The Seven Sisters The Great Oil Companies and the World They Made
Anthony Sampson Hodder and Stoughton, 1975, ISBN 0 340 19427 8 Chapter 11 - Part 1 The Crunch The price of an article is exactly what it will fetch. -- Marcus Samuel of Shell, 1911 AFTER the Teheran and Tripoli agreements, for the next two-and-a-half years, the companies were in trouble on three separate fronts. First the producers were demanding part-ownership of the concessions, or 'participation'. Second, there were increasing signs of an oil shortage. Third, the Arab-Israel situation was again heading towards conflict. The convergence of the three was to produce the greatest crisis in the history of world oil. Participation For the more radical Arabs the whole concept of oil concessions -- which had been leased to the companies under quite different regimes and conditions for very long periods -- was increasingly unacceptable. The notion that a producing country was entitled to part-ownership of the concession -- as opposed to merely taxing it -- had been enshrined as long ago as 1920, as we have seen, in the San Remo agreement over Iraq, and ever since ignored. In the meantime the angrier radicals had favoured the more extreme course of wholesale nationalisation. But that drastic remedy, whether in Mexico in 1938 or in Iran in 1951, carried the danger of excluding the producers from the oil markets. How could producers take over control, and yet remain part of the world market system? In the late 'sixties they began to concern themselves with the idea of gradual nationalisation, under the tactful slogan of 'participation'. The chief advocate of participation was not one of the fiery extremists from Libya or Iraq, but the man who had been the special favourite of the oil companies, a graduate from Harvard, from the most conservative country of all. Sheikh Zaki Yamani of Saudi Arabia was to be the dominant figure in the next stage of the conflict. He had gained great confidence since he had first become King Feisal's oil minister in 1962. His old oil company friends, who used to regard him as a clever young protegˇ, now found themselves being kept waiting outside his huge office in Riyadh, or pursuing him as he flitted between capitals, exercising his growing power with obvious relish. He was quicker than most of them; with his sharp eyes, his Mephistophelean beard and his debonair style, he was like an unbottled genie from Arabia, impatient to take over from his master. Yamani had been a director of Aramco since 1962, but his apparent involvement only made him more aware of his exclusion from the crucial decisions. As he put his case later, 'I want to know what is going on and I want to have a say in it. And that is what frightens them most.' (Leonard Mosley: Power Play, London, 1974, P. 395.) Yamani realised the dangers of abrupt nationalisation, and the need to maintain the orderly system of the oil companies; and in this he was at loggerheads with his predecessor Tariki, who was now advising other oil countries, and firmly advocating nationalisation. Yamani believed that the oil producers should gradually edge their way into the intricate world system, without disrupting it. The producing countries could take over a share of the oil, and could thus build up their own national oil companies -- Petromin in Saudi Arabia, KNPC in Kuwait, NIOC in Iran. In other words, OPEC would not beat the cartel, but join it. Yamani had been interested in some form of participation for many years, but he first boldly proclaimed his policy in a seminar at the American University in Beirut in June 1968. It was in the wake of the humiliation of the Six-Day War, when the West was most sceptical of Arab effectiveness and Yamani felt the need for a militant initiative. He pointed out that many of the newcomers to the Middle East had agreed to various forms of partnership, and he warned the sisters: 'the June war, with all its psychological repercussions, has made it absolutely essential for the majors -- and not least Aramco -- to follow suit if they wish to continue operating peacefully in the area. Partnership with the host governments is a must; any delay will be paid for by the oil companies concerned.' (Middle East Economic Survey, June, 1968.) A meeting of OPEC in the same month duly endorsed the principle in a Declaratory Statement, that 'the Government may acquire a reasonable participation'. But the oil companies were very far from agreeing. Some company men realised that their control could not last, but the sisters could not bring themselves to give anything up before they had to -- for the profits were still so vast that every extra day seemed worth hanging on to. Some ammunition to the Arabs was given in 1970 by the U.S. Department of Commerce. It estimated that the net assets of the petroleum industry in the Middle East were $1.5 billion, yielding profits of $1.2 billion, a return on investment of 79 percent -- compared to only 13.5 percent from smelting and mining industries in the developing countries. It was a calculation that was carefully noted by OPEC. (Abdul Amir Kubbah: OPEC Past and Present, Vienna 1974, p. 78.) Yamani saw the Saudis' position as being now so strong that they could get what they wanted; and in March 1969 he described participation to Richard Johns of the Financial Times, as creating a bond which 'would be indissoluble, like a Catholic marriage'. At the same time, he urged that participation would be in the interests of the oil companies. 'It will save them from nationalisation,' he explained at a seminar in Beirut, 'and provide them with an enduring link with the producing countries'. But some of the majors, he observed wryly, 'seem to be obsessed with the empire they have built. It is so vast and it took them so many decades to achieve. And now they see these newcomers -- these national oil companies in the producing countries -- wanting to come and take a piece of their cake, which is the last thing they want to happen.' (3rd Seminar of Economics of the Petroleum Industry, American University of Beirut, 1969.) It was not until after the Teheran agreement in 1971, when OPEC was stretching its muscles, that Yamani made much further progress. The Saudis again felt the need to show an initiative, after the success of the Shah, and the two chief oil producers were more than ever rivals for leadership. The Teheran agreement, binding for five years, appeared to leave no room for argument; but participation provided a field for demands outside the agreement. 'It was like labour unions', said one Dutch Shell director: 'when they've agreed about wages, they go for co-determination.' For the next two years the battle for participation took over from the battle for prices. At the OPEC conference in June 1971 Yamani succeeded in convincing most other members, against the arguments of Tariki, that they should immediately demand a 20 percent share in the. companies' operations, to be gradually increased to 51 percent, with the assets to be paid for at 'net book value'. Later Yamani was put in charge of negotiating with the companies for all the Gulf countries. The companies on their side again resolved to stand together. John McCloy got special permission from the anti-trust chief, McLaren. The seven sisters and others met in London to decide on common tactics, renewing their agreement to share out their oil if one company was singled out. The two sides were again heading for confrontation: the pace was quickening, and the more radical members of OPEC were determined not to be outdone. Already in February 1971 Algeria, after bitter disputes about prices, had nationalised 51 percent of all French interest in her oil, thus dashing French hopes of a special connection. Now ten months later, just as OPEC was meeting again, the Libyans announced the nationalisation of all BP's assets, on the unconvincing grounds that Iran had just occupied three islands in the Persian Gulf that technically were under British protection; and that BP, because it was half-owned by the British government, must take responsibility. The nationalisations encouraged the other producers to be more militant. In January 1972 OPEC met the companies again in Geneva. OPEC's first aim was to obtain more money because the dollar had been devalued: the companies quickly agreed to link the posted price to a basket of currencies, instead of the dollar, and thus put up the price by 8.5 percent, which cost the consuming countries another $700 million a year for oil from the Persian Gulf alone. Then OPEC went on to demand participation in more detail: the companies soon bitterly complained about the terms, and the new battle began. The prospect of participation placed the sisters in a much more exposed position, stuck in their no-man's-land between producers and consumers. Their problem was forcefully analysed by the oil consultant Walter Levy in New York, a man who from now onwards was to play an increasingly important role in oil policy. Levy had a very international background: he had been educated in Hamburg and worked as an oil journalist in London before moving to Washington during the war; and then set up as an independent consultant. He was now retained as adviser to all seven sisters, and to several governments. Writing in Foreign Affairs in 1971, Levy warned that participation was a grand design, in Yamani's mind, to 'bind the interests of the oil companies.' Levy predicted that 'the oil companies would be destined to become completely subservient to their host government.' They would thus face a major decision: 'to what extent and for how long they can be held hostage by their resource interests in producing countries ... It should now be recognised that their position as an internationally integrated private industry depends on a closer relationship and better understanding with consuming governments.' The companies were already, as Sir Eric Drake put it in 1970, the tax-collectors of the producers; now they would be much closer partners. Professor Maurice Adelman of MIT, writing in 1972, accused them of being simply 'agents of a foreign power'. (Foreign Policy, New York, Fall 1972.) For a few oilmen participation appeared a worse evil than nationalisation, for it would impair their freedom of movement, and commit them to the producers' side: Sir David Barran of Shell (which had no huge Middle East concessions like the Aramco partners) said in April 1972 that nationalisation would be preferable to participation, which he regarded as 'intolerable'. But most of the companies, though they were to argue bitterly over terms, were inclined slowly to give way to participation; for it was still the crude oil that provided most of their profits. And they began to perceive that what mattered in a growing shortage was not so much who owned the oil, as who was able to buy it. Aramco was now the critical battleground for participation; it was both on Yamani's home ground, and it was by far the richest prize in the Middle East. The four owner-companies -- Exxon, Texaco, Socal and Mobil -- were more thoroughly dependent on it as the shortage elsewhere was more pronounced, and for each of them Aramco was the source of 'the incremental barrel'. Since the 'fifties the Aramco company town at Dhahran had expanded into a settlement with every indication of permanence. Trees, gardens and two-storey houses had grown up inside the barbed wire, and the 'Aramcons' had become almost a separate breed. There was now a generation of employees who had been born and brought up in the desert. It had become a kind of symbol of the no-man's land of the oil companies, belonging to no culture and no country. Visiting it, I felt as if I were inside an idealised America, like an old cover of the Saturday Evening Post; an America untouched by the turmoil of the 'sixties, by long hair or drugs, with its citizens watching old movies on Aramco TV, playing baseball or mending their cars. To the Aramco engineers the compound offered not only fat salaries and early retirement, but a kind of engineer's utopia -- progress without politics, and technology without doubts. All around them the twisting pipes, the giant towers and flares were the monuments to their skills. The Aramcons had done what they could to satisfy the Saudis. Ever since the early 'fifties, the headquarters of the company had been out in the desert, whither the directors would fly from New York or California. Saudi engineers lived alongside the Americans and hundreds of Saudis were sent to America for training. There were Saudi-pleasing public relations projects, and Aramco experts on Saudi culture, history and politics. The new president, Frank Jungers, had been in Arabia ever since graduating at Washington University, and his son was following him into Aramco. A stocky slow-speaking engineer, Jungers was essentially a pragmatist, talking about Saudi politics in the same matter-of-fact style as he talked about Aramco's great projects -- the unique installations, the 'first-time-built size-wise facilities'. His Texan-style house, with romanticised pictures of idealised Arabs on the walls, looked on to a bright green garden, with the desert beyond the wire: Aramco was his life, and Dhahran was his home. Jungers disseminated to the Saudis a quiet confidence in all things American. As one oilman described him: 'he's like W. C. Fields, who dropped out of the sky into the bed of a fair maiden, and reassured her in a state of shock: "Don't worry about a thing ma'am. I'm a citizen of the United States of America."' Yamani began his negotiations withJungers early in 1972. The two men got on well, but in the background the owning companies -- 'the four neurotic parents' -- were standing fast. Yamani was exasperated by their stubbornness: 'It is always hard to be moderate,' he complained to a British visitor in January 1972, 'but it is particularly hard with American oil people, because they are apt to mistake moderation for weakness ... I am afraid that sometimes, when oilmen think only from a money angle, they get blind.' (Mosley, pp. 400-402.) Aramco put forward a rival proposition, that the Saudis could have a 50 percent share in future developments, which Yamani quickly rejected. Aramco also rashly tried to recruit the help of Washington, thus breaking the tradition of separation from government. Ken Jamieson, the Chief of Exxon, called on Nixon at the White House, who passed a message to Riyadh. Yamani, furious at the intervention, retaliated by recruiting the support of the King himself. The next day he read a stern message from His Majesty, with a clear threat of unilateral action. 'Gentlemen: the implementation of effective partnership is imperative, and we expect the companies to co-operate with us with a view to reaching a satisfactory settlement. They should not oblige us to take measures in order to put into effect the implementation of participation.' Yamani warned that the producers 'must prepare for battle', and convened another extraordinary conference of OPEC. But on the eve, Aramco accepted the principle of immediate government participation of 20 percent. It was now the Americans who were making the mistake that they had attributed to BP in Iran twenty years before; of 'failing to yield gracefully that which they were no longer in a position to withhold'. (Dean Acheson, quoting Burke: see Chapter 6.) The next month Yamani continued his talks on participation in San Francisco with the Aramco sisters and BP and CFP. The diehard companies were still resisting, and Socal bluntly told Yamani that their share in Aramco was not for sale. There were more attempts at U.S. government pressure; John Connally, then Secretary of the Treasury, made a hawkish speech on April 18, saying that the U.S. would soon have to back up private corporations in dealing with foreign governments which controlled natural resources critical to America. The OPEC negotiators promptly warned that any such intervention would greatly complicate the participation negotiations. The State Department agreed with the companies that the Teheran agreement did not allow for participation; and they made representations through the Ambassadors in Iran, Saudi Arabia and Kuwait. But they eventually restricted themselves to protesting about compensation at book value, pointing out that future OPEC investments in the U.S. might meet a similar fate -- an issue which was eventually resolved with a complex compromise. (James Akins: Foreign Affairs, April 1971.) Participation was now the catchphrase of the Middle East. The rich Sheikhdoms of Abu Dhabi, Qatar and Kuwait all soon wrested agreements for 20 percent ownership from the companies. And in Iraq the long arguments with the IPC, the grandfather of all the consortia, were reaching a bitter climax. The Iraqis were demanding a greater share in the revenue, participation in the concessions, and a guarantee of high production; they complained that the companies had been restricting production to punish Iraq for the past decade. (The Nationalisation of IPC's Operations in Iraq, Baghdad, 1974, p. 8.) Eventually in June 1972 Iraq finally nationalised the consortium, and soon afterwards agreed with the French company, CFP, to take its usual share of the nationalised oil. The Iraqis, in a time of shortage, could now play the French against the seven. The old warning of 'look what happened to Mossadeq' was no longer valid, as the nationalised companies showed they could operate their own oil. Through 1972 Yamani went on bargaining with Aramco, who still resisted, and the King repeated his warning. Eventually in October the companies met in New York with the five Persian Gulf States, headed by Yamani, and reached a 'General Agreement', that they would give up 25 percent of the established concessions, rising to 51 percent in 1983. The final agreement was signed at the end of the year in Riyadh. But the Battle for Aramco still raged, now centring on the question of the price the four companies should pay for the oil that they bought back from the Saudi government's share -- the so-called 'buy-back price'. Yamani knew that he now held the whip hand, and the four sisters, led by Exxon, could not risk a real showdown. For the Aramco board had now approved a plan to expand vastly the Aramco oilfields to provide for 13.4 million barrels a day by 1976, and as much as 20 million barrels a day by 1983. For this breathtaking prospect, even though it would be shared with the Saudis, the Aramco partners were prepared to yield over prices. Their greater fear was that the Saudis would sell their oil to other companies. By December 1972 George Piercy of Exxon noted that Yamani was 'prepared to relax and await capitulation' and recommended his colleagues to improve their offers. But Gulf, which was outside Aramco, was exasperated by the other companies' willingness to 'buy back at inflated and irrational prices'. Gulf did not have the same self-contained system of outlets as Exxon or Mobil, and was thus more concerned about price -- and about consumers. Their chairman Bob Dorsey protested to the team: 'your insistence on maintaining control of the oil for your own use has given strength to the OPEC position and has brought us to this point'. He went on with asperity to suggest that the prompt acceptance of higher prices 'might not prove acceptable to consumer interests'. (Multinational Report: 1975, p. 136-7.) But Aramco was desperate to settle their access to the oil, and Gulf eventually had to negotiate an agreement in Kuwait similar to Aramco's. Yamani could now divide and rule the sisters, as they had once done with him. Mobil, still hungry for crude oil, and more militant under the regime of Warner and Tavoulareas, was determined to get more than its 10 percent share of the 'buyback oil'. They were threatening to make a separate deal with the Saudis if their terms were not good enough, as the Socal negotiator, Jones McQuinn, anxiously observed (Ibid: p. 139-40), and Yamani could use the threat to extract better terms from the others. The negotiations dragged on through the summer of 1973. Yamani refused to bargain on the buyback price, and at one point in August, he warned the Aramco team: 'don't be surprised if at any moment, I pick up the phone and instruct Brock or Frank [Brock Powers, chairman of the board of Aramco, and Frank Jungers, president of Aramco, see Multinationals Report, p. 138] to cut production to seven million barrels a day.' At last, on September 13, 1973, the Aramco partners gave in to Yamani's stiff terms -- a buyback price of 93 percent of the posted price -- which would soon increase the price to the West. Yamani had got what he wanted -- a stake in the great concession. And the companies, having fought so long and ruthlessly, were now more relaxed about the new prospect. For participation now established a common interest between the companies and the producing countries, with both sharing the same interest in the orderly world market. It worked like the fifty-fifty tax deal twenty years earlier, but at a deeper level. The oligopoly of the companies had now been effectively joined by the oligopoly of OPEC. ------------ [continued: The Crunch - Part 2] ------------------------ Yahoo! Groups Sponsor ---------------------~--> Buy Stock for $4 and no minimums. FREE Money 2002. http://us.click.yahoo.com/k6cvND/n97DAA/ySSFAA/FGYolB/TM ---------------------------------------------------------------------~-> Biofuel at Journey to Forever: http://journeytoforever.org/biofuel.html Please do NOT send "unsubscribe" messages to the list address. To unsubscribe, send an email to: [EMAIL PROTECTED] Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/
