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WEEKLY NEWSLETTER
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Saudi Arabia
Index
Abd al Aziz ibn Abd ar Rahman Al Saud, the first king of
Saudi Arabia, had not gained control of the western part of the
country when he granted the first oil concession in 1923. A
British investment group, the Eastern and General Syndicate, was
the recipient. The syndicate gambled on the possibility that it
could sell the concession, but British petroleum companies showed
no interest. The concession lapsed and was declared void in 1928.
Discovery of oil in several places around the Persian Gulf
suggested that the peninsula contained petroleum deposits.
Several major oil companies, however, were blocked from obtaining
concessions there by what was known as the Red Line Agreement,
which prohibited companies with part ownership of a company
operating in Iraq from acting independently in a proscribed area
that covered much of the Middle East. Standard Oil Company of
California (Socal), which was not affected by the Red Line
Agreement, gained a concession and found oil in Bahrain in 1932.
Socal then sought a concession in Saudi Arabia that became
effective in July 1933. Socal assigned its concession to its
wholly owned operating subsidiary, California Arabian Standard
Oil Company (CASOC). In 1936 Socal sold a part interest in CASOC
to Texaco to gain marketing facilities for the crude discovered
in its worldwide holdings. The name of the operating company in
Saudi Arabia was changed to Arabian American Oil Company (Aramco)
in January 1944. Two partners, Standard Oil Company of New Jersey
(later renamed Exxon) and Socony-Vacuum (now Mobil Oil Company),
were added in 1946 to gain investment capital and marketing
outlets for the large reserves being discovered in Saudi Arabia.
These four companies were the sole owners of Aramco until the
early 1970s.
The original concession called for an annual rental fee of
5,000 British pounds (£) in gold or its equivalent until oil was
discovered; a loan of £50,000 in gold to the Saudi government; a
royalty payment of four shillings gold per net ton of crude
production after the discovery of oil; and the free supply to the
government of specific quantities of products from the refinery
Aramco was to build after oil was discovered. (In 1933 the
British pound was worth about US$4.87; there were twenty
shillings to the British pound.) The company received exclusive
rights to explore for, produce, and export oil, free of all Saudi
taxes and duties, from most of the eastern part of Saudi Arabia
for sixty years. The terms granted by the government were
liberal, reflecting the king's need for funds, his low estimate
of future oil production, and his weak bargaining position.
The original concession agreement was modified many times.
The first modification was made in 1939 after the discovery of
oil in 1938. This change added to Aramco's concession area and
extended the period to 1999 in return for payments substantially
higher than those specified in the first agreement and for larger
quantities of free gasoline and kerosene to be supplied by Aramco
to the Saudi government. In 1950 a fifty-fifty profit-sharing
agreement was signed, whereby a tax (called an income tax, but
actually a tax on each barrel of oil produced) was levied by the
government. This tax considerably increased government revenues.
Further revisions increased the government's share--slowly until
the 1970s and rapidly thereafter. At the beginning of 1982,
Aramco's concession area amounted to about 220,000 square
kilometers (189,000 onshore and 31,000 offshore), having
relinquished more than 80 percent of the original area of almost
1.3 million square kilometers.
Once the existence of oil in quantity was ascertained, the
advantages of a pipeline to the Mediterranean Sea seemed obvious,
saving about 3,200 kilometers of sea travel and the transit fees
of the Suez Canal. The Trans-Arabian Pipeline Company (Tapline),
a wholly owned Aramco subsidiary, was formed in 1945, and the
pipeline was completed in 1950. Many innovations were required to
keep costs down and to make operations competitive with tankers.
Tapline linked the Lebanese port of As Zahrani, close to Sidon to
Al Qaysumah in Saudi Arabia (a distance of more than 1,200
kilometers), where it connected with a pipeline collecting oil
from Aramco fields. Initial capacity was 320,000 bpd, but
capacity was expanded, eventually handling 480,000 bpd in the
mid-1970s. Tax problems with Saudi authorities and transit fees
due Jordan, Iraq, and Lebanon plagued Tapline for many years. The
line was damaged and out of operation several times in the 1970s.
And while operating costs of Tapline increased, supertankers were
reducing seaborne expenses. By 1975 Tapline was no longer used to
export Saudi crude via Sidon. In 1982 the line was again damaged.
In late 1983, Tapline filed formal notice to cease operations in
Syria and Lebanon, although small amounts of crude would
reportedly continue, albeit temporarily, to supply a refinery in
Jordan.
From the very start, Aramco had to concern itself with more
than just oil. Its company presidents were virtually United
States ambassadors in Saudi Arabia and played a significant role
in shaping United States-Saudi relations in the early days of the
oil company. Moreover, the undeveloped infrastructure and
facilities demanded that Aramco construct virtually everything it
needed. A port to bring in equipment had to be built; water had
to be found and delivered to work areas; and housing, hospitals,
and offices had to be constructed to launch development. Few
Saudis were familiar with machinery, local construction firms
hardly existed, and the unavailability of most materials locally
necessitated long supply lines.
Aramco adopted the long-range policy of training Saudis to
take over as many tasks as possible, although major management
positions (culled from the ranks of the parent companies) were
not intended to be relinquished, until Aramco could not resist
government pressure to do so in the 1970s and 1980s. A wide
variety of training programs, including sixty annual scholarships
to foreign universities, and social service programs were
established by Aramco. Saudis, for example, were trained as
doctors, supply experts, machinists, ship pilots, truck drivers,
oil drillers, and cooks. Many of these Saudis later fanned out
into the local economy to establish businesses and entered the
growing bureaucracy in Jiddah and Riyadh. Others remained with
Aramco and advanced in responsibility. Aramco was also one of the
first foreign companies in Saudi Arabia to employ labor from a
variety of countries other than the United States. By 1980 about
22,000 of the 38,000 Aramco employees (excluding some 20,000
workers employed by Aramco contractors), were Saudis. More than
45 percent of management and supervisory positions were occupied
by Saudis. In 1982 Ali Naimi, who had started with Aramco at age
eleven and had risen through the ranks, became first executive
vice president in charge of operations; two years later, Naimi
became the first Saudi president of Aramco. The United States
presence declined over the years. By 1980 there were only 3,400
United States citizens with Aramco. The remaining work force
consisted of nationals from about forty-four countries. In 1989
the total number of company employees was 43,248. Of these,
31,712 were Saudis whereas the United States work force had
shrunk to 2,482, and other foreign workers were slightly more
than 9,000.
To divest itself of supply and service sidelines, Aramco had
always subcontracted work to local entrepreneurs and at times
provided technical, financial, and material assistance. At the
request of King Abd al Aziz, Aramco teams helped find water and
develop agricultural projects. The Saudi government paid the
company to build a modern port at Ad Dammam and to supervise the
construction of a railroad linking the port to Riyadh.
In the 1970s, Aramco's activities expanded greatly. Part of
the expansion was associated with the facilities needed for the
more than threefold increase of crude oil production during the
period. Well drilling, pipeline installation, and construction of
gas-oil separation plants, storage tanks, and tanker-loading
terminals accelerated tremendously. As the world's largest oil
company, Aramco frequently had to design and build installations
larger than those used elsewhere. During the 1970s, Aramco was
also entrusted with developing a gas-gathering system (currently
referred to as the master gas system), which reportedly cost
between US$10 billion and US$15 billion for the first phase alone
and was completed in 1982. The company was also charged with
producing the Eastern Province's electricity supply through
managing the regional electric power company.
In 1968 Minister of Petroleum and Mineral Resources Ahmad
Zaki Yamani first publicly broached the idea of Saudi
participation in Aramco. In December 1972, long negotiations were
completed for the Saudi government to buy 25 percent ownership of
Aramco, effective in 1973. Negotiations during 1973 resulted in
Saudi participation increasing to 60 percent, effective the
beginning of 1974. In 1976 arrangements for total ownership of
Aramco were reached, and in 1980 payments to the four Aramco
parent companies were completed. By 1988 Aramco was converted to
a totally Saudi-owned company called Saudi Arabian Oil Company
(Saudi Aramco). By the 1990s, Saudi Aramco had responsibility for
all domestic exploration and development--its mandate was
expanded to include all Saudi Arabia--engaging in downstream
joint ventures overseas, purchasing on-land storage facilities
closer to key consuming markets for its crude oil, and expanding
its tanker subsidiary, Vela Marine International.
The General Petroleum and Mineral Organization (Petromin) was
established in 1962 as a public corporation wholly owned by the
Saudi government to develop industries based on petroleum,
natural gas, and minerals by itself or in conjunction with other
investors, foreign or domestic. Although its activities
predominantly centered on the country's hydrocarbon resources,
Petromin also explored for and developed other mineral resources.
Petromin's original charter suggested that it would
eventually become the country's national oil company. After the
mid-1960s, only Petromin received concessions for exploration and
development. Petromin, however, assigned its rights, but not its
concessions, to companies formed with foreign oil companies. A
joint venture was formed with an Italian state company to explore
part of the Rub al Khali, or Empty Quarter, but activity ceased
in 1973 after the company failed to discover oil. In 1967
Petromin joined a number of foreign oil companies in an equally
unsuccessful exploration of areas of the Red Sea claimed by the
kingdom.
In the 1960s, Petromin became responsible for domestic
distribution of petroleum products, partly by purchasing Aramco's
local marketing facilities. It became part owner with private
Saudi investors in domestic refineries in Jiddah and Riyadh. It
also began marketing crude oil abroad and became involved in
tanker transport. By 1975 some of Petromin's activities were
curtailed as part of a ministerial reorganization. Among the
reasons for limiting its scope were its unsuccessful attempts at
further oil exploration, the incompetence of its operations, and
the diffusion of its activities. A clearer distinction between
its activities and those of Aramco also occasioned the
restriction. Some businesses in which Petromin held part
ownership, such as a fertilizer plant and a steel mill, as well
as responsibility for the many large petrochemical plants that
were in the study stage, were transferred to the new Ministry of
Industry and Electricity.
Although its responsibilities shrank somewhat after 1975,
Petromin's activities increased. It supervised the construction
and became responsible for operation of the crude oil pipeline
from the Eastern Province oil fields to the new industrial city
of Yanbu on the Red Sea coast. In joint-venture partnerships with
foreign oil companies, it rapidly expanded refining facilities
for domestic use and export. Petromin had responsibility for the
supply, storage, and distribution of domestic petroleum products,
for which the demand was growing rapidly. Petromin marketed some
crude oil and petroleum products abroad and exported natural gas
liquids. It also continued exploration and drilling activities
well into the 1980s.
By the late 1980s, however, the government decided to create
a company to take over Petromin's activities. The Saudi Arabian
Marketing and Refining Company (Samarec) was created in 1988 to
produce and market refined products in the kingdom and abroad. It
assumed control of the joint ventures with foreign oil companies.
Moreover, the government ordered Samarec to implement the major
upgrading of domestic refineries, believed to cost well over US$5
billion during the first half of the 1990s.
Among the pivotal concessions Saudi Arabia awarded were those
made to two small independent oil companies to explore for oil in
the
Divided Zone (see Glossary).
In 1949 the Getty Oil Company
(formerly Pacific Western Oil Corporation) was granted the right
to explore in the Saudi share of the Divided Zone. Aramco had
relinquished this area in 1948 partly because the ruler of Kuwait
had won very favorable terms for a concession in his share of the
Divided Zone, and Aramco did not want to match it
(see External Boundaries
, ch. 2).
Production from this concession (since the 1970s partly owned
by Saudi Arabia) averaged 60,000 bpd during the 1980s. During the
Persian Gulf War, production came to a halt because Getty's
facilities were heavily damaged by the Iraqi occupying forces.
The oil fields were mined while wells and gathering centers were
seriously damaged or destroyed, as were the refinery and ten of
fourteen crude oil storage tanks.
The second pivotal concession was granted in December 1957 by
Saudi Arabia to the Arabian Oil Company (AOC), owned by Japanese
business interests, giving exploration rights to the Divided Zone
offshore area for two years, subject to extension. If oil were
discovered in commercial quantities, an exploitation lease was to
be granted for forty years. Subsequently, Saudi Arabia and Kuwait
each became 10 percent owners of AOC. By the mid-1970s, Saudi
Arabia had increased its stake to 60 percent, and in the early
1990s still controlled the company.
During the 1980s, average production was 125,000 bpd. After
Iraqi attacks on storage facilities and the removal of personnel
during Operation Desert Storm, output was shut down; production
returned to peak levels by early 1992.
Data as of December 1992
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