Saudi Aramco: The birth of an oil giant

11 January 2008
Three-quarters of a century ago, an unlikely huddle of Americans, Saudis and one Briton met in Jeddah to strike a deal that would become one of the most important developments of the 20th century.

For six months from February 1933, Saudi negotiators led by King Abdulaziz al-Saud’s Finance Minister Abdullah al-Sulayman were locked in talks that eventually yielded an agreement handing the first oil concession in the kingdom to California Arabian Standard Oil Company (Casoc), an affiliate of Standard Oil of California (Socal - today’s Chevron). From that agreement emerged the world’s biggest endowment of crude oil, transforming a huge, barren expanse of desert on the Arabian Peninsula into a pivot for the global economy.

Regional counterbalance

The story of Saudi oil is littered with ironies and events driven by chance. The largest reserves of oil in global history were discovered by the smallest of the ‘seven sisters’ - the band of oil companies that dominated world oil production in the 20th century. But it was no coincidence that Abdulaziz chose to strike a deal with US, rather than UK, prospectors.

Then the dominant foreign power in the Middle East, the UK controlled Jordan and Palestine to the north, southern Arabia, the Gulf trucial states and enjoyed a substantial presence in southern Persia. The Saudi king understood the importance of striking a deal with the US to counterbalance the UK’s influence.

Ironically, it was a Briton, the king’s adviser Henry St John Philby - an Arabist and convert to Islam - who steered the king towards the US oilmen. As legend has it, Philby told the king on a driving trip that money was to be made by exploiting the kingdom’s untapped mineral resources. Philby arranged a meeting with US philanthropist Charles Crane, who then brought in a geologist, Karl Twitchell, to start prospecting for minerals.

Twitchell first approached Texaco and then Exxon, attempting to stir up interest in prospecting in the kingdom. They unwisely turned down the offer. Exxon was barred because of the terms of the Red Line Agreement - a deal signed by partners in the Iraq Petroleum Company (IPC) in 1928, intended to prevent its partners from independently seeking oil interests in former Ottoman territories.

Socal moved quickly to negotiate with the Saudis. The timing of Socal’s exploration efforts could not have been better for the Al-Sauds, who were busy attempting to consolidate their grip on a vast, poverty-stricken kingdom.

Socal, under Philby’s advice, came up with a suitable offer: an immediate loan of £30,000, ($59,250) to be followed 18 months later by another loan of £20,000 and an annual rent of £5,000 - all paid in gold. The company would start drilling no later than three years from the effective date of the concession and drill until it gave up or developed commercial production, which was defined as 2,000 tonnes of oil a day.

US officials agreed to share profits with the king, train employees, build roads and towns, and turn the company into a Saudi-run and owned outfit, in return for revenue and exclusive oil rights. This deal laid the foundations of the modern kingdom.

“Oil money made the Saudi state,” says Saudi expert Gregory Gause of the University of Vermont in the US. “There was a Saudi state before oil but it was a monarchy built on the charisma of individuals and the ideology of Wahhabist Islam. Oil money gave the Saudis the ability to rely on something other than Wahhabism to perpetuate their rule - for example, enabling them to provide services to their citizens. With-out oil, you do not get that.”

By August 1933, the historic agreement was signed and sealed. Yet Socal, an outsider from the outset, soon realised it lacked the capital and marketing prowess to drive the expansion of Saudi oil on its own. It approached Texaco, which in 1936 acquired a 50 per cent interest in Socal’s concession. By 1939, Saudi oilfields were in full production, with the first barrels being loaded onto tankers for export.

Name change

In 1944, Casoc changed its name to Arabian American Oil Company (Aramco), which was rebadged the Saudi Arabian Oil Company (Saudi Aramco) in 1988.

Socal and Texaco realised they needed more partners to maximise the potential of the resource bonanza they were sitting on. With the ending of the Red Line Agreement in 1948, Exxon and Mobil joined in as partners, Exxon taking 30 per cent and Mobil 10 per cent.

It was not until 1973 that the Saudi Arabian government acquired a 25 per cent equity share in Aramco. The early 1970s were the most turbulent time in the kingdom’s history, following the imposition of the Arab oil embargo and the subsequent quadrupling of oil prices as Arab states looked to punish the West for its support for Israel in the 1973 Yom Kippur War.

On 17 October 1973, members of the Organisation of Arab Petroleum Exporting Countries announced they would no longer sell petroleum to nations that had supported Israel in its conflict with Syria and Egypt.

Opec members simultaneously agreed to raise world oil prices, after the failure of negotiations with the seven sisters earlier in the month. This period dramatically shifted the balance of power away from the big international oil companies in favour of national oil companies such as Aramco. In effect, a cartel of companies was replaced by a cartel of sovereign states. Meanwhile, the government steadily built up its equity holding in Aramco, rising to 60 per cent in 1974 and full control in 1980.

Since day one, Aramco has been professionally run and has never been interfered with by senior members of the royal family. While high-ranking Al-Sauds are involved in framing oil policy, Aramco has maintained its autonomy on the technical side. The strategy has worked and Aramco tops every chart that is worth heading in the rankings of global oil companies on revenues, production and exports.

Though pointed questions are starting to be asked about the true extent of Aramco’s reserves - a side-effect of the lack of transparency in the kingdom - the company remains a powerful entity. And if the past 75 years is a guide to the future, Saudi Aramco is unlikely to shirk any of the challenges that may be put in its path.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications