Oil Industry—West Asia | Research & Encyclopedia Articles

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Oil reserves Summary

Oil Industry—West Asia

The countries of the Persian Gulf region sit atop 65 percent of the world's total oil reserves, and Western Asia's critical importance to the world oil market is obvious. Iraq has 11 percent of world oil reserves, and Iran has 9 percent. In 2000, all Persian Gulf producers accounted for nearly 28 percent of the world's total oil production, and most observers expect this share to rise in the future. Turkey does not have major oil reserves or production but serves as an important transit route for Iraqi oil exports and potentially for exports from Azerbaijan and Central Asia. Besides being important to the world oil market, the oil industries of most Persian Gulf countries make up a disproportionate share of their economies and are the main sources of hardcurrency inflows and government revenues.

Iran

The British initially developed Iran's oil industry in the early 1900s. The first drilling concession was awarded to a British subject, William Knox D'Arcy, in 1901, and the first major discovery of oil in commercial quantities occurred in May 1908. From this discovery was born the Anglo-Persian (later Anglo-Iranian) Oil Company, which built the initial pipeline and refining infrastructure needed to make use of the oil and acquired a tanker fleet for overseas distribution.

Foreign control of Iran's oil industry generated much resentment, and for several decades Iranian leaders struggled to gain greater control and more equitable distribution of revenues. In November 1932, Shah Reza Pahlavi announced his intention to terminate the Anglo-Persian oil concession. After five months of negotiations, a new agreement was signed in April 1933, providing a guaranteed minimum royalty level independent of world oil prices and a partial "Persianization" of the company's workforce.

Tensions over royalties mounted again in the years following the Second World War, and in 1951 the newly appointed prime minister, Mohammed Mosaddeq, announced that Anglo-Iranian Oil would be nationalized. Britain imposed an embargo on Iranian oil, and Mosaddeq was deposed in August 1953, in a coup backed by Britain and the United States. Afterward a consortium dominated by Anglo-Iranian, but also including Royal Dutch Shell and a number of U.S. companies, was formed to manage oil production in Iran. Iran's National Iranian Oil Company (NIOC) nominally owned the oil reserves, but real control rested with the foreign firms. Power gradually shifted toward NIOC, however, and by 1973 Shah Mohammed Reza Pahlavi had instituted a system in which NIOC was recognized as the operator of Iran's oil industry, with the foreign firms functioning as service contractors. Iran was a founding member of the Organization of Petroleum Exporting Countries (OPEC), and while it did not side with Arab members during their oil embargo of 1973–1974, it did make production cuts in the mid-1970s to help the cartel sustain high prices.

In the aftermath of the Iranian Revolution of 1978–1979, which overthrew the shah and brought to power a government dominated by Ayatollah Ruhollah Khomeini, most foreign firms withdrew from Iran, and the country's oil exports experienced a dramatic decline. This second "oil shock" contributed to a rapid rise in world oil prices, which in turn had negative effects on the world's developed economies. Iran's oil production gradually recovered during the 1980s, when some foreign firms returned and local expertise became more available, but the Iran-Iraq War of 1980–1988 led to attacks on tankers and on Iran's main oil-export terminal at Khark Island.

By 2000, Iran's oil production had reached 3.7 million barrels per day (bbl/d), still far below the 6 million bbl/d peak it had reached in 1974 but well above the 1.4 million bbl/d low point it reached in 1981, after the revolution. Iran is expected to continue expanding its production and is again courting investment by foreign oil companies. The country's constitution forbids foreign ownership of oil reserves, so that these investments take the form of "buyback" contacts, which guarantee the foreign partner a set rate of financial returns.

Iraq

The first discovery of commercial quantities of oil in Iraq took place in October 1927, but the country had long been thought to hold major oil reserves due to oil seepages at ground level and other geological clues. The Iraq Petroleum Company (IPC), which was British led but included American and French firms among its owners, carried out the early development of the oil industry in Iraq.

As with other Persian Gulf oil producers, foreign control of the industry eventually led to local resentment and calls for nationalization. In the wake of a rising tide of Arab nationalism in the late 1950s, the Iraqi monarchy and the government of the prime minister Nuri as-Said were overthrown by a military coup in July 1958. The new government of Abdul Karim Kassem modified the terms of the IPC concession, eliminating over 99 percent of the land area it covered and allowing IPC to retain only the immediate locations of currently operating production facilities. The IPC consortium continued to produce oil, but it drastically curtailed investment in production capacity. As a result, Iraq's oil production increased only slightly during the 1960s, a period when world demand was surging and Iran and Saudi Arabia saw rapid increases in production. Iraq completely nationalized IPC in 1972, during a period when major oil producers worldwide were ending foreign control of their oil industries.

Since then, developments in Iraq's oil industry have been dominated by politics, and Iraq has failed to attain its full potential as an oil producer. After strong production increases in the late 1970s, Iraqi crude oil production peaked at slightly less than 3.5 million bbl/d in 1979. Saddam Hussein's decision to launch a war against Iran in September 1980, however, resulted in chaos in the Iraqi oil industry, and production fell to 1 million bbl/d in 1981. Combined with developments in Iran, this drop in production led to the highest oil prices ever, adjusted for inflation. From 1984 onward, production began to recover and reached 2.9 million bbl/d by 1989.

After Iraq's August 1990 invasion of Kuwait, however, the United Nations Security Council imposed sanctions on Iraq, which prohibited oil exports. Production plummeted to only 305,000 bbl/d in 1991. In May 1996, under pressure from humanitarian organizations, the United Nations Security Council passed a resolution allowing Iraq to begin limited oil sales. The Oil for Food program has since been expanded, and restrictions on export volumes have been removed, but revenues are still routed through an escrow account controlled by the United Nations. In 2000, Iraq's oil production had rebounded to nearly 2.6 million bbl/d. In addition to the Oil for Food program sales, Iraq is known to smuggle out substantial quantities of crude oil and petroleum products in violation of sanctions.

Turkey

Turkey does not have substantial oil reserves, but it is important as a transit route between oil producers in the Middle East and Central Asia and consumers in Europe. Turkish crude oil production in 2000 was slightly under 59,000 bbl/d. Much of Iraq's crude oil exports crosses Turkey via a pipeline from northern Iraq to the Turkish Mediterranean port of Ceyhan. A proposed pipeline would also link oil fields near Baku in Azerbaijan with the Ceyhan export terminal and might carry crude oil from Kazakhstan to the Mediterranean as well. In addition to pipelines, some oil is exported from the Black Sea region by tanker via the Bosporus Straits.