Basis for the Settlement with AIOC
Memorandum by Anglo-Iranian Oil Company

The Mossadegh Project | July 31, 2019                                                         



ANNEX I

Memorandum by Anglo-Iranian Oil Company

12th March, 1954

IRAN

Basis for the Settlement with Anglo-Iranian


1. In considering the question of a settlement, it is advisable first to review the situation as regards oil reserves.

The PROVED RECOVERABLE RESERVES are estimated at 1,700 million tonnes so that with no extension or exploration drilling, the reserves actually provided are more than needed for continuing to produce at the constant rate of 30 million tons per annual for the next 40 years. If production were restored to 30 million tons at the end of three years and increased thereafter at 5 per cent per annual, the total quantity produced for a period of 20 years would be 875 million tons, i.e. only just about half the proved reserves.

Probable reserves, with extension drilling on producing fields only are estimated at 5,500 million tons, much more than sufficient to sustain an increase of 5 per cent per annual for 40 years which, by comparison, would require only 3,261 million tons.

Unproved reserves are estimated at very much greater figures.

There is, therefore, no room for doubt as to the adequacy of Reserves for any reasonably foreseeable production rate over the 40 year period of the Agreement.

One approach to the problem of assessing what Anglo-Iranian should receive for the deprivation to which it has been subjected would have to do this by reference to the Oil Reserves, valuing these at a rate per barrel, as is done elsewhere in the sale and purchase of oil rights. Using even a much lower rate than has applied in other areas, very large figures would result - 5,500 million tons at 20 cents per barrel represent over 8 billion dollars - and it is felt that this approach to the problem is not the one to adopt.

The more practicable approach is considered to be to view the matter more by reference to Production than to Reserves, against the background of the knowledge that there are Reserves ample by a large margin to support a continuing expanding product for which large scale and efficient facilities are already provided.

2. Anglo-Iranian’s view has been that the circumstances call for the payment to it of compensation by Iran in addition to the consideration to be received from the other participants in the Consortium for their acquisition of interests in the oil resources Anglo-Iranian has proved and developed, and of rights to the use of facilities it has provided.

It is felt that there is, as regards the payment of compensation by Iran, an important principle involved - that the preservation of Comity in international commerce requires the payment of compensation for rupture of Agreement. The obligation to pay compensation, clearly recognized by Iran, also appears as a real interest of Iran from the stand point of repute and all that implications for a country which needs foreign investment for development.

Anglo-Iranian does not seek to obtain from Iran compensation burdensome to Iran’s economy either as to amount or as to manner of payment. It is proposed that compensation to Anglo-Iranian should be paid in the form of crude oil free of cost which can be delivered at very little expense to Iran and that the delivery of the oil should be spread over a period of years at a rate related to the Consortium’s offtake. It is considered that the measure of the amount to be delivered in each year should be 127 per cent of the Consortium’s production for its own account in that year, the pro-rata costs of producing this additional amount of oil being borne by Iran and that the total quantity so to be made available to Anglo-Iranian over a period should be 110 million tons.

If the Consortium’s production program on its own account should be 10 million, 20 million and 30 million tons respectively in the first, second and third years, increasing thereafter at 5 per cent per annual, the deliveries of compensation oil would be 14 million tons in the first year rising to 3 million tons in the third year and increasing my rate of 5 per cent per annual thereafter - and the total quantity of compensation oil would have been delivered at the end of 20 years.

3. As regards the consideration to be paid to Anglo-Iranian by the other participants, it is suggested that this should amount, for each 1 per cent participation to:

                  £2 million Cash Down Payment

and

annual payments in sterling at the rate of 10 cents per barrel on each year’s production until the Participant has taken 8.75 million tons per 1 per cent participation. This, on the production schedule referred to above, would be for a period of 20 years.

4. In arriving at these figures, Anglo-Iranian has regard to a Cash Down Payment of $1 million per 1 per cent participation as applicable to crude oil production, and £1 million per 1 per cent participation as related to the Refinery facilities.

In considering the Refinery element, Anglo-Iranian has had in mind the doubts which have been expressed in the discussions as to the practicability of restoring operations at Abadan to the former level.

5. It is considered that the Stores stock (which will be needed by the Consortium for the maintenance of operations) should be separately deal with and, together with the stocks of all, should be regarded as Anglo-Iranian property, to be acquired by the Consortium.

The estimated values ​​are: -

Stores etc.        £20m.        (which is below current replacement value)

Oil Stocks        £14m.        (which is below the value, at Platt’s Low, of the stocks left in September 1951)

£34m.

To finance this Consortium purchase, 40 per cent of the amount would be provided by Anglo-Iranian as a Consortium Member; the contribution from the other participants would be 60 per cent - £20.4 million or, say £20 million.

6. It has been assumed that the Consortium would not be concerned with what may be regarded as the “Internal Consumption” facilities, i.e. the Naft-i-Shah field, Kermanshah Refinery and the Distribution Assets. Anglo-Iranian would regard these as provided for within the compensation payment referred to in paragraph 2 which, it is desired to emphasise, is framed on the assumption that, in conjunction with the New Agreement, it wipes the slate clean as between the Iranian Government and Anglo-Iranian.


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Related links:

Sir William Fraser’s Statement To AIOC Stockholders (June 1954)

Anthony Eden Confirms Iran Oil Consortium Plans (Jan. 1954 Memo on “Persian Oil”)

Status Report on Iran Oil Negotiations (Donald D. Kennedy, June 16, 1954)



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