compensation for Kermanashah refinery and domestic distribution facilities, the British Petroleum also obtained 214 million Pounds (600 million dollars) from its new partners. From Iran’s point of view, the contents of this agreement were much more unfavorable than conditions set forth several months earlier in the joint ‘Churchill-Eisenhower’ proposal to Dr. Mosaddegh. Iranian oil production in the first 3 years reached the pre-nationalization era level. From then on, production operations that were limited to Masjed Solaiman and Haftgel fields, were quickly expanded and covered the huge oilfields of Gachsaran, Ahwaz and Aghajarj.
Oil Bill and Company Agreements In 1957, three years after signing of the Consortium Agreement, the first Iranian oil law was approved. It paved the way for the signing of agreements to carry out activities outside the area where the consortium operated, with the cooperation of foreign investors. The participation formula*, which was considered as an innovation at the time, triggered the dissatisfaction of major oil companies. They, however, gradually changed their attitude and found it a more proper approach to ensure continued cooperation with oil producing countries. Iranian participation agreements were 50/50 deals. 50 percent of the shares belonged to the National Iranian Oil Company and the remaining 50 percent went to foreign companies. Foreign partners paid half of their shares to the Iranian government as tax. As a result, those agreements came to be known as 75/25 deals.
Taxation plan was revised later on, based on which the foreign companies had to pay 85 percent of their shares as tax. Also, foreign partners were obliged to pay royalty to the National Iranian Oil Company.
Contracts of Service Contracts The oil law passed in 1957, however, was revised in 1974. Consequently, the foreign companies could only make investments in the upstream oil sector including exploration, development and production operations, through service contracts. The law prohibited foreign firms to take part in the production and utilization phases. Based on the new law, foreign companies willing to sign a service contract had to accept the risks involved in exploration operations.
In other words, if operations were not commercial, the companies could not ask for reimbursement of the investment they had made. But if they reached oil, they had to hand over the discovered field to National Iranian Oil Company and reimburse the investment in 10-year installments and then deduct them from their payments for crude oil they purchased.
Islamic Revolution of 1979 and Termination of the Contracts The consortium agreement of 1954 was revised in 1974 and a new agreement replaced it. Decisions made by the Organization of Petroleum Exporting Countries (OPEC) further restricted the operating companies.
Companies, which were granted concession, practically turned into service contractors of oil-exporting countries in the late 70s. Their tax payments had increased from 50 to 80% and their royalty payments from 12.5 to 20%. Oil prices were also set by the producing countries. Thus, foreign companies were left with just 22 cents per barrel.
These firms were supposed to undertake the treatment of some 300-thousand bpd of crude oil in Abadan refinery and export of products. In addition, they had to pay 40% of interest-free capital investments to NIOC, as down-payment for the crude oil produced. They were also obliged to provide NIOC with all of the needed technical services for a 5-year period. The Companies were facing problems in living up to their commitments because of the limitations imposed on them by OPEC’s decisions. The Consortium found it impossible to continue the job after the 1953 agreement, and called for resumption of negotiations on a new agreement.
