Iraq’s Oil History & Outlook, Part One
As the world’s second-largest owner of oil reserves, Iraq is growing rapidly as a regional economic power. And, the country faces an even brighter future ahead.
Since the Iraqi economy and Iraqi Dinar depend on revenues from oil sales, understanding Iraq’s oil industry is key to understanding the nation’s economy and benefiting from its growth.
In Part One of this two-part series we’ll look at the history of Iraq’s petroleum industry and its current state of development, including the major players.
Then in Part Two we’ll examine how new petroleum technologies are increasing Iraqi oil output and sales revenues, and consider the future outlook for Iraq’s economy and the Dinar as they relate to the oil industry.
Iraq is rich with petroleum. In fact, there’s so much oil that throughout the country there are numerous locations with natural seepage of bitumen and liquid petroleum. The Persian word naft and the Greek word naptha refer to this seeping oil.
Ancient uses of petroleum included waterproofing walls and roofs, and paving. Yet, because of the lack of drilling and transportation technologies, during ancient times petroleum was only used locally and only in relatively small quantities.
Beginning in the 1850s governments and businesses worldwide began to focus on petroleum as an energy source instead of merely using it for construction purposes.
By the 1860s entrepreneurs had begun searching globally for petroleum, and Iraq turned out to be an especially rich source.
The Beginning of the Iraqi Oil Industry
Although geologists first began drilling for oil in Iraq in 1908, it wasn’t until 1925 that commercially successful wells were developed. Then, in 1927 several major wells were drilled, and Iraq’s first pipeline and refinery were built.
The earliest oil companies to explore Iraq were the Anglo-Persian Oil Company (or APOC), and the Turkish Petroleum Company (TPC), which would later become the Iraq Petroleum Company (IPC).
Early in the 20th Century many British, American, French and German diplomats and businessmen became focused on the lucrative opportunities in Iraq’s oilfields. Industrialized nations were searching eagerly for energy sources to support their own growth
In 1905 the Germans sent a geologic survey team, and in 1908 the Americans sent Admiral Colby Chester as representative of the New York Chamber of Commerce to propose the construction of oilfields and other infrastructure.
However, before Americans or Europeans could gain a foothold in the Iraqi oil industry, the leader of the Ottoman Turks was ousted in a coup.
This downfall of the Ottoman Empire worried Westerners who had invested heavily in petroleum development. The Brits in particular were alarmed by the local political changes, and they were desperate to find ways to avoid being shut out of the regional oil boom.
Beginning in 1910, the British-owned Turkish National Bank and the Royal Dutch Shell Oil Company worked closely with Calouste Gulbenkian, a shrewd, politically-connected Turkish-Armenian petroleum engineer and businessman, in order to enter the Iraqi oil exploration and production business.
By 1912 the Turkish Petroleum Company (TPC) was registered in London and well-capitalized for business. However, the company didn’t have any exploration or drilling concessions from the government. The TPC had money and political clout in Britain, but not in Turkey or Iraq.
Finally, after intensive lobbying by the British and German ambassadors, in 1914 the leader of Turkey, the Grand Vizier Said Halim, granted broad concessions to the TPC for exploring and drilling for oil in both the Mosul and Baghdad areas.
Regarding ownership of TPC, the Turkish National Bank (secretly owned by British interests) was supposed to own 50% of the company, and Deutsche Bank was to receive 25%, and Royal Dutch Shell 25%.
Yet, because these ?major players? were unable to obtain the necessary mineral concessions from the then-Turkish ruler of Iraq, they were forced to rely on Mr. Gulbenkian to convince him. The Turks hesitated to allow TPC, a foreign company, to enter Iraq
Mr. Gulbenkian’s multicultural business skills and his close relationship with the Turkish leaders in control of Iraq helped him persuade them to allow TPC to drill and explore throughout Iraq.
He insisted on receiving 5% ownership as his commission for closing the deal, which earned him lifelong recognition as ?Mr. Five Percent.?
By unlucky coincidence, on July 28th, 1914 ? the same day that the Turkish Grand Vizier granted his oil-drilling concession to TPC ? in Europe a nationalist assassinated the Austrian Archduke Franz Ferdinand, which triggered World War I.
When the war ended four years later, Turkey and Germany were defeated and the Ottoman Empire was divided into separate states. Iraq was placed under British control.
In 1921 the Brits installed Sultan Faisal as ruler of Iraq. He remained in power until 1933. Faisal was succeeded first by his son, and later by his grandson, Faisal II. All three rulers supported the development of Iraqi oilfields by foreign partnerships.
Iraq continued under this British-sponsored monarchy until the 1958 revolution which brought the Ba’ath Party to power and eventually led to the rise of Saddam Hussein.
The Search for Oil Resumed after World War I
In 1920 the British and French secretly agreed that the original German shares of TPC would be transferred to the French, as a wartime reparation.
Yet, the Americans were afraid of domestic oil shortages. With urging from the U.S. government, the British concluded that oil ventures in Iraq would be easier and more profitable if they were developed with American technology, capital and political support. So, American interests were brought into the mix.
In March 1925 the TPC finally received a concession from the new Iraqi government, and soon afterward a large expedition arrived to begin drilling.
Several wells were drilled; most were unproductive, yet one well in particular was extremely productive.
Iraq’s first successful well was drilled near the city of Kirkuk in 1927. In fact, the name Kirkuk is a variation of gurgur, which means ?flames.? It refers to the numerous oil seeps in the area, some of which burned for many years after lightning strikes set them ablaze.
This well became Iraq’s first gusher. When the drillers struck oil there, the extreme oil pressure blew out the valves on their safety equipment and petroleum gushed for nine days before the well could be brought under control.
Kirkuk proved to be the first major discovery for the TPC, and a turning point in the development of Iraq’s oilfields. Even today, Kirkuk is still the country’s single biggest oilfield, thought to hold at least 12 billion barrels.
Oil exports from the Kirkuk field started in 1934 once the IPC completed the twelve-inch pipelines to carry Iraqi oil to refineries in Haifa (then in Palestine) and Tripoli in Lebanon.
The Iraq Petroleum Company
In 1929 the TPC changed its name to the Iraq Petroleum Company (IPC), and in the following year the Iraqi nation gained its independence from Britain.
Between 1925 and 1961 the IPC had a tight monopoly on all petroleum exploration and production throughout Iraq. Even today, although not operating actively the company remains based in London and it still owned jointly by several of the world’s biggest oil companies.
By 1930 there were at least twenty producing oil wells located in and around Kirkuk. Other regions of Iraq were slower to yield petroleum ? The next oil discovery didn’t come until 1937 with the Ain Zalah field.
In 1931 the government signed a fresh new revenue agreement with the IPC, by which the company paid to the government a royalty of four British shillings in gold per each metric ton of oil produced, and an agreed minimum annual payment of at least ?400,000 during the first 20 years.
The new agreement granted development of the northwest region of Iraq to a consortium of oil companies operating as the Mosul Petroleum Company. And, in 1938 the new Basrah Petroleum Company began drilling at sites in southern Iraq.
Nationalization of Iraq’s Oil Industry
These three companies ? The Iraq Petroleum Company, Mosul Petroleum Company, and Basrah Petroleum Company ? became the nucleus of the Iraqi petroleum industry.
In 1961 the Iraqi government began the process of nationalizing the IPC and eventually expropriated 95% of its drilling concessions.
The Iraq National Oil Company (or INOC) was created by the Iraqi government to replace the IPC and operate the nation’s oil industry.
The foreign owners of the IPC were alarmed by the prospect of losing their assets, so they offered to sweeten the terms of their original contract by increasing monthly oil production, increasing prices, and offering the government advance royalty payments.
In 1967 and 1969 Iraq and the Soviet Union signed agreements by which the Soviets would provide technical and financial assistance to the INOC. American business interests were alarmed at the prospect that the Soviets might eventually control U.S. access to foreign oil.
Emboldened by Soviet assistance, the Iraqi government demanded ever-better terms from the IPC. In 1970 the government gave the company a list of demands which included 20% of IPC’s assets and even more control over operations.
Greedy for more, in 1972 the Ba’athist government finally nationalized all IPC operations and handed them over to the government-controlled INOC.
In that same year, the North Rumaila Field was opened for production with technical help from the Soviets.
Iraqi Oil Industry Controlled by Saddam Hussein
During this period Saddam Hussein emerged as the leader of Iraq. From the beginning he worked tirelessly to consolidate his control over Iraq’s economy, and especially the oil industry.
Saddam also began placing family members and henchmen in managerial roles throughout the Iraqi government and oil industry. His goal was to squeeze maximum profit from Iraq’s booming economy.
Within its first few years of controlling the industry, the INOC succeeded in increasing Iraq’s total production from about 1.5 million barrels per day (bpd) to a peak of more than 3 million bpd by 1980.
However, between 1980 to 1988 the Iraq-Iran War greatly reduced Iraq’s oil production and weakened its economy.
The war was sparked by Saddam’s expansionist aggression against Iran, and during a brief invasion the Iraqi forces successfully seized Iranian oilfields in border areas, before being repelled.
The war dragged on for several years without significant gains on either side, and hostilities finally ended in 1988 without a written treaty.
Partly because of the hardships caused by the war, in 1987 the Iraqi government separated the INOC into several regional oil companies, the biggest of which were the North Oil Company (NOC) headquartered in Kirkuk and the South Oil Company (SOC) in Basrah.
The Gulf War
In August of 1990 Saddam Hussein ordered the invasion of neighboring Kuwait. He apparently sought to acquire Kuwait’s oil reserves while expanding Iraqi control over the region. The United Nations responded with increasingly-strict economic sanctions, but Saddam was undeterred.
In January 1991 the U.S.-led coalition began a military campaign which quickly drove the invading Iraqi forces out of Kuwait.
During the 1990s, the global economic sanctions against Iraq continued, and they had a devastating effect on the nation’s oil industry. Unable to obtain critical replacement parts for aging equipment, the Iraqi oil industry quickly deteriorated.
Oil production slowed to a trickle, and the impact of UN sanctions continued to hinder the Iraqi economy until the eventual ouster of Saddam Hussein in 2003.
Next: The New Iraqi Oil Industry, and the Future Outlook for Iraq’s Economy and Dinar
The Gulf War was the beginning of the end for Iraq’s decaying, nationalized oil industry. After Saddam’s departure the country’s economy and oil industry would have a fresh opportunity for growth.
In the upcoming Part Two of this series we’ll look at the growth and development of Iraqi petroleum infrastructure since the end of the Saddam era.
Most importantly, we’ll consider the future outlook for Iraq’s oil industry, and how Iraq’s economy and the Iraqi Dinar will benefit from the nation’s oil wealth going forward.
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