National Iranian Oil Company Business Information, Profile, and History

Company Perspectives:

Now in its 24th year of self-reliance, the national petroleum industry is moving on with full strength and confidence utilizing up-to-date technology, powerful and innovative management, highly skilled and creative manpower resources, and a futuristic approach to planning development projects.

History of National Iranian Oil Company

The second largest producer of oil among Organization of the Petroleum Exporting Countries (OPEC) companies in 2003, state-owned National Iranian Oil Company (NIOC) boasts about 7 percent of the world's total oil reserves. Its natural gas reserves are the second largest in the world, totaling about 812 trillion cubic feet in the early 2000s. NIOC produces some 3.8 million barrels of oil daily, and it provides nearly half of the Iranian government's revenues. Earnings from oil exports account for about 80 percent of the country's total export revenues. The company hopes to step up its exploration efforts in the early 21st century.

Nationalizing the Oil Industry: 1940s-50s

NIOC was formed as a result of tensions between the British-owned Anglo-Persian Oil Company--renamed Anglo-Iranian Oil Company in 1935 and British Petroleum Company in 1954--and the Persian and then Iranian government, which came to a head after World War II. The British oil company had found oil in southwest Iran in 1908 and, on the basis of this discovery and the support of the British government, which acquired a 51 percent shareholding in it in 1914, it had grown to become one of the world's largest international oil companies by the 1930s. There was resentment within Iran, however, at the privileged position held by Anglo-Iranian, and its close association with the British government, whose imperialist ambitions were feared. The British invaded and occupied Iran in alliance with the Soviet Union in 1941, which did nothing to reduce suspicion of the oil company. There was particular resentment at the low amount of royalties paid to the government by Anglo-Iranian. In 1948 negotiations began to improve the share of oil income retained by Iran, but these were unsuccessful, and in 1951 the strongly nationalist prime minister, Dr. Muhammad Mussadegh, nationalized the oil industry. The resulting conflict became one of the great causes célèbres in the history of oil-company-host-government relationships in the 20th century.

NIOC was incorporated by the Iranian government on April 30, 1951, as the corporate instrument of the government's nationalization policy. Initially it took over all the employees and physical assets of Anglo-Iranian within Iran, with instructions to set aside 25 percent of its profits to meet compensation claims by the British company. NIOC's attempts to take control of the industry were gravely weakened, however, because the main international oil companies boycotted Iranian oil exports to demonstrate their support for the British company. Iranian production collapsed, as the oil majors replaced Iranian oil with expanded production from Kuwait and Saudi Arabia. In 1953 Mussadegh was overthrown in a coup. In the following year agreement was reached between the conflicting parties. The result was a new role for NIOC.

In September 1954 an eight-member consortium called the Iranian Oil Participants (IOP) was formed. The arrangement was similar to others in operation in much of the rest of the Middle East. The shareholding was in the hands of the major Western oil majors. British Petroleum Company (BP) held 40 percent, Shell 14 percent, Chevron 8 percent, Exxon 8 percent, Gulf 8 percent, Mobil 8 percent, Texaco 8 percent, and Compagnie Française de Pétroles 6 percent. NIOC was recognized as the owner of Iran's oil deposits and of all installed assets of the Iranian oil industry, but actual control over the industry was placed firmly in the hands of the consortium members. NIOC lacked influence over the production, refining, and export of Iranian crude oil and products. Two companies owned by IOP--the Iranian Oil Exploration and Producing Company and the Iranian Oil Refining Company--operated the assets formally owned by NIOC, to whom they were officially appointed as contractors. They produced oil for NIOC, which was then sold to IOP member companies that were responsible for export marketing. An additional secret agreement between the IOP companies, which did not become public until the early 1970s, established the aggregate programmed quantity formula, which effectively gave those member companies with the lowest reliance on Iranian oil the greatest influence over how much should be produced. The upshot was that Iran's oil production grew comparatively slowly over the following decade.

Despite these constraints, NIOC was able, during the second half of the 1950s, to develop its role as an independent oil company. A law in 1957 empowered it to enter into joint ventures with foreign oil companies to explore areas other than those leased to IOP. The first joint venture agreement was signed by the Italian oil company Agip SpA. This was a subsidiary of the state energy corporation ENI and was led by the entrepreneurial Enrico Mattei, who was searching for a source of cheap oil not controlled by the oil majors. In August 1957 the Société Irano-Italienne des Pétroles (Sirip) was formed, owned 50 percent by NIOC and 50 percent by Agip. In June 1958 a similar joint venture agreement was signed with Standard Oil Company of Indiana, which formed a company jointly owned with NIOC called the Iran Pan American Oil Company (Ipac). By 1961 both ventures were producing crude oil, with Ipac enjoying particular success.

Seeking Independence and Strength Through Joint Ventures: 1960s-70s

The joint venture strategy was developed in the 1960s. In 1965 six new joint venture agreements were signed, followed by three more, including one with a Japanese group, in 1971. In December 1966 the Iranian government, having discovered the existence of the aggregate programmed quantity formula, forced IOP to increase production to give up 25 percent of the area in which it had exploration rights, and to supply NIOC with 1.47 billion barrels of crude oil for export over the following five years. As a result of the joint venture arrangements and the December 1966 agreement NIOC began to have its own supply of crude oil, although it still controlled only a tiny proportion of total Iranian crude exports. In 1960 the consortium accounted for 99.9 percent of Iranian crude oil exports. By 1973 its share had fallen to 89.2 percent. NIOC accounted for 5.8 percent and the varying joint ventures accounted for the remaining 5 percent by that date.

During the second half of the 1960s NIOC heightened its exploration efforts within Iran through the use of service contracts. Service contracts differed from joint ventures in that the foreign operator had no ownership rights in Iran at all, but was only a contractor working for NIOC and was remunerated for its services with crude oil. In August 1966 NIOC concluded a 25-year service contract with the French state oil company ERAP, which created a new Iranian-registered subsidiary, Sofiran, to explore for oil. NIOC made all policy decisions in respect to Sofiran's operations within Iran, while Sofiran had functional management responsibility. During 1969 two further service contracts were awarded to a group of European oil companies and of U.S. independents.

During the 1960s NIOC had sufficient crude to begin international marketing. Initially, attention was focused on Eastern Europe, Asia, and Africa. In Eastern Europe NIOC reached a number of barter agreements, under which it would exchange oil for manufactured goods. NIOC also sought to establish a presence in overseas refining. In 1969 NIOC and Standard Oil Company of Indiana each took a 13 percent stake in an Indian refinery at Madras that was supplied with Iranian crude by Ipac. In 1971 NIOC took a 17.5 percent interest in a new South African refinery, again signing a long-term supply contract. In the same year, a 24.5 percent stake was taken in the Madras Fertilizer Plant. A tanker fleet was developed by a NIOC subsidiary, the National Iranian Oil Tanker Company. By 1974 the fleet had four oceangoing tankers. In 1965 NIOC established another subsidiary, the National Petrochemical Company (NPC), which launched a series of wholly owned and joint venture chemicals and fertilizer plants within Iran. By the early 1970s NIOC had become a medium-sized international oil company, ranked alongside ENI and U.S. independents such as Atlantic Richfield Company and Occidental. In terms of share of world crude oil production, it controlled slightly less than 1 percent at this time, which made it about the 19th largest oil company in the world by this measure.

The Iranian government was a prominent player in the events in the early 1970s that led to the end of the consortium system in the Middle East, and the huge price rises of 1973 and 1974. Because the 1951 nationalization of the Iranian oil industry had never been canceled, however, there was no formal transfer of assets of the kind seen almost everywhere in the Arab world. In July 1973 negotiations between IOP and the Iranian government led to a new agreement, which replaced that signed in 1954. NIOC assumed sole responsibility over the former consortium area. The IOP member companies agreed to provide part of the future capital investment in production operations by NIOC in the form of annual prepayments against their future crude oil purchases. The IOP companies also were given preferential oil-purchase rights in Iran for a period of 20 years. Subsequently, there were endless disputes between the oil company, the Iranian government, and NIOC about these arrangements, which continued right up to February 1979, when the shah and his government were swept away by the Islamic revolution.

Throughout its existence in the shah's Iran, NIOC had been an instrument of the government. Nominally it was a public company and not a state-owned corporation, although all its shares were government owned. In practice NIOC operated under the close scrutiny of the government. The prices of its four main products--gasoline, kerosene, gas oil, and fuel oil--could not be changed without the approval of the Iranian Cabinet. In 1962 Dr. Eqbal, a former prime minister, was appointed chairman and managing director, and government control was further exercised through a body called the Shareholders's Representatives, which consisted of seven ministers headed by the contemporary prime minister. Oil was the driving force behind the shah's flawed attempt to modernize Iran, hence NIOC was of key strategic importance to the regime. Oil provided 90 percent of Iran's foreign-exchange earnings in the last years of the shah's rule. Given the atmosphere of corruption that pervaded most aspects of Iranian life by the 1970s, it was remarkable that NIOC was able to develop and function as a modern integrated oil company, but the enterprise was not immune to the intense personal and political rivalries that afflicted the ruling elite.

Struggling to Survive Under Political Upheaval: 1980s

NIOC was placed under the direct control of a newly created Ministry of Petroleum in September 1979. The Islamic government immediately ended the purchasing privileges enjoyed by IOP, and the 1973 agreement with IOP was abrogated by Iran in 1981. In 1980 all NIOC's joint venture and service contract agreements with foreign oil companies were terminated. The joint venture companies were wound up and regrouped under the Iranian Offshore Oil Company of the Islamic Republic. Names of oil fields with imperial connotations were changed. From 1980, for example, Cyrus became Sorush, and Feridun became Foroozan. The investment in the South African refinery was abandoned, although NIOC retained its holding in India's Madras refinery. There was a period of considerable confusion in the first years after the revolution, with NIOC losing strategic direction. The first postrevolutionary chairman, Hassan Nazeh, caught on the wrong side in this period of rapid political change, resigned along with the rest of the board of directors six months after his appointment, and fled to France. The influence of the workers' committees that sprang up in this period was a prime reason for management instability, but NIOC seems to have been able to retain some professional managers by hiring them on advisory contracts.

The following years were bleak ones for the company. Oil production fell 75 percent between 1979 and 1981. The disruption caused by the revolution was followed by the imposition of trade sanctions by the United States and other industrial countries during the period of the U.S.-Iranian hostage crisis between November 1979 and January 1981. The outbreak of war with Iraq in September 1980 was followed by physical damage to oil installations. The large Abadan refinery was badly damaged by Iraqi attacks in 1980 and 1982. Iran's main crude oil export terminal at Kharg Island was damaged repeatedly by Iraqi air attacks, and in August 1986 NIOC's Sirri Island terminal was wrecked by Iraqi bombers. NIOC had to switch to a temporary loading point at Larak Island, in the Strait of Hormuz, which could be better protected but raised costs. The revolutionary government was committed to reducing Iran's dependence on oil, and had a stated policy of restricting output to less than three million barrels per day. In practice, the disastrous war with Iraq, combined with the deterioration in the world market for crude after 1981 and OPEC export quotas, left NIOC in no position to expand production even if it had so wanted.

NIOC's situation when the Iranian cease-fire with Iraq was arranged in August 1988 was difficult. Many oil installations were destroyed. By 1990 crude oil production had risen to 2.3 million barrels per day from two million in 1988 with exports averaging 1.7 million barrels per day, but refining capacity was still down, and NIOC had to import some petroleum products from overseas refineries that processed Iranian crude.

NIOC displayed considerable resilience in these circumstances. Its oil engineers were able to repair war damage and increase production during 1989, which grew to 2.85 million barrels per day. During 1989 several new medium and large oil fields were discovered. Plans were made to construct additional refinery capacity of 450,000 barrels per day, mostly at Bandar Abbas and Arak, by the end of 1993. At the end of 1990 a contract was awarded to ETPM Entrêpose of France to rebuild the Kharg oil export terminal.

In 1991 NIOC remained as dependent as ever on the political conditions in its home economy and region, which had been thrown into uncertainty yet again by Iraq's invasion of Kuwait in August 1990. Leaving aside these fundamental uncertainties, the company controlled a considerable amount of crude oil production. In 1990 it was announced that it would join with Malaysian and Indonesian interests in a new refinery project in Keddah state, Malaysia. NIOC also claimed to operate, through its subsidiary the National Iranian Oil Tanker Company, the world's third largest tanker fleet of 5.55 million tons. The company owned 28 oil tankers and 32 other vessels and had on charter 35 oil tankers and 34 other vessels. NIOC was also one of the largest employers in Iran, where it was engaged on a large scale in the provision of housing and medical care for its workers alongside more conventional activities. Arguably the rehabilitation and further development of the Iranian oil industry would be best achieved by re-establishing contracts with Western oil majors who could provide technology and expertise, but that--like so much in NIOC's history--would be a political decision on which NIOC's management was unlikely to have the final word.

Continued Struggles Amid Sanctions in the 1990s-2000s

As NIOC headed into the 1990s, it worked to rebuild itself and regain strength lost during the war against Iraq. NIOC planned to build five new refineries with an aim to have 11 operational plans in the mid-1990s. In addition, the company expressed an interest in working with Western countries to develop oil and gas projects in Iran. In the early 1990s Mobil Corporation and Coastal Corporation began purchasing Iranian crude oil, and NIOC claimed it was in negotiations to sell crude to additional U.S. companies.

NIOC's attempts to establish ties with U.S. investors came to a halt in 1995 when U.S. President Clinton imposed sanctions against Iran. The sanctions prohibited U.S. companies and any foreign subsidiaries from engaging in business activities with Iran or providing financing for energy exploration or development. President Bush extended the sanctions in March 2003. In addition, to further discourage business dealings with Iran, in 1996 the U.S. Iran-Libya Sanctions Act was enacted. It imposed sanctions on non-U.S. businesses that invested more than $20 million per year in Iranian oil or natural gas markets. The Act was extended for an additional five years in July 2001.

In October 1999 Iran made what it believed to be its largest oil discovery in 30 years: an onshore field known as Azadegan, located near the Iraq border in the southwestern province of Khuzestan. Estimated to hold in-place oil reserves of 26 to 70 billion barrels, Azadegan had the potential to produce some 300,000 to 400,000 barrels per day over 20 years. On November 1, 2000, Japan earned exclusive negotiating rights to develop Azadegan in exchange for a $3 billion loan to Iran. Japan negotiated the agreement for a consortium of Japanese firms that included Japex, Inpex, and Japan National Oil Corp. Negotiations dragged on, however, and by early 2003 no final agreement had yet been reached. In addition, the United States placed pressure on Japan to delay any finalization of the agreement until Iran agreed to allow more thorough inspections of its nuclear plants. In September 2003 Iran indicated it would open negotiations regarding Azadegan to other countries, and in November Iran announced that it was in talks with France's TOTAL S.A. and Norway's Statoil.

Another significant oil discovery NIOC made since 1995 was the Darkhovin onshore oilfield. The field was estimated to have reserves of three to five billion barrels. NIOC made a deal with ENI of Italy in 2001 to develop Darkhovin. Production output was expected to reach 160,000 barrels per day. In February 2001 NIOC discovered a large offshore oilfield known as Dasht-e Abadan.

All of NIOC's agreements with foreign companies fell under the regulations of Iran's 1987 Petroleum Law. The law allowed for contracts with outside companies under a buyback system, meaning the foreign company provided all financial investments and at the end of the contract gave up all operating rights to the state company. In return, the foreign company received a share of the production at a set price. Buyback contracts generally were for short periods of time, which often was a disadvantage to the foreign company. NIOC's risk was that oil prices could drop below the fixed compensation rate.

Despite the somewhat unattractive nature of buyback contracts, many foreign companies signed agreements with NIOC to develop oil fields. The first under the agreement came onstream in October 1998 and was the offshore Sirri A field operated by TOTAL and Petronas of Malaysia. The following year Iran signed contracts with France's Elf Aquitaine and Italy's ENI/Agip to implement an oil recovery program at the Doroud oil and natural gas field. Iran also agreed to allow Bow Valley Energy of Canada and TOTAL to develop the Balal field, an offshore oil field with 80 million barrels of reserves. In 2000 Iran signed a development deal with Statoil that allowed Statoil to begin exploration of the Strait of Hormuz region as well as to develop a processing plant for four onshore fields.

The industrywide plunge in oil prices in the late 1990s adversely affected NIOC's revenues, but by the early 2000s Iran was able to establish an oil stabilization fund thanks to high oil export revenues. The fund included the earnings that were above budget and by about 2003 totaled about $8 billion.

The Iranian government remained confident its economy would stabilize, and in keeping with this belief it established a five-year economic plan in 2000 that called for the privatization of a number of Iran's major industries, including parts of the oil and natural gas markets. The government hoped to boost GDP and create hundreds of thousands of new jobs, but political opposition slowed the restructuring process.

Despite its worn, out-of-date oil industry, NIOC moved ahead with goals to increase foreign investment and oil output. Increased earnings meant NIOC might be able to modernize its oil industry and invest in improved technology. The company hoped to boost oil production to seven million barrels per day by 2015, and to accomplish this it would need foreign investments of as much as $5 billion annually. In late 2003 Iran boasted 32 producing oil fields and net exports of about 2.6 million barrels per day. Iran exported oil to a number of customers, including Japan, China, South Korea, Taiwan, and Europe. Iran was the largest heavy fuel oil exporter in the Middle East.

Principal Subsidiaries: National Iranian South Oil Company; National Iranian Offshore Oil Company; National Iranian Central Oil Fields Co.; Khazar Exploration & Production Co.; Petroleum Engineering & Development Co.; Pars Oil and Gas Company; Pars Special Economic Energy Zone Co.; National Iranian Oil Terminals Company; National Iranian Drilling Company; Petroiran Development Company; Fuel Consumption Optimization Org.; Kala Naft London Ltd.; Kala Naft Canada Ltd.

Principal Competitors: Petróleos de Venezuela S.A.; Petróleos Mexicanos; Saudi Arabian Oil Company (Saudi Aramco).

Chronology

• Key Dates:
• 1951: The Iranian oil industry is nationalized, and National Iranian Oil Company (NIOC) is founded.
• 1954: The Iranian Oil Participants (IOP), an eight-member consortium, is established.
• 1957: NIOC begins forming joint ventures with foreign companies.
• 1979: NIOC comes under the control of the newly formed Ministry of Petroleum.
• 1995: The United States places economic sanctions against Iran.
• 1999: NIOC discovers Azadegan, the largest oilfield discovery in 30 years.