The Seven Sisters The Great Oil Companies and the World They Made
Anthony Sampson Hodder and Stoughton, 1975, ISBN 0 340 19427 8 Chapter 10 - Part 1 Libyan Ultimatum It seems that it is only in the United States that an almost masochistic attack on the position of its own oil companies persists. -- John J. McCloy, 1974 IT was not in the established oil countries of the Persian Gulf that the sisters faced their first critical showdown, but in Libya, the upstart oil producer on the edge of the Arab world in North Africa. For Libya broke up the ranks on both sides. It had let in the independents to challenge the sisters; and it was aloof from the cautious attitudes of the rest of OPEC. It was the outsider at both ends and by ignoring the rules it changed them. Since the Libyan oil began to flow in the early 'sixties, it had a fatal fascination for the West, particularly Europe. By 1969 Libya was supplying a quarter of Western Europe's oil. It was of high quality, with little sulphur, which became more important as the West worried more about pollution: and it was very close to Europe, on the right side of the Suez Canal. That became more significant after the Canal was closed in the 1967 war, and still more so after May 1970 when the 'Tapline' from Saudi Arabia was again breached in Syria, and then carefully not repaired. The closeness of Libyan oil was now still more desirable, and there was no alternative so attractive: Nigeria, two thousand miles further south, was being rapidly developed as a 'safe' new source of oil, but by the middle of 1970 Nigeria was being rent by the Biafra War, and supplies had stopped. Libyan oil was not only the closest, but the cheapest, for the companies made no special allowance to Libya for the cheap transport. Exxon argued that if they paid more because the Suez Canal was closed, they would not be able to reduce the price when it was open again. But many oil experts reckoned that the Libyans were being screwed, and that it was only a matter of time before they realised it. The rush of Libyan oil, like all sudden oil bonanzas, brought with it great dangers to the big companies. In the first place it threatened, as we have seen, to disturb their delicate balancing act, and to cause bitter resentment with the older producers, particularly Iran and Saudi Arabia. The problem was well put by the International Petroleum Encyclopaedia, for 1970 (p. 36): Indent It's not hard to see why, as increasing amounts of African oil threaten to grab off even larger chunks of their prime market target (Europe), the Mideast nations become upset. Their very way of life is being threatened -- a way of life they are just becoming used to and one which they don't want to lose. The interests of the producing and the consuming countries are at once the same and exactly the opposite. The role the large international oil companies play as a buffer element between the two is essential to both. It's a role that, if eliminated would throw the two forces face to face and spell disaster for the entire industry. This then is the reason for the 'three-party' system which is of benefit to all. End indent The dependence on Libyan oil was also more directly dangerous to Europe, for the Libyans could threaten to cut it off to extract better terms; and some experts in the State Department in the late 'sixties were seriously concerned. There was even a proposal for consumer governments to collaborate in an international treaty to safeguard oil supplies. But the governments were at odds, and the companies were complacent, too busy making money out of Libya. Libya had also become a bitter battleground between the majors and the independents. From the beginning, as we have seen, the Libyans were determined to bring in the outsiders, to speed up exploration. 'We wanted to discover oil quickly', explained the former Petroleum Minister, Fuad Kabazi: 'this is why we preferred independents in the first stage, because they had very little interests in the Eastern Hemisphere outside Libya.' (Multinational Report, 1975, p. 98.) It was true that Exxon once again led the field, producing 750,000 barrels a day from Libya by 1970: but the independents were producing half the oil from Libya, and they had no interest in restricting production or in playing the balancing game. Exxon and the other sisters were alarmed by their reckless expansion, and exasperated because the independents, as they saw it, enjoyed a tax advantage: for the independents paid taxes on the basis of the market price of the oil they sold, while the majors had to pay on the higher posted price. They saw their chance to damage the independents by using OPEC against them -- an ingenious but dangerous game. After OPEC in 1963 had demanded that royalties be included in their expenses, the majors offered the same terms to Libya (who had just joined OPEC) provided all companies were taxed in the same way. The independents fought back bitterly, arguing that they were not involved with OPEC, and could not afford higher taxes. But the new Petroleum Law was duly passed in 1965, and the independents never forgave the majors. Then, in the round of concessions in 1966, there arrived in Libya the most wily and independent of all the independents; the unique phenomenon of Dr. Armand Hammer. This extraordinary old walnut of a man had a combination of imagination and ruthlessness that made him in some ways more disrupting to the sisters than Getty or Mattei; and his whole career had been based on defying convention. He had made his first fortune in Russia after the Revolution and built up a fabulous collection of Tsarist treasures, the first of several art collections. His first experience of oil was in trying to acquire Russian oil for Germany in the 'twenties, when Exxon and Shell were battling for 'stolen oil' (Armand Hammer: The Quest of the Romanoff Treasure, New York, 1936, p. 143. (The title has little connection with the subject-matter)), and he was thus no great respecter of the sisters. He had come back into oil in 1956, by buying up a sleepy West Coast company called Occidental (or 'Oxy'), and he was now determined to join in the Libyan bonanza. He made a bid of exceptional generosity, offering an agricultural development project and a joint ammonia-plant; and he wrapped up his bid in red-green-and-black ribbon, the Libyan colours. He also -- according to evidence in a subsequent lawsuit -- recruited a team of entrepreneurs to help him get the bid. He got his concession, and was soon sensationally successful in his discoveries, becoming for a short time the biggest producer in Libya. The advent of Hammer, whose oil was soon flooding across Europe, still further exasperated the majors, particularly Exxon. As the American Ambassador, David Newsome, put it later, with marvellous understatement, 'I think it is safe to say that the advent of Occidental on the scene was not warmly welcomed by all of the other companies'. (Multinational Report 1975, p. 99.) It was not just that Hammer was adding to the glut; Exxon also knew that Hammer was far more vulnerable to pressure from the Libyans. For him, Libyan oil was his life blood. So long as King Idris was in power in Libya with his corrupt regime, the oil companies were not seriously threatened. The King complained about the low price of oil, but the warning of Mossadeq was still in the background. Everything was changed on September 1, 1969, when ldris was deposed by a band of young army officers, led by Colonel Muamer Qadaffi. They were determined to use oil as an ideological weapon against Israel and to make the West pay for it. They knew the workings of the oil business: the first prime minister, Dr. Suleiman Maghrabi, had taken his doctorate at George Washington University, had worked briefly as a lawyer for Exxon, and was later jailed in 1967 for organising an oil-workers' strike. The new government had no doubt that Libya had been cheated by the oil companies. The 'wild men of Libya' saw oil in the simplest terms, with none of the sophistication of the Shah or Yamani, but with a directness which was to dispel the mystique of the sisters, and revive the whole confidence of OPEC. Colonel Qadaffi quickly confronted the oil companies; he told the twenty-one companies that unless they agreed to raise prices he would take unilateral action. To show they meant business, the new regime soon made contact with Moscow, to discuss eastern markets for their oil; and they also began talking to the oil companies -- separately, picking them off one by one. They began by talking to Exxon and Oxy. They demanded an extra forty cents a barrel, which was not exorbitant in view of the quality and accessibility of Libyan oil compared to the Persian Gulf. And they received some support from an unlikely quarter, the State Department. There the oil expert was Jim Akins, a forthright Arabist who was increasingly worried by the prospect of an energy crisis, and will play an important part in the subsequent story. He was a formidable advocate, a tall erect Quaker with uncompromising principles; but he was regarded by many diplomats as being too committed an Arabophile. He was now convinced that the companies must try to come to terms with the Libyan revolutionaries; he talked to the sisters, including Exxon, Texaco and Mobil, and also, through the British Embassy, with BP, advising them all that the Libyan demands were fair. (Multinational Hearings: Part 5, p. 6.) But the big companies, led by Exxon, were adamant: they would not pay more than five cents extra. Many oilmen reckoned that Exxon were being excessively hard-nosed, and that settling now would save trouble later. But Exxon were in a tooth-and-claw mood, and their major interests were anyway outside Libya. Qadaffi lost no time in reprisals. He struck not at Exxon but at the newcomer Oxy, which he well knew was totally dependent on Libya. In May and June 1970 he ordered Oxy to cut back production from 680,000 to 500,000 barrels a day. Officially it was for reasons of conservation -- the old pretext for cutbacks -- and certainly Oxy was extracting oil at a rate which many oilmen thought was harming the field. But the cutbacks were obviously meant to force Oxy to pay more, and they soon had their effect. Oxy, with their own refineries in Europe waiting for Libyan oil, could not get the oil anywhere else; and Oxy shares were a 'hot stock' which depended on Libya. By July, Armand Hammer was desperate, and he went to see Ken Jamieson, the new chief executive of Exxon. It was a historic meeting between the two opposite sides of the oil business. Hammer told Jamieson he could not withstand the Libyan pressure unless he had an alternative source of crude oil. Could Exxon help? Jamieson was more conciliatory towards the independents than his predecessor, Haider: but he still did not trust them. He was prepared to promise Hammer replacement, at the normal price for third parties. But Hammer wanted oil at close to cost, and Jamieson could not agree. (Jamieson: interview with author, May 1974.) Thus Exxon rejected the first opportunity for a common front; it was some time before Jamieson realised the extent of the common danger. Dr. Hammer was thus left on his own. He himself negotiated with the revolutionaries through August, flying back from the sweltering heat each night to Paris in his private plane. But he had no real leverage, for both sides knew that he could not do without the Oil. Finally he agreed to pay thirty cents more, going up a further two cents a year for five years, and to raise the tax rate from 50 percent to 58 percent. Other company men were appalled: as a Shell man put it, 'from that point on, it was either a retreat or a rout.' Two weeks later the Libyans made a similar deal with the Oasis consortium, whose shareholders included three independents, Continental, Marathon and Amerada-Hess. But another of the shareholders was Shell; and Shell with their huge interests elsewhere, were in no mood to give in. Their chairman since 1967 was an outspoken aristocrat, Sir David Barran, who was a figure of stature in the oil world: he was precisely articulate, wore a monocle and had the style of a cultivated country squire. He believed that, even though Shell depended heavily on Libyan oil, they must not give in; for that would risk undermining 'the whole nexus of relationships between producing governments, oil company and consumer'. He believed that Shell should 'at least try to stem the avalanche'. (Letter to Senator Church 1974: Multinational Hearings.) Shell therefore refused to sign the agreement. A week later, on September 25, all its share of Oasis production (150,000 barrels a day) was stopped. In New York, the American companies were now thoroughly alarmed, and they turned again to the master-lawyer who had served as their legal adviser off and on for the past decade: John Jay McCloy. After he had told President Kennedy about the dangers of OPEC in 1960, McCloy had warned successive attorney-generals that the oil companies might eventually have to act together; when in late 1970 the seven sisters saw OPEC threatening them with a succession of escalating demands, they looked naturally to McCloy. He was now seventy-five, with a unique experience of governments and oil policy, working from his own law firm at the top of the Chase Manhattan skyscraper in Wall Street. He represented not only all seven of the sisters, but nearly all the biggest independents, too. Administrations, trust-busters, and chief executives came and went, but McCloy carried on, as the memory of the industry, and its link with each government. Three days after Oxy had given in to the Libyan demands, McCloy went to Washington with the heads of the oil companies to talk to the State Department. They saw the Secretary of State, William Rogers, Under-Secretary Alexis Johnson and Jim Akins the oil expert. They agreed that the position was serious, but reached no decision. Two weeks later the heads of the two British oil companies, both involved in Libya, came over to New York: Sir David Barran of Shell and Sir Eric Drake of BP. They lunched together with the British Foreign Secretary, Sir Alec Douglas-Home, who was attending the United Nations, and Barran explained to him the gravity of the crisis and the danger of an avalanche. (Barran: interview with author, October 1974.) They told Sir Alec that they thought the oil companies should try to hold out, even at the risk of losing their Libyan concessions. They reckoned that without Libyan oil the companies should be able to supply Europe with 85 to 90 percent of its needs for at least six months, probably without need of rationing; by that time there would probably be either a settlement, or further alternative sources. Sir Alec was sympathetic and said he would consult his European counterparts at the U.N.: but having done so later, he reported a noticeable lack of preparedness among them to risk any cutting-off of Europe's oil. The prospect of a common stand was thus already dim; for without the governments behind them, the companies knew their position was perilous. If the companies were nationalised, the Europeans might well buy the 'hot oil' direct from the Libyans, and thus undermine them: with the growth of the independents and national companies the majors were no longer in the position to enforce a boycott, as they had been in Iran twenty years earlier. Just after their lunch, Sir David and Sir Eric flew on to Washington to attend a further meeting at the State Department, headed by Alexis Johnson, and attended by McCloy and the heads of the American sisters. The British pair found it an astonishing meeting. For the first hour, the oilmen were lectured about the problem of Jordan and the Palestinians, with the implication that a Middle East settlement would also settle the oil problem. At last Barran was able to put his case, that the seven must stand together over Libya: Shell's experience in Libya gave his argument, as he put it, 'a rather specially keen cutting edge' (Letter to Senator Church: August 16 1974), and he even suggested that the American companies should dare the Libyans to nationalise. He was supported first by Drake of BP, and then by the chairman of Mobil, Rawleigh Warner; and by Mobil's president, Bill Tavoulareas, now making his debut in oil diplomacy. But it was now clear that the 'terrible twins' among the seven, Socal and Texaco, were in no mood for a showdown: they had a joint concession in Libya which was threatened, and they changed quickly from their customary hawkish position to a dovish one. As for Jamieson of Exxon, he sounded statesmanlike, holding the balance between the doves and the hawks, without giving an opinion. Some of the American oilmen seemed infected by Sir David's boldness, and by his assumption -- so contrary to anti-trust principles -- that companies and governments should work closely together. But Jim Akins, for the State Department, was against provoking the Libyans. Akins, according to one of the British oilmen 'was hypnotised by the Saudi Arabians. He said that there was no question of Saudi Arabia following Libya. I said you must be joking and nearly walked out.' Sir David flew back to New York in the Exxon plane, with Jamieson and McCloy, and told them his suspicions of Socal and Texaco; he thought the game was up. Shell stuck it out for a few weeks, but soon Socal and Texaco did cave in, on terms very similar to Oxy's. Their colleagues suspected that they were not averse to putting up the price to undermine the independents: it was anyway Aramco they cared about, far more than Libya. The surrender by the two sisters was more significant than Hammer's; and the others soon followed. Sir David and his board decided that 'continued resistance, and consequent isolation, became pointless'. The Libyans had decisively won the first round, and the companies were in visible disarray. The demands for higher prices were now rapidly spread beyond Libya, with the 'leapfrog' effect which the oilmen had always dreaded. The frog leapt to Iraq, Algeria, Kuwait and Iran, which all quickly claimed an increased tax rate of fifty-five percent. And in December 9, 1970 the members of OPEC met in Caracas in a mood of new militancy. As one OPEC official later put it: 'The Libyan success was an embarrassment to other OPEC countries. It rendered further silence almost impossible.' (Abdul Amir Kubbah: OPEC Past and Present, Vienna, September 1974, p. 54.) The more radical members saw the Libyan tactics with the technique of the cut-off as preparing the way to new victories. At the same time there were now the first signs since the formation of OPEC of a world shortage of oil. OPEC's report saw 1970 as a turning-point, with the buyer's market turning to a seller's market. What the moderate leaders of OPEC had failed to achieve in ten years, the tactics of the wild revolutionaries of Libya were apparently achieving in a few months. At Caracas it was decided that there was now a 'change of circumstances' as a result of the market situation, which justified revising agreements: and a new resolution was adopted, declaring 55 percent as the minimum tax rate on profits, advocating higher posted prices, and eliminating discounts for companies. OPEC also resolved on 'concerted and simultaneous action', and proposed a new round of negotiations with the companies in Teheran in the New Year. But even these proposals were not militant enough for the Libyans, and soon after Caracas, the frog leapt again: Libya demanded another fifty cents a barrel, with retroactive claims and an extra twenty-five cents for 'reinvestment requirement'. The avalanche was now rolling. But in the meantime some of the oilmen were trying again to form a barrier against it. Dr. Hammer, realising that his own capitulation had begun the retreat, was in touch with Sir David, to explain his predicament (it was Hammer's habit to ring up his fellow oilmen from California, unaware that he was waking them up in the middle of the night). At the end of 1970 he asked Sir David whether Shell would be able to help out the independents with a 'safety-net' in the next showdown (as he had asked Jamieson six months before). Sir David wasn't sure about the legal aspects, but promised that if the rest of the industry agreed to a plan, Shell would join in. After observing the escalating demands from Caracas and Tripoli, Sir David was convinced that this was the last chance for bold action. He wrote a 'New Year Letter' to all the oil companies concerned with Libya, proposing a meeting to discuss a joint policy and suggesting they should all decline to deal with the producers except on a total, global basis. As a result on January 11, 1971, the representatives of twenty-three oil companies assembled in New York in the lush offices of John McCloy. All seven sisters were represented, as were the leading independents, CFP, theJapanese Arabian Oil Company, the Belgium Petrofina and the German Elverath. The immediate problem was the anti-trust laws, on which McCloy was expert, and he was soon able to show his influence. In his anteroom, decorated with signed photographs of every past President since Roosevelt, were waiting two men from Washington. One was Jim Akins from the State Department, the other was Dudley Chapman from the anti-trust division: and McCloy explained that they would inspect any agreement and prepare for a clearance from theJustice Department. Over the next three days, the company executives continued meeting in New York -- in McCloy's office, in the Mobil skyscraper in 42nd Street, in the heavy palazzo of the University Club (which since the first Rockefeller joined it, has been a haven for oilmen) -- while the government men waited to refer drafts of their agreement back to Washington. It was the collaboration between government and companies for which McCloy had been holding himself in readiness for ten years. His justification was persuasive, for the oil companies were now up against a more formidable potential cartel than themselves. As he put it: 'the idea that you can't confront a highly organised cartel of sovereign states is rather silly.' (Interview with author: September 1974.) But the collaboration marked a total reversal of the ostensible principles of anti-trust. Now (as in Iran in 1954) anti-trust appeared as a luxury which could be dispensed with in time of crisis. And more important, the collaboration assumed that OPEC could only be dealt with by confrontation. The separation of interests which had begun in 1960 had now developed into a full-scale clash between two armies. The 'Poisoned Letter' The oilmen now had two aims before the Teheran meeting: the first was to write a joint letter to OPEC, proclaiming their common front. The second was to sign a 'safety net agreement' to help each other out, in case they were again picked out one by one. The letter was finally approved in the middle of the night in the Mobil headquarters, and signed by the representatives of twenty-three companies taking part. The letter marked a remarkable reversal from the companies' first attitude to OPEC ten years ago. Then, they were refusing to recognise its existence; now, they were insisting that it must be effective and binding on all its members. In confronting each other, the two cartels were building each other up. The letter began mildly enough with the words: 'We wish to place before OPEC and its member countries the following proposal', but it came quickly to the point: 'we have concluded that we cannot further negotiate the development of claims by member countries of OPEC on any other basis than one which reaches a settlement simultaneously with all producing governments.' This accomplished, the companies then discussed the terms of the safety net, and prepared the 'Libyan Producers' agreement -- a document which was kept secret for the following three years. (It was only eventually released under strong protest from the State Department: see Multinational Hearings: Part 5, p. 100.) Each party promised not to make any agreement with the Libyan government without the assent of the others; and if the Libyan government ordered one to cut back, all the others would share the cutback in specified proportions. John McCloy had obtained Washington's approval in the form of a temporary 'business review letter' from the head of the anti-trust division, Richard McLaren. It was not (McCloy insisted) the same as a waiver; it was 'pretty left-handed'. But in effect it guaranteed that the justice Department would not interfere with the collaboration. For McLaren, who at this time appeared to be embarking on an anti-trust crusade, notably against ITT, this was a striking concession to the oil companies. McCloy had also taken a new diplomatic initiative. On January 15 he again went to Washington together with several heads of the oil companies to visit the Secretary of State, William Rogers, on the eighth floor of the State Department. The other diplomats present included Alexis Johnson, Jim Akins and Jack Irwin (now U.S. Ambassador in Paris), a former lawyer with Sullivan and Cromwell, who had just joined the Department. McCloy explained that, in addition to the message to OPEC and the safety-net agreement, 'it would be wise if the government could enter into this thing and get the heads of the countries involved to moderate their demands'. The oilmen suggested that the State Department might send a diplomat to the Middle East. Secretary Rogers asked who, and someone suggested Jack Irwin. (Irwin was under the impression that McCloy suggested him, but McCloy denied it; in any case the idea apparently originated with the oil companies. See Multinational Hearings: Part 5, pp. 147, 155, 263.) Rogers discussed it with President Nixon the same day, who then gave a personal message through Irwin to the Shah of Iran, the King of Saudi Arabia and the Sheikh of Kuwait, expressing his interest in the Persian Gulf and his concern about oil supplies. The very next day Irwin flew out to the Middle East: 'My mission,' as he explained it, 'was to stress to the leaders of the countries the concern the United States would feel if oil production were cut or halted.' ------------- In the meantime the companies' letter to OPEC members had rapid repercussions. In Libya, the representatives of the two most threatened independents, Oxy and Bunker Hunt, had stormy interviews with the Oil Minister, who alternated threats with enticements to break away from the other oil companies, and harangued them about the 'poisoned letter' to OPEC. But they stood firm. The Bunker Hunt representative, Henry Schuler, was a tough-minded young Princetonian who was convinced that the companies could out-stare the countries, and his boss Bunker was right behind him. Schuler believed that the Libyan bravado was bluff. (Multinational Hearings, 1974: Part 5, pp. 75-101.) In Iran too the reaction was explosive. The finance minister, Dr. Amouzegar, was now in charge of oil policy, a sophisticated and cosmopolitan diplomat, articulate in several languages, with a disarming humour: he had studied hydraulics at Washington University, and had married a German wife. Dr. Amouzegar immediately protested. A single negotiation, he warned, would be disastrous for the oil companies, for the other OPEC countries could not stop the Libyans making 'crazy demands', and would then be committed to following them. The Libyans would not join the Gulf States, and the Gulf States could not wait. The joint approach was a 'dirty trick' which could lead to the oil from the whole Persian Gulf being shut down. Two days later Jack Irwin arrived in Iran, at the beginning of his tour, and went to see the Shah, accompanied by the American Ambassador, Douglas MacArthur (the son of the general). The Shah reiterated Amouzegar's arguments. The American diplomats were persuaded with remarkable speed, in view of the strong language of the letter to OPEC which they were supposedly supporting: McCloy suspected that MacArthur was suffering from the ambassadors' ailment of 'localitis', becoming more Persian than the Persians. MacArthur quickly recommended to Secretary Rogers in Washington that the companies should have two separate negotiations. [continued: 'Beware the Oil Kings'] ------------------------ 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/
