OPEC'S EVOLVING ROLE: D'Arcy concession centennial and OPEC today - an historical perspective

On May 28, 1901, at Tehran's Sahebqaraniyyeh Palace, Muzaffar ul-Din Shah inked an 18-point concession granting William Knox D'Arcy, a British "rentier," the special rights for prospection, exploration, exploitation, transport, and sales of the following products: natural gas, petroleum, asphalt, and mineral waxes.

The concession area covered some 1,242,000 sq km-"the whole of Persia, exception made of the five northern provinces." It was granted for 60 years. The Persian government was to receive 16% of the operating companies' net annual profits.¹

What looked like yet another concession granted by Persia to a foreign entrepreneur would turn out to have momentous consequences not only for the parties concerned but also for the Middle East region in general and for the special world of oil.

D'Arcy's gamble

The first step of this extraordinary adventure was taken by D'Arcy. Nothing had prepared this 52-year old millionaire to invest in a Persian venture; he had never set foot on Persian soil and never would. Nevertheless, he had the vision to look further afield than others² and the courage to "grasp the nettle" when the occasion presented itself, possibly encouraged by "the biggest gusher of all" at Spindletop in East Texas on Jan. 10, 1901.³

However, D'Arcy also had the shrewdness to pick the right men for the enterprise at hand. He chose Alfred T. Marriott for securing the concession and then selected a self-taught geologist, George Bernard Reynolds, for conducting the exploration part. He later even dispatched Dr. M.Y. Young to Persia as the company's medical officer. Now, if Marriott had the required tact, diplomacy, and savoir-faire for securing the agreement, Reynolds had the necessary will power, resilience, and higher motivation to forge ahead until he found oil. As for Dr. Young, his medical skills would endear him not only to the company's European staff but also to its Persian personnel. The dictum "les affaires sont moins importantes que les homes" ("affairs are less important than men") seems to apply especially well in the Middle East.

Supermajor ancestors

In 1909, the work of D'Arcy and his men had brought about the creation of the Anglo-Persian Oil Co. (later, British Petroleum and then BP PLC). This new outfit was to dominate the small world of oil during the 20th century alongside the Standard Oil Trust (created in 1870) and Royal Dutch/Shell (amalgamated in 1907). Even the famous "Seven Sisters" were, in fact, the "Big Three" in addition to four lesser American sisters. Of the latter, only Chevron Corp. (soon-to-be ChevronTexaco Corp.) remains standing alongside Exxon Corp. (now ExxonMobil Corp.) after the megamergers of the late 1990s. Both these two US majors, in fact, have their roots in John D. Rockefeller's legendary Standard Oil.⁴

At the dawn of the 21st century, the Big Three are still at the very top; their nearest rival is not even half their size. In the year 2000, all three made mind-boggling profits: $17.7 billion for ExxonMobil, $14.2 billion for BP, and $13.1 billion for Shell. With these results, ExxonMobil achieved a world record for an industrial corporation, and BP set a record for UK company profits.

The discovery of oil in southwestern Persia placed the Middle East region squarely on the oil world map (see table). D'Arcy had struck at the heart of the Iranian-Arabian oil province, this immense "horseshoe structure"⁵ of hydrocarbon-bearing fields. They begin in Iraq's Kirkuk field, run along the Zagros Mountains range all the way to southeastern Iran before crossing over the Strait of Hormuz in the UAE and Oman and curving back northwards into the great Saudi constellation of super giant fields (e.g., Ghawar and Safaniyah) with ramifications in Kuwait (Burgan field) and South Iraq (Rumaila field). According to the "horseshoe" concept, two major areas still lay bare and should have to be filled with fresh discoveries: Southeast Iran and Iraq's Western Desert.

Impact on Iran, OPEC

Reynolds's oil discovery at Masjid-I Sulayman would also make a lasting impact upon Persia's social and political life. A full century later, Iran is not only dependent on oil and gas for 99% of its domestic energy needs, but it also depends on its oil exports for at least 90% of its hard currency income.

During the 20th century, oil gradually became one of the pillars of Iran's internal and international politics; it is present at every twist and turn of the country's crises, sometimes taking center stage (as in the oil nationalization of 1951) and sometimes tipping the scales of power (as during the Revolution of 1978-79).

Now, Iranian politics is so linked to oil revenues that no one notices it any more, and the "national oil rent" is taken for granted. Without this secure income-amounting to some $15 billion/year-who would volunteer to captain the vessel of state?

In September 1960, at the creation of the Organization of Petroleum Exporting Countries, four of the five founding members were Middle East countries: Iran, Iraq, Kuwait, and Saudi Arabia. Later on, Qatar and the UAE also joined, giving the region a majority among OPEC's present 11. OPEC's founding father, Dr. Juan Pablo Perez Alfonso, had the foresight to visualize that oil-rich Middle East countries could maximize their oil revenues both by volume and by price, whereas his country, Vene- zuela, couldn't rely on volume-hence his idea to form an organization that would endeavor to maximize income by price.

Today, most global industry planners place their hopes for future oil supplies with OPEC in general and in particular with its three most promising members: Saudi Arabia, Iraq, and Iran.⁶ Industry pundits have predicted that non-OPEC production will soon peak (2001-02), and thus supply increases will have to be somehow provided from OPEC's enormous proven reserves. Thus, the gap between supply and demand inevitably widens, and OPEC's role will tend to become more critical with time (see author's related article, p. 66).

However, in order to transmute OPEC's undeniable oil potential into available capacity, four major requirements will have to be fulfilled:

• Careful planning.
• Diligent management.
• Adequate technology.
• Timely investment.

Of the last element, the requirement of timeliness is critical because of the industry's long project lead times and the investment half of that term relates to the capital-intensive nature of upstream development operations.

So it is apparent that, notwithstanding the tremendous changes having occurred within the oil industry over the past century, once again, at the dawn of the new century, the focus is on the Middle East. And roughly the same qualities will be required for those "going for oil": vision, courage, tact, diplomacy, savoir-faire, resilience, determination and, above all else, some higher motivation⁷ or, in other words, a sense of mission and devotion to the unique enterprise for oil.

References

1. Bearing in mind the times' standards, the D'Arcy Concession was a rather consistent and rational agreement, seen from the points of view of both concessionaire and host country. The same couldn't be said of some of the agreements entered into towards the close of the 20th century.
2. In his memoirs, the renowned Calouste Sarkis Gulbenkian ("Mr. Five Percent") wrote: "Between 1895 and 1900, the Persian Concession (offered at £15,000) was a drag on the market. I submitted this business to my friend Sir Frederick Lane, the shipping tycoon, and to [Henry] Deterding of Shell. But we all thought it was a wildcat scheme, not at all for our trio." (See Henry Longhurst, Adventure in Oil, Sidgwick & Jackson, London, 1959, pp. 82-3). Even the government of India, "which had once sent its own geologist to Persiaellipseregarded the prospects of oil in southwest Persia as very poor." (See Sir Arnold Wilson, Southwest Persia, Readers Union Ltd., 1942, p. 40.
3. To bring about the Spindletop strike, first there had to be the determination of Patillo Higgins, a one-armed mechanic and lumber merchant obsessed by the Spindletop mound, then the ingenuity of Capt. Anthony F. Lucas, a former officer in the Austrian Navy. It also needed the connections of the country's most successful firm of wildcatters, that of James Guffey and John Galey. Petroleum had Galey bewitched; he was unstoppable and indefatigable in the hunt for oil. Finally, the money of the banking firm of T. Mellon & Sons was required. The strike at Spindletop squarely placed East Texas on the oil map and led to the creation of Gulf Oil Corp. and the subsequent blossoming of the city of Houston.
4. Of the five American "sisters"-Exxon Corp., Mobil Corp., Chevron Corp., Texaco Inc., and Gulf-the first three had begun life as Standard Oil subsidiaries: Standard Oil Co. of New Jersey, Standard Oil Co. of New York, and Standard Oil Co. of California, respectively. Chevron was to take over the non-Standard oil sisters-first Gulf (1984), then Texaco (2000). In the meantime, Exxon had acquired Mobil. Thus, the five American majors have been reduced to only two: ExxonMobil and thepending ChevronTexaco. A merger of these two would yield the original Standard Oil.
5. To my knowledge, the "horseshoe" concept was first spelled out by Eng. Muhammad Faham of National Iranian Oil Co.'s exploration division.
6. According to Colin J. Campbell, undiscovered oil reserves worldwide amount to about 216 billion bbl, and OPEC's three main members account for some 71 billion bbl, or roughly one third of these reserves (C.J. Campbell, The Golden Century of Oil 1950-2050, Kluwer Academic Publication, 1991, p. 35).
7. A typical example of things to come was given in the mid-1990s by six American individuals, who each ventured $1 million of their own money to develop an abandoned Russian oil field. They applied for, and obtained, an $80 million loan from a bank and got on with the job. They refurbished the field, produced and sold the oil, duly repaid the loan, and reaped a handsome profit in the process. However, profit was just the icing on the cake; the "cake" was the actual achievement.

The author

Ali Morteza Samsam Bakhtiari is a senior expert in the corporate planning division of National Iranian Oil Co., Tehran. He specializes in questions related to the global oil, gas, and petrochemical industries, with emphasis on the Persian Gulf and OPEC. Formerly, he lectured on design and economics at the chemical engineering department of Tehran University's Technical Faculty. He holds a PhD in chemical engineering from the Swiss Federal Institute of Technology at Zurich and is the author of a new book on Iran's modern history. E-mail (www.samsam.go.cc).