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Iran sanctions: Tehran is no stranger to oil's upheavals

US sanctions will target Iran’s energy industry from November. But the country where the first Middle Eastern oil discovery was made has faced many past vagaries in oil fortunes

It all began in London in 1900. An emissary of the government of Persia (as Iran was generally called up to the 1930s) was on the lookout for someone who might be interested in buying a concession to search for oil. A retired British diplomat recommended "a capitalist of the highest order", William Knox D'Arcy. He was an Englishman who had spent time in Australia and had made money in a gold-mining venture there. He was up for taking a punt in Persia.

In 1901, he sent a representative to Tehran, and negotiations with Shah Muzaffar al-Din began. The Persian government was keen for a Briton to win the concession to balance Russian influence in the country. This factor helped smooth the discussions, which eventually ended in D'Arcy agreeing to pay £20,000 in cash and the same amount in shares—plus 16% in annual profits. In return, he was given a 60-year concession covering three-quarters of Persia.

Thus, the first oil deal in the Middle East had been done, but the hard work was yet to come. As Daniel Yergin wrote in The Prize: "D'Arcy had no organisation, no company, only a secretary to handle his business correspondence. To put together and run the operations on the ground in Persia, he hired George Reynolds, a graduate of the Royal Indian Engineering College with previous drilling experience in Sumatra."

Drilling began in 1902, with the focus on the south-west of the country. As the months and years passed, the money started to run out. Even the determined and enthusiastic Reynolds was losing heart. D'Arcy was on the point of pulling out of Persia altogether when, in May 1908, oil was discovered at Masjid-i-Suleiman. As Yergin put it, "a gusher of petroleum, rising perhaps fifty feet above the top of the drilling rig, was smothering the drillers". The history of modern Persia, soon to be known by its endonym Iran, had begun.

A year after that first discovery the Anglo-Persian Oil Company was formed, and in 1914, with an eye on the need for a secure flow of oil to power its navy, the British government took a majority share in the company. In practice, Britain controlled Persia's production and exports—a state of affairs that would increasingly rankle with the population. In 1933, just before the name of the company was changed to the Anglo-Iranian Oil Company (AIOC), a new deal, slightly more favourable to Tehran, was agreed.

Despite making some concessions to Iran, Britain insisted on keeping control of exports. This contributed to rising anti-British feelings in the years after World War Two. The Iranians accused the British company of unfairly exploiting their country's natural resources by failing to channel a sufficient amount of oil revenue into the national coffers. They also wanted more representation in the AIOC management.

Matters came to a head in 1950, when the Iranian parliament voted to nationalise the oil industry. The following year, with nationalist prime minister Mohammad Mossadeq in power, the government took over AIOC. Most of the 3,000 expatriates, overwhelmingly Britons, working for the company were forced to leave via the port of Abadan. One of those in the final group recalled that they were "all marshalled down at the Gymkhana Club and then went out by launch to HMS Mauritius. When we were all on board the naval band began to play and we sailed off to Basra."

Mossadeq was subsequently removed from power by a coup engineered by Britain and the US, but Iran retained the right for a half-share of AIOC profits.

The next major upheaval came in 1979, with Ayatollah Khomeni's Islamic Revolution that overthrew the shah. Even in the months before that, strikes had severely disrupted oil production and by the end of 1978, output had stopped. After the revolution, the National Iranian Oil Company took over all operations in the country.

That was the last occasion when the flow of Iranian oil came to a halt. During subsequent periods of economic sanctions imposed on the country, Tehran has always found customers for its oil and gas. It will, too, after November. Iranians know, based on experience over the past 110 years since the first discovery, that while oil can bring prosperity it can also spell trouble.

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