country's success in controlling the policy and production areas of all its oil industry — and not just 10 per cent of it. It was in this respect that the regime failed to make any notable progress in the 1950s. It was a period during which the regime was weak and the international oil companies were formidable
in their unity against Iran and the other regionally
disunited producers. Moreover the global political and economic circumstances were not favourable. These restraining factors began to alter by the beginning of the 1960's, and, with this, so did the attitude of the Shah's regime towards the Consortium companies. The major development was the foundation of the Organisation of Petroleum Exporting Countries (OPEC) in 1960. This marked the beginning of a new phase in oil politics and in the evolution of Iran's oil policy to a position where it was to challenge directly within a little more than a decade the Consortium companies, and finally abrogate the 1954 Agreement.
The Oil Policy of 'more production more revenue':- 1960-1970
Until the end of the 1950s, the international oil companies held virtually a complete monopoly, not only of the Iranian oil industry, but also of the Persian Gulf resources as a whole. While the post-War boom in the West was increasing the demand for oil, the companies kept
increasing their Persian Gulf production and explored more fields in both old and new areas, including Libya and Algeria. The main reason for their concentration on increasing their Gulf production was the cheapness of oil there: a barrel of oil was produced at a cost as low as 10 cents. Having been caught between cheap oil and growing available markets, which brought them enormous profit, the companies failed to assess the world oil boom-demand situation accurately. As a result, when there was a minor downturn in the world oil market in 1959, the companies found
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themselves with a considerable surplus supply. There were several reasons for the down-turn. The major ones included, first of all, excessive production by the companies themselves, a downward fluctuation in the post-War reconstruction and industrialisation boom in the West, the US decision to adopt protectionist policies in order to help its domestic oil industry against the inflow of cheap oil from outside,^ and the sudden rise of the Soviet Union as a major oil exporting country, which offered its oil to many of the less developed consuming countries
at prices between 10 and 25 per cent less than the Persian Gulf oil
prices fixed by the international companies, and often in return accepted 17
payment in local currencies or with non-oil commodities.
Although the downturn was minor, the companies panicked at the prospect of a world glut in the oil market. In order to protect their own interests, they immediately used their controlling power over pricing and cut the posted prices twice, without consulting the producing governments, during the first six months of 1959. Consequently, the posted price for Venezuelan crude was reduced by $0.05-0.25 and that of Persian Gulf crude
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by $0.22-0.32 per barrel. In the case of Iran, the posted prices of its crude dropped from $1.80-1.99 in 1958 to $1.62-1.81 in 1959.19
Since the companies paid royalties and taxes to producing governments on the basis of posted prices, there was a substantial drop in the latter's revenues. The first Arab Petroleum Conference (April 16-22, 1960)
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rejected the companies' unilateral price reductions as illegal. To their annoyance, Venezuela, a hard-liner in oil politics, and Saudi Arabia, a fundamentally pro-Western state which was being pressured by growing Arab nationalism, called on the producing states, on May 13, to
formulate a "common petroleum policy" in order to defend themselves and 21
prevent the companies from further unilateral price cuts.
By now the Shah's regime was in a better position than it had been a few years previously. It felt secure enough to make use of the opportunity and to take a substantial step towards achieving its long term oil objectives, by putting aside its main differences with the two other Gulf producers, Saudi Arabia and Iraq, and joining them in promoting their common cause against the companies. Besides this, such a move
on the part of Iran would have neither put the Shah in direct confrontation with the companies nor would it have singled out Iran as a rebel against the West. In fact, it was Saudi Arabia, another close Western ally, not Iran, which initiated the call for a common petroleum policy. In return for its cooperation with other producers, the Shah's regime was unlikely to lose anything, but to gain a source of collective strength and protection from other producers. This had not been available to Mossadeq, and the Shah could promote it now to strengthen his bargaining position not only against the Consortium companies but also against his
domestic and regional critics, who denounced him for allying with the West and Western companies at the cost of Iran's interests, and made political capital out of this in stimulating opposition to him.
The Shah's government therefore joined the governments of four other major oil exporting states, Venezuela, Saudi Arabia, Kuwait and Iraq, in a series of consultations in Baghdad in order to coordinate their oil policies. While the major capitalist consuming countries and oil companies expected little from them, the participants finally founded the Organisation of Petroleum Exporting Countries (OPEC) on September 14, 1960. It was the first of its kind and was set up as a permanent inter-governmental organisation. Its membership remained open to any less developed country with a sizable petroleum capacity. Given the political aims and leanings of its founding members, the principal aim of the Organisation from the start was in effect a compromise between the two 'radical' governments of Venezuela and Iraq, and the two pro- Western 'conservative' governments of Saudi Arabia and Iran, which wanted not confrontation but negotiation with the companies, in order to iron out their differences with them.
As a result, the Organisation's principal aim had two major aspects. First, it stressed the determination of OPEC to coordinate and unify "the petroleum policies of member-countries" in an attempt to safeguard "their
interests, individually and collectively" and ensure "the stabilisation of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations". Second, it emphasised that it should give due regard to the necessity of securing "an efficient, economic, and
regular supply of petroleum to consuming nations; and a fair return on 22
their capital to those investing in the petroleum industry.".
This policy objective of OPEC was basically modest, and made no attempt to produce any substantial change in the governments-companies relationship. It was, therefore, in line with the Shah's long-term oil
policy, which underlined the gradual expansion of Iranian control over the country's oil industry through accommodation, not the confrontation with the West, which had cost Mossadeq his government. As could have been expected, the immediate achievements of OPEC were very limited. The member-countries' general weakness, lack of sufficient determination and unity, as well as the unfavourable international situation of the Cold War period, did not permit them to pressure the powerful and united companies to the point where they would first acknowledge OPEC's
existence, and then seriously respond to its demands. One way to exert pressure on the companies was to restrict production. But the leading OPEC producer, Saudi Arabia, was not interested in this, and Iran never condoned it either. Another way which Iran and Iraq proposed was "programming" production according to population — both having large populations. But other member-countries wanted programming according
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to need. ~ Finally in mid-1962, the fourth OPEC conference, in which Iran played an active role, resolved to establish a uniform rate for royalties in each country; moreover, it recommended that prices be brought up to their pre-August 1960 levels and royalty payments should
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