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Volume 50, Number 1January/February 1999

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Prelude to Discovery

Written by Jane Waldron Grutz
Photographs courtesy of Saudi Aramco

It is impossible to say exactly when the search for oil in Arabia began. But if one date had to be chosen, it might well be January 15, 1902, the day that 'Abd al-'Aziz ibn 'Abd al-Rahman Al Sa'ud recaptured Riyadh and began the march to Arabian statehood.

Without the stability King 'Abd al-'Aziz assured by consolidating nine-tenths of the Arabian Peninsula into a single polity, a search for oil would likely not have begun under auspicious circumstances, nor would it have yielded the prosperity that characterizes Saudi Arabia today. Yet it was hardly the consolidation of the kingdom alone that was responsible. Three other world-shaping events—the discovery of oil elsewhere in the Middle East, the First World War, and the Great Depression—each also drove and shaped Arabia's search for oil.

The discovery of oil in the Middle East occurred some six years after 'Abd al-'Aziz's victory at Riyadh when, on May 25, 1908, a self-made British millionaire named William Knox D'Arcy struck oil at Masjid-i-Sulaiman, the site of a natural oil seep in the Zagros Mountains of western Persia.

It had long been thought that oil would be found in this region. Ancient oil seeps had been discovered at several sites, including Masjid-i-Sulaiman itself. (See Aramco World, July/August 1994.) But getting it out was another matter. When D'Arcy signed a concession agreement with Shah Muzzafar al-Din Kadjar in 1901, he had been advised that the search might cost some £10,000.

By the time Masjid-i-Sulaiman came in, D'Arcy and his partner, Burmah Oil, had spent hundreds of thousands of pounds sterling, and they realized that millions more would be required to develop the roads, refineries and ports necessary to bring the oil to market.

To generate these vast new funds, in 1909 D'Arcy and Burmah Oil offered to the public shares in the newly formed Anglo-Persian Oil Company. But by the end of 1912, the company's capital was exhausted and no bank was willing to back the fledgling enterprise any further. Anglo-Persian then turned to the British Admiralty, which had just converted its ships from coal-fired to oil-fired engines. As war jitters reverberated throughout Europe, Britain was eager to secure a reliable source of fuel oil, and that, it turned out, was Anglo-Persian.

On June 17, 1914 First Lord of the Admiralty Winston Churchill presented a bill to Parliament authorizing the Admiralty to purchase 51 percent of Anglo-Persian's stock for £2.2 million. In a surprising victory, the bill passed 254 to 18. It was an astoundingly astute move.

Just 11 days later, Archduke Franz Ferdinand of Austria was assassinated at Sarajevo, and Europe devolved into the chaos that became World War I. By the time of the armistice four years later, there was no doubt of the role that oil had played.

Before the advent of the internal combustion engine, troops had to be mustered at a railhead or port and marched to battle, with equipment, guns and supplies on horse-drawn wagons. Horses were costly: They ate 10 times as much as a man. When oil arrived, however, transport vehicles were limited only by the terrain, and airplanes, it was soon discovered, could surmount even that obstacle.

The decisive difference between the allied forces of England, France and the United States and those of Germany, Austria-Hungary and Ottoman Turkey was thus not so much tactics or even leadership but oil supply. In addition to Anglo-Persian—which by 1916 was supplying one-fifth of the British Navy's needs—the Allies had at their disposal the giant networks of Royal Dutch/Shell and Standard Oil of New Jersey. The Germans were less fortunate. When the Allies destroyed the oil facilities in Romania in November 1916, and then prevented Russia's Baku fields from falling into German hands in August 1918, the war was unsustainable.

The lesson was clear: No longer could a nation be secure without a steady supply of oil. And, as a huge new discovery in 1927 at Baba Gurgur in Iraq demonstrated, nowhere was that oil more apt to be found than in the Middle East. But barely had British, French, Dutch and Americans formed the Turkish Oil Company, largely operating in Iraq, when the 1929 stock market crash undermined the world economy.

When 'Abd al-'Aziz took control of the Hijaz in 1926, he was delighted to find that the taxes paid by pilgrims to visit the holy cities were enough to administer not only the Hijaz, but the rest of his domain besides. By 1931, however, the number of pilgrims had fallen from an annual average of more than 100,000 to fewer than 40,000. Foreign debt repayments and administrative salaries began to fall badly into arrears.

With this in mind, 'Abd al-'Aziz began to reconsider an idea he had explored some 10 years earlier when he first met an enterprising New Zealander named Frank Holmes.

Holmes was something of an adventurer. Before the war he had traveled the world as an itinerant mining engineer, moving from Mexico to Russia to Nigeria. The war took him to Gallipoli and then Ethiopia, where he first learned of the oil seeps of the Arabian Gulf region. Convinced that oil would be found in the area, he set himself up in Bahrain as agent of a brokerage house called the Eastern and General Syndicate. Its business was arranging concessions in the region for business development ventures of all sorts, but its first and foremost interest was oil.

In 1925 Holmes signed a concession with the island state of Bahrain. But he believed that oil could be found in even greater quantities a short distance away on the Arabian mainland, along the Arabian Gulf coast.

After meeting with 'Abd al-'Aziz in al-Hasa in 1922, Holmes returned the following year to al-'Uqayr, where he once again saw the ruler. In May 1923 King 'Abd al-'Aziz signed an agreement with Holmes which entitled the Eastern and General Syndicate to find a company to search for oil in eastern Saudi Arabia.

But there was trouble from the beginning. It began when Eastern and General invited a Swiss geologist to survey al-Hasa. Apparently oblivious to the signs that later oil men would herald as excellent, the Swiss insisted that exploration in eastern Arabia "would have to be classified as a pure gamble." Thereupon, London banks refused to lend Eastern and General the money needed to renew the lease for a third year.

Unable to generate interest from Anglo-Persian, which then had more oil flowing than it knew what to do with, Holmes headed for New York, where he looked up Gulf Oil, one of the few US companies committed to developing foreign oil at that time. In November 1927 Gulf took over all rights to the Eastern and General concessions, which included Bahrain, al-Hasa and Kuwait. In 1928, however, Gulf joined the Turkish Petroleum Company, then jointly owned by US, British, French and Dutch interests, and thereby became a party to the so-called Red Line Agreement, which effectively blocked Gulf from undertaking exploration anywhere in the region, except Kuwait, without the backing of all the partners of Turkish Petroleum. With the oil market glutted and little geological confidence that there would be oil in Arabia at all, that backing was not forthcoming. Within the year, the concession lapsed.

In 1931, Standard Oil of California (SOCAL)—which was not a partner in Turkish Petroleum and therefore free to act within the former Ottoman Empire—agreed to take over the Bahrain portion of the concession from Gulf. On May 31, 1932 SOCAL's newly formed Bahrain Petroleum Company struck oil there, and SOCAL's eyes turned toward al-Hasa.

In his book, Arabian Oil Ventures, Harry St. John ('Abd Allah) Philby, who was 'Abd al-'Aziz's confidant on Western affairs, tells how, in response to 'Abd al-'Aziz's concerns about his Depression-wracked financial situation, Philby remarked that the king and his government seemed "like folk asleep on buried treasure."

When 'Abd al-'Aziz replied that he might consider granting a new concession, Philby suggested that he talk to Charles Crane, an American plumbing tycoon and philanthropist who was then sponsoring development projects in neighboring Yemen. As Crane happened to be in Cairo, it was easy enough to invite him for a visit. On February 25, 1931 'Abd al-'Aziz greeted him in Jiddah with a banquet, and presented him with a bundle of carpets and swords as well as two Arabian horses. In return, Crane offered to send, at his own expense, one of his mining engineers, Karl Twitchell, then working in Yemen, to search for artesian wells for the king.

It took Twitchell some time to make the 2400-kilometer (1500-mi) journey north, complete the surveys— which encompassed much of the Peninsula—and prepare a report. The news, he noted, was mixed: There was no water, but there might be oil.

Twitchell noted the similarity between the geology of eastern Arabia and that of Bahrain. Should SOCAL find oil in Bahrain, he reasoned, the likelihood was great that oil would be found in al-Hasa, too, and possibly in much greater quantities, owing to al-Hasa's greater area. When Bahrain 1 came in, it confirmed Twitchell's expectations—and those of 'Abd al-'Aziz. The king quickly dispatched Twitchell to the United States to find an oil company willing to invest in a search for oil in eastern Arabia.

Within weeks, Twitchell was referred to SOCAL in San Francisco, the same company that had been hoping to approach the king ever since it had begun its exploration in Bahrain.

With both SOCAL and 'Abd al-'Aziz now pursuing the same objective, events began to move quickly. Following a flurry of letters between Riyadh and San Francisco, Twitchell returned to Jiddah in February 1933 accompanied by Lloyd Hamilton, a lawyer representing SOCAL, who had been instructed to sign a concession agreement if the two parties could agree on terms.

However, Philby, aware that the king might achieve better terms if there were two bidders instead of one, had written to his friends at Anglo-Persian. Although the amply supplied British were not much interested in more oil from the Middle East, they were adamant about not letting anyone else into the region in which they enjoyed hegemony. The news of SOCAL's Bahrain strike had them worried. Through the Iraq Petroleum Company (IPC), which had grown out of the Turkish Petroleum Company, they sent a representative, Stephen Longrigg, to enter the bidding.

Since IPC was acting defensively, and had no intention of developing any oil resources that might prove to exist in Saudi Arabia, Longrigg was instructed to offer only a tiny fraction of what the Saudis were asking. When Longrigg explained his situation to Philby, he received little sympathy.

"You might as well pack up," said Philby. "The Americans are far and away higher than that." Longrigg took the next plane back to Basra.

SOCAL, for its part, was not prepared to pay the fees demanded by Saudi Minister of Finance 'Abd Allah al-Sulayman. From the start, he had asked £100,000 as an immediate loan, and had made rental and royalty payments secondary. Saudi Arabia had bills it needed to pay immediately, he explained. Furthermore, maintained al-Sulayman, the concession was well worth this amount of money, and likely a great deal more. After all, excellent terms had been offered for concessions in Iran and Iraq, where the geology was similar.

To the businessmen at SOCAL, al-Hasa was a pure calculated risk. It took three and a half months of wrangling before SOCAL came up with its final offer: An initial loan of £35,000 in gold and a second loan of £20,000 after 18 months, and a rental of £5,000 per year for the concession area, beginning in the second year. Then, if oil should be discovered in commercial quantities, SOCAL would provide a £50,000 loan in gold and a second loan of £50,000 a year later.

On May 8, 1933 al-Sulayman asked the king for his decision. 'Abd al-'Aziz's answer was simple and direct. "Put your trust in God and sign," said the king.

On May 29, 1933 'Abd Allah al-Sulayman and Lloyd Hamilton signed the agreement. Under it, SOCAL received exploration rights to some 930,000 square kilometers (360,000 sq mi) of land for 60 years.

Four months later, SOCAL geologists Robert P. "Bert" Miller and Schuyler B. "Krug" Henry landed at the Arabian Gulf port of Jubail.

The search for oil in Saudi Arabia had begun.

Jane Waldron Grutz is a former staff writer for Saudi Aramco who now lives in Houston.

...66 Years Later
Written by Jane Waldron Grutz

Number of round-trips between the Earth and Mars that a car getting 25 miles per gallon could make using the gasoline refined from a single day's Saudi Aramco crude-oil production: 48

Number of round-trips the same car could make using the daily output of Alaskan oil fields: 9.1 *

Number of times the Great Pyramid of Giza—if it were hollow—could be filled by Saudi Aramco's cumulative production of crude oil since 1938: 5,075

Percentage of the world's crude-oil reserves located in Saudi Arabia: 25

Saudi Aramco's rank among the world's companies producing crude oil and holding crude oil reserves: 1

Approximate number of weeks crude oil from a Saudi Aramco field takes to get from wellhead, through refining and distribution, to a gas station: 2

Number of quality-control laboratory tests performed each month at Saudi Aramco's Ras Tanura Laboratory: 36,000

Approximate number of customers' ships per month that offload Saudi Aramco crude oil at US lightering stations in the Gulf of Mexico: 35

Chances that a supertanker loaded with Saudi Aramco crude oil in 1997 offloaded in the US: 1 in 5

Chances it offloaded in Asia: 2 in 5

Chances that a tanker loaded with Saudi Aramco refined products in 1997 offloaded in the US: 1 in 10

Chances it offloaded in Asia: 1 in 2

Approximate number of houses built since 1951 by Saudi employees of Saudi Aramco using company-provided home loans: 41,400

Number of Saudi Government boys' and girls' schools built and maintained by Saudi Aramco since 1953: 113

Current enrollment in those schools: 65,000

Chances that an employee of Saudi Aramco lives in Dhahran: 1 in 10

Number of nations from which Saudi Aramco's international employees are drawn: 51

Rank of the US among these: 2

Rank of the Philippines: 1

Square meters of Dhahran's 27-hole golf course that are covered in grass: 0

Average number of days each year since 1993 that the daily high temperature at Saudi Aramco's Abqaiq Plants, the world's largest crude oil stabilization center, exceeded 45 degrees Centigrade (113°F): 55

Number of years that oil exploration field teams in Saudi Arabia had no access to air conditioning: 22

Current average price of a US gallon of gasoline at a gas station in Saudi Arabia: 61¢

Number of oil and gas fields discovered by Saudi Aramco between 1989 and 1998: 25

Percentage of all of Saudi Aramco's oil and gas fields that this represents: 30

'Abd Allah Al-Sulayman
Written by Jane Waldron Grutz

Originally from the heartland of Arabia, 'Abd Allah al-Sulayman studied trade and bookkeeping in Bombay before he was named finance minister by King 'Abd al-'Aziz in 1932. He was a man who could make a little go a long way, and he proved a shrewd manager for the kingdom's Depression-era economy. Generally regarded as one of the king's most able ministers, he was responsible also for defense and oversight of the Hajj.

Yet even though al-Sulayman was unable to convince SOCAL to provide the immediate £100,000 loan he regarded as vital to pay off the kingdom's debts, he did succeed in securing more than that amount contingent upon the discovery of commercially useful oil resources. But his far more lasting legacy is that he ensured in the 1933 SOCAL concession that Arabia would continue to receive substantial proportions of all future oil revenues. It was this framework that in time brought his nation unprecedented prosperity, and laid the groundwork for the establishment in 1988 of Saudi Arabia's nationally owned oil company, Saudi Aramco.

King 'Abd al-'Aziz ibn 'Abd al-Rahman Al Sa'ud
Written by Jane Waldron Grutz

Following his conquest of the Hijaz in the mid-1920's, 'Abd al-'Aziz's primary source of income became pilgrim receipts, fees charged as pilgrims traveled from the port of Jiddah to the holy cities of Makkah and Madinah. In the late 1920's, the number of pilgrims averaged between 100,000 and 130,000 annually. But by 1931, the year this photograph was taken, the Great Depression had reduced those numbers to below 40,000, and national income had fallen proportionately.

As the worldwide depression deepened, 'Abd al-'Aziz began to look with more interest toward mineral-resource development. But Twitchell's survey turned up little—even oil was then only a hope, not at all a proven resource. Foreign oil ventures had already disappointed 'Abd al-'Aziz once, when Major Holmes's 1923 venture collapsed for lack of financial backing. In March 1932 the king confided to Shaykh Ahmad Al-Sabah of Kuwait that he remained skeptical of the region's oil potential and was furthermore "not eager in the least to grant concessions to foreigners."

Yet when the SOCAL subsidiary Bahrain Petroleum struck oil in neighboring Bahrain in May 1932, 'Abd al-'Aziz began to accept cautiously that another oil concession might be worth the risks.

This article appeared on pages 30-35 of the January/February 1999 print edition of Saudi Aramco World.


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