BP & the 100 Year Showdown

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BP & the 100 Year Showdown

In 1872 William Knox D’Arcy had the good sense to marry Elena Birkbeck of Rockhampton, the daughter of a successful mining engineer. After a decent legal career D’Arcy was launched into the world of  gold speculating.

In this, it turned out, he had a special talent.     

By 1889 he was worth £711,000,000 (in today’s money). Most decent Englishmen would retire to their country estate to drink gin and smoke cigars when they achieved filthy rich status… 

Turns out this was only D’Arcy’s opening act. 

Black Gold

In 1900 with the help of a few associates and the grand sum of £20,000 (worth ~US$2.9 million today) D’Arcy and crew locked down the oil rights to nearly the entirety of Iran (1,200,000 km2). In exchange D’Arcy promised Iran 50% equity ownership, including 16% of any future net profits.

 In 1908 he struck oil and the money started rolling in.

But, as Europe descended into World War oil became a strategic resource, prompting the British government to buy a controlling stake in D’Arcy’s venture, effectively nationalizing British oil production in Iran. In 1935 the company was renamed the “Anglo-Iranian Oil Company” (AIOC).

But…  All was not well.  

Throughout Iran discontent was brewing over the management of AIOC, seen as a tool of British imperialism.

The Brits didn’t do themselves any favors; refusing to allow the AIOC’s books to be audited they left the Iranian government with no way of knowing whether they were being paid what they were promised.

But that was about to change…

In 1951, Mohammad Mosaddegh was elected as the 35th Prime Minister of Iran. 

Mosaddegh wouldn’t take no for an answer. When the Brits refused to cooperate, the Iranian parliament voted to nationalize Iran’s oil industry, including the British-built Abadan oil refinery – the world’s largest refinery at the time.

The nationalization of AIOC meant the Iranian government took total control and ownership over the company and its assets.

Calling in the Kermit

This did not sit well with King & country back in the UK. 

Following the nationalization of AIOC, Britain instigated a global boycott of Iranian oil.The UK and US saw Mosaddegh as unreliable and potentially a communist.

Mosaddegh confirmed their fears by dissolving Parliament, giving himself complete control, whilst stripping the Shah (AKA the Iranian King) of any power. 

Mosaddegh granted himself total dictatorial power.

UK prime minister Winston Churchill and the Eisenhower administration now had the excuse they needed to overthrow Mosaddegh’s government and put AIOC back in the hands of Western business owners. The Shah (Reza Shah Pahlavi), who had been reluctant to support the CIA’s demand for a coup, finally agreed to support it. 

In 1953, Mosaddegh’s government was overthrown by MI6 and the CIA, in an operation led by Kermit Roosevelt Jr. (President Theodore Roosevelt’s grandson).

Following the coup, the Shah reigned as leader of Iran and implemented a series of economic, social, and political reforms. He was the founding father of modern Iran as he replaced Islamic law with western law, and forbade traditional Islamic clothing, separation of the sexes, and veiling of women (hijab).

Yes, yes, he was still a dictator, but he was OUR dictator! And most importantly he let the Brits keep their oil!

Oil & Policy

In 1954, Anglo-Iranian Oil Company was renamed once again; to the British Petroleum Company  or “BP.”

When the Shah took power, the British-led oil embargo ended and oil revenues ripped. 

The Anglo-Iranian Oil Company’s monopoly was replaced with a group of corporations that included British Petroleum and eight European and and American companies – called the Oil Consortium Agreement. 

Oil revenues increased from $34 million in 1954/55 to $181 million in 1956/57. 

Not bad for 24-months work. 

As might be expected Iran began to develop rapidly. Reforms resulted in decades of sustained economic growth that made it one of the fastest growing economies in the world. Growth that exceeded the United States, Britain, and France. All  while national income rose 423X. 

But… All good things come to an end.

Nobody likes a dictator… especially one whose reign has the look of a lavish orgy. Eventually the Shah’s total power led to resentment internally and externally. 

Crisis #1

Externally, The US stopped supporting the Shah when Iran supported OPEC’s (Organization of Petroleum Exporting Countries) 1973 oil embargo. This embargo caused the first oil crisis, causing  oil to jump from  $3/bbl to $12/bbl.

After the embargo in 1973, the Shah faced further tensions with the US after announcing he would not renew the consortium’s agreement, and planned to nationalize Iranian oil in 1979.

Internally, the Shah’s regime was seen as oppressive, brutal, corrupt, and lavish. The Shah was perceived by many as beholden to non-Muslim Western powers (i.e., the United States)… which makes sense, because he was. 

Out goes the money, in comes the zealots.

In 1975, oil prices dropped sharply and crushed Iran economically. Things deteriorated quickly due to high inflation and the country’s inability to pay back its debts (sound familiar?). 

Eventually, internal resentment led to the Iranian/Islamic Revolution in 1979 which replaced the Shah’s government with an Islamic anti-Western totalitarian theocracy under the rule of Ayatollah Khomeini. 

Crisis #2

This  led to the 1979/second oil crisis. During the second oil crisis, the fall of Iranian production led to a 4% drop in global oil production, which sent prices higher once again. Prices rose from $14/bbl to $39/bbl.

TODAY: A new wave of protests.

Protests in Iran have been going on for the past several weeks following the death of 22-year-old Mahsa Amini.

Amini was visiting family in Tehran, where she was arrested by Iran’s “Guidance Patrol” for wearing an “inappropriate” hijab. Amini was transferred to the “Moral Security” agency, which informed her brother she would be attending a “briefing class”, and released shortly after.

Amini never made it out.

Kasra Hospital announced Amini’s death after being in a coma for three days, saying she was brain dead on arrival. Police claim she died from a heart issue, but all evidence points to police brutality as the cause of death. 

Anger (rightfully) swept through Iran following Amini’s death, with people risking taking the streets in defiance.

Women burnt their hijabs, cut their hair and screamed “Women, life, freedom” and “Death to the dictator” .

Viva La Revolution!

This response is unprecedented for the last 40 years. The movement is quickly turningfrom protest to revolution

The current regime knows this and is responding with censorship and brutality. 

According to human rights groups, hundreds of protesters have been killed by government officials.

What comes next?

If Khameni’s regime survives, then the Joint Comprehensive Plan of Action (JCPOA), commonly known as the Iran nuclear deal, is almost certainly dead. The most recent discussions ended with German leaders saying that Iran’s nuclear deal with world powers “has no future and is not in line with reality”, also stating that they will not negotiate “with an inhuman regime that is completely rejected by its own people and has no legitimacy whatsoever.”

Khameni stated that “[The West] feel that the country [Iran] is progressing towards full-scale power and they can’t tolerate this.”

Under the JCPOA Iran agreed to dismantle much of its nuclear program and open its facilities to extensive international inspections in exchange for billions of dollars worth of sanctions relief. 

If the Iran nuclear deal dies, It is very possible Iran will charge full steam ahead towards building a nuclear bomb – strategically it will be their best insurance policy against invasion (think Russia and Ukrain). However, there is a very serious risk that Israel would launch a preemptive strike against Iran.

Crisis #3?

Beyond the very scary prospect of a brutal theocratic dictator having a nuke, a revolution in Iran would likely disrupt the global supply of oil for a third time. 

Russia’s invasion of Ukraine has thrown global energy supplies off balance, and a revolution in Iran has the potential to throw fuel on the fire. 

Russia and Iran are the world’s third and seventh largest oil producing countries; supply disruptions from either nation have major implications for energy markets. 

Spare capacity in global oil production has fallen to exceptionally low levels – meaning the world doesn’t have the ability to easily or quickly increase oil production in a meaningful way. 

Global spare production capacity has shrunk to just 1.5% of global consumption according to Saudi Aramco, leaving the market vulnerable to shocks from unexpectedly strong consumption/demand or any disruption to production/supply.

Where will new production come from?

Between 2010 – 2019 U.S. shale producers accounted for nearly the total increase in global crude production. Today these shale companies are opting to limit growth and enjoy higher profits from existing production. The majority of their land producing the cheapest oil has seemingly been drilled. 

Until there is an oil exploration boom, the world may be out of “cheap” oil. Leaving the future supply of oil and gas in a precarious state.

As Churchill said: “Never let a good crisis go to waste.” 

It’s time for investors, and ANYONE hoping to protect their hard earned capital, to start thinking seriously about their portfolios energy exposure.

Jamie Keech

Jamie Keech

CIO; Editor

Nick D'Onofrio

Nick D'Onofrio

Head of Research