Oil and Middle East Politics: the Case of British Petroleum (BP) and Shell in the Suez Crisis

Oil and Middle East Politics: the Case of British Petroleum (BP) and Shell in the Suez crisis

Neveen Abdelrehim

Josephine Maltby

Steven Toms

Introduction

Walker explains crisis as “times of acute disturbance which may impact at the global, national, organisational or personal level”[1]. Historians remain interested and enthusiastic in the search for explanations for continuities and explanations for changes which occur over long periods to help in identifying major vital turning points[2]. The Suez crisis of 1956-57 when the Egyptian leader, Colonel Gamal Abdel Nasser, nationalised the Suez Canal remains a crucial event in 20th-century business and economic history. It presented a number of interesting issues relating to UK relations with Egypt and with the USA which have been explored in previous literature - but it also had an impact on oil companies which has attracted less attention and which, we argue, deserves further exploration. This paper explores the impact of the crisis on 2 oil companies with a major British connection, BP and Shell, and draws a number of comparisons between Suez and the earlier crisis of Iran's nationalisation of BP's Iranian site.

The study is of significant interest to academics and the business community alike, since historical studies offer an opportunity to consider changes in the levels of disclosures in terms of both quantity and quality through the analysis of reactions to social change and regulation. The contextualization of the development of accounting by reference to major key points and periods of crisis assist in the search for the origins of a debacle and try to arrive at conclusions which generate historical evidence.

The objectives of this paper are to undertake a comparative study to examine the role of narrative accounting disclosure for two major oil companies (BP and Shell) to examine and compare the bargaining power of both companies in two important episodes (the oil nationalisation crisis in Iran in 1951 and nationalisation of the Suez Canal in 1956). These were in territories- Iran and Egypt- that were considered as of economic and strategic importance to Britain because they were integral to the post-war imperial system. The paper addresses this objective by analysing relevant narrative disclosures in major archival documents and publicly available annual reports produced by BP[3] and Shell. Our sources are examined to explain how the company’s annual reports were used as part of a propaganda battle. We argue that crisis affects the extent and quality of disclosures made by companies in their annual reports. Its analysis theoretically informed by resource dependency theory[4] as it particularly complements stakeholder theory in coping with the increased complexities arising from a wider stakeholder base[5]. We hypothesize that firms (BP and Shell) with a stakeholder orientation will have high level of disclosures in their annual reports during crisis. Our study contributes to a greater understanding of observed variations in disclosures among two different oil companies (BP and Shell) to understand the differential pressures for disclosure in different periods. These differences permit us to explore differences in managerial disclosures to provide support for a stakeholder explanation for observed differences in reporting during the crisis. Our findings based on a content analysis of 1950-1958 annual reports for BP and Shell in the oil industry lend support to the stakeholder explanation for disclosure practices during crisis. In short, we argue that the annual report disclosures are being used to enhance the bargaining position of the oil companies.

The paper begins by outlining the prior literature and theory development and then goes to the nature of the crisis to consider its reporting by the chosen companies, Shell and BP, in a review of their reporting in financial reports and at AGMs over the period.

Prior Literature and theory development

The widespread use of annual reports plays an important role because they are the main form of corporate communication which can be attributed to an increase in the control of shareholders and may well reflect the company’s appreciation of a genuine responsibility to a wider public than its own shareholders[6]. Annual reports are regarded as a medium for communicating both quantitative and qualitative corporate information to different potential users. They can also be seen as strategic documents as they reflect impressions about a firm’s activities[7]. Annual reports are an important mediating document between various stakeholder groups which include investors, creditors, employees and the government. Van der Laan Smith et al. (2005, p. 127) suggest that success of the corporation requires the support of all its stakeholders through disclosure and open communication between them and the management of the corporation. The primary method for developing such a dialogue is through the company’s annual reports. Gray et al. (1995) highlight that social disclosure is also seen an important part in developing open communication between management and various stakeholder groups. Stakeholder theory defines the constituency of a corporation as “a person or group that can affect or is affected by the achievement of the organisation’s objectives”[8]. As Mitchell et al. (1997, p.855) argued, the stakeholder concept aims to “broaden management’s vision of its roles and responsibilities beyond the profit maximization functions to include interests and claims of non-stockholding groups”. In similar vein, Preston et al. (1999, p.4) emphasise that managers should communicate with their stakeholders about “their respective concerns and contributions and about the risks that they assume because of their involvement with the corporation”. This would require managers to be “equipped with the skills, knowledge and expertise to be able to build effective external relationships and secure adequate resources to address the interest of these multiple stakeholders and wider environmental impacts under current operating conditions”[9].

The underpinning theory that corporations can draw from to ensure effective governance and effectiveness of the directors who make up the board is resource dependency theory. Toms and Filatotchev (2004) addressed the managerial accountability in respect of governance in the context of resource dependency theory. Christopher (2010) argued that the effect of resource dependency theory is to reduce uncertainty and improve the overall efficiency of the organisation and thus reducing costs. Pfeffer (1981) suggests that power accrues to those parties who control resources required by the organisation, creating power differentials among stakeholders. Pfeffer and Salancik (1978) characterized the managerial role as crucial in enhancing the company reputation and in steering it in the right direction. Thus, managerial disclosure can be viewed as a strategic plan to allocate limited resources of the firm and manage stakeholder relations[10]. This in turn would be reflected in the managerial disclosure to stakeholders through the level and type of disclosures during crises.

Significance of Suez

The Suez Canal Company was an Egyptian chartered company owned by French and British investors with the British government acquiring 44 per cent of the voting shares. It held a unique place “in both the mythology and practicalities of empire-its defence, imperial and commonwealth trading links, and passenger routes and with the onset of Cold War, the artery had acquired the status of a vital base against possible communist expansion of attack”[11].

Under nationalisation, Egypt took over all assets, rights and obligations of the company and created an independent Egyptian agency to operate the Canal. Shareholders of the company were to receive compensation on the basis of the last-quoted price for the shares payable when Egypt had received all the assets and property of the company[12]. Nasser aimed to secure for the Egyptian government the rights to nationalise its resources and exclude foreign companies from exploitation, challenging the Western world by standing in opposition to imperialism. The Egyptian president believed that British imperialism had contributed insufficiently to Egypt’s economic and social progress and was aware of the fact that the Egyptians were hired only for unskilled positions. It has been argued (e.g. by Onslow that Musaddiq’s nationalisation of the assets of BP (then the Anglo-Iranian Oil Company AIOC) in 1951 in Iran was a significant contributory factor behind Nasser’s challenge to British interests which culminated in the Suez crisis[13]. It can be argued that failure to respond to the Iranian crisis in 1951 led to disaster elsewhere. As explained by Onslow, “the humiliating outcome of the withdrawal of British personnel under duress from the Abadan refinery decided the battle lines within the party over the future of the Suez Canal base”[14]. (For a consideration of the impact of the Iranian nationalisation see Abdelrehim et al 2012 and 2011).

The Suez Canal and its importance to the British Empire had dramatic and enduring consequences that had long been a major subject of study. As Bamberg argued “No event in the post-war years exposed more starkly the decline in Britain’s power and Western Europe’s growing dependence on Middle East oil than the Suez Canal crisis which broke out in 1956”[15].

In the next section the background to the Suez crisis is presented, together with a timeline of key events for the Suez crisis in order to set the context for the subsequent analysis. The subsequent section outlines the research methodology utilised explaining the content analysis of relevant disclosures from the financial reports published by BP and Shell during the period 1951-1958. The final section draws conclusions.

Key events of the Suez crisis

After 1945, nationalisation appeared to be an approach in a number of Britain’s decolonising territories[16]. Britain’s difficulties with the Iranian government in 1951 appeared directly to encourage “Egyptian intransigence over Britain’s continued presence at the Suez Canal Zone base. British power and prestige and her ability to maintain and protect her influence in the Middle East an area in which she dominated since the end of the First World War was under grave threat and required a robust response. Nothing less than Britain’s future as the premier power-the basis of her great power status- was at stake”[17]. BP in Iran had long acted as an agent of empire in blocking the predatory tendencies of other great powers[18]. Therefore, the nationalisation of BP by Musaddiq “raised the whole question of British influence in the Middle East. If he was allowed to get away with it, followed almost automatically that someone (like Nasser) want to nationalise the Suez Canal Company”[19]. As White highlighted, no imperial business leader could have failed to observe the Iranian nationalisation in 1951 as an example of worldwide failure of British governments to protect commercial interests from the predatory instincts of determined post-war economic nationalists[20].

Table 1 below illustrates that the years preceding the Suez nationalisation witnessed a series of failed proposals on the one hand, and a succession of Egyptian government and institutional changes on the other. Clearly, with the nationalisation of Suez Canal, the international economy witnessed fundamental changes and the oil industry became a central issue on the political agenda.

Table 1: Timeline of key events for Suez crisis, 1952-1957

Date / Event
1952 / King Farouk was overthrown by Muhammad Naguib [21]
13 Nov. 1954 / Nasser takes over from Neguib as president. Signs agreement for withdrawal of UK troops by June 1956
Nov 1955 / Oil at this date= 2/3 of all traffic on Suez canal[22]
Jan 1956 / US and UK pledge finance towards Aswan dam
13 June 1956 / Britain withdraws from Suez Canal
23 June 1956 / Nasser elected president
19 July 1956 / US then UK withdraw offer of Aswan funding, World Bank follows suit.
26 July 1956 / Nasser nationalises Suez Canal to obtain funding for Aswan
9 Sep 1956 / Peace talks collapse
October 1956 / France, Israel and UK pledge to attack Egypt/regain control of Canal
29 October 1956 / Israeli attack on Mitla Pass (Sinai Peninsula)
5-6 Nov 1956 / Successful Anglo-French assault halted by UN ceasefire
29 Nov 1956 / Tripartite Invasion officially ended
Dec 1956 / Petrol rationing in UK
24 Dec 1956 / Anglo-French troops leave Egypt
Winter 1956-57 / ‘Oil lift’ and ‘sugar bowl’ pooling arrangements (Europe collectively, Europe with US) are finally put into place to ensure emergency supplies.
Delays to Oil Lift described by Eric Drake (BP) as ‘nothing less than a calamity for Europe’[23]
28 Dec 1956 / Operation starts to clear sunken ships from Canal
15 & 17 Jan 1957 / UK and French banks in Egypt nationalised
15 March 1957 / Nasser bans Israeli use of Canal
April 1957 / Canal reopens, April 19 First British ship pays toll for Canal passage
Mid May 1957 / End of petrol rationing in UK. ‘Suez crisis was really over’[24]

Source: Yergin

The Suez Canal was the main highway and the lifeline of the British Empire linking England to India and the Far East. During 1950, Europe’s reliance on Middle East oil was growing with 90 percent of oil supplies derived from concessions in this region[25]. In 1955, the Americans in conjunction with the British and the World Bank have considered a loan to Egypt to build a huge Dam at Aswan on the Nile. However, on June 1956, opposition was rising in the United States because of their fear that Egyptian cotton crop would then increase which would then compete with the American exports on the World market. On 19 July 1956, the proposed Aswan Dam loan was cancelled taking Nasser by surprise. Nasser was annoyed and as a consequence on July 26th 1956, he announced his decision to nationalise the Suez Canal and use the tolls from the canal in financing the Aswan Dam. As with the Iranian oil concession, most of the Suez Canal’s earnings derived from tolls were going to European shareholders, including the largest shareholder of all, the British government (Yergin, p. 463). Tolls were paid to the company which in turn provided Egypt with a share of the profits. The total earnings of the Canal constituted a formidable sum but the share of the Egyptian government in the profits was relatively small. Nasser explained that the oil producing countries received 50 per cent of the profits from their oil but Egypt did not get 50 per cent of the profits from the Canal. Evidently, the Canal Zone was left at the mercy of the British government under the terms of the 1936 Anglo-Egyptian treaty and Nasser wanted to take for the Egyptians the maximum profits from their resources and make every effort to provide for the welfare of the disadvantaged elements in their own population. Nasser stated that the Egyptian policy was to assure: