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Volume 19, Number 2March/April 1968

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Discovery! The Story Of The Aramco Then

Chapter 2: The Crucial Corner

Written by Wallace Stegner
Illustrated by Don Thompson

SYNOPSIS OF CHAPTER 1: For the Kingdom of Saudi Arabia, a handful of California oil executives and an astonishingly diverse group of individuals in the Middle East, February 15, 1933 was to he an important date. That was the day Lloyd Hamilton, standing eagerly on the deck of the pilgrim ship Talodi, arrived in Jiddah,

Lloyd Hamilton was a lawyer and a land lease expert for the Standard Oil Company of California. He was also the last player to make an entrance on what had become a very crowded stage since the curtain had risen eleven years before on the drama of Arabian oil.

The first act of that drama actually opened in the early 1920's when a group of London financiers set up the Eastern and General Syndicate as a broker in Middle East oil concessions, picked a genial New Zealand adventurer named Major Frank Holmes as their representative and sent him to persuade the dynamic monarch of Saudi Arabia, King Ibn Sa'ud, to grant the syndicate a concession to search for oil. Major Holmes succeeded, but the syndicate, unable to find a customer willing to buy the concession, later let it lapse in favor of a more promising prospect on Bahrain. It then sold the Bahrain rights to the Standard Oil Company of California and in so doing permitted an American oil company to edge into the Middle East for the first time.

On the other side of Saudi Arabia, meanwhile, explorer Harry St. John Philby was making a most important suggestion to King Ibn Sa'ud, now known as King Abd al-Aziz. Instead of waiting for someone like Holmes to tap Arabia's treasures, Philby said, why don't you discuss the matter with someone else? The someone he suggested was the American philanthropist and former Middle East adviser to President Wilson, Charles R. Crane. The King thought it over, agreed and in 1931 Crane, and then a mining engineer called Karl Twitchell, came out to take a long hard look. Twitchell's report was optimistic: the prospects for oil are promising.

Up to that point, the King, Philby, Crane, Twitchell, Holmes and the various companies involved had been groping in the dark, none of them entirely sure of what they wanted, or how they wanted to go about getting it. But suddenly Socal found oil on Bahrain and the situation changed radically. Almost overnight Socal decided that a concession in Arabia could be very valuable and dispatched experts to see the King and open negotiations. One of those experts was Lloyd Hamilton and on February 15, 1933 he arrived in Jiddah to do just that...

However unsteady the profile of Jiddah had been from the sea, the quay was as solid as a knock on the head. The docks were crowded with the curious; the smells of the city smote the newcomers. Karl Twitchell's assurance that they would be admitted with only a cursory customs examination proved unreliable. Some officer had missed his signals, and Airy Hamilton watched—and so did about a thousand interested spectators—as every intimate article of her clothing was pulled out and shaken and stuffed back in again.

Then the streets of Jiddah, the flavor of a forbidding land: sand-floored alleys, sun-smitten squares, and the shadows, almost impenetrable by contrast but shot with beams and slants of light, under the tin and board and palmfrond roof of the suq; the loom of the city's mud and coral wall, glimpses of tiny shops crammed with rugs, copper, strange foods. This world startled them with contrasts—white teeth flashing from a black beard, eyes of an incredible aliveness in a dark face under a turban or framed by a ghutra; an occasional woman in sepulchral black, only the hint of eyes showing behind the mask's square holes, the robed figure as nervous as a runaway child.

And the Grand Hotel, balconied at all three stories, ornamented along its roof with merlons and crenels of plaster. They were its first guests. Twenty or thirty workmen had been busy on it for several weeks, renovating it not only for the Americans but for future use as a first-class hotel for wealthy pilgrims accustomed to Western comforts. In all the 1,300 years of the hajj there had been no such public accommodations in Jiddah and the Americans approached it with interest and entered with curiosity.

On the whole, the Government had done well by them. By the standards of that time their quarters on the top floor were lavish—two great high-ceilinged bedrooms with brass beds and washbowl sets, a dining room big enough for banquets and furnished with table and chairs; a well-furnished living room the size of a basketball court, divided into two sections which they christened the coffee shop and the lounge. And two bathrooms.

The Twitchells, old Arabian hands, were very well pleased, but Airy Hamilton called her husband in and showed him the facilities with raised eyebrows. There was no running water. Bathing was evidently to be performed by standing in a tin pan and pouring water over oneself. Fair enough.

Of servants there seemed to be dozens, whose principal duty seemed to be to rise respectfully when anyone came in or out. They were the friendliest and most smiling of mortals, a mixture of Arabs and Somalis, and as curious as the crowds on the dock. It was not unreasonable that they should be, for these four were the only Americans in Arabia, and there hadn't been enough of their tribe there before them to make them a familiar sight.

Within hours of their arrival the foreign colony of Jiddah began to pay calls. All knew what they were there for; there were no leading questions. Invitations were issued and accepted; they began to feel their way into the city's mysteries. Then on the fourth day came driving from Mecca the most influential man, next to the King, in Saudi Arabia. This was Shaikh Abdullah Sulaiman, the Minister of Finance, small, polite, acutely intelligent, capable of instant and bold decisions and of long and shrewd maneuvering. The ladies had put on their best dresses and covered their arms; the gentlemen had brushed their hair and donned coats. The Arabian delegation came in single file, according to rank. Thank God, thought the Hamiltons, for the Twitchells, who spoke some Arabic, and for the servants, who seemed to know what to do.

They introduced themselves and they sat around the walls and had tea and cakes, and they talked politely of banal things, through a suave interpreter named Najib Salha who had worked for British firms in the Sudan and Egypt and was now Abdullah Sulaiman's private secretary. Then came coffee, poured ceremoniously from a beaked pot into small handleless cups, a sip or two to each cup. Everything was very deftly done. The spectacle of their own formal hospitality astonished them; they felt that it had been a picturesque and instructive hour when the Minister of Finance, through Najib, begged leave to go.

It was only then that they found Shaikh Abdullah's capacity for single-minded attention to business. This had been purely a social call, but Shaikh Abdullah understood that they had come to talk about oil, and he wanted to know what time suited them. He himself suggested eight that evening. A little startled, for they had an invitation to dine at the British Legation, Hamilton said that eight would be perfect. It was a good sign that Shaikh Abdullah was so eager.

Later, when everyone had gone, Hamilton went out in the late afternoon onto their balcony. Across the rooftops, on the perilously slanting shelf of a minaret, he saw the white figure of the muezzin, and heard the high wavering cry. In the streets passersby and shopkeepers prepared themselves, and down below him his own servants were aligning themselves in prayer, bending and rising with their faces all turned toward the east. The crooked alleys of Jiddah were half filled with dusk; from the suq he heard the complaining snarl of a camel, and then for a moment in the stillness, the perhaps imaginary mutter of a whole city's prayers...

For all the promptness with which Abdullah Sulaiman got down to business, American Industry was not destined to make fruitful contact with Arabia in one ceremonial coffee visit and an evening's conversation. It would be three and a half months of hard, hot, discouraging work before Hamilton and the King's ministers would succeed in hammering out an agreement.

The men with whom Hamilton dealt most frequently were Shaikh Abdullah, a Najdi by birth; Fuad Hamza, the Deputy Foreign Minister, and the King's confidential secretary Yusuf Yasin. Hard-headed, smart, patient, tenacious, wary, they were bargainers worthy of anyone's steel, and Hamilton was handicapped in his negotiating by his ignorance of Arabic and of the Arab character and culture. British political opposition, too, made itself almost immediately apparent in the hospitably hostile attitude of Sir Andrew Ryan, the British Minister. It was likewise clear that Socal would not have a clear field, but would have to compete for a concession with at least the Iraq Petroleum Company and perhaps others. Most complicating of all was the fact that in Iran and Iraq, on the strength of enormous potential production and enormous proved reserves, new agreements profitable to the local governments had recently been made; and on Bahrain oil had been struck with the first well. It was these agreements and discoveries that the Saudi Ministers were using as a basis for judging the value of their own concession. There was a fair possibility that the combination of hard bargainers, outside political and economic competition, and excessive expectations on the part of the Saudi Arabs would result in a higher price than a very speculative wildcat was worth.

To counter these difficulties, Hamilton had certain advantages. He was as shrewd a bargainer as even Shaikh Abdullah, and his ignorance of Arabic and Arab customs was partly offset by the presence of Twitchell and Philby. Philby particularly, from his station in Mecca, was in a position to forward information on government attitudes almost as soon as they crystalized. The IPC, whose representative Stephen Longrigg turned up on March 12, was a definite threat to Socal's chances, but Longrigg very shortly gave indications that his principals were less interested in developing Arabian oil than in preventing others from doing so and that their purse strings were by no means wide open. It looked as if IPC could be outbid. And Saudi Arabia, as Hamilton well knew, was deeply in debt, hard hit by the world-wide depression and desperate for cash to meet its new, growing responsibilities.

Despite this, negotiations for an oil concession were as difficult as if the ministers had not a fiscal care in the world. They played off Longrigg's presence against Hamilton's, and vice versa; they played off offer against offer; no sooner had Hamilton got what he thought were outrageous demands down to something reasonable and got San Francisco's approval of an offer, than the ministers made new demands as extravagant as the old ones. Hamilton at one time went up to Cairo to confer with Lombardi, who had come over from Bahrain, and there encountered Major Holmes, also over from Bahrain, with some proposals he wanted to make Ibn Sa'ud on the oil rights to the Saudi Arabia-Kuwait Neutral Zone, which were shared half and half between Ibn Sa'ud and the Shaikh of Kuwait. Holmes' proposals, however, later fizzled out when he got to Jiddah.

The story of the three and a half months during which Lloyd Hamilton worked out his concession agreement with Ibn Sa'ud's ministers has been told several times: by Philby in his Arabian Days and Arabian Jubilee, by Twitchell in Saudi Arabia, by Longrigg in Oil in the Middle East, by Benjamin Schwadran in The Middle East, Oil, and the Great Powers, by Marquis Childs in an article in the old Collier's magazine. It has never been quite fully or quite accurately told, even by the people who participated in it. For one thing, not even Twitchell knew that Philby was acting as a consultant for Socal, and Longrigg, who had served with Philby in Mesopotamia, tried at one point to turn over his job as IPC negotiator to him, so that Longrigg could get back to his pipeline job at Haifa. Sometime some historian, working from Hamilton's and Lornbardi's letters, will relate the episode in detail, but even if incomplete the negotiations suggest the way in which men, corporations, and governments, moving almost as if by some ineluctable force, turn the crucial corners of history. The concession for which Longrigg and the IPC unsuccessfully bid and which Hamilton won would insure—or compel—Saudi Arabia's entrance into the modern world. It would also mark a step in the decline of British power in the Middle East and the second step—a huge one—in the entrance of America into the region. For Great Britain the painful politics of relinquishment of power; for Saudi Arabia the unsettling effects of sudden wealth and abrupt cultural change; for America, though it came here without political intention, the inevitable political responsibilities of massive involvement—they were all implicit in the drama of demand and offer, stipulation and concession, in which Hamilton and the ministers were engaged.

On April 20, Hamilton gave Shaikh Abdullah the Company's last offer, the one on which he advised the Company to stand. It called, among other things, for an advance loan of £30,000 gold to Saudi Arabia, with a second loan of £20,000 eighteen months later; for the beginning of exploratory geological work within three months; for drilling within three years at the latest; for a guaranteed royalty somewhat less than the ministers had persistently asked; and for development as fast as was consistent with good oilfield practice.

There was every reason to believe that the ministers would accept these terms. Hamilton expected it; he was, in fact, assured of it, because one of these mornings Shaikh Abdullah called on him at the Grand Hotel, informed him that the King was briefly in Jiddah and would like to see him, and escorted him and Twitchell to the palace a mile or two outside Jiddah's walls. A few minutes in that monumental and kingly presence compensated for weeks of shadowboxing with the negotiators. Sitting in the great majlis, surrounded by fierce-looking guards and servants who wore pistols when they brought coffee, Hamilton, as he said later to his wife, was almost scared to move. But he was greatly impressed by Ibn Sa'ud, by his size (the King was over six feet four), by his dignity, by his grasp of the issues at stake. And he was greatly heartened by what Ibn Sa'ud said. The King liked the speed with which the Americans had developed Bahrain, and the methods they had used there. Though if he could suit himself he would prefer to develop the country's resources himself, without the help or the intrusion of foreigners, still if he had to deal with Western companies he liked the Americans better because geographically they were so far away. And so with regard to these latest terms, the King believed Hamilton could rest easy.

After that interview, about which he told no one, Hamilton was perfectly assured that if anyone got the concession it would be Socal; he did not need Philby's letter from Mecca which said that the King had been putting pressure on the ministers and that things looked propitious.

But on the day when Hamilton submitted his final terms, something happened that threw the whole tangled negotiations into a snarl again. April 20, 1933, was the day on which the United States announced an embargo on gold. Within a few days Lombardi was cabling from London to hold everything, and the Netherlands Bank in Jiddah had raised the value of the gold pound from $4.87 to $5.60. Within another few days it climbed to above $6—carrying with it the whole price of Hamilton's carefully negotiated agreements.

It was not clear, from Jiddah, exactly what the embargo meant, apart from a perhaps temporary devaluation of the dollar. At worst, it might mean complete abandonment of the gold standard, with fatal consequences for the concession, since Saudi Arabia insisted on being paid in gold. Initially Hamilton was not seriously alarmed, and he did not pass on to the Government San Francisco's proposal that all concession payments be pegged at a value of $5 to the gold pound. In London, Lombardi went on trying to find out how gold might be secured, since it could not be shipped from the United States; he investigated the importation of sovereigns from India at a three-shilling premium, and the purchase of bullion in the London and Amsterdam financial markets, at the present premium value of gold, without liking either alternative.

The ministers, still hopeful of playing off one bidder against the other, asked Hamilton for a revised statement of the April 20 terms, and got it finally on May 3, Hamilton having delayed because he knew the IPC, through Longrigg and Sir Andrew Ryan, was trying hard to discover the Socal terms in order to make up its mind about a topping offer. (It made up its mind on May 5 that it did not want to compete further, and thus left Socal alone in the running.)

The summer heat grew in Jiddah's streets and in the fanless and iceless Grand Hotel. The tension in Jiddah's social life grew too. The more remote tensions of the world's financial collapse seemed, in the circumstances, less critical than they were, but they were critical enough to make Socal seriously consider pulling out of the negotiation, and to cause Hamilton days and nights of strain. Even when he was convinced he was winning, or about to win, delays and snags blocked a final approval. In Mecca Philby, after attending a meeting of the ministers on May 8 in which the draft of Hamilton's final offer was debated point by point, wrote jubilantly that the thing was in the bag.

And yet the conferences and arguments went on—May 14, May 16, May 18, May 23—with the tough bargainers Shaikh Abdullah, Fuad Hamza, sometimes Yusuf Yasin, always the interpreter Najib Salha. The Government steadfastly clung to its wish to be paid in gold and its insistence that the initial loan be repayable out of only 10% of royalties. Socal, though it consented to make the initial payment in gold, insisted that it must be protected from having to buy further gold at premium prices in case the gold embargo persisted, and that the first loan must be repayable more promptly than 10% of the purely hypothetical royalties would do it. Hamilton had already had a hard time instructing the ministers in what he meant by a loan—money that must be repaid, even if there never were any royalties—and had already made a major concession by designating the loan as interest-free in deference to the Muslim law against usury.

Wearily the duelists fought it out, until, on May 29, Shaikh Abdullah signed the concession agreement at Kazma Palace on the outskirts of Jiddah. It became effective on July 14 by publication in the official Government Journal. The terms were far below those which the Saudi Arab Government had first proposed, but well above what Socal considered justifiable for a mere look at a wildcat prospect. The Saudi Arab Government was to receive an initial loan of £30,000 gold and another loan of £20,000 in 18 months. The first annual rental of £5,000 was also to be in gold, but the second loan and all subsequent rental or royalty payments could at Socal's option be made in other currencies on the basis of a flexible exchange formula.

The Company would begin exploration within three months and keep at it until it started drilling or gave up the concession. It 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 tons of oil per day. On the announcement of commercial production, it would pay the Saudi Government a royalty advance of £50,000, and a year later it would pay £50,000 more. The agreement was good for 60 years; it covered the whole of eastern Saudi Arabia, from the Gulf to the western edge of the Dahna sands, and from the northern to the southern boundaries—both ill-defined—of the country.

In a separate and private agreement, Socal acquired preferential rights in other areas reaching west from the Dahna; it could, by matching any offer made in good faith by any other company, acquire the right to explore and develop in this additional territory. As for the Neutral Zone, the private agreement specified that the Company could acquire rights there too, by matching any terms obtained by the Shaikh of Kuwait for his share.

What Hamilton had thought might take a few weeks had taken three and a half months. After he had signed the agreement with Shaikh Abdullah, the Hamiltons left Twitchell to look after details (Philby had already gone on to Cairo on a business trip) and took several weeks' vacation in southern Europe, winding up in London about the first day of July. While they were traveling, six copies of an "impressive piece of paper," in both English and Arabic, went back and forth across the ocean and received the signatures of many people. By the end of July, Hamilton had it in his hands to forward to W.F. Vane, head of the land-lease division, in San Francisco. It contained then the signature of Amir Faisal, Foreign Minister of Saudi Arabia, on behalf of his father Ibn Sa'ud. The Amir's signature was authenticated by the Dutch vice-consul in Jiddah. Hamilton jokingly doubted the necessity of having the vice-consul's signature authenticated by the Minister of Foreign Affairs at the Hague, and the signature of the Minister of Foreign Affairs validated by the American Minister to the Netherlands. And yet the weight of this impressive piece of paper warranted the most gingerly and reverential treatment: such documents as this, stemming from the work of such people as humorous, boy-faced Lloyd Hamilton, make the future of nations and alter the economic equilibrium of the world.

Now there were only loose ends to be tied. Hamilton tied them from London, where he set up a small permanent office for the company. He arranged with Twitchell, still looking after the company's affairs in Arabia, to take two cars and two light trucks, with drivers and mechanics, across to the Arabian Gulf coast as soon as arrangements could be made; there he would help start two geological teams on the first explorations. He began stirring up San Francisco about possible use of a plane in Arabia, as permitted by a clause in the private agreement. And he made a deal with Philby for the lease of Philby's old, delightfully dilapidated palace, the Bait Baghdadi, as a Jiddah headquarters. Philby, now that he had the Government monopoly to sell Ford cars, was moving outside the walls to an old building known as the Green Palace, given to him by the Government to house his expanded operations. Philby would leave furniture and equipment, including an electric-generating plant, behind him for the use of the junior land-lease man who would shortly be sent out to represent the company.

As for the gold sovereigns for which the Saudi ministers had so tenaciously dickered, they were a little delayed. Socal's unoptimistic application for a permit to export the sum of $170,327.50 in gold received no reply from the United States Treasury Department, and on July 26, within a few days of the due date, Hamilton made an emergency arrangement to have 35,000 gold sovereigns shipped to Jiddah by the Guaranty Trust Company of London. The move proved wise when Dean Acheson, then Undersecretary of the Treasury, denied the export permit on July 28. The boxes of gold went out from London on a P & O steamer on August 4, and on August 25 Twitchell cabled that he had counted them out on the tables of the Netherlands Bank in Jiddah under the eyes of Shaikh Abdullah Sulaiman, and had Shaikh Abdullah's receipt.

That was the first-act curtain. The second act would follow after a brief intermission.


This article appeared on pages 15-21 of the March/April 1968 print edition of Saudi Aramco World.


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