Emergence of the Middle Eastern Oil Empire
The Wright brothers set the tone of the 20th century when they accomplished the first flight (1903) with an oil combustion engine instead of a coal steam engine: oil would become the new gold.
The German Empire started building the Berlin–Baghdad railway in the same year. Part of the deal between the German and Ottoman Empire was that the oil found around the railway would become property of ‘Deutsche Bank’ so the Germans carefully drawn the railway around the known oil resources.
The role of oil became even more visible before and during World War I and European nations faced a major problem: there were coal mines in Europe but no known oil reserves; so the European powers had to look for oil somewhere else: the Middle East (Ottoman Empire).
Turkish Petroleum Company (TPC)
UK and France were running late in the oil quest at the wake of WWI compared to the German Empire who had some kind of “oil” deal with the Ottoman Empire. In an attempt to bring together the competing British and German interests in the region, a British company known as ‘African and Eastern Concession Ltd’, was formed in 1911.
This company became the ‘Turkish Petroleum Company (TPC)’ in 1912, formed with the purpose of acquiring oil explorations concessions in Mesopotamia from the Ottoman Empire. The owners were a group of large European companies: Deutsche Bank, the Anglo Saxon Oil Company (a subsidiary of Royal Dutch Shell), the National Bank of Turkey (a British concern) and an Armenian businessman called Calouste Gulbenkian.
San Remo Oil Agreement
The question of TPC shareholding became a major issue at the San Remo conference (1920) when the Ottoman Empire was dismantled after World War I.
The San Remo Oil Agreement (1920) between Britain and France defined the TPC shareholding: the French’ Compagnie Française de Petroles‘ (CFP) 25%, the Anglo-Persian Oil Company (APOC) 47.5%, the Anglo Saxon Petroleum Co 22.5% and Calouste Gulbenkian 5%.
Americans felt as if they had been left behind. US oil companies were eventually permitted to buy into TPC after long negotiations.
In 1921, Iraq was placed under British mandate and was not an independent nation. It was called ‘The Kingdom of Iraq under British Administration’, or ‘Mandatory Iraq’.
TPC obtained its first concession to explore for oil in 1925. In return, the Iraqi government would receive a royalty for extracted oil, but it was linked to the oil companies’ profits and not payable for the first 20 years. The concession required the company to select 24 rectangular plots of 8 square miles (21 km2) for drilling operations.
The San Remo agreement had stipulated that Iraqis should be allowed 20% of the company but eventually no Iraqi shareholders were allowed to participate, despite pressure by the British government to accept Iraqi shareholders.
In 1927, TPC finds oil in Kirkuk (Iraq).
Red Line agreement
TPC shareholders signed an agreement in 1928 to include the Near East Development Corporation (NEDC), an American consortium of five large US oil companies that included Standard Oil of New Jersey, Standard Oil Company of New York (Socony), Gulf Oil, the Pan-American Petroleum and Transport Company, and Atlantic Richfield Co.
Shares were held in the following proportions: Anglo-Persian Oil Company, Royal Dutch/Shell, Compagnie Française des Pétroles (CFP), and the NEDC each received 23.75% ; the remaining 5% went to Calouste Gulbenkian.
TPC was registered in Britain as a nonprofit company and produced crude oil for a fee for its parent companies based on their shares. The company itself was only allowed to refine and sell to Iraq’s internal market in order to prevent any competition with the parent companies.
This agreement became known as the ‘Red Line Agreement’ because oil companies drowned a red line around the former boundaries of the Ottoman Empire (with the exception of Kuwait), effectively bound the partners to act together within the red line.
The Red Line Agreement gave birth to oil cartelisation and determined the pattern and tempo of oil development in the Middle East.
Iraq Petroleum Company (IPC)
In 1929, TPC was renamed the Iraq Petroleum Company (IPC) and IPC eventually monopolised oil exploration inside the Red Line zone.
IPC acted as a cartel by intentionally delaying drilling and pipelines rights-of-way negotiations to control supply and price during the Great Depression (1929-1939).
However, IPCs owners had conflicting interests: the Anglo-Persian Oil Company, Royal Dutch/Shell and Standard Oil had access to major sources of crude oil outside Iraq, and therefore wanted to hold the Iraqi concessions in reserve, whilst CFP and the other companies pushed for rapid development of Iraqi oil as they had limited crude oil supplies.
These competing interests further delayed the development of the Iraqi fields and IPC’s concession eventually expired because the companies failed to meet certain performance requirements, such as the construction of pipelines and shipping terminals.
The concession was renegotiated in 1931, giving the company a 70-year concession on an enlarged area. The Iraqi government demanded additional payments and loans, and the construction of two oil pipelines to the Mediterranean sea by 1935—something CFP had demanded for a long time, in order to get its share of the oil quickly to France.
The Red Line Agreement lasted until 1948 when two of the American partners broke free and joined a partnership with ARAMCO to develop oil resources in Saudi Arabia. The Americans claimed that World War II had ended the Agreement. The other IPC shareholders refused to release the Americans from the Red Line Agreement.
Eventually a deal was agreed. American partners joined ARAMCO and the French Government and Gulbenkian received a greater share of IPC’s output. The Red Line agreement boundaries were also redrawn to exclude Saudi Arabia, Yemen, Bahrain, Egypt, Israel, and the western-half of Jordan.
Pipelines
- Geopolitics
All pipeline operations were transferred to IPC.
The French favoured a northern route for the Iraq – Mediterranean pipeline terminating at Tripoli (Lebanon) while the British and the Iraqis preferred a southern route terminating at Haifa, in what was then Palestine.
The issue was settled by a compromise which provided for the construction of two pipelines: the Northern line to Tripoli (856 km) and the Southern line to Haifa (1.000 km).
In 1934, the pipelines were completed from Kirkuk to Al Hadithah, and from there, to both Tripoli and Haifa. IPC only began to export oil in significant quantities in 1938.
Oil production came to a standstill during World War II, when restricted shipping in the Mediterranean forced down the production sharply.
- Pipelines and Oil Tankers Economics
Not all pipelines are equal; we have major vs minor pipelines; and crude-oil vs oil products and gas pipelines.
Oil producers usually combine pipelines and oil tankers to transport crude oil, but oil must reach the maritime terminal by pipeline before it is loaded on a tanker.
Initially, tankers were chartered by oil companies on longer or shorter leases. Later, especially in the 1970s and 1980s, oil companies began to develop their own modem tanker fleets.
Oil transport costs are determined by oil tankers and pipelines costs. The golden rule is to go for the cheapest route.
Tanker costs include: buying or chartering a tanker (building & maintenance cost), the length of the route, the transit fees if the tanker uses a canal or a strait within the territory of an independent state, and the political safety of certain waterways. Pipeline cost include: building, maintaining, protecting and of course paying oil transit fees through a pipeline.
There are two major Middle Eastern pipeline systems: the Iraqi and the Saudi Arabian.
Iraq during the Cold War
In the 1960s, the Iraqi government started to demand their piece of the IPC cake. The Soviet-Iraqi agreement of 1969 emboldened the Iraqi government and in 1970 they made a list of demands including 20% ownership of IPCS company’s assets, more control, increased oil production, increased crude oil price and advance payments on royalties.
In 1970 the Iraqi government made a new set of demands which involved more Iraqi control and profit-taking. However, Iraq didn’t get what it wanted and on 1 June 1972 it nationalised IPC operations, which were transferred to the ‘Iraq National Oil Company’.
Suez Canal
The oil industry depends heavily on oil tankers to transport oil to the West and by means of cost reduction …. the shorter the route the better.
The Suez Canal (193 km) is an artificial waterway in Egypt connecting the Mediterranean Sea to the Red Sea, dividing Africa and Asia and is a key trade route between Europe and Asia. It reduces the journey distance from the Arabian Sea to London by approximately 8.900 kilometres.
Building a canal in the region wasn’t a new idea. Egyptian pharaohs built smaller canals to connect the Nile with the Red Sea. However, french diplomat ‘Ferdinand de Lesseps’ formed the ‘Suez Canal Company’ in 1858 to build the canal who was officially opened in 1869.
The British government had opposed this project because the canal might disrupt their commercial and maritime supremacy.
International opinion was initially skeptical and shares of the Suez Canal Company did not sell well overseas. Eventually, the Rothschild family assisted the operation and bonds and shares were successfully promoted in France and other parts of Europe.
The canal had an immediate and dramatic effect on world trade and it played an important role in facilitating European colonisation of Africa.
Eventually, the Brits got interested and involved in the Suez Canal.
The Convention of Constantinople in 1888 declared the canal a neutral zone under the protection of the Brits who had occupied Egypt and Sudan to suppress the Urabi Revolt.
At the beginning of the World War I in August 1914, Egypt, under the nationalist Khedive Abbas Hilmi II, declared that the Canal would be open to ships of all nations. However, the UK subsequently deposed Abbas; replaced him with his uncle, Hussein Kamel; and declared the re-establishment of the Sultanate of Egypt as a British protectorate. Thereafter, Britain barred canal access to ships of the Central Powers for the duration of the war.
The British defended the canal against a major Ottoman attack in 1915 during World War I. Eventually, under the Anglo-Egyptian Treaty of 1936, the UK retained control over the canal.
The canal was the property of the Egyptian government, but European shareholders, mostly British and French, owned the concessionary company which operated until July 1956.
Egypt became closer with the Soviet Union so the UK and the US withdrew their pledge to financially support the construction of the Aswan Dam. In 1951 Egypt repudiated the 1936 treaty with Great Britain.
Egyptian President Gamal Abdel Nasser responded by nationalising the canal on 26 July 1956 and transferring it to the Suez Canal Authority (SCA), intending to finance the dam project using revenue from the canal.
On the same day that the canal was nationalised, Nasser also closed the Straits of Tiran to all Israeli ships. According to the pre-agreed war plans under the ‘Protocol of Sèvres’, Israel invaded the Sinai Peninsula on 29 October, forcing Egypt to engage them militarily, and allowing the Anglo-French partnership to enter the war to regain the Canal and bring down the Nasser government.
Nasser gave the order to sunk ships in the canal so as to make it unnavigable. Eventually the United Nations got involved in 1956 and the canal was cleared with UN assistance in 1957.
In May 1967, Nasser closed the Straits of Tiran to Israeli ships. Israeli forces occupied the entire east bank of the Suez Canal during the Six-Day War (June 1967). Tensions would arise in the coming years.
The military conflict stopped when Nasser died in 1970 but the underlying tensions persisted. Egypt imposed a blockade which closed the canal to all shipping immediately after the beginning of the Six-Day War. The canal remained blocked for eight years.
On 6 October 1973, during the Yom Kippur War, the Egyptian military crossed the Suez Canal into the Israeli-occupied Sinai Peninsula. Arab oil exporters, sympathetic to Egypt, pushed OPEC to raise the price of crude oil by around 17 % and eventually imposed an embargo against the US and other Israeli allies.
On 10 June 1975, the Suez Canal was re-opened for the first time since the 1967 Arab-Israeli war.
- Today
Suez Canal Authority (SCA) is an Egyptian state-owned authority which owns, operates and maintains the Suez Canal.
SCA is an independent authority having legal personality. SCA was established by the nationalisation act signed on 26 July 1956 by the Egyptian president Nasser. The act also nationalised the Suez Canal Company and transferred all of its assets and employees to the SCA established by this act.
SCA is responsible for the operation and maintenance of the Suez Canal, for the safety of the traffic and for all other matters relating thereto. According to the nationalisation act, SCA is bound by the 1888 Convention of Constantinople, which grants the right of free access and use of the canal at equal conditions to all ships, commercial ships and ships of war, in times of peace or of war, even to ships of belligerent parties.
The canal is big business. In 2022, annual revenue stood at $8 billion in transit fees.
Gas in Gaza
Natural gas fields (Gaza Marine) offshore the Gaza Strip were officially discovered in the year 2000.
The Palestinians signed a memorandum of intent in November 1999 with British Gas (BG) and the ‘Consolidated Contractors Company’ (Palestine) giving them rights to explore the area.
Israeli Prime Minister Ehud Barak deployed the Israeli navy in Gaza’s coastal waters to stop the implementation of the contract between Palestine and British Gas (BG).
Israel demanded that the Gaza gas be piped to facilities on Israeli territory at a price below the prevailing market level and that Israel should control all the revenues destined for the Palestinians.
With this Israeli action the Oslo Accords were officially doomed, as Israel did not accept any kind of Palestinian budgetary autonomy. And there can be no sovereignty without budgetary autonomy.
British Prime Minister Tony Blair tried to re-negotiate a deal in 2007 were the Palestinian would have delivered the gas to Israel at below-market prices, with the same 10% cut of the revenues for the Palestinian Authority. However, those funds were first to be delivered to the Federal Reserve Bank in New York for future distribution, to guarantee that they would not be used for attacks on Israel.
In 2015, the Palestinian government resumed negotiations on the agreement with BG and retracted the exclusive rights it had given to the company. It also raised the PIF (Public Investment Fund) share from 10% under the old agreement to 17.5%. Subsequently, Shell acquired BG in April 2016.
As of 2017, the Gaza Marine field licenses were owned by PIF with 17.5% of the field development rights, Consolidated Contractors Company owned 27.5% of these rights and Shell 55%. The development and gas extraction rights belonged to the Palestinians alone. In 2018, Shell which had taken over British Gas earlier, decided to renounce its 60% stake in Gaza Marine, transferring it to Palestinian companies.
Personal remark
It’s not a coincidence that the ‘fossil’ resource got its name from the Hebrew word for ‘God’ and the name of the main Phoenician god: El …. Oil.
Germany was removed from the Middle-Eastern oil equation after WW I and the Ottoman Empire was divided amongst the European superpowers. It was not a coincidence that Iraq was placed under British mandate as the region was an oil field. Many ’empty’ promises were made to the Iraqis as oil (profits) prevailed above all. The last two modern days Iraqi wars were also about oil.
WWI had weakened and accelerated the fall of the British Empire so it was time to privatise ‘oil’ profits under a new privately-owned structure …. Oil (in)corporation …. a bit of mythological etymology here: … El in Corpo Ra Aten…. El in the body of Ra’ Aten (Ancient Egyptian gods).
Oil concessions gave birth to the use of rectangles and straight lines to draw new borders in the Middle East and Africa.
There has never been free trade when it comes to oil in the region; it was a cartel between the UK, France and US oil gods from day one.
It was important to transport oil from the Iraqi fields to the Mediterranean sea so they needed to build pipelines and oil terminals. The French went for the Lebanese option, the shortest and most logical option; but the Brits were always one train ahead. They knew there was oil and gas in a country then called Palestine but they didn’t know where exactly so they opted for a pipeline to and an oil terminal in Haifa (Palestine) … they missed the Gaza gas fields by 150 km which is not bad for the time.
It has never been a love story between the oil gods and Arab nations as the later had always resisted the colonisation attempts. The oil gods had a dream: colonising the region with European people like it had been done in America and Australia in the past. A unique opportunity arose at the end of World War II when innocent surviving Jewish victims of the concentration camps had lost everything they had and could easily be transported on American vessels to colonise the Middle Eastern region… preferably where the oil terminals and gas fields were located. The idea had already been laid down in 1917 when the House of Rothschild received a blank cheque through the Balfour declaration to set up a new home for the Jewish people in a country once called Palestine.
The etymological roots of the word Gas comes from the Greek word ‘Chaos’. Gas in French is written ‘Gaz’.
The extent of the Gaza gas fields have been intentionally minimised so as to avoid suspicion and more chaos on the Eastern front. The most funny episode in this chapter is when Shell renounced their rights in Gaza Marine a few years ago. Shell refusing to extract gas in the region; seriously? That smells a bit … gassy.
Gaza didn’t stole its name as its full of Gas.
Oil gods also had to deal with another uncontrollable problem …. the Suez canal who is expensive, located in a politically sensitive region, too narrow, not deep enough and too difficult to manoeuvre. And once in a while, there’s a ship that blocks the whole damn thing … recently a Japanese ship called ‘Ever Given’ got stuck during the Covid crisis.
Oil gods had another rabbit it their hat: the ‘Ben Gurion Canal’ project, to compete with the Suez canal, to build a canal through Israel to connect the Gulf of Aqaba to the Mediterranean Sea…. coincidentally passing through Gaza. The US even considered the possibility of using 520 underground nuclear explosions to excavate the hypothetical canal.
Ironically, this may be a biblical coincidence here but you remember the story about the Red Sea crossing …. when God used water to separate the Ancient Hebrews from the Egyptians: the Suez canal (if you read the word ‘Suez’ from right to left as in semitic languages you get ‘Zeus’ … the main god in Greek mythology) and the Ben Gurion Canal.
To make a long story short: one needs to understand the history and underlying oil and gas gods to understand Middle-Eastern politics.
It’s not about the people; it’s about gods, semi-gods, oil, gas, pipelines, canals, terminals and oil tankers …. that’s it folks.
Refs
- Iraq Petroleum Company
- The Oil Empire Fairy Tale
- Mandatory Iraq
- Major Pipelines in the Middle East: Problems and Prospects
- fossil
- Interview oil is not a fossil
- Endless Wars and Sacrifice Zones: How Pipeline Politics Link Oil and Death
- Suez Canal
- Suez Canal Authority
- Convention of Constantinople
- Link to map (Gaz in Gaza)
- Link to map (Gaz in Gaza I)
- Link to map (Gaz in Gaza II)
- Natural gas in the Gaza Strip
- Ben Gurion Canal Project