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 2
Libyan Ultimatum
'Beware the Oil Kings'
The day after this setback for the companies, the two sides gathered
in Teheran to begin bargaining. OPEC had appointed a formidable trio,
all educated in America: Dr. Amouzegar, for Iran; Sheikh Zaki Yamani,
the Saudi oil minister; and Saadoun Hammadi, the austere chairman of
the Iraq National Oil Company, who had taken his Ph.D. in
agricultural economics at Wisconsin University. The companies, on
their side, had chosen two chief negotiators: the first was George
Piercy, who had recently taken over from Howard Page as the director
of Exxon concerned with the Middle East, and who from now on was
probably the single most important figure in oil diplomacy. He had
shown himself adaptable and conciliatory in dealing with Middle East
politics, but he lacked Page's intuitive understanding of the Arab
attitudes, and particularly of Yamani; and he was still new at the
job. The other was Lord Strathalmond, the son of the former chairman
of BP, who had just succeeded to his father's title and was now a
managing-director of BP. (He was to be appointed as a director of
Burmah Oil in 1975 to help rescue the company after it had asked for
government aid.) The second Baron was a much more genial man than his
dour father. He had begun as a lawyer, and had made his name in BP by
arranging for the tax paid by BP in Kuwait to be exempted from
British taxation. He kept racehorses, enjoyed night-life, had a house
in Tobago and an American wife. He was on excellent terms with both
sides; he enjoyed arguing over gin and caviar with Amouzegar till two
in the morning, and he got on very well with 'Groucho', as he called
the Kuwaiti oil minister, Atiqi. But he was not the intellectual
equal of his opponents, and he freely admitted that Amouzegar had a
far finer brain. (BP Shield, 1974.) Some of the Iranians were
understandably confused by his arrival, since they associated his
name with their bitter negotiations fifteen years before.
They arrived in Teheran at short notice in some confusion, of which
the details, as recorded in the cables, have recently been painfully
revealed. (See McCloy's testimony in Multinational Hearings: Part 5,
p. 62-73.) Piercy, having helped to prepare the letter to OPEC, was
surprised by Ambassador McArthur's recommendation, and he cabled back
to New York that it would violate the companies' letter. (See cables
reproduced in Multinational Hearings, 1974: Part 6, pp. 60-65.) He
soon realised that the diplomats had undermined the companies'
strategy, and the next day the two negotiators cabled to
headquarters: 'it was perfectly clear that Dr. Amouzegar believes he
and His Imperial Majesty have convinced American Government in recent
discussions of the correctness of their position on a Gulf
negotiation coming first, with the result that our negotiating stand
on the procedure to be adopted is by no means an easy one.'
The State Department had already hindered rather than helped the
companies ('We weren't too impressed' said McCloy), who now had the
worst of two worlds. Their common front had first provoked OPEC and
then broken in two. In the muddle the Shah was soon able to drive a
wedge between the companies and the government, and gave the oil
companies a two-day deadline to abandon their global approach. Piercy
tried to enlist the support of Yamani, explaining that they had a
mutual problem over Libya's preposterous demands, which were not in
anyone's interests. Yamani was sympathetic, but said that OPEC could
not control the Libyans, and he warned Piercy significantly: 'George,
you know the supply situation better than I. You know you cannot take
a shutdown.'
Yamani also confirmed to Piercy a rumour that he had already heard:
that at the OPEC conference at Caracas, six weeks before, there had
been a plan to enforce a world oil embargo to strengthen their
demands, which (said Yamani) had the blessing of both the Shah and
King Feisal. Piercy said the companies were astounded, and warned
Yamani about the effects of an embargo, and 'what it will do to the
prestige of these producing countries'. But Yamani explained -- as he
was to explain many times later -- 'I don't think you realise the
problem in OPEC. I must go along.' (Multinational Hearings: Part 6,
p. 71.)
Strathalmond and Piercy cabled in bewilderment now hoping that OPEC,
their old enemy, would hold together: 'It is not easy to advise what
should be done. If we commence with Gulf negotiations, we must have
very firm assurances that stupidities in the Mediterranean will not
be reflected here. On the other hand, if we stick firm on the global
approach, we cannot but think ... that there will be a complete
muddle for many months to come. Somehow we feel the former will in
the end be inevitable.'
In New York, in the meantime, 'the Chiefs' of the companies were
assembling daily, usually in the Mobil offices by Grand Central
Station, still hoping that a common front could hold together. With
them periodically was John McCloy, now playing a double role; being
both the companies' lawyer and the agent of the Justice Department to
'monitor' the discussions to make sure that they did not connive
beyond their agreement.
At the same time in London senior executives were assembling for the
new committee formed as a result of the joint agreement, called The
London Policy Group, or LPG. They met at the new skyscraper of BP,
Britannic House, and American oilmen were struck by the smooth
organisation; it was like a peace conference of diplomats. Through
the thickly carpeted foyer with its models of tankers, past an
anteroom full of refreshments and handouts, they entered the great BP
conference room in the basement with a row of fifty black leather
chairs facing the tables with another row of chairs behind for
advisers.
It was a gathering of oilmen unique in the history of the industry.
(I am indebted to an eyewitness for the following description.) At
the head was the veteran Joe Addison, the chairman, just retiring as
head of the Iranian Oil Participants, with beside him Bill Jackson
from McCloy's office. On the right were the American companies,
headed by Exxon, Mobil and Texaco, going down to Occidental at the
end. On the left was Shell, followed by BP, Marathon, Gelsenburg,
Hispanoil and CFP. BP and Shell, untroubled by past memories of
anti-trust, dominated the meetings with their quiet assurance and
copious information; when for instance the Americans were worried
that OPEC might be planning changes in their currency demands, Shell
were able to reassure them that their men had been watching the OPEC
offices in Vienna: no monetary experts had come in, and no OPEC
economists had gone out. There were no diplomats present, but Jim
Akins was in London and kept himself informed.
The assembly included some of the best brains in the oil business --
Tavoulareas of Mobil, far more incisive than his American colleagues;
Jean Duroc Danner, the brilliant director of CFP; David Steel, the
lawyer who was heir-apparent of BP. George Piercy of Exxon arrived
with a retinue of experts worthy of a summit conference. Laurence
Folmar of Texaco lived up to his company's dogged reputation. The
frictions between the majors, and between them and the independents,
were very soon evident, and the independents quickly showed their
anxiety. 'Smokey' Shafer of Continental veered between industrial
statesmanship and preoccupation with his company's dependence on
Libya. George Williamson, the brash young representative of Oxy,
faithfully reflected the toughness of Dr. Hammer. It was very clear
that the companies did not altogether trust each other, with some
reason. In later London meetings the mood was not improved by the
discovery that the Libyan ministers, Jalloud and Mabruk, appeared to
have full knowledge of the terms of reference of the company
negotiators. Someone in the room, it seemed, had been leaking.
For three weeks confused cables passed between the four bases
(Teheran, London, New York, later Tripoli) and executives flew across
the Atlantic and the Mediterranean. But the cross-purposes became
still more apparent. At the first London meeting, the oil companies
had already backed down from their global approach without actually
admitting it. (It has never been the intention that the individual
negotiations of the several companies with the several governments
[said the agenda for January 20 in stately prose] should be carried
out to the last detail by a central, and therefore monstrous, overall
negotiation (though this was the implication of their letter to
OPEC).) The independents, led by Schuler of Bunker Hunt, protested at
the climb-down, but did not use their veto. The meeting concluded
that 'we would not exclude that separate (but necessarily connected)
discussions could be held initially with groups comprising fewer than
all OPEC members'. But the phrase 'necessarily connected', as Schuler
complained, was a moving target; 'it kept changing its significance
as we encountered one round of resistance after another.'
(Multinational Hearings: Part 5, p. 132.)
The London Policy Group now drafted a new letter to OPEC, including
the possibility of separate-but-necessarily-connected discussions,
and cabled it to Strathalmond and Piercy, in Teheran. Dr. Amouzegar
described it as a 'poor lawyers effort', and Strathalmond was
inclined to agree. Amouzegar insisted that the companies must start
negotiating immediately with the Gulf countries.
Piercy flew back to New York, Strathalmond flew to London, and the
two sides exchanged intercontinental missiles. In Teheran the Shah,
now in his element, gave a press conference for two-and-a-half hours
attacking the oil companies for enlisting the support of their
governments -- 'a precise example of what is called economic
imperialism'. He threatened to remove the companies altogether: 'the
conditions of the year 1951 do not exist anymore. No-one in Iran is
cuddled under a blanket or has shut himself in a barricaded room.'
But he also gave his fellow-members of OPEC a pregnant warning: 'if
the oil producing countries suffer even the smallest defeat, that
would be the end of OPEC. And then, nations will not dare to gather
together and to rise against these giants.' He recalled how he had
once been told: 'Beware the Oil Kings and what they might do.' But
now, he made clear, the companies had lost their old power.
In New York, McCloy was worried by the apparent retreat. He took a
tougher line than any of his clients, and while they explained to him
that it was their money that was at stake, he insisted that if the
producing governments held together, the companies must hold together
too. (Interview with author.) Moreover the anti-trust chief, McLaren,
warned McCloy that his anti-trust clearance only related to the
original message to OPEC, insisting on a single negotiation. In the
meantime the U.S. government conceived a special meeting of OECD in
Paris where the consuming nations made clear that they were in no
mood to resist higher prices.
But the oilmen were now alarmed that the Gulf countries might take
unilateral action, and they clung to the hope of
'separate-but-necessarily-connected'. They took refuge in a new
notion, that the Gulf settlement could be a 'hinge' for a settlement
in Libya, with no leap-frogging between them. So they agreed to split
into two teams: one to stay in Teheran, led by Strathalmond, to treat
with the Gulf states; the other, led by George Piercy, to go to
Tripoli to negotiate with the Mediterranean states, led by Libya.
In Teheran on January 28, Strathalmond at last began the formal
negotiations; the Gulf countries had now set a five-day deadline.
Strathalmond proposed the companies offer, including an increase in
the posted price of $0.15 per barrel, and allowances for inflation:
Dr. Amouzegar demanded an extra $0.54 a barrel, and a much higher
inflation factor. The producing countries threatened a world-wide
shutdown and the Libyans refused to negotiate in Tripoli until the
Teheran terms were agreed. The team returned to London to consult.
The London Policy Group now discussed enlisting their governments'
support; but having consulted with the 'Chiefs' in New York, they
decided instead to put their faith in assurances from OPEC. Henry
Schuler was horrified by the retreat, and at a dinner on January 30
he argued his case hotly, backed up by his colleague, Norman Rooney,
who burst out: 'You're selling us down the river!' Next day he even
talked on the telephone to the chiefs in New York, at the invitation
of Jamieson of Exxon, and protested that the retreat would destroy
the companies' credibility on all sides. But only the German
Gelsenburg supported him (Multinational Hearings: Part 5, p. 135);
and reluctantly he gave in, while putting his opinion on record. As
he put it later: 'the OPEC countries were confident of their ability
to face-down the oil companies ... and the companies had reverted to
an attitude of narrow self-interest.'
The companies' ineffectual contacts with governments now provided
useful ammunition for OPEC. On January 30 the LPG gave details of
proposed terms, in a cable sent through the Foreign Office in London
to the British Embassy in Teheran, which thus routinely carried the
signature of Sir Alec Douglas-Home. But a public relations man left a
copy of it on a table, and the text appeared in full in the Teheran
morning papers, to the intense embarrassment of the companies. Sir
Alec's signature was removed, but Dr. Amouzegar made the most of it
in private, commenting that if the censorship were removed, it would
become clear that the British government was running the negotiations.
The deadline expired on February 2, and negotiations were broken off.
OPEC then held its own conference, ending with a menacing resolution
that each country would legislate new terms if the companies did not
accept by February 15, and would embargo any country which did not
accept the terms. The companies faced a simple choice: settle, or be
settled.
But the majors were desperate to avoid unilateral action, or
nationalisation. The team returned to Teheran, where the Shah was now
less menacing, but still firm: 'all the oil producing countries know
that they are cheated,' he told the BBC, 'otherwise you would not
have the common front ... the all-powerful six or seven sisters have
got to open their eyes, and see that they're living in 1971, and not
in 1948 or 9.'
On St. Valentine's Day, February 14, a day engraved.in the memory of
the oil industry, the Teheran agreement was signed. It allowed for an
extra $0.30 on the posted price, escalating to $0.50 by 1975: a
minuscule increase compared to what happened later, but regarded at
the time as almost ruinous. The Shah pledged that there would be no
leap-frogging, but the agreement specifically excluded any commitment
to oil prices in the Mediterranean. The 'hinge' was either broken or,
worse still, the door might now swing back again the wrong way.
McCloy insisted that it was a kind of victory, justifying the
combined action. He told McLaren in a long letter in July: 'while the
cost of settlement was extremely high, the companies by virtue of
their common stand were able to resist the joint threats of OPEC ...'
But many of the oilmen believed that the balance had now turned. The
Oil Kings were no longer the companies, but the countries.
The House of Cards
Four days after the Teheran agreement, talks began in Tripoli. The
Libyans were determined not to face the companies en bloc. George
Piercy of Exxon had arrived three weeks earlier to lead the
companies' team, but the Libyans ignored him, and were determined to
deal with the companies one by one. The Libyans were backed up by all
the Mediterranean oil countries, Algeria, Iraq, and Saudi Arabia, who
soon threatened a Mediterranean embargo if the companies did not
agree with Libya's terms. Two of the countries, Iraq and Saudi
Arabia, were also Gulf producers: the Saudis, who had earlier been
friendly to the companies, were now worried by the danger of their
pipeline being blown up by Palestinian guerrillas if they did not
join the embargo. The enmity to Israel was adding to the unity.
The Libyan team was headed by the fiery Major Abdul Salaam Jalloud,
translated by the veteran diplomat, Ali Mabruk. The Libyans, they
pointed out, had survived for 5,000 years without oil, and could
quite well do without it, but the companies couldn't. They invited
the company representatives, one by one, to negotiate, which meant
long waiting followed by insults and speechmaking. When the
representatives of Socal and Texaco came to see them with their
offers, they looked at them and then threw them to the floor: the
oilmen meekly picked them up -- a symbolic obeisance from the
terrible twins. There was now a visible divergence between the
majors, whose main interest was outside Libya, and the independents
who desperately needed to keep their Libyan oil cheap. Many
independents suspected that the majors would not be too worried to
see them suffer.
By March 1971 the companies agreed on a figure of $3.30 per barrel
for the Libyan posted price -- an increase of 76 cents, together with
other fringe benefits. The Mediterranean oil ministers insisted on
$3.75, and threatened to cut off all supplies. OPEC made a display of
solidarity: the Syrian deputy prime minister flew to Tripoli, Nigeria
said it would join OPEC, and eventually Yamani of Saudi Arabia flew
into Libya.
The Libyan ministers, Jalloud and Mabruk, at last asked the German
representative of Gelsenburg, Enno Schubert, to negotiate on behalf
of all the companies, presumably expecting that a German would feel
specially dependent on Libya. Schubert asked to be joined by the
Mobil man, Andrew Ensor, a patient ex-diplomat with a long experience
of oil policies. The two then spent seven hours with the two Libyans
in a marathon haggle, with Ensor entering into the spirit of the
game, until finally they narrowed down to two cents, in a classic
dialogue:
Indent
Mabruk: The Major (Jalloud) really appreciates your putting your
cards on the table.
Ensor: That's where they are, all right. It's most frustrating to be
only two cents apart -- one permanent, one temporary.
Jalloud: Well, I will move to my final final final. I may be killed
but I will make both cents temporary.
Ensor: [after further pause] Major, you have been extraordinarily
accommodating. You know our situation. We are already 1-1/2 cents
beyond what we have. All the same, you have been so helpful that we
must make one last effort to close the gap. If you can, here and now
split the difference at $3.29 we will. I can only get fired once. If
I would have been fired at 1.5 cents, I might as well risk that for
2.5 cents.
Jalloud: You have been very frank. I will be, too. I absolutely
cannot go below $3.30. 1 told the Revolutionary Council we would get
$3.45 but I can persuade them it is necessary to go below that, but
absolutely not below $3.30. You must understand this is
psychological. $3.29 sounds much lower than $3.30. So, I appreciate
your offer but I cannot accept it. I would be killed.
Ensor: That is too bad, but I do understand. I must withdraw the
offer and we remain 2 cents apart on temporary. If you could agree to
a recess of an hour or so, we would recommend it. We shall tell them
how hard you have tried to accommodate us and we should hope to come
back with the two cents.
Jalloud: Very well. To go lower would be prison, at least for me ...
End indent
They adjourned for food, then went on till one in the morning. They
agreed on the posted price of $3.30, with premiums bringing it up to
$3.45.
On April 2, six weeks after the Teheran agreement, the Libyan
government signed the five-year Tripoli agreement with the fifteen
companies: agreements with Nigeria, Iraq and Saudi Arabia
(characteristically the last) followed in the subsequent weeks.
-------------
The two agreements in Teheran and Tripoli were meant to hold good for
five years, until 1976. They survived for two years, but their
weakness was apparent from the start. The Shah was furious when he
heard the Libyan terms, realising that he, too, could have got more,
and he soon obtained an extra premium for port costs; the door was
swinging back again already.
The companies had revealed at Teheran and Tripoli their fundamental
weakness, that they could not collaborate either with each other, or
with their governments. The collapsed common front had underlined
their disability. OPEC had called their bluff and found a new
confidence: as one Shell director put it 'they were on the pig's
back, and they knew it'. Moreover, there was now a serious
possibility of world shortage, or at least a lack of surplus
capacity: the projects outside OPEC, in Alaska or the North Sea, were
not developing fast enough to satisfy the West's hunger for oil. As
Yamani had warned Piercy, the companies could not face a shut-down in
one critical country.
The more far-sighted oilmen reallsed that the agreements were very
fragile: that they were, in the phrase ofJohn D. Rockefeller 1,
'ropes of sand'. As one delegate put it, Teheran was 'a house of
cards', waiting to be blown down by the next high wind: and Walter
Levy, the oil consultant in New York, warned that the oil industry
was facing a 'hurricane of change'. What the agreements did was to
buy time, for both companies and consumer governments to face up to
the next crisis. But almost nothing was done. The more public-minded
of the sisters, notably Shell and Mobil, did try to warn their
governments and their public. But most of them preferred to present
themselves as masters of the situation. They were still playing
Atlas, with the world on their shoulders; but privately they
suspected that it was beyond their control.
NOTE:
Some company men saw the fault as lying more seriously with Western
governments, who were now more visibly unprepared to take
responsibility. This is the comment of one of the company
negotiators, on reading this chapter:
Consuming governments preferred to wring their hands, to acknowledge
their lack of staff qualities for this sort of negotiation, and their
desire to 'keep these matters out of politics', to bicker among
themselves and to contemplate sauve qui peut initiatives against one
another. The Italians, French and Japanese on the whole saw the
weakness of the companies, and planned separate initiatives vis-a-vis
OPEC; the Americans, British, Germans and Dutch preferred to hope
that the hurricane would pass without causing much more damage.
But none of them saw what was really needed -- solidarity among all
of them -- to be a practical policy aim. The French were too
anti-American, the British too bemused by their debt to Pompidou, the
Italians too much governed by Mattei's legacy of dislike for the
seven sisters, and the Japanese too scared of the OPEC reaction for
any discussion to get started towards what was needed.
All these governments had no conception of the scale of the disaster
to which their lack of initiative and solidarity was exposing them.
In this climate, the companies had no sound alternatives; they saw
themselves as damned if they did, and damned if they didn't.
Certainly, to have publicly drawn attention to their own weakness, as
some critics now say they should have done, would not only have been
against the grain (no one readily acknowledges he is a broken reed);
more important, it could only have hastened the debacle. It would
have publicly invited OPEC to drive on further and faster.
[continued: The Crunch]
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