From «Oil Nationalisation and Managerial Disclosure: The Case of Anglo-Iranian Oil Company, 1933-1951»
Chapter 4: Profit distribution by the AIOC
Author : Neveen Abdelrehim | The university of york
Royalties were paid by the AIOC to Iran in return for taking away minerals from
their exhaustible natural deposits, and they should reflect either a proportion of mineral output or a fixed sum based on the volume of production. The basis of calculation and the amount of royalties received by the Iranian Government were key issues. Penrose has pointed out that in the period 1930-9: Royalty and tax payments to the Iranian Government substantially exceeded income tax payments to the British Government and amounted in total to nearly two-thirds of the net profit after tax of the Company.
For the period, the tax and royalties paid to Iran were £22,134,000 compared with UK income tax of £8,749,000 and net profit of £35,754,000. AIOC management argued that Iran was in a sound position financially and had always managed to balance her national budget, since royalties had formed a reserve on which the government could draw for special purposes. But meanwhile, Jacks pointed out to Fraser that, after the Second World War, the Iranian government became unhappy with the concession and with the Supplemental Agreement because it was eager to improve the royalty terms. The Iranian government received royalties representing half of the company‟s post-tax proceeds, while the British government received over double this amount in taxes from AIOC. The proportions were then reversed, so that the AIOC paid much more company tax to the British government than it did in royalties to the Iranian government, a fact which was regarded with increasing concern in Iran. The Iranian government was also conscious that the royalties paid for oil extraction in Saudi Arabia, Iraq and Venezuela were more favourable than those paid to the Iranian government. Therefore, Iranians thought that a comparison with the concessions granted in Venezuela during the same period would help to bring to light the poor bargain reached between the Iranian government and AIOC. The Gidel Memorandum reiterated this point, claiming that: Total royalties earned by the Iranian government in the year 1933 amounted to 33% of the price of all the petroleum extracted while for the year 1947 this ratio was in the neighbourhood of 9%.
Katouzian described the fall in royalties as “ridiculous” and “inexplicable”. The Memorandum also claimed that if the same basis had been used for Iranian as for Venezuelan royalties, the 1947 payment would have been more than three times higher. Ali Mansur proved unwilling to defend the Supplemental Agreement and remarked to Shepherd that a gesture by the company would be expected involving an increase in royalty payments. Ali suggested that it would be expedient for the AIOC and the Iranian government to revise the terms and conditions of the concession satisfactorily. To reinforce the point, Table (9) below compares the cost of oil production in Iran with that in Venezuela to examine whether the concession in Venezuela compares favourably or not with Iran.
As noted from Table (9) above, the AIOC received $2.35 more per ton from
Persia than the companies exploiting reserves in Venezuela, assuming that the Supplemental Agreement had been put into effect. This raises the question of why the AIOC‟s royalty payments to the Iranian government declined despite the company‟s higher profits in comparison to Venezuela? Was the AIOC‟s intention in this method of paying royalties to enhance the prosperity of the company alone? AIOC Chairman, Sir John Cadman, was concerned not to carry discussion on the royalty matter beyond a certain point. AIOC was worried that any revised deal would be less advantageous to them than the present one: Fraser for instance commented in 1948 that it was the very last thing the company desired, as no new concession could ever be as favourable to the company as the one then in existence. Furthermore, Gass was aware of the injustice of AIOC and declared that “the company‟s 1947 financial results added fuel to the fire” because he knew that the profit-sharing method of calculating royalties would invite curiosity and a wish by the Iranian government to interfere with the company‟s commercial transactions and accounting systems. The AIOC contended that it was unrealistic to make comparisons over time or between countries. Moreover, the company argued that Iran also benefited from the high level of the company‟s investment, from the amount of Rials it purchased annually and from its subsidization of cheap oil supplied to the Iranian Government. AIOC claimed that its role first and foremost was as a commercial undertaking, committed both to heavy royalty and taxation payments to the Persian government and to dividend returns to its shareholders. To provide further evidence concerning the Iranian claims, a financial analysis is conducted in Table (10) to assess the royalty estimates under different negotiating assumptions, applied to profits subject to the 1933 Agreement.
Table (10) sets out the royalty shares under various negotiating assumptions.
Column A shows the total pre-tax profits; column B illustrates the Iranian government bid to share 50% of total profits; and column C records the actual royalties paid under the 1933 Agreement. The Table highlights how the 1933 Agreement was of marginal benefit to the Iranian government because the royalties due to the Iranian government in 1948 under the 1933 Agreement were £9.2m whereas, had the Iranian government demanded a 50% share of the pre-tax profits, it would have resulted in a payment of £25.5m to Iran. Therefore, a difference of approximately £16.3m represented a large increase on the existing agreement. Moreover, the royalties paid in 1950 under the 1933 Agreement were £16m; if they were renegotiated line with the Iranian government 50/50 bid, this would have resulted in a payment of £42.9m to Iran, a difference of approximately £26.9m which was large enough, from the Iranian point of view, to terminate the agreement. Consequently, the Iranians‟ lack of trust in AIOC accounting, coupled with the former‟s understanding that their bargaining position had led them to forego the sum of £26.9m, provided two important reasons behind the Iranians‟ nationalisation sentiment.
Notes & References :
554. Issawi and Yeganeh, The Economics of Middle Eastern Oil, 105.
555. Penrose, The large International Firm in Developing Countries: the International Petroleum Industry, 64.
556. Penrose, The large International Firm in Developing Countries: the International Petroleum Industry, 68.
557. BP 126345, Informal discussion at Britannic house on 20th October 1949, 2.
558. BP 070266 Jacks to Fraser on 19th August 1934, 1.
559. Keddie, Modern Iran, 124.
560. Karshenas, Oil, State and Industrialization in Iran, 81.
561. Gidel Memorandum, 4.
562. Katouzian, The Political economy of Modern Iran 1926-1979, 118.
564. BP 126343, Reference No. 231, Northcroft to Rice on 3rd June 1950, 1.
565. BP 126343, Notes on Supplemental Agreement handed by Ali Mansur to Shepherd on 3rd June
566. BP 68386, Report by Sir John Cadman, visit to Persia and Iraq, Spring 1926, 33.
567. BP 101099, AIOC opinion on 20th June 1948, 6.
568. BP 126407, Report on visit to Tehran 31st August to 26th October 1948, 49.
569. BP 126347, Supplemental Oil Agreement- further conversation between Sir F. Shepherd and Mr.
Razmara, 10th October 1950.
570. Gidel Memorandum, 22.
571. BP 070266, Jacks to Fraser on 19th August 1934, 3.