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Saudi Arabia
Brief History
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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