A pretty good deal just now 1 ' The Anglo-Iranian Oil Company, Oil Nationalisation and Managerial Response: 1951

‘A pretty good deal just now1

’ The Anglo-Iranian Oil Company, Oil Nationalisation and

Managerial Response: 1951

By

Neveen Abdelrehim,

Josephine Maltby,

Steven Toms

(University of York)

1 BP 72188, Meeting between Sir Maurice Peterson, FO and Fraser on 17th February 1943, p.2.

1

Acknowledgement: The authors are grateful to the participants at the British Academy

of Management Special Interest Group Symposium on Corporate Social Responsibility

held at the University of York, March, 2009 EBHA, and Mark Billings, for helpful

comments on earlier versions of this paper.

2

Oil Nationalisation and Managerial Response: The Anglo-Iranian Oil

Company, 1951

Abstract

The paper draws on archival evidence surrounding the events leading up to and immediately

following the nationalisation of the Anglo Iranian Oil Company’s assets in May 1951. Iranian

justifications for this action were based on accusations of unfairness in the distribution of profits

from oil production and anti-Iranian discrimination in the AIOC’s employment policies. To

provide further evidence concerning these claims, a financial analysis is conducted to assess the

division of profits from the oil industry between the AIOC, the British and Iranian Governments.

Evidence on anti-Iranian discrimination is also re-examined. A textual analysis of the

Chairman’s Statement to Shareholders is conducted and the validity of the Statements is

reappraised with reference to historical evidence.

The analysis shows that the AIOC management did a good job of maintaining

shareholder confidence at a time of crisis for the company. However the version of events

presented to the shareholders did not reflect other historical evidence of AIOC’s behaviour. The

company’s treatment of Iran was unfair in terms of profit sharing and the firm’s Iranian

employees were treated as colonial subjects rather than genuine stakeholders.

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Introduction

Throughout the first half of the twentieth century, the Anglo Iranian Oil company (AIOC)

(subsequently British Petroleum)2 had been heavily implicated in the political economy of the

Middle East, and in particular, Iran. Writing of BP in 1959, Winston Churchill praised the

historic role of ‘this great enterprise’ contributing to ‘national prosperity in peace and our safety

in war’.3 Churchill’s comment reflected increasing British dependence on oil in the two world

wars and the reorientation of the peacetime economy away from coal. More than coal, the oil

industry has been associated with government intervention due to its importance in providing

intermediate inputs to the modern economy. In 1914 the British government had taken a 51%

stake in the company.4 The AIOC was Iran’s main source of income because it had in Iran the

world’s largest refinery, the second largest exporter of crude petroleum, and the third largest oil

reserves.5 Moreover, AIOC ‘was so dominant within the Iranian economy that it was effectively

a state within a state and regarded to all intents and purposes as an arm of the British Admiralty

and the British Strategic policy.’6

Although dealings with the Shah had been problematic for the AIOC, after the Second

World War, nationalism and democracy had become new features of the Iranian political

landscape. At the top of the agenda for nationalist politicians was the renegotiation of previous

2 Originally the Anglo-Persian Oil Company, in deference to the Shah it became the Anglo-Iranian Oil Company in 1935 and in 1954 took on the name of its former marketing subsidiary, British Petroleum; Elm, Oil Power and Principle, 36; Chandler, Scale and Scope, 303. For consistency ‘Iran’ as in AIOC, rather than ‘Persia’, is used throughout, except in direct quotations. 3 Churchill, foreword in Longhurst Adventure in Oil, 6. 4 Chandler, Scale and Scope, 300; Millward “Business and the State,” 543. 5 Abrahamian, “The 1953 coup in Iran,” 6 Cited in Marsh, “Anglo-American Crude Diplomacy,” 28.

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concessions made by the Shah on better terms for Iran. Notwithstanding the economic and

military importance of Iran, British politicians and the senior management of AIOC have been

accused of complacency and colonial arrogance in their dealings with successive Iranian

governments.7 A series of unsuccessful negotiations culminated in the assassination of one Prime

Minister in March 1951 and the subsequent ratification of nationalisation of AIOC’s Iranian

assets by the Shah on 1st May 1951. The repercussions were serious, not just for the company,

which lost a significant proportion of its assets, but for wider regional and indeed global

geopolitics. The nationalisation therefore had major consequences for Anglo-Iranian relations

and represented a blow to British imperial power which did not fully recover even after the CIA

sponsored coup to remove Musaddiq in 1953. Parra describes the episode as “a sorry tale, in

which Iran, AIOC and Britain all emerged losing”8 Different phases and aspects of the dispute

have been researched extensively, including its significance for Anglo-American relations,

British and American foreign policies international law, covert operations, Iranian nationalism,

the development of the Iranian oil industry, and the impact on international oil companies,

including the AIOC.9

The present paper offers a deeper understanding of the Iranian government case over the

renegotiation of the 1933 Concession Agreement, of the agenda and tactics of the senior

management of the AIOC in avoiding or limiting the impact of fresh terms and of their

7 Elm, Oil, Power and Principle ; Heiss, Empire and Nationhood . 8 Parra, Francisco, Oil Politics. A modern history of petroleum IB Tauris 2005 9 For Anglo-American relations see Marsh, Anglo-American Relations and Cold War Oil. For American and British foreign policies see Gasiorowski, US Foreign Policy and the shah; Louis, The British empire in the Middle East. For covert operations see Gasiorowski, and Bryne, eds. Mohammad Mosaddeq; Marsh, The US, Iran and Operation Ajax: 1-38; Roosevelt, Countercoup. For the impact on Iran see Bill and Louis, eds. Musaddiq; Elm, Oil, Power, and Principle. For the company perspective, see Bamberg, The History of the British Petroleum Company; Engler, The Politics of oil; Stern, Who won the Oil wars.

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relationship with the British FCO in conducting the resistance. Hitherto unused material from the

BP archives, together with documents from the FCO, press coverage and AIOC’s financial

reports, provide a new level of detail and emphasise the role played by financial reporting data in

supporting AIOC’s advocacy of its case

The key issues

(a) The nationalisation crisis brought into sharp focus issues affecting key

AIOC stakeholder groups, including domestic investors and Iranian employees and society., and

they became the subject of claim and counter-claim from the AIOC board and Iranian nationalist

opinion. In particular, Gass the AIOC representative identified 3 major demands for alteration of

the 1933 Concession Agreement:

(b) Maximum revenue denoting maximum expansion

(c) Maximum refining within Iran because of the employment and the sale of the

foreign exchange such a policy brings

(d) Maximum employment of Iranians10

In general, there was a clash between the AIOC’s claim to be a well managed company

playing a progressive and developmental role in Iran on the and the Iranians’ view of it as a

rapacious exploitative representative of British imperialism. The AIOC’s policies are implicated

in the nationalisation and the resulting international crisis, particularly if Iranian claims about the

unfair distribution of the proceeds of oil production, discrimination against Iranian employees

and misadministration are upheld.

11

10 BP 126407, Report on visit to Tehran 31st August to 26th October 1948, p.43

11 For a list of the Iranian accusations against the company, and the company’s defence of these see Anglo Iranian Company Annual Report and Accounts 31st December 1950 (published November 19th 1951), 22.

6

A consequence of these disputed claims was a propaganda battle. This became a crucial

ingredient of the crisis, not least because a key objective of the AIOC management was to

maintain investor confidence in the face of a major threat to its asset base. In addition, AIOC’s

ability to defend itself from the claims made by the Iranian government about unfairness in the

sharing of proceeds, and discrimination against Iranians was crucial in absolving it from any

blame for the international crisis.

As a consequence, several issues are worthy of further investigation. These are

-the basis for the Iranian government’s claims that AIOC was paying an unjustly low return

under the terms of the 1933 Concession and discriminating unfairly against its Iranian employees

-the validity of the company’s arguments in self-defence:

-the involvement of the Foreign Office as an advisor to and support for AIOC

- and the extent to which AIOC’s accounting reports figured in the controversy, as a source of

data about profit and performance and as an opportunity for AIOC to transmit arguments in

defence of its position and behaviour.

The roles of senior AIOC management are also examined in detail. Although they figure

prominently in the wider literatures on the nationalisation crisis, the extent of their implication in

the events of 1951 has not been fully assessed. In particular, the role of the Chairman, Sir

William M. Fraser (1888-1970), the AIOC’s chairman (1941-1956) is worthy of further scrutiny.

To investigate these questions, comparisons are made between the AIOC’s management’s public

view of the crisis and the private opinions exchanged by senior executives in planning their

strategy and tactics for conducting negotiations. Consideration is also given to how AIOC’s

management attempted to influence the lobbying process and news agenda to counter the

accusations of the Iranian nationalists. To examine these propositions the paper draws upon the

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company’s annual reports including the chairman’s statements they contain, the representation of

the crisis by different British media organisations and diplomatic correspondence in the period

June 1949 - November 1951.

The company’s financial reports play a significant role for a number of reasons. They are

analysed by both sides as evidence for and against changes to the basis on which AIOC was

taxed, royalties were paid under the concession, and to other elements of the return made to Iran

for AIOC’s activity were to be calculated. At the behest of Golshayan, the Iranian Minister of

Finance, Gilbert Gidel, a French Law Professor, produced a fifty page document describing the

‘accounting tricks’ used by the AIOC to cheat the Iranians out of huge sums of money.12

Gass remarked in 1948, for instance, that “our 1947 financial results added fuel to the fire”

13

The paper commences with an overview of the business strategy of AIOC and the

economic and political context of Iranian Oil nationalisation and detail on the background to the

crisis, key events and the personalities involved. The following section reviews claims and

counter-claims in relation to two questions: Were profits shared fairly prior to nationalisation,

and what was the nature and extent of anti-Iranian discrimination? Fraser’s response is then

analysed in detail using comparative textual analysis of his communications to shareholders,

They were also used as a means for AIOC’s chairman, Fraser, to make a case, addressed to the

shareholders and to the public at large, in defence of the company’s negotiating position, its

behaviour towards its Iranian employees and its future prospects and profitability in Iran and

worldwide. An innovative methodology is used to analyse these documents, which although used

elsewhere in the social sciences, has not been extensively employed in historical studies

generally nor in business and economic history in particular.

12 Kinzer, All the Shah’s Men, 69. 13 BP 126407, Report on visit to Tehran 31st August to 26th October 1948, p.11.

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with particular emphasis on his statement of 19th November 1951, following the Iranian

nationalisation of the company. The consequences of the company’s policies and their

communication are then examined from the shareholders point of view. A final section draws

conclusions.

Background to the crisis

After the end of World War II, the AIOC rapidly expanded its production and investment in Iran,

so that by 1950 its Abadan refinery was the world’s largest and Iran the leading oil producer in

the Middle East.14

14 Onslow “Battlelines for Suez,”

The promulgation of the ‘Nine Point Law’ for oil nationalisation by His

Imperial Majesty the Shah on 1st May 1951 represented the culmination of a rising tide of

nationalism that overwhelmed the efforts of the AIOC to negotiate a new concession. The

preceding four years witnessed a series of failed proposals on the one hand, and a succession of

Iranian governments and institutional changes on the other, reflecting the increasing influence of

political organisations opposed to the AIOC. Some of the important events dealing with the

background to the crisis are set out in table 1 (Panel a).

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Table 1: Timeline of key events, May 1933-November 1951

Date Event Commentary and related events

a) Background events

29th May

1933

Concession Agreement

receives Iranian assent

Agreement regulating AIOC’s operations in Iran concluded between

AIOC and the Iranian Government.

22nd Oct.

1947

Single Article Law Iranian government committed to renegotiate the Concession.

17th July

1949

Supplemental Oil Agreement

(SOA) signed subject to the

approval of the Majlis

In 1948 the AIOC entered into negotiations with the Iranian Government

for a revision of some of the terms of the 1933 Concession. SOA signed

by an AIOC representative and the Iranian Minister of Finance.

Jun 1950 Elections to Majlis Increased National Front representation on Majlis Oil Committee (MOC)

b) events immediately precedingFraser’s 1951 Chairman’s Statement, 1 Dec 1950-19th November 1951

1st Jan Saudi 50:50 agreement Signed between Saudi Government and Aramco.

11th Jan SOA Bill rejected by the

Majlis

Followed MOC conclusion that the agreement did not safeguard Iranian

interests.

10th Feb. Negotiations between

Northcroft and Razmara

Northcroft for the AIOC offers £25m and 50:50 share of Iranian profits.

19th Feb Musaddiq proposes

nationalisation to the MOC

Political dispute between Razmara and Musaddiq over nationalisation

7th March Assassination of the Prime

Minister Razmara

Succeeded by Ala.

8th March MOC passes resolution for

nationalisation

15th

March

Single Article Bill on

nationalisation approved by

the Majlis

10

20th

March

Single Article Bill approved

by Senate

AIOC management in Khuzistan imposes wage and allowance

reductions, resulting in strikes and anti-British violence. Three AIOC

staff killed. British Govt takes over responsibility for negotiations.

26th April MOC promulgates “Nine

Point Law”.

Mixed board of senators and deputies to implement nationalisation.

British government proposes setting up new AIOC subsidiary with some

Iranian directors.

29th April Musaddiq appointed Prime

Minister.

Resignation of Ala following failure of negotiations with Britain. Nine

Point Law approved by Senate and received assent on 1st May

19th June Jackson Mission to Tehran AIOC delegation offer, including acceptance of the principle of

nationalisation, money for present needs and a practical foundation for

future partnerships.

5th July Ruling of the International

Court of Justice

Granted the British request for interim measures of protection

4th

August

Lord Stokes Mission with

Harriman to Tehran

British and US government 8-Point proposals subsequently withdrawn.

British staff withdrawn from Abadan.

28th Sept Iranian Government orders all

British staff to leave Abadan

In response the British government refers the dispute to the UN security

council; submits Memorial to International Court of Justice

22nd

October

Musaddiq holds talks with

Truman and Acheson

Joint proposals developed.

8th Nov Eden rejects joint proposals.

Sources: Compiled from Cmd 8425, ‘Explanatory Memorandum’ Correspondence between His

Majesty’s Government; AIOC Annual Report and Accounts, 1950, 11-22; Bamberg, The History

of the British Petroleum Company, chapters 15-18.

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An important reason for these events and shifts in the political landscape, aside from wider cold

war and Middle East geo-political considerations, was the perceived unfairness associated with

the AIOC’s operations, in terms of the share of oil wealth received by Iran and discrimination by

the AIOC against Iranians. It was the role of Fraser as Chairman to rebut these allegations. When

Fraser wrote to the shareholders on 19th November 1951, the company had already felt the full

force of nationalisation and its consequences. These events are set out in table 1 (panel b).

In addition to Fraser, other AIOC officials referred to are Ernest G. Northcroft (1896-

1976), the AIOC’s Chief Representative in Tehran, 1945-51, and Basil R. Jackson (1892-1957),

Deputy Chairman. British government officials included the Lord Privy Seal, Richard R. Stokes

(1897-1956). They dealt with a succession of Iranian Prime Ministers, beginning with Ali

Razmara (1901-1951) June 1950-7th March 1951, Mirza H.K. Ala (1882-1964), 8th March – 28th

April, and most significantly, from 28th April, the leader of the National Front coalition,

Muhammad Musaddiq (1882-1967).15 In the US, the Truman administration increasingly became

drawn into negotiations from a relatively neutral position, wishing above all to bolster Iranian

governments of whatever nationalist hue against the Soviet Union. W. Averell Harriman (1891-

1986) was appointed by Truman as his special envoy to Iran for the August 1951 diplomatic

round, and subsequent negotiations involved Truman himself and Secretary of State Dean

Acheson (1893-1971).16

Opposition to the AIOC consisted of Islamic groups, which opposed the economic

development conducted by the AIOC, the Communists (Tudeh) which opposed the economic

15 Musaddiq led the National Front coalition from its formation in 1949; Bamberg, The History of the British Petroleum Company, 605-606. 16 Bamberg, The History of the British Petroleum Company, biographies, 593-610.

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treatment of Iranian employees by the AIOC17 and looked to the neighbouring Soviet Union for

support, and the secular nationalists, ultimately led by Musaddiq, who favoured a fairer share of

oil resources for the Iranian people. The Shah and political royalists such as Razmara, who was

assassinated by a religious nationalist of the extremist Feda’iyan-e Islam group whilst serving as

Prime Minister on 7th March 1951, were progressively weakened as a political force. The Shah

was weakened by his refusal to challenge Britain on the oil issue, and because he increasingly

reminded the country of his dictatorial father. Additionally, he depended on America not only for

military advisers and hardware but also for economic aid for his Seven Year Plan.18

Musaddiq in particular was a controversial figure. His strengths and weaknesses have

been much debated, although it is agreed that he appealed to and operated diverse

constituencies.

19 His concern was not with the technical aspects of oil industry operations, but

with political questions of control, motivated by strong anti-British sentiment. Such was the

assessment one of his more favourably disposed western critics, George McGhee, the US

Assistant Secretary responsible for detailed negotiations with Musaddiq in the autumn 1951

diplomatic round. 20 In December 1951, Musaddiq gave a clear statement of his political

objective to the Majlis (Iranian parliament): ‘we should assume that like Afghanistan and the

European countries we do not have oil, we should reduce our spending and increase our

revenues, the nation should tolerate the burden of hard times in order to free itself from the yoke

of slavery.’21

17 Tudeh led protests against bad housing and low wages in the oil industry and mobilised mass meetings against the government’s procrastination in implementing the nationalisation law; Abrahamian, Iran Between two revolutions, 266.

18 Abrahamian, Iran Between two revolutions, 251. 19 De Groot, Religion, Culture and Politics in Iran, 221. 20 Bamberg, The History of the British Petroleum Company, 462. 21 Cited in Mansoor “State-Centered vs. Class-Centered Perspectives,” 14.

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For Musaddiq, the past behaviour of the AIOC and its long record of profit extraction were the

major sources of injustice.22 He criticised the AIOC for not contributing much to the Iranian

economy “as might be inferred from the fact that Iranian oil workers lived in

hovels”23.Downplaying the economic significance of oil, Musaddiq said that ‘Persia must at all

cost maintain her independence and that he would be content to sell no more than 10 million tons

a year which he thought would be enough to balance the budget,’24 and that henceforth ‘we value

independence more than economics.’25 In sum, Musaddiq blamed the British for Iran’s misery,

demonstrating perceived intransigence to the British, prompting accusations of playing the ‘usual

record.’26 Musaddiq was hailed as a hero for his fiery speeches on the evils of British control of

Iran’s oil industry,27 suggesting that his anti-British position was an important reason for his

increasing and enduring political power as the crisis unfolded. His government was democratic,

popular with a broad base of support.28 Musaddiq was alert, well informed and “was able to

control parliamentary and public opinion mainly because of his personal popularity.”29

On the other hand, important representatives of British opinion were strong in their

condemnations for the man who became their political and diplomatic adversary following his

rise to power in 1951. Sir Francis Shepherd (1893-1962) the British ambassador in Tehran

(1950-52) described him in emotive terms scarcely relevant to the pursuit of diplomatic activity:

22 The Times, September 26, 1952, 4(c). 23 Pirouz, “Iran’s oil nationalisation: Musaddiq at the United Nations and his negotiations with George McGhee,”111. 24 Middleton to Foreign Office, July 25, 1952, BP 100571. 25 Ferrier, The History of the British Petroleum Company, 180; Kinzer, All the Shah’s Men, 74. 26 Shepherd to Foreign Office, July 17, 1951, BP 5E 4082. 27 New York Times http://www.nytimes.com/library/world/mideast/041600iran-cia-index.html, visited August 10, 2008. 28 Curtis, The coup in Iran, 1953. http://markcurtis.wordpress.com/2007/02/12/the-coup-in-iran-1953/, visited August 10, 2008. 29 FO 248/Persia 1951/1514.

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‘He is rather tall but has short and bandy legs so that he shambles like a bear, a trait which is

generally associated with considerable physical strength. He looks rather like a cab horse and is

slightly deaf so that he listens with a strained but otherwise expressionless look on his face.’30

Bamberg summarises British opinion of the Iranian leader as ‘demagogic agitator and lunatic

extremist.’31

Such were the highly polarised views of the person that confronted Fraser as the chief

threat to the value of the AIOC’s very substantial Iranian investments. Bamberg sums up Fraser

as a competent practical oilman but poor diplomat.

32 According to Sir Edward Bridges Fraser,

Permanent Secretary to the Treasury, Fraser was narrow minded, lacked political insight and

should be removed.33 After World War Two there was significant friction between His Majesty’s

Government and the autocratic Sir William Fraser but the British government held the upper

hand34. Fraser ‘did not think politics concerned him at all and had all the contempt of a Glasgow

accountant for anything [which] could not be shown on a balance sheet.’ 35 From the US

perspective, Acheson and McGhee agreed that the usual and persistent stupidity of the company

had helped Musaddiq’s cause.36 “The Americans had for some time been annoyed by Fraser, the

AIOC’s parochial arguments about commercial feasibility, and by the apparent failure of the

British government to control company policy”37

30 FO 371/91459.

. As far as the US negotiators were concerned,

after several rounds of diplomacy it was clear that either Fraser or Musaddiq would need to be

31 Bamberg, The History of the British Petroleum Company, 413; Heiss, Empire and Nationhood, 74; Keddie, Modern Iran, 125 32 Bamberg, The History of the British Petroleum Company, 413. 33 Bamberg, The History of the British Petroleum Company, 463 in turn, Fraser had ‘a fire eating contempt for civil servants’, ibid. 34 Marsh, “HMG, AIOC and the Anglo- Iranian Oil Crisis,” 143. 35 Sampson, The Seven Sisters, 120. 36 Bamberg, The History of the British Petroleum Company, 462. 37 Marsh, “HMG, AIOC and the Anglo- Iranian Oil Crisis,” 163.

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removed if matters were to be progressed and they did not care either way. It is easy to see that

this was the correct conclusion, since where Musaddiq was concerned with politics and ignored

commerce, Fraser ignored politics and applied only commercial logic.

In summary then, Fraser’s position was potentially difficult and the forces ranged against

the AIOC very powerful. In the next section, the validity of some of the key claims against the

AIOC is tested against the evidence. To the extent these claims, of inequality in the distribution

of wealth from Iran’s oil resources and discrimination against Iranians are upheld or repudiated,

Fraser’s subsequent defence of the company’s activities can be more precisely evaluated. Did the

company mislead the Iranians and others about shares of the oil revenues and did it discriminate

against the people on whom it depended from profitable operations? In short, was the company

the chief architect of its own downfall?

In response to nationalist demands for increased shares of the profits the Iranian government in

October 1947 passed a law committing it to re-examine the oil concession granted to the AIOC

in 1933.38 On 17 July 1949, the AIOC provisionally agreed a Supplemental Oil Agreement with

the Iranian government, but its ratification in the Majlis was successfully opposed by Musaddiq’s

National Front party.39 A subsequent proposal, for a fifty-fifty division of the company’s total

profits, was rejected as a result of AIOC’s insistence that only Iranian profits should be

divided.40 These difficulties were the precursor to the bill approving to nationalisation of the

company’s holdings of May 1951.41

Were profits shared fairly prior to nationalisation?

38 Marsh, “Anglo-American Crude Diplomacy,” 27. 39 AIOC, Annual Report and Accounts, 1950, 12-13. 40 Brumberg and Ahram, The National Iranian Oil Company, 10. 41 Mansoor, “State-Centered vs. Class-Centered Perspectives,”

16

The Iranian proposals to revise the Concession Agreement of 1933 were set out in detail in the

1947 Memorandum (Archive no 101099) which it presented to Gass, the AIOC representative.

This consisted of 25 points which it considered to require rectification in the Supplementary

Agreement to be drafted for signature by the Majlis. The major points and the arguments put

forward on either side are identified below. Memorandum points are indicated as M and AIOC

responses as AI.

• Calculation of royalties – profit versus quantity basis

The basis of calculation, and the amount, of royalties received by the Iranian Government were a

key issue. 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’42. 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 £35,754,00043 But after WW2 the proportions were reversed, so that

the AIOC paid much more in income taxes to the British government than it did in royalties to

the Iranian government and this was regarded with increasing concern in Iran.44 In 1947, the

British Treasury accrued £16.82 million in tax revenue whilst Iran received £7.1 million in

royalties and taxation. In 1950, the proportions were £50.71m to £16.03m.45

42 Penrose, Edith T (1968) The Large International Firm in Developing Countries: the International Petroleum Industry London: George Allen & Unwin, p.64

43 Penrose, The Large International Firm, p.68 44 Keddie, Modern Iran, 124. 45 1947 figures from Bamberg, The History of the British Petroleum Company, 325; 1950 figures calculated from table 2.

17

Iran repeatedly compared the relationship between royalty and profit and royalty and sales. Gass

reported for instance a press attack on the situation which found that royalties had fallen from

30% of the value of sales in 1938 to 9% in 194746

The Memorandum repeated this point, claiming (M16) 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 is in the neighbourhood of 9%.’ It argued 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. (Despite this, Parra claims that the Venezuelans were “decidedly not

welcome” when they visited Iran in 1949 to preach the desirability of the 50:50 profit share

practised in Venezuela

.

47

AIOC was concerned that any revised deal would be less generous to them than the present

one: Fraser for instance commented in 1948 that it was

)

the very last thing the company desires as no new concession could ever be as favourable to the

company as the one now in existence48

In AI16 it countered that it was unrealistic to make comparisons over time or between countries

–Iran also benefited from the high level of the company’s investment, the amount of rials it

purchased annually and its subsidization of cheap oil supplied to the Iranian Government.

.

• Payment of taxation –UK and Iran

M2, M17 claimed that British tax should not have been deducted from the profit share of the

Iranian Government, and that the company underpaid Iranian tax on its profits because of the

immunities it enjoyed. AI countered that it could not change British tax provisions, and that the

46 BP 071187, Press extracts No. 792 on 4th September 1948, p.2. 47 Parra, Oil Politics, p.16 48 BP 101099, AIOC opinion on 20th June 1948, p.6.

18

Iranian government enjoyed benefits from AIOC investment which would not have been possible

if the company had not been given tax immunity.

• Payment of AIOC dividends to the Iranian Government

These were restricted as a result of postwar limitations imposed on British companies. M3 called

for dividends payable to the Government to be relieved from this: AIOC pointed out that the

amounts held back by the restriction were being held in reserve for the Government, and offered

to make these available immediately.

• Calculation of reserves

M24 called for the method of calculation of the company’s various reserves to be clarified. The

Prime Minister Ali Mansur commented in 1950 that the reserves were implausibly large:

On usual occasions and in accordance with ordinary trade principles few companies would

reserve such terrific amounts (representing as much as 1 ½ of ordinary shares in 2 years)49

In particular AIOC’s treatment of depreciationwas seen as producing unfair reduction of profits

with the aim of reducing the amount it was required to pay the Iranian government. Because

depreciation is an estimate and a matter of accounting policy, there is considerable scope for it to

be used to manipulate profit. Gidel recognised this. High depreciation charges would have two

unfair effects. Charges on assets outside Iran would mean that

.

the government would in effect have paid for a part of the depreciation of properties outside Iran to

which it had no right at the end of the concession

and charges inside the country meant that

the government would in effect have been paying towards the depreciation of the company’s properties in

Iran which should under the concession revert to the government at the end of the concession free of any

49 BP 126343, Notes on Supplemental Agreement handed by Ali Mansur to Shepherd on 3rd June 1950, p.1.

19

cost and at the end of the concession the government would have no share in the reserves provided for

this purpose. The result would be that the ordinary stockholders would benefit from the reserves at the

end of the concession and from the company’s property outside Iran, while the government’s reversionary

right to the property inside Iran would be defeated50

AIOC countered (AI24) that the only amount available to the Government was 20% of the

company’s general reserve. Other reserves, such as those for taxation, preference dividends and

bad debts, could not be calculated ‘with absolute accuracy’ and were not likely to be payable to

shareholders unless they were found to have been overstated.

.

As for the request that depreciation should be divided between properties inside and outside Iran:

The assets in Iran for instance are all contained in the accounts of the A.I.O.C, F.E.C., and K.P.CO. while

assets outside Iran are included in other subsidiary companies. Depreciation is of course provided

separately for each company. It should be mentioned, however, that the AIOC accounts, include in

addition to the Iran assets, certain small assets not in Iran. These amount to less than 1% of the total gross

value51

The implication was that only trivial amounts of non-Iranian asset depreciation were being charged

against Iranian profits.

.

• AIOC subsidiaries outside Iran

M8 invoked the Government’s ‘right upon expiry of the Concession’ with regard to these. AI8

responded by stressing the ‘fundamental difference’ between its establishments inside and

outside Iran: the former would revert to the Iranian government, but there was no question of

allowing the latter to do. The treatment of subsidiaries was a matter of concern because of their

implications for AIOC’s profitability. Makki complained in 1949 that the company accounts did

50 BP 126422, Note of first meeting of the understanding committee on 1st May 1949, p. 9. 51 BP 72188, Royalty questionnaire and answers, p. 9.

20

not mention the capital employed in its 37 subsidiaries52. And in 1950 Mussadiq attacked the

company’s treatment of its subsidiaries from two angles. Firstly, AIOC could not withhold its

profit from Iranian royalties on the basis that it had been earned outside Iran. The majority of its

earnings were

I should point out that, in its balance sheet for 1948, the AIOC had about £28,000,000 shares in

its subsidiary and combined companies and in respect of these shares it received £2,000,000.

This amount is not above 7% of the investment which totally belongs to Iranian oil resources

Iranian:

53

Supposing that this amount, in which Iran should have a share by right, is deducted from the

company’s earnings, then will still be reduced from £62,000,000,(given by the company) to

£60,000,000 and therefore they will not decrease substantially

.

54

Further, the subsidiaries were in any case financed with Iranian profits

.

For instance, the profits of the British Tanker company, (which is a shipping company for

Iranian oil, whose capital has been invested by the AIOC) were at least £10,000,000 in 1949.

From this amount it gave only £240,000 to the parent company, while £4,000,000 of the earnings

of our oil has been invested in that company55

so.

.

• Access of Iranian government to AIOC financial records

52 BP 126346, AIOC concession supplemental agreement bill on 28th July 1949, p.1. 53 BP 126349, press extracts No. 816, Dr. Musaddiq’s letter to ITTILA’AT on 20th November 1950, p.3. 54 BP 126349, press extracts No. 816, Dr. Musaddiq’s letter to ITTILA’AT on 20th November 1950, p.3. 55 BP 126349, press extracts No. 816, Dr. Musaddiq’s letter to ITTILA’AT on 20th November 1950, p.3.

21

M6 claimed that, in order to supervise the operation of the Concession and check the calculation

of its royalty and dividend share, the Government needed to ‘examine the Company’s books and

accounts.’ Makki complained in 1949 about the quality of AIOC reporting: under D’Arcy

concession Iran had had the right to examine all the technical and financial information of the

company56. Razmara in 1950 called for the admission of a government auditor to their Head

Office Books.57

These demands caused alarm for AIOC, and Northcroft resisted. He stressed to Razmara that

the books are kept in London and were audited in accordance to British law by a firm of

Chartered Accountants of unquestionable integrity and in the forefront of their profession58

and that

,

stockholders of the company who put all their money in the company had taken all the risk for

nearly half a century and accepted the company’s accounts without any question and even

received little enough in comparison with other participators59

In its Note on the Government’s Memorandum AIOC emphasised the problems of accounting –

‘the difficulties involved in...defining “gross profits” and AI6 made the same point. The royalty

was paid on the basis of volume, not profit, because ‘experts (would) always differ on the

assessment of profit because of the very many factors involved’ Nor could the Government be

put in a position to approve ‘purely commercial transactions’ – this would delay the completion

of contracts, with ‘grave ill effects on the revenues of Iran’.

.

56 BP 126346, AIOC concession supplemental agreement bill on 28th July 1949, p.1 57 BP 126347, 28th September 1950 58 BP 126347, Reference number 318, Northcroft to Rice, 29th July 1950, p.5. 59 BP 126347, Reference number 318, Northcroft to Rice, 29th July 1950, p.5.

22

The recurrent themes of the clash between the Iranian government and AIOC were the fairness

of the royalty and tax payments made by the company. Iran stressed that AIOC used an unfair

basis – quantity rather than profit - to calculate royalties, and kept down the dividend payable to

the Iran by accounting policies which overstated the charge to reserves and by disclosure that hid

the performance of subsidiaries. AIOC’s argument was that the accounting data which the

Iranians sought was potentially misleading because it depended so heavily on judgement – hence

the company’s consistent invocation of quantity rather than profit as a basis for royalties. In any

case, AIOC representatives contended, Iran should be considering not solely its income from tax

and royalties, but also the variety of other benefits conferred- the level of investment that AIOC

made into Iran, and the jobs it had created.

In 1950, Northcroft met Mussadiq informally and took the opportunity to put the company’s

case. In a note of the meeting, Northcroft recorded that he gave Mussadiq ‘figures that revealed

that Iran’s income was larger than that of HMG (His Majesty’s, i.e. the British, Government) ’

and that he

‘suggested that the shareholders of the Company, who after all were the owners, were probably

the most hard done by of all, as for the last year or so they had been only receiving something

like 5% of the Company’s annual profits as a return for their investment.’60

The following section of the paper draws upon the arguments developed here to consider the

shares of profits paid to three stakeholder groups: the Iranian Government, the British

Government and other AIOC shareholders (those with the 49% of ordinary shares not controlled

by the British government and the owners of the preference shares). How compatible are they

with the claims made by either side?

60 BP 126347, Interview with Dr Mussadeq, 9th August 1950

23

‘The most hard done by of all’?

Table 2 computes a detailed analysis of shares of profits using data from the 1950 AIOC Annual

Report and Accounts to examine the distribution of the firm’s pre-tax profits to As can be seen,

the total share for the Iranian government was 19.18%, implying that 80.82% accrued to British

equity interests, with the British Government’s share predominating. Around £10m was invested

in Iran in the 1950 financial year in the form of new capital expenditure, which amounted to

under 15% of the c. £67.5m earned by British interests in Iran in the same year, compared to

total AIOC capital expenditure of £27.6m.61

61 Bamberg, The History of the British Petroleum Company 348, figure 14.1. Total AOIC capital expenditure in 1950 is estimated by taking the difference between book value fixed assets in the 1949 accounts and 1950 plus depreciation, giving a total of £27.6m.

Similar analyses were conducted for financial years

1948 and 1949 yielding similar results (appendix 1). Comparing these two years with 1950, it is

evidence that the share taken by the British was the highest in the year in which nationalisation

was precipitated. Figure 1 shows the share of Iranian royalties as a percentage of AIOC pre tax

profits and compares it with the AIOC return on capital employed for the same period. The long

run trend is a declining share for Iran and a rising share for the AIOC shareholders. This

culminated in three out of the four years from 1947 when the Iranian share was under 20%. The

total British share comprising government taxation receipts and AIOC profits is the inverse of

the Iranian share in figure 1. In short, with the expansion of production and refining in the 1947-

1950 period the proceeds accruing to the British increased in both absolute and relative terms.

24

Table 2

Panel (a) below shows the geographical distribution of AIOC activity.

Table 2(a) Geographical distribution of AIOC activity

Country

Crude

production Refined Total %

Iran 31,750 24,050 55,800 80.15%

Kuwait 7,367 1,054 8,421 12.10%

Iraq 1,681 1,681 2.41%

Qatar 380 380 0.55%

UK 46 3,291 3,337 4.79%

Total 41,224 28,395 69,619 100.00%

In panel (b) AIOC profits for 1950 are allocated between 3 groups of stakeholders – the

Iranian and the British governments and other stockholders. The following basis has been

used:

*£84,466 is the profit for the year before tax taken from AIOC, Annual Report and Accounts

1950, p.6, and split using the following rules:

1. Splits of profits between Iranian and Non-Iranian activities are allocated pro-rata from Panel

(b) estimates, so that an estimated 80% of the profit and other figures are attributed to Iranian

activities.

2. Total Iranian royalties as disclosed in the notes to the accounts, Annual Report and Accounts

1950. As these were charged to the accounts as a cost of production (Bamberg, p.325) they need

25

to be added back to the profit available for distribution to the above stakeholders, so a deduction

of £16,032 is made in the final column to reconcile to disclosed accounting profit.

3. Remaining equity dividends attributable to Iran divided 51:49, British Government: Other

AIOC Stockholders. Reserve appropriations, retained profit and minority interests are allocated

in the same proportions.

4. The effects of discounted pricing to the benefit of the British Admiralty and their consequence

for reduced Iranian royalties are not factored in the calculations below.

26

(b) Stakeholder shares of AIOC Profits, 1950

£'000 £'000 £'000 £'000 £'000 £'000

Iranian

Govern-

ment

British

Govern-

ment

Other

AIOC

stockolders

Estimated

Iranian

share of

profit

(80.15%)

Estimated

non-Iranian

share of

profit

(19.85%)

Total per

accounts

Royalties 16,032 16,032 16,032

Ordinary dividend 2,464 2,368 4,832 1,208 6,040

Preference dividend 857 857 214 1,071

Reserve

Appropriations 10,608 10,192 20,800 5,200 26,000

Retained profit -3 -3 -6 -2 -8

Minorities and

subsidiaries 268 258 526 131 657

UK taxation: profits 9,368 9,368 2,342 11,710

UK taxation:

dividend income tax 31,197 31,197 7,799 38,996

Total 16,032 53,902 13,671 83,605 16,893 100,498

% Share 19.18% 64.47% 16.35% 100.00% 16,032

Accounting profit 84,466*

Source:

AIOC Annual Report and Accounts, 1950

27

28

Figure 1

Sources: AIOC Annual Report and Accounts, Bamberg, The History of the British Petroleum

Company, tables, 1.2, 8.5, 10.3; Elm, Oil, Power and Principle, 38.

The company emphasised that there were difficult accounting issues in arriving at an

assessment of such profits. 62 It repeatedly stressed, for instance, the judgemental nature of

accounting estimates, as in its comment that reserves could not be calculated with ‘absolute

accuracy.’ To a certain extent, this was a reflection of its anxiety to avoid disclosure where this

could be avoided. Its preliminary statement was unhelpful since it did not disclose trading profit

nor the taxation provision for the year, ignoring a major Stock Exchange requirement.63

62 Mansoor, “State-Centered vs. Class-Centered Perspectives,” 13-14.

. It is for

this reason that estimates have been used to compile table 2.

63 The Economist, June 24 1950, 1406.

Iranian Royalties and AIOC Returns

0.00% 10.00% 20.00% 30.00% 40.00% 50.00%

1932 1934 1936 1938 1940 1942 1944 1946 1948 1950

Year

% Iranian royalties as percentage of pre tax profits AIOC Post tax return on capital

29

Most important among these reservations was the insistence by the AIOC that non-Iranian

subsidiaries should not be consolidated, having the effect of depriving the Iranian government of

profits from overseas operations.64 The treatment of subsidiaries, as noted above, was one of the

major bones of contention between Iran and the company. In discussing the importance of

vertical integration in the oil industry and its significance for the allocation of costs and prices

between different subsidiaries/departments of the firm. Penrose describes its impact as producing

‘an important element of arbitrariness’ in the realisation of profits, so that for instance profits

may be realised in regimes with the lowest tax rates65

. Much of the capital raised from the other interests which the company represented was invested

outside Iran in operations which were themselves profit earning. On several occasions too, we

drew attention to the fact that profits on an increasing scale were derived from crude oil of other

origins

These were important concepts for both

sides. AIOC argued consistently that its Iranian and non-Iranian activities should be viewed as

separate – hence for instance the assertion in AI8 of a ‘fundamental difference’ between its

‘establishments’ inside and outside the country. In AI22 it stressed that its relations with ‘other

interests’ (i.e. associate companies) had nothing to do with Iran. In addition, it was important to

present these other activities as being independent of Iranian profits, so that for instance Gass

asserted in 1948 that:

66

In other words, it was important that the Iranians should not see subsidiaries as being financed by

Iranian profits. AIOC’s anxiety to divorce the rest of its profits from Iran – and to imply that they

.

64 Elm, Oil, Power and Principle, 53. 65 Penrose, Edith T (1968) The Large International Firm in Developing Countries: the International Petroleum Industry London: George Allen & Unwin, p.43 BP 126349, press extracts No. 816, Dr. Musaddiq’s letter to ITTILA’AT on 20th November 1950, p.3. 66 BP 126407, Report on visit to Tehran 31st August to 26th October 1948, p.44.

30

were an increasingly significant source of income – was countered by Mussadiq in 1950 in his

letter to the Ittila’at newspaper quoted above. Mussadiq emphasized that the total dividends

reported in 1948 from the AIOC subsidiaries were negligible compared with the Iranian income -

£2 million against an investment of £28 million 67 . The evidence strongly supports Elm’s

conclusion, endorsed by British Treasury and Foreign Office officials, that Britain could not

refute Iran’s claim that the company’s world wide business ‘had been built up on Persian oil.’68

The argument about the importance of non-Iranian profits - and AIOC’s apparent anxiety to

downplay vertical integration is one which suggests that it is a worthwhile exercise to examine

the likely breakdown of profit between locations. Penrose has concluded that ‘because the

Companies are largely self-financed’ they have been able to maintain their position in this very

rapidly growing industry without recourse to outside capital or to their shareholders’

69

Iran

played a key role in this self-financing of AIOC’s other interests.

Although the intermediate negotiations failed, it is interesting to use the data in table 2 to

estimate what the Iranian share would have been had the Iranian Government agreed to measures

short of nationalisation. Resisting American pressure to go beyond the Supplemental Agreement,

Fraser insisted ‘one penny more and the company goes broke’, and in discussions between

McGhee and Seddon in January 1950, claimed that any more concessions ‘would leave nothing

in the till.’70

67

The pre-1933 arrangement was 16% of profits, which is comparable to the 19%

68 Elm, Oil, Power and Principle, 107. 69 Penrose, The Large International Firm, p.50 70 Kinzer, All the Shah’s Men, 87-88; Elm, Oil, Power and Principle, 61. In response, an American briefing paper showed the company’s operations to be ‘exceptionally profitable’ (Heiss, Empire and Nationalism, 34), which can be confirmed by a cursory glance at the figures presented here and elsewhere, for example Bamberg, The History of the British Petroleum Company, table 10.3, 275, and table 2, figure 1 (above), and appendix 1.

31

achieved under the 1933 agreement. The 1933 agreement was therefore of marginal benefit to

the Iranian government, particularly when the British Government’s ability to claw back

royalties through dividend reductions is taken into account. A 50% share of just the profits

earned in Iran would have increased the Iranian Government’s share from the £16m royalties

shown in Table 2b to around £34.3m. A 50% share of all company profits wherever earned in

Iran would have increased the Iranian Government’s share to around £42.9m. The difference of

approximately £8.6m between £42.9m and £34.3m was sufficient to break the deal from the

Iranian point of view, even though £34.3m would represent a large increase on the existing deal.

From the Iranian point of view therefore, the lack of trust in AIOC accounting is a possible

reason for ultimate nationalisation since either the AIOC had the wherewithal, or at least the

Iranians believed it to be the case, that accounting profits could be manipulated within these

ranges. A second, and complementary hypothesis, is that the Iranians had a good understanding

of their bargaining position, which meant that for a temporary investment of foregoing £8m the

ultimate prize of nationalisation was available and would yield a much greater pay-off. AIOC

management’s readiness to negotiate at 50/50 may also have reinforced the opinion of the

Iranians about the strength of their position.

Table 3: Funds generated and location of capital expenditure: 1946-1951

a B c D e

Funds

generated

from

Increase

in capital*

Capital

Expenditure

(total)

Capital

Expenditure

(Iran)

%

d/c

32

operations

1946 15.2 Nil 20.2 9 44.55

1947 43.9 Nil 31 8 25.81

1948 58.8 Nil 39 14 35.90

1949 43.1 1.6 55.7 18 32.32

1950 93.5 0.8 42.1 10 23.75

1951 83.2 4.2 60.2 n/a n/a

totals 337.7 6.6 188 59** 31.38**

Notes:

* Refers to loan capital

** Excludes 1951

Sources:

Adapted from Bamberg, The History of the British Petroleum Company, table 10.4, 276 and

figure 14.1, 348.

. Willingness to adopt the 50:50 solution on the part of AIOC’s management may reflect

exposure to potential charges of unfairness apparent from a consideration of the figures in tables

2 and 3. A 50:50 solution would have reduced the AIOC’s shareholders’ return from £13.6m to

£10.6m per year, which pro-rata would devalue their investment value by 22%. Sir William

Fraser’s discussion of his Board’s willingness to make such a concession is couched in

33

apparently very reasonable terms in his 19th November Chairman’s statement.71 Fraser stressed

the generosity of the proposed deal for increased royalty payments under the Supplemental

Agreement of 1949 as ‘the most advantageous offered to any country then producing oil in the

Middle East.'72 By implication the same was true of the proposed 50:50 agreement, since when

compared over a number of years to the Supplemental Agreement ‘there is little to choose

between them.’73

71 AIOC, Annual Report and Accounts, 1950, 12-13. 72 AIOC, Annual Report and Accounts, 1950, 13. 73 AIOC, Annual Report and Accounts, 1950, 14.

34

Table 4: Royalty estimates under different negotiating assumptions

a b c d e f g

Date

Total

Pre-tax

profits

Iranian

government

bid: 50:50

share of

total

Estimated

Iranian

pre tax

profits

AIOC

offer

50:50

share of

Iranian

profits

Royalties

paid under

1933

agreement

Royalties

payable under

Supplemental

Agreement

Difference

f-d

1932 3.5 1.8 2.8 1.4 1.5

1933 3.1 1.6 2.5 1.2 1.8

1934 5.3 2.7 4.2 2.1 2.2

1935 5.3 2.7 4.2 2.1 2.2

1936 7.8 3.9 6.2 3.1 2.6

1937 9.8 4.9 7.8 3.9 3.6

1938 8.7 4.4 7.0 3.5 3.3

1939 7.4 3.7 5.9 3.0 4.3

1940 10.3 5.2 8.2 4.1 4.0

1941 11.5 5.8 9.2 4.6 4.0

1942 21.0 10.5 16.8 8.4 4.0

1943 22.7 11.4 18.2 9.1 4.0

1944 27.9 14.0 22.3 11.2 4.5

1945 23.4 11.7 18.7 9.4 5.6

35

1946 28.9 14.5 23.1 11.6 7.1

1947 37.3 18.7 29.8 14.9 7.1

1948 51.0 25.5 40.8 20.4 9.2 17.2 -3.2

1949 41.2 20.6 33.0 16.5 13.5 23.6 7.1

1950 85.7 42.9 68.6 34.3 16.0 27.4 -6.9

411.8 205.9 329.4 164.8 100.5

Notes:

All figures in £m.

Column a is compiled from Bamberg, The History of British Petroleum, table 1.2, 23; table 8.6,

228 and table 10.3, 275.

Column a values are adjusted for inflation so this explains the difference in the computed

Accounting profit figures in table 2b and the Appendix.

Column b estimates calculated under the 50:50 share of pre-tax profits

Column c estimates calculated using an assumption that 80% of profits originated in Iran (as

calculated in Table 2 panel b)

Column d estimates calculated under 50:50 share of Estimated Iranian pre tax profits

Column e is compiled from Bamberg, The History of British Petroleum, table 12.1, 325.

Column f is a retrospective estimate computed by inflating the production based element of the

royalty by a factor of 1.5 (6s/4s) and adding the imputed dividend using the formula (x – 0.671)

x 20%, where x = the dividend per the annual report and accounts plus the minimum figure

(£4,000,000) for share of dividends and reserve; compiled from the Economist May 6, 1950.

36

Sources: Compiled from AIOC, Annual Reports and Accounts and Bamberg (1994), tables 1.2,

8.5, 10.3, 12.1.

Writing this after the nationalisation, Fraser had a great deal to gain by stressing AIOC’s

generous negotiating position if his objective was to show the Iranian Government as being

unreasonable. Table 4 sets out Iranian shares under various negotiating assumptions applied to

profits subject to the 1933 agreement. Column b shows the Iranian position of 50% of all profits,

which would have resulted in them earning more than double the royalties paid under the 1933

agreement. The AIOC position is column d, which is 50% of the estimated share of profits

earned in Iran. Actual royalties paid under the 1933 agreement are shown in column e, and an

estimate of how far they would have been modified under the Supplemental Agreement is shown

in column f. As a test of Fraser’s claim, the difference between the AIOC’s 50:50 negotiating

position and the Supplemental Agreement is shown in column g. Fraser does not say to what

span of profit history he is referring. If applied to the following period (1948-1950), where the

AIOC entered into negotiations with the Persian Government, the results in column f shows that

the Supplemental Agreement lagged behind the Iranian’s demand because it offered them

£68.2m when compared with £89m from their bid.

A modification to the royalty calculation discussed in the negotiations but not reflected in

table 4 was the proposed replacement of the 20% dividend share with a 20% share of transfers to

the general reserve. Dividend limitations arising from UK fiscal policy were a source of Iranian

disaffection, since they reduced the royalty triggered by this mechanism. According to the

accounts for the 1950 financial year, the balance accumulated in the AIOC general reserve was

£65m, of which a 20% share would yield £13m. By comparison, the amount generated over the

37

period 1933-1950 arising from AIOC dividends was £14.4m. However since 1946 profits had

risen strongly whilst dividends were held constant, there would have been a greater benefit to the

Iranians if this had applied from 1948 onwards as was proposed. In the three financial years

1948-1950 inclusive, AIOC placed £54m into the general reserve, compared to dividend

distributions of £22.3m, of which the Iranian shares would be £10.8m and £4.1m respectively, a

difference of £6.7m. Even so, the difference between 50:50 and the Supplementary Agreement

proposals was £10.8m for 1950 alone.74

In sum the financial analysis of profit shares between stake-holders shows AIOC

shareholders and the British Government to be increasingly benefiting and the Iranians doing

increasingly badly. The strong returns that Fraser was delivering to the shareholders make his

uncompromising negotiating position seem rather surprising, particularly in view of the growing

possibility that the political situation would translate into serious downside commercial risk. But

a review of AIOC’s internal papers makes it clear that the company’s executives were aware that

they enjoyed a very favourable deal, and they had no wish to do anything that might weaken

their position. In 1943, in a meeting with the Foreign Office, Fraser had commented that

I could not think of any modifications in the concession for which I would like to ask at the present time

in view of the very likely possibility that if such a review were to take place the Iranian government

would have suggestions to make which we might have difficulty in resisting and which on balance would

leave us in a less favourable position than we were in today under the concession… I thought in general

we had a pretty good deal just now if we could only hold on to it75

74 Calculated from AIOC Annual Report and Accounts, 1948-50.

. AS Gass said in 1948, AIOC’ s

negotiators needed to

75 BP 72188, Meeting between Sir Maurice Peterson, FO and Fraser on 17th February 1943, p.2.

38

use all their persuasive powers to guide the government to accept the contention that the

principles and the methods of royalty payment written into the existing concession were in their

own best interests76

This was the approach taken in the financial discussions outlined above: it also applied to the

response to Iranian dissatisfaction with its treatment of its workforce, which is reviewed in the

next section of the paper.

.

76 BP 126407, Report on visit to Tehran 31st August to 26th October 1948, p.18.

39

Anti-Iranian Discrimination

An important part of the political process between AIOC and Iranian representatives were

Iranian requests for increased investments in welfare benefits, such as health, housing and

education, and increasing employment opportunities for Iranians at the expense of foreign

employees (referred to as Iranianisation and agreed under the General Plan of 1936). In part,

Iranian nationalist justification for nationalisation was the charge of discrimination by the AIOC

against its Iranian employees One of the points raised by the Iranian Memorandum of 1947 was

the need for ‘reduction of foreign personnel and improvement of the conditions of Iranian

employees and workmen’ (M 11) These were significant issues which continued to anger

Iranians throughout the period of the concession.

Elwell-Sutton, a member of AIOC’s British staff in Persia, had written in 1936 of a dispute

between a Persian worker and his European job officer. The European attacked the Persian, but it

was the latter who was discharged. Elwell-Sutton described it as ‘one more example of the stupid

attitude of the European out here- to antagonise rather than co-operate with the Iranians77

The criticism is frequently heard, sometimes in violent terms, that individual Persians who have

worked with Britishers have met with discourteous and unjust treatment from them

’ And

in 1950, Northcroft admitted privately to Rice that

78

There is considerable evidence over time that the AIOC treated its Iranian staff badly

.

79

77 Elwell-Sutton, L.P. Persian Oil: a study in Power Politics Lawrence & Wishart 1955, p.103

. Attacks

came from numerous sources within Iran. These were partly concerned with the conditions of

78 BP 126349, Reference No. 522, Northcroft to Rice on 12th December 1950, p.6.

40

housing and welfare,.80 In May 1951, Kazem Hassibi (Under-Secretary of the Finance Ministry)

made a strong attack on the living conditions provided by the company for Iranian employees at

Abadan declaring that ‘20,000 workers were living in holes in the ground and even 10,000 for

whom the company had provided houses, lived surrounded by open gutters in which sewage, and

drinking water mingled.’81

Elwell-Sutton noted among the failings of AIOC employment practice its use of ‘a nomenclature

borrowed from India – the Britons were “sahibs

There was also considerable Iranian anger at the effects of company

policies on the availability of skilled and managerial posts for Iranians, especially for young

graduates who found a career closed to them. Mussadiq was alluding to this in his meeting with

Northcroft when he delicately suggested that ‘he was not fully satisfied that the AIOC make

enough provision for the hypersensitive character of Iranians’

82

The company took the imperial culture and hierarchical relations it found in the familiarity of

British India, and introduced them to its company town and operations in Persia

”’.Johnson suggests that Indian influence was a

significant factor in AIOC’s policy in Iran:

83

This, she suggests, resulted in a separatist view of the Iranian employees as excluded from the

Empire, and in a preference for non-Iranians. Indeed, there was a substantial recruitment of

Indian and Pakistanis to the artisan grade as late as 1949

.

84

There were also admissions by English employees and executives that AIOC discriminated

against Iranians, As early as 1920 Sir John Cadman, then company chairman, admitted that they

.

79 See for instance Kinzer, All the Shah’s Men, 67-68, Elm, Oil, Power and Principle, 103. Abrahamian, “The 1953 coup in Iran,” 80 BP 126347, Interview with Dr Mussadeq, 9th August 1950 81 Manchester Guardian; May 28, 1951, 5. 82 Elwell-Sutton, Persian Oil, p.101 83 Johnson. V. (2008) Formal and Informal Empire http://www.voxeu.org/index.php?q=node/1186 84 Elwell-Sutton, Persian Oil, pp.92-3

41

‘must strive more and more to regard our own activities through Persian eyes and in terms of a

Persian vocabulary’85

The housing schemes initiated in 1934 are proving inadequate …and the result is being reflected

in heavy and increasing wastage amongst all classes of labour

and in 1938, Elkington reported that

86

Even Gass admitted during his 1948 visit that

It is not only our enemies who believe that we have not done our best and that we have failed to

make the progress we should have made87

Although some higher ranking Iranians were apparently paid the same as their British

equivalents, their views were not necessarily respected. Mostafa Fateh was Northcroft’s assistant

in Tehran and provided the AIOC board with an eloquent and detailed advisory memorandum on

how to engage constructively with Iranian national aspirations. The British diplomatic response

was dismissive, stating that Fateh ‘was not to be trusted.’

88 British staff in Tehran were of the

opinion that without them, ‘no one would be able to run the central heating in the AIOC’s

offices.’ 89 The Israeli correspondent referred to above paraphrased the typical response to

suggestions that Iranians be treated differently: ‘We English have had hundreds of years of

experience on how to treat the Natives.’90 It was hardly surprising that the company’s labour

force became heavily involved in the nationalisation movement.91

There is, indeed evidence that the AIOC engaged with its social responsibilities under the terms

of the 1933 Agreement. After the 1945 the Company recognised the housing problems in

85 BP 68386, Report by sir John Cadman, visit to Persia and Iraq, Spring 1926. 86 BP 067627, Report on a visit to Tehran in 1938, p.59. 87 BP 126407, Report on visit to Tehran 31st August to 26th October 1948, p.33. 88 Kinzer, All the Shah’s Men, 77. 89 Elm, Oil, Power and Principle, 80. 90 Soleh Boneh, Jerusalem Post, July 6, 1951, cited in Elm, Oil, Power and Principle, 103. 91 Elm, Oil, Power and Principle, 81.

42

Abadan and embarked upon an emergency accommodation programme 92. An ILO observer

commented in 1950 that one ‘cannot fail to be impressed by the vast number of modern houses

and amenities which the Company has been able to provide in such a short space of time and in

spite of exceptionally unfavourable circumstances.’93 Hospital and healthcare spending attracted

similarly favourable comment.94 The AIOC also made investments in education, for example

endowing Tehran University, supporting technical institutes and schools, and provided extensive

educational and training schemes.95 Writing in 1949, Fraser commented that 2038 houses and 79

ancillary buildings such as canteens, schools, medical clinics, shops, clubs, etc was completed

during the year at a cost of nearly £6m. He also pointed out that there were now 2000 students on

various category of training schemes, including 84 in Britain.96

But there was a difference between AIOC’s public projection of its wish to be seen as a good and

progressive employer and some of the private discussion. In 1933, Fraser claimed that Iranians

had an unrealistic attitude to their capacity for promotion: they were among ‘the nations who

attach an excessive importance to education’97. He was concerned lest proposals for increasing

the recruitment of Iranians would take in ‘ merely failed B.A.’s’98

92 For a comparable programme of ‘corporate paternalism’ by another British company faced with labour militancy, see Decker, “The Renaissance of Corporate Paternalism: Ashanti Goldfields Corporation in the Gold Coast 1945-46,”1-6.

The company’s public

93 Bamberg, The History of the British Petroleum Company, 374. 94 Bamberg, The History of the British Petroleum Company 375. 95 Bamberg, The History of the British Petroleum Company 361- 63. 96 AIOC, Annual Report and Accounts, 1948, 19. 97 BP 070268, Fraser to Jacks on 16 November 1933, p.1. 98 BP 070268, Fraser to Jacks on 16 November 1933, p.5.

43

response to the 1947 Memorandum was that it was taking ‘very extensive measures to increase

the supply of Iranians possessing the requisite competence and skill’99

‘did not want to graft on to the Iranians too high a standard of living

but there was reluctance

to engage too closely with them. Iranian staff were to be housed separately because the company

100’Gass regarded the Iranian

government aims of achieving ‘maximum employment of Iranians’ as ‘seeking control over…

the entry of our foreign employees and even our management’101. The company could not

‘maintain efficiency’ under this pressure. It would take training schemes, he thought ‘over the

next 7 to 10 years’,102 for these manpower changes to be practicable. Northcroft even warned

Mussadiq directly in their 1950 meeting that AIOC regarded it as ‘a suicidal personnel policy

(to) appoint unqualified Iranians to highly responsible technical jobs103

Addressing the differential wage issue, Fraser commented ‘it is noteworthy that Iranians received

the same pay as British staff in similar posts’.

’

104

These contrasting propositions can be examined

with reference to the comparative earnings data shown in table 5.

Table 5: Comparative earnings

£ £ %

Year Year Change

99 BP72188 100 BP 68067, Jameson to Fraser, 6th March 1938 101 BP 126407, Report on visit to Tehran 31st August to 26th October 1948, p.43. 102 BP 126407, Report on visit to Tehran 31st August to 26th October 1948, p.35. 103 BP 126347, Interview with Dr Mussadeq, 9th August 1950 104 AIOC, Annual Report and Accounts, 1950, 22.

44

Average annual wages and

salaries 1945 1949

a) All Iranian labour 76 314 413

b) All British labour 980 2140 218

A as a percentage of b 7.76 14.67

c) non-graded Iranian staff 290 838 289

d) graded Iranian staff 604 1910 316

C as a percentage of b 29.59 39.16

D as a percentage of b 61.63 89.25

Source: Adapted from Bamberg, The History of the British Petroleum Company, table 14.4, 357.

As table 5 shows, it is the case that the remuneration of the AIOC’s Iranian employees increased

substantially after 1945. Data about the precise composition of the workforce is not available, so

that whilst it is clear that higher graded Iranian employees received a disproportionate share of

the general increase, the distribution of higher graded staff to lower grades is not known. It is

clear however that inequality within the Iranian workforce increased during the period, and

whilst lending credence to Fraser’s claim of parity on a grade by grade basis, it is also suggestive

that the cases he cites were in a minority. Apparently, by the end of 1950 “the Anglo Iranian

labour force as opposed to its technical and clerical staff was wholly Persian except for 652

45

Indians and Pakistanis”105. The company’s staff manager in Iran, speaking in 1947 suggested

that ‘there is more joy in Iran over the appointment of one Iranian chemist/ engineer/ accountant/

doctor/ labour officer than there is over the appointment of 100 Iranian artisans or 1000 Iranian

cooks.’106 Even so, it is clear that for many better educated Iranians, the incentives offered by the

AIOC employment package were insufficient to entice them away from more congenial

vocations in Tehran.107

Although the trend in wages had been upwards, on 20th March 1951, the AIOC imposed

immediate reductions in wages, travel and accommodation allowances on the grounds that rents

and prices had fallen. As a result, by 1st April 45,000 employees were on strike, martial law was

imposed, and in a highly charged atmosphere, three Europeans (AIOC employees) were lynched

as the strike spread to other sectors.

108

Within a week of the end of the strike on 25th April,

Musaddiq pushed through his nationalisation bill. Although this is perhaps to be expected, the

timing of the company’s imposition of wage cuts is nonetheless interesting, coming within five

days of the approval of Musaddiq’s bill for nationalisation in the Majlis and only two weeks after

the assassination of Razmara. Indeed the timing of the dispute, which coincided with the

nationalist upsurge could not have been worse and somewhat undermines Fraser’s attempts to

show the firm’s employment policies in a positive light.

Advocacy advertising’: press coverage and financial reporting

In general the above review of the accounting evidence suggests that AIOC had a weak case as

far as the equities of oil production were concerned and that discrimination strengthened the

105 The Economist, June 9 1951, 1380. 106 Bamberg, The History of the British Petroleum Company, 360. 107 Bamberg, The History of the British Petroleum Company, 366. 108 Abrahamian, Iran Between Two Revolutions, 368.

46

political case further. Milne and Patten use the term ‘advocacy advertising’ to describe corporate

attempts to defend their activities or to advance arguments in favour of their interests109_.

Studies have identified this in a range of modern companies, and also at the beginning of the

20th century, when British companies used the chairman’s address to the Annual General

Meeting to defend their industrial relations or their wartime profitability or to make the case for

government support110

AIOC and the press

_ This section of the paper considers the extent to which AIOC defended

and advanced its interests using available media, first considering its press coverage in the years

of crisis and then Fraser’s presentation of the events around nationalisation in the financial report

of 1951.

The Bill for the ratification of the Supplemental Agreement was presented to the Majlis on 19th

July 1949. In a correspondence between D.R. Hobson, AIOC representative in Tehran, and Rice,

Hobson discussed possible tactics for encouraging support for ratification. He suggested three

ways to ‘enlighten the Iranian public’:

1- A first-class English daily or weekly paper, such as “The Times” or the “Economist” might be

encouraged to publish an article on the present position of the negotiations between the company

and the Iranian government and to explain the offers made by the company. If such an article

were airmailed to Tehran immediately on publication, it could be carefully translated and

“placed” in friendly local newspapers. The advantage of this method is that such an article, since 109 Milne, M. J. and Patten, D. M. (2002), “Securing organizational legitimacy: an experimental decision case examining the impact of environmental disclosures” Accounting Auditing and Accountability Journal Vol. 15, No.3, pp.372-405 110 See for instance Maltby, J., (2004), “Hadfields Ltd: its annual general meetings 1900-1939 and their relevance for contemporary corporate social reporting” British Accounting Review Vol.36 No. 4, pp. 415-439 and Maltby, J., (2005), ““Showing a strong front”: corporate reporting and the business case in Britain 1914-1919”, Accounting Historians Journal, Vol. 32 No. 2, pp.145-172

47

it would be quoted from an English newspaper, would not wear the aspect of an official

statement by the company.

2- The provision of guidance on “talking points” for use in conversation with newspaper

correspondents and influential people generally.

3- Something in the form of a coloured chart which would include suitable symbols and figures

showing the increases in the company’s payment under the Supplemental Agreement might do

much to explain the position to the Iranian man-in-the-street…This chart might perhaps be

distributed in Tehran and the provinces in the same way as the company’s wall newspapers or

alternatively offered to local newspapers111

Hobson’s suggestions are of great interest because of the strong support enjoyed by AIOC in the

Economist during the next two years.. Articles on Persian and on AIOC during the period all

supported the company, sometimes in terms that very closely mirrored its response to the

Memorandum:

_.

‘During the War (the Persians) gained greatly from local expenditure and from local employment

of foreigners as well as from rising oil royalties112

‘None can as yet claim to treat its local employees so handsomely as does Anglo-Iranian

113

Other supportive comments made by the journal included

’

114

(Persians can finance the Seven-Year plan) ‘only by foreign borrowing or else by accepting the

111 _ BP 080924, Reference No. 153 on 2nd August 1949, p.5. 112 ‘Can Persia Plan?’ The Economist 6 May 1950 p932 113 Labour in the Middle East Oilfields – II, The Economist, Saturday, 16 June 1951. P.1447 114 See also Living from Hand to Mouth Persia in Trouble - II The Economist, Saturday, 31 March 1951 and the Editorial Leader Persia's Road to Ruin The Economist, Saturday, 5 May 1951.

48

Supplemental Agreement on oil royalties115

The Persian Government would be wise to think twice before it stopped the flow of its main

source of income_

’

116

‘The advocates of expropriation are wreckers who will bring down not only the oil company but

the whole of Persia’s flimsy social fabric with it_’

117

Dr Mossadegh’s cabinet is still talking with far too many voices

118

The correspondence between the line taken by The Economist and AIOC’s own approach does

not prove that the company did in fact ‘encourage’ the journal to publish what it did – but it

raises the possibility, especially when taken with Hobson’s proposal. It also suggests that AIOC

management was anxious to shape opinion, and hence that public communications by

management deserve to be explored, as we do in the following review of Fraser’s report for the

AGM in 1951.

_

In general the above review of the accounting evidence suggests that AIOC had a weak case as

far as the equities of oil production were concerned and that discrimination strengthened the

political case further. When Fraser prepared for the company’s annual general meeting in late

1951, he was under considerable pressure. His personal position and authority had been brought

into question, the AIOC’s activities had stirred nationalist sentiment to an extent unparalleled in

any other Middle Eastern country, AIOC employees had been killed and many others forced,

with their families, to flee the country, and the majority of the company’s assets had been seized

115 Persia Faces Both Ways The Economist, Saturday, 11 November 1950. , p.748 116 How Important is Persian Oil?, The Economist, Saturday, 7 April 1951. , p.1244 117 Persia in Trouble III: The Roots of Agitation The Economist, Saturday, 26 May 1951 118 Mission to Teheran The Economist, Saturday, 9 June 1951, p 1360

49

by a foreign government. From an AIOC shareholders point of view, Fraser had some explaining

to do.

Table 5 sets out the results of a textual analysis of Fraser’s statements to stockholders in

1950 and 1951 (published in the Annual Report and Accounts for the financial years 1949 and

1950 respectively). A software program was used to analyse the semantic features of the text.119

For each parameter, measured using connotative word counts, table 6 (panel a) reports the

average frequency of occurrence by 500 unit word counts. These are compared to a normal range

for the typical text that occurs in company financial reports. Table 6 (panel b) reports counts of

specific significant words. In addition to the comparison reported in table 6, comparisons were

also conducted with the Chairman’s statements of Shell and with coverage in the British Press

using randomly sampled 500 word sections from The Times, Manchester Guardian and Daily

Mirror.

The analysis allows an investigation of the tone adopted by Fraser in what was an

important communication not only with stockholders but also with a wider public – the media,

and the Governments of both Britain and Iran. Reports of listed company Annual General

Meetings, at which the Chairman would also present the published statement, were likely to

appear in the national press.120

119 DICTION is a computer-aided content analysis program, developed from linguistic research that analyses unique aspects of a text (Hart, Diction 5.0).

Fraser’s communication with this large and significant group of

stakeholders, supporters and opponents is thus key to an understanding of the company’s

portrayal of itself and its actions. Did it wish to appear resolute or accommodating, determined

or responsive; how far was it aligning its behaviour with British interests generally; was it open

120 The AIOC 1950 statement for instance appeared in The Economist December 1st 1951, 59-65.

50

to further negotiation with Iran? Table 6 compares his use of groups of words and vocabulary

that are particularly relevant to an understanding of AIOC’s self-presentation. The 1950

statement was published in June 1950 as part of the Annual Report for the year ended 31st

December 1949, before the crisis: it is used as a comparison with Fraser’s statement of 19th

November 1951, made after nationalisation and the breakdown of negotiations.

Table 6: Textual Analysis of Fraser’s statements to stockholders, 1950-51.

a) DICTION scores

Average score

by year Normal Range

Parameter Connotation 1950 1951 Low High

Ambivalence

hesitation, uncertainty,

confusion 3.20 7.83* 0.00 6.16

Self reference use of first person 0.95 3.00* 0.00 1.02

Accomplishment task completion 30.77 17.55* 18.72 43.11

Communication social interaction 1.28 8.90 0.00 6.24

Passivity

inactivity, compliance,

docility 8.55* 6.83 0.23 7.23

Familiarity use of common pronouns 123.39 152.57* 106.54 137.49

Present concern

physical activity, social

operations and task

performance 5.75 6.59 1.06 8.54

Past concern ditto relating to past 2.83 3.96* 0.00 3.85

Centrality agreement on core values 12.85* 4.51 1.32 11.39

51

Rapport

similarities among groups,

deference, affinity 1.43 5.46* 0.00 2.27

Diversity

individual or group

differences from the norm 5.46* 0.99 0.00 3.53

Liberation

Maximizing of individual

choice 1.90* 2.35* 0.00 1.39

Insistence repetition of key nouns 80.53 60.06* 111.39 341.91

Variety

tendency to avoid

overstatement 0.56* 0.48 0.29 0.52

b) Specific word counts

British † 23

Iran/Iranian 11 124

Iraq 6 †

Company/Company's 10 95

Construction 9 †

Employees 4 †

Personnel 4 †

Staff † 11

Sources: AIOC Annual Reports and Accounts, 1949 and 1950, Statement to Stockholders by the

Chairman, pp.11-19 and pp.9-30 respectively.

Notes:

* +/- 1 standard deviation outside the predicted range of usage

† counts of <3 are ignored by the diction software. Nouns only.

52

The view of the Times correspondent was that Fraser’s statement of 19th November 1951 ‘…is

conciliatory and restrained in tone. It burns no bridges’.121 In view of the events reviewed above,

and the associated uncertainties from the company’s point of view, it is perhaps not surprising

that the ambivalence of Fraser’s communications increased from 1950 to 1951. References

suggesting confusion and uncertainty were attributed to Iranian behaviour: ‘by that time the

National Front propaganda had gained a firm hold and there were few who were ready to be

receptive to a factual appraisal of the Agreement.’122 Fraser refers here to the Supplemental

Agreement (compare table 4 column f above) and the biased treatment it received in the Iranian

press. ‘By that time’ alludes to, without mentioning directly the previous role of Bahram

Shahrokh, a former Nazi propagandist recruited by the AIOC and director of Iran’s Radio and

Propaganda Department under Razmara and previous governments. In this role, Shahrokh

broadcasted talks favouring the Supplemental Agreement. 123

There are more references in 1951 than in 1950 to greater physical activity, social

operations and task performance, but with less acknowledgement of completion and greater

reference to the past. There is less concern with references to physical acts such as construction

and investment. Fraser is much more concerned to describe communication processes than make

references to task completion. ‘The company lost no time in communicating…’, whilst inertia

and failure to complete tasks were attributed to the Iranians: ‘the Iranian government took no

121 The Times, November 28, 1951, 9(c). 122 AIOC, Annual Report and Accounts, 1950, 13. 123 Elm, Oil, Power and Principle, 70, 120; Kinzer, All the Shah’s Men, 74, 97.

53

steps…’124

Secretive behaviour by the AIOC is not referred to even though it was material to the

negotiations on the Supplemental agreement. There were repeated Iranian requests to allow them

to audit the AIOC’s accounts, which were refused.

Secrecy, where it occurs, is attributed to the Iranian side. For example ‘successive

governments made only sporadic efforts to publicise the terms of the Agreement.’

125 The request was nonetheless reasonable in

the context of the negotiations (and compare table 4 above), it the Iranian negotiators were to

make an assessment of the alternatives. Razmara argued that he could win approval for the

Supplemental Agreement if the AIOC open its books to Iranian auditors. There were two other

requests: more training of Iranians for managerial jobs and to make some advance payment of

royalties. As these other two points were implicitly accommodated in past agreements and

subsequent behaviour, it can only have been the Iranian request for open accountability that

stirred Shepherd to reject Razmara’s proposals to the accompaniment of another undiplomatic

outburst.126

As discussed before, Fraser also criticised Razmara’s secretive behaviour.

127 On the

Iranian side, Razmara’s objective was to avoid a conflict with the British and keep the details of

the 50:50 discussions secret as a result, in part because he feared public opinion would be

disappointed if aware that anything less than nationalisation were being considered.128

124 AIOC, Annual Report and Accounts, 1950, 14, 16.

After

arguing against nationalisation to the Majlis Oil Committee and a call from Ayatollah Kashani

‘to all sincere Muslims and patriotic citizens to fight against the enemies of Islam and Iran and

125 Elm, Oil, Power and Principle, 53. 126 Shepherd stated the only concession the Company would consider ‘was perhaps free medical treatment of certain hysterical deputies who continued to denounce the Supplemental Agreement.’ FO 371/91512, cited in Kinzer, All the Shah’s Men, 73. 127 AIOC Annual Report and Accounts, 1950, 13, and note 79 above. 128 Ansari, Modern Iran since 1921, 111.

54

join the nationalisation struggle,’ Razmara was assassinated on 7th March 1951 amid an upsurge

of nationalist sentiment. 129

Fraser viewed all this with apparent equanimity. In his statement to the stockholders, he

wrote: ‘Despite the Company’s endeavours to persuade the Prime Minister to make known in

Iran both the company’s offer to reopen negotiations for a 50/50 profit sharing scheme and its

action in undertaking to make advances, General Razmara refused to do so and maintained the

closest secrecy regarding both matters.

It was against this backdrop that Musaddiq succeeded as Prime

Minister and pushed forward the bill for nationalisation.

130 On a literal reading of this statement in the context of

the explosive situation, it can only be concluded that Fraser did not understand Razmara’s

royalist political objectives and the essential role of secrecy if they were to be achieved. As the

AIOC was intended to be a principal beneficiary of the secrecy, it is difficult to uphold this view.

Moreover, Shepherd later admitted that he had written ‘the gist’ of Razmara’s speech to the Oil

Committee on 3rd March.131 Alternatively, and perhaps equally unlikely, is that Fraser simply

misunderstood the mood of the Iranian people, even though such misjudgement was

symptomatic of paternalist colonial attitudes. A more likely interpretation therefore is the role of

the chairman’s statement as a piece of propaganda, in which the public face of a ‘reasonable’

company is portrayed, and, consistent with the wider British discourse, nationalism is

inconsequential and ephemeral.132

If anything the language reinforced the sense of colonial superiority. References to ‘staff’

replaced references to ‘employees’ and ‘personnel’, The word ‘staff’ has military origins and

129 Ansari, Modern Iran since 1921, 111-112. 130 AIOC, Annual Report and Accounts, 1950, p.15. The advances referred to were concessional payments on account £5m as a lump sum and £2m per month throughout 1951. 131 Elm, Oil, Power and Principle, 80. 132 Ansari, A. M. Modern Iran since 1921, p.112.

55

connotations, alluding to a responsibility to plan and to organise.133 Where Fraser uses the term

‘staff’, the references are to British individuals and ‘employees’ refers to Iranians. For example

‘…tens of thousands of employees in Iran,’ ‘strikes occurred among our Iranian employees’ and

‘…three members of our British staff were killed’ (emphasis added).134 Here the differences

between British and Iranians are stressed. Other references to staff occur where Fraser attempts

to stress commonality and repudiate Iranian claims of discrimination: …spirit of amity and

partnership between British and Iranian staff’ and ‘…Iranians received the same pay as British

staff in the similar posts…’135 Whilst Fraser regretted the deaths of the three employees in his

Chairman’s statement, albeit without referring to the strikes, he otherwise dealt with only the

positive aspects of the AIOC’s employment strategy. 136 The chairman’s statement of 1950

included more detailed references to employee welfare provisions made by the company when

compared to 1949. These were referred to only in passing in the 1949 annual report statement,

although there is greater detail in the 1948 report.137 However in 1950 there were important

changes in tone. For example, Fraser now stressed partnership and signalled that the company’s

strategy was to provide housing, leave and pension benefits, medical care and hospital facilities,

club life and amenities to all employees applied on an equal basis.138

In similar vein, the behaviour of the centrality, rapport and diversity scores reveal how

Fraser attempted to manage the disagreement. The decline in the centrality score –i.e. stress on

shared values - shows that Fraser gave a great deal of emphasis to the disagreements between the

AIOC and the Iranians. However, the increase in the rapport and decline in diversity show that

133 Fair, “The Corporate CIA,” 134 AIOC, Annual Report and Accounts, 1950, 12, 28. 135 AIOC, Annual Report and Accounts, 1950, 22. 136 AIOC, Annual Report and Accounts, 1950, c/f 28 and 21-22. 137 See examples above referred to in note 62. 138 AIOC, Annual Report and Accounts, 1950, 22.

56

he attempted to overcome these differences by stressing common interests between the parties.

For example ‘I wish to pay tribute to the many Iranians, some occupying very senior posts, who

have given long, loyal and devoted service to the company and, I feel, also, their country.’139

Here Fraser equates the interests of the AIOC with the interests of Iran, although as documented

in the review of evidence above, it was the AIOC’s refusal to share the proceeds of oil wealth

fairly and the mistreatment of Iranians that accentuated the rise of Iranian nationalism and

opposition to the AIOC.

Stock market reaction to events

1) Share price discussion –benchmark needed e.g. Shell

As far as Fraser was concerned, the interests of stockholders were paramount.140

As shown in figure 2a, from the third quarter of 1947 the price had been suffering a

steady decline, notwithstanding rising accounting profits. A likely reason is the uncertainty

introduced by the single article law in October 1947 which committed the Iranian government to

renegotiate the concession. Before that, in June, the then British Ambassador, Sir John le

Rougetel, was warned by the Prime Minister Qavam, that the Iranian Government might need to

How well then

did his involvement in the events described in his report to the stockholders succeed in his aim of

maintaining the value of their investment? A share price index for the period 1946-1951 is

shown in figure 2a. An index corresponding to the time line of key events in table 1 is shown in

figure 2b.

139 AIOC, Annual Report and Accounts, 1950, 22. 140 Elm, Oil, Power and Principle, 66.

57

‘attack’ the company to appease rising nationalist sentiment.141 Up to that point a shareholder

investing at the beginning of 1946 had enjoyed a 60% cumulative return. An investor purchasing

shares in July 1948 and holding them until November 1951 would have experienced a negative

return of 47%. As the trend in figure 2a also makes clear, July 1948 is an important structural

break.142

In the period immediately prior to nationalisation, the share price had suffered significant

decline, falling from an average price of 707p to 661p for the year to November 1950, a decline

of 6.5%. In the twelve month period ended November 1951 the average price was 542p,

representing a further decline of 18% (figure 2b).

Much more than actual events with direct economic impact including nationalisation

itself, it was the inauguration of a new period of more problematic relations between the

company and the host country communicated via diplomatic channels that unnerved investors.

143 These declines are more notable against a

backdrop of rising earnings. Taking these into account, the corresponding changes in the price to

earnings ratios were a 52.2% decline from 8.27 in 1949 to 3.95 in 1950 and a 23.3% rise from

3.95 in 1950 to 4.87 in 1951.144

By December 1950 the shares had lost around 25% of their value, reflecting the collapse

of the Supplemental Agreement. Although the share price fluctuated somewhat, the period June-

July, 1950 represents a structural decline in the trading range of the share price of over 20%. It

was at this point that the Majlis first demanded nationalisation and created the MOC headed by

141 Bamberg, The History of the British Petroleum Company, 385. 142 Calculated from The Times, closing prices using summative cumulative returns; dividends are ignored. 143 Taken from The Times, lists of Closing Prices. Pre-decimal share quotes have been converted into decimal equivalents. 144 AIOC, Annual Report and Accounts, 1949, 1950, 1951, Balance Sheets and Profit and Loss Accounts. Calculated by dividing after tax profits minus preference dividends by the value of issued ordinary stock.

58

Musaddiq. 145

Although the events of 1951 were more dramatic, with the assassination of

Razmara and the formalisation of the nationalisation legislation, the share price was less volatile.

The lowest quotation during the period covered by figure 2 was 20th March, coinciding with the

approval of the Single Article Bill on nationalisation by the Iranian Senate. On this date, the legal

obstacles to nationalisation disappeared. After that date, notwithstanding the appointment of

Musaddiq as Prime Minister, the failures of the Jackson and Stokes missions and the worsening

of the company’s underlying trading position following the bumper profit year of 1950, the share

price staged a steady recovery during the year. Investors at least, it would appear, had confidence

in Fraser’s management and shared his view of the ongoing legitimacy of AIOC claims to

Iranian oil assets.

145 Bamberg, The History of the British Petroleum Company, 401.

59

Figure 2a

Anglo Iranian Share Price, 1946-1951

0

2

4

6

8

10

12

31/12

/1945

30/06

/1946

31/12

/1946

30/06

/1947

31/12

/1947

30/06

/1948

31/12

/1948

30/06

/1949

31/12

/1949

30/06

/1950

31/12

/1950

30/06

/1951

Date

Pric

e £

Figure 2b

60

Anglo Iranian Share Price, Nov 1950-Nov 1951

4 2/5

4 3/5

4 4/5

5

5 1/5

5 2/5

5 3/5

5 4/5

6

6 1/5

30/11

/1950

30/12

/1950

30/01

/1951

28/02

/1951

30/03

/1951

30/04

/1951

30/05

/1951

30/06

/1951

30/07

/1951

30/08

/1951

30/09

/1951

30/10

/1951

30/11

/1951

Date

Pric

e £

Conclusions

To the reader of the Chairman’s statement of 19th November 1951, the behaviour of the company

was nothing more than a reasonable response to difficult circumstances. However, the moral tone

of Fraser’s arguments only reinforced the colonial attitudes that incensed so many Iranians.

Moreover, as the evidence analysed above shows, where apparently reasonable claims were

made in the Chairman’s statement, they often failed to correspond to evidenced instances of the

company’s actual behaviour. The accusations against the AIOC, of not sharing the profits from

oil fairly and anti-Iranian discrimination can be upheld on the basis of the evidence reviewed

here. Accusations levelled at the Iranians, such as secrecy and the use of propaganda were

practised on the AIOC side with greater vigour.

61

In short, Fraser and the AIOC board were taking great risks with the shareholders’ assets,

yet the shareholders were kept in ignorance of the true nature of the political situation in Iran. It

is possible that investors were misled by the British press, which shared many of the pre-

conceived colonial attitudes of the AIOC. It is possible that they shared these attitudes and the

complacency that accompanied them. By promoting ignorance, Fraser promoted shareholder

confidence, and in this respect at least, he was successful.

.

62

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66

Appendix 1: Stakeholder shares of AIOC Profits, 1948-1949

1948 £'000 £'000 £'000 £'000 £'000 £'000

Iranian

Government

British

Government

Other AIOC

stockholders

Estimated

Iranian

Estimated

non-

Iranian

Total per

accounts

Royalties 9170 9170 9170

Ordinary dividend 2464 2368 4832 1208 6040

Preference dividend 857 857 214 1071

Reserve Appropriations 6936 6664 13600 3400 17000

Retained profit -19 -18 -38 -9 -47

Minorities and

subsidiaries 166 160 326 81 407

UK taxation: profits 5662 5662 1416 7078

UK taxation: dividend income tax 16986 16986 4247 21233

Total 9170 32196 10030 51396 10556 61952

% Share 17.84% 62.64% 19.51% 100.00%

9170

Accounting Profit 52782

67

1949 £'000 £'000 £'000 £'000 £'000 £'000

Iranian

Government

British

Government

Other AIOC

stockholders

Estimated

Iranian

Estimated

non-

Iranian

Total per

accounts

Royalties 13489 13489 13489

Ordinary dividend 2464 2368 4832 1208 6040

Preference dividend 857 857 214 1071

Reserve Appropriations 4488 4312 8800 2200 11000

Retained profit 114 109 223 56 279

Minorities and subsidiaries 22 21 43 11 54

UK taxation: profits 5284 5284 1321 6605

UK taxation: dividend income tax 12988 12988 3247 16235

Total 13489 25360 7667 46516 8257 54773

% Share 29.00% 54.52% 16.48% 100.00%

13489

Accounting Profit 41284

Notes and sources: See table 2.