Excerpt From 1970s Senate Report On French-American Disputes Over Saudi Oil
In my research on oil for a project I’m working on, I came across something from the readings I posted earlier that made me think about current political affairs. Specifically, Saudi-American relations over the intervention in Yemen along with Western allies deciding to join the Asian Infrastructure Investment Bank, which may cause tension with the U.S. (although I am cautious to believe it would lead to such allies to stray from the U.S.).
I took an excerpt (and I swear it’s the last one) on French-American tension over oil discovered in Saudi Arabia, a bonanza considering the profits it raised for Saudi Arabia. Again, I recommend reading the first three chapters for anyone interested in this topic. I’m lucky to even have the willpower to look into this and hope to write something on it in the future.
As a sidenote, some things to clarify: American Group may refer to Exxon and Mobil (both were separate at this time), IPC is Iraqi Petroleum Corporation and Aramco is Saudi-owned enterprise dealing with oil.
I recommend the reading the first I put up on Tuesday about this. In addition, this is from a report created by the Senate Subcommittee on Multinational Corporations to the Senate Committee on Foreign Relations, which was released in the mid-1970s.
Without further ado…
The French Demand Participation in Aramco
The French were unhappy about the American Group’s new position on the 1928 IPC Agreement, although at first they were not informed by their partners as to its real meaning. When news of the Aramco negotiations appeared in the London press, however, the French reacted strongly. On December 19, 1946, at the next IPC meeting, CFPs Guillaume deMetz and Gulbenkian’s representative recommended that IPC quickly move to secure an interest in the Saudi Arabian concession. On January 7, 1947, the American Group’s counsel received formal notice that CFP and Gulbenkian had “no course left but to seek the protection of the Courts” if the Aramco merger proceeded without French participation. The French flatly charged Exxon and Mobil with bad faith:
It would appear that the Sherman Act no longer is the real cause of concern but was merely an excuse upon which to hang a contemplated and now effected breach of the Group Agreement, namely the negotiations leading up to your clients’ proposed acquisition of a large interest in Caltex.
CFP, as the trustee for France’s Middle East oil interests, took a particularly strong national stance and launched a major campaign to win an interest in the American concession in Saudi Arabia. “The French have disturbed our people in France,” a Mobil official wrote, “to the point that Crampton (Mobil’s French representative) fears our business will be adversely affected if the French are not placated. Apparently the French are using political tactics and commercial pressure in addition to the suit to bring us to terms.” While CFP and Gulbenkian threatened to turn the IPC dispute into an international “cause celebre,” the French Government put the State Department on formal notice that it regarded the 1928 Group Agreement as an arrangement between the two governments and that it expected the American Government to make Exxon and Mobil live up to the terms of the agreement. It became increasingly clear that the French felt “frozen out” of Saudi Arabia and that their national objective was not so much the negative one of blocking further American participation in Aramco as an aspiration to be included in the greatest oil deal in the history of the industry.
The American Group feared that French insistence upon participation in Aramco as a prerequisite for settlement of the IPC dispute jeopardized continued American control of the Saudi Arabian concession itself. As one Mobil executive explained the sensitivities involved:
It is well known that Ibn Saud desires Aramco to remain wholly American owned. He has asked whether or not Jersey and Socony are solely American. He wants to know whether British interests are getting into Aramco through this deal . . . whatever the reason for the questions, the result is that Aramco naturally must see to it that there is no possibility of any interest other than American acquiring any right, actual or contingent, in Aramco. It is realized by Aramco that if the French, contrary to all our views, should win the case, the Aramco situation in Saudi Arabia would be a difficult one, to put it mildly.
In the event the two American partners in IPC merged with Aramco, the Mobil executive suggested that a provision be included in the contract stating that if any national other than an American, through operation of law or otherwise, became entitled to an interest in Aramco, those shares would be automatically canceled and surrendered to Aramco. The suggestion was also made that Aramco’s certificate of incorporation and by-laws could be amended to prohibit any non-American national from owning or voting shares in Aramco or receiving dividends from Aramco.
The IPC/Aramco Swap
The American Group privately regarded the French legal threat seriously enough to plan an alternative strategy: if either Exxon or Mobil opted to “get out” of IPC, the country that did so might go ahead with the Aramco merger while minimizing its chances of an adverse ruling. On January 14, 1947, representatives of Exxon, Mobil, Texaco and Socal met at Aramco’s New York headquarters to discuss their alternative strategy for dealing with the restrictive covenants of the Iraq agreement and the pending litigation in London. Minutes of Texaco’s Executive Committee meeting of January 22, 1947 indicate that the four American companies agreed to close the Aramco deal in either one of two ways:
(1) By either (Exxon) or (Mobil) selling to the other its interest in the Iraq properties, the purchasing company thereby withdrawing from the Iraq agreement and the selling company acquiring one-third stock interest in the Arabian American Oil Company at the proportionate part of the purchase price authorized for sale of the 40% interest;
(2) To proceed with the sale of the 30% stock interest to Jersey and the 10% stock interest to Socony on the basis authorized by this Company’s Board of Directors. . . . , with an agreement that should the English court of last resort finally decide that the Iraq agreement was valid and binding on the (Exxon) and (Mobil) companies, then the purchase price for said stock would be repaid by Arabian American to the purchasers in annual installments over a ten-year period . . .
At another conference held by the four American companies on January 30, 1947, serious consideration was given to the alternative of Exxon selling Mobil its interest in IPC in exchange for a greater share in Aramco. It was agreed that Exxon would proceed to acquire 33 1/3 % of Aramco on March 10th if it had agreed by that date to transfer its IPC interest to Mobil. As the deadline drew near, however, the two American majors decided to risk an unfavorable ruling and go ahead together with the Aramco merger.
Like the Stoner alternative, the IPC/Aramco swap arrangement represented another crossroads in the history of Middle East oil. Had crude-short Mobil ended up holding the entire American interest in IPC, it would have had a far greater incentive for the rapid development of Iraq’s petroleum reserves. As it was, the uneven production performance of IPC contributed to Iraq’s nationalization legislation (Law 80) in 1960. Without an interest in Iraq, Exxon would undoubtedly have increased Aramco’s production much faster. By staying together, however, Exxon and Mobil increased their flexibility of crude supply. Exxon’s and Mobil’s ability to straddle IPC and Aramco, as explained in Chapter 5, is an important part of the allocational system run by the American multinational petroleum corporations during the 1950’s and 1960’s.
Keeping the French out of Aramco
The intense strain that the Aramco merger negotiations created in Franco-American political relations was of great concern to the State Department. In late February 1947, Paul Nitze, Deputy Director of the Office of International Trade Policy, concluded that the IPC/Aramco swap alternative had political advantages which the Department should raise with Exxon and Mobil: 1) it would afford a simple, clear-cut solution to the immediate problem with the French since their rights under the Red Line Agreement would not be involved, and 2) it would go some way toward meeting Congressional and domestic oil industry criticism of the multiplication of interlocking arrangements among the small group of large American and British oil comparties.
On March 7, 1947, following a second note of protest from the French Government, Harden and his Mobil associates were called to Washington to meet with Paul Nitze, George McGhee, Special Assistant to the Under Secretary for Economic Affairs, John A. Loftus, Petroleum Division Chief, and other State Department officials. The company representatives said that their respective management had already rejected the IPC/Aramco swap alternative but that the French would be taken care of under the new IPC system they were now offering. (Exxon and Mobil had been supplying the State Department with copies of their on-going cable traffic between New York and London.) The Departments attention was called to a February 15th cable in which the American IPC partners agreed for the first time to give CFP and Gulbenkian more oil than the IPC Group Agreement allowed. The State Department’s representatives sought assurances that the new arrangements being negotiated would not increase future friction with the French. The Exxon and Mobil representatives insisted that once implemented their strategy could be harmoniously administered. U.S. domestic oil companies, the Department officials noted, were putting increasing pressure on the State Department to help them secure concessions in the Middle East. The Exxon and Mobil representatives assured the Department that they had not taken any action to cause other American companies to be excluded from the Middle East. Mobil’s understanding of the conference was as follows:
It was apparent that the Department’s concern was two-fold: that present arrangements should be such as to minimize chances of future friction between American and French interests; and that grounds should not be given for the possible charge that the Government had supported Jersey and Socony in obtaining positions in the Middle East which might be considered exclusive.
While the State Department answered the French Government’s protests, Exxon and Mobil went ahead and made a “standstill” agreement with Caltex in Saudi Arabia. The ultimate acquisition by Exxon and Mobil of a stock interest in Aramco and the Trans-Arabian Pipe-Line Company (Tapline) was held in abeyance until they settled with CFP and Gulbenkian so as to avoid forfeiture of their Aramco stock to the French in the event the latter went ahead with their legal threat and won in the British courts. In their “standstill” agreement, Exxon and Mobil guaranteed a bank loan of $102,000,000 for their 30% and 10% respective Aramco interests as well as their equity share of a $125,000,000 capital investment loan for the construction of Tapline. Although Exxon and Mobil eventually reached an IPC settlement the French never forgave the Americans for keeping them out of Saudi Arabia.