In London yesterday visiting Saudi Crown Prince, Mohammed bin Salman (MbS) allowed the signing of a set of trade memoranda with various British companies, including buying Typhoon aircraft, and many other things, 18 such deals, although some sources say only 14, total value maybe about $90 billion, although much of that already in the works and in the end may amount to what the $110 billion plus deals he agreed to with Trump, not much at all. One large item not in the deal, a promise to let London handle the upcoming massive IPO for 5% of ARAMCO, with both New York and Riyadh itself still in contention for that one, the main claim to “privatization of the Saudi economy” that its PR machine has been relentlessly spinning about loudly for some time now. I continue to forecast that wherever it is done, it will end up being a Saudi insiders deal to get some shares of ARAMCO into MbS approved private princely hands.
But the deal that triggers this post is one that signals the final end of two closely related deals made in 1928 between the leading oil companies of the day, the As Is Agreement and the Red Line Agreement. The first is the more important one, although the latter involved the dramatic drawing of a red line on a map by Calouste Gulbenkian that basically supported the As Is one. That one was made at a secret meeting held at Achnacarry Castle, after a round of grouse hunting, between the world’s three most powerful oil CEOs, Sir Henri Deterding, host and owner of the castle and Chairman of Royal Dutch Shell from 1900-1936 (created by him by merging his Royal Dutch shipping company with Marcus Samuel’s Shell Company based in the Dutch East Indies, now Indonesia, originally actually dealing in shells but then in oil production), Sir John John Campton, Chairman of then Anglo-Persian Oil Company, which became Anglo-Iranian Oil Company in 1935 when the nation showed its alliance with Hitler and his Aryan racial master race theory (and was briefly nationalized by Mossadegh in Iran in 1951, only to have that undone by the mostly US Project Ajax, which let some US oil minors in) and which is now British Petroleum (and was 50% owned by the British govermment from WW I when Churchill nationalized it to guarantee oil for the British navy until Thatcher sold off the “family silverware” shares in the 1980s), and finally Walter Teagle, Chairman of New Jersey Standard, the largest successor to Rockefeller’s Standard Oil, which would later become Exxon, and more recently would buy up the second largest successor, Mobil, originally New York Standard.
They divided up the Middle East among them, with the Red Line emphasizing it. For our purposes here, the crucial matter is that Saudi Arabia, not then definitely known to have any oil, was granted to Jersey Standard, aka Esso aka Exxon. In 1938 petro-geologists from the company found oil and cut the first deals with then King Abdulaziz to start production, which did not really take off until after his death in the early 1950s, although it was co-founder (with Venezuela) of OPEC in 1960, and is and long has been and will continue to be the world’s largest exporter of oil. ARAMCO was the company, originally Jersey Standard (Exxon), New York Standard (Mobil) , Califonrnia Standard (Chwevron), and the now defunct Texaco. By the end of the 40s, the Saudis hasd intiated a 50-50 profit sharing agreement. By the time of the first oil price shock in 1973 that they initiated, they had bought out these US companies, and while everybody calls it ARAMCO (Arabian-American Oil Company), it is officially the Saudi Arabian Oil Company. Nevertheless, the ols US companies continued to get contracts to do various things for and with ARAMCO.
So, in London MbS allowed a British breach of the old As Is/Red Line Agreement from 1928. For the first time a Briitsh-based oil company will get in on the action in Saudi Arabia, in tis case, good ols Royal Durtch Shell, which is really part British part Dutch (the Dutch royal family still holds shares, I unserstand). They are going to be brought in, reportedly, to help with developing shale oil production of natural gas, apparently on the fringes of the al-Ghawar field, by far the largest oil pool in the world, responsible currently for about 4-5% of world oil production. This may yet not come to pass, but it does indeed mark the final end of the 90 year old agreement that said oil production in Saudi Arabia was strictly for the American oil companies (among non-Saudi ones). Time passes on.
What is your take on the Russians getting involved in Saudi Arabia?
“Russian banks and a joint Russia-China investment fund are eager to participate in Saudi Aramco’s initial public offering, according to the head of a sovereign Russian investment fund.
Several banks and other groups in Russia are interested in investing in shares of Aramco, the world’s biggest oil exporter, Kirill Dmitriev, chief executive officer of the Russian Direct Investment Fund, said Wednesday in Riyadh. Saudi Arabia plans this year to sell about 5 percent of the company in what could be a record IPO.
“Not only this, but we have a Russia-China investment fund, and through that Russia-China investment fund we see a major interest in the Aramco IPO from a number of leading Chinese institutions,” Dmitriev told reporters. “We see significant interest to invest in the Aramco IPO from Russia, from China, and we believe that this is very good for, once again, thinking jointly about oil.”
Russia and Saudi Arabia, the world’s two largest oil-producing nations, have abandoned their long-time rivalry and formed an alliance to try to prop up crude prices amid a surge in output from U.S. shale drillers. The pair engineered a global accord to cut output until the end of the year. Russian Energy Minister Alexander Novak and his Saudi counterpart Khalid Al-Falih spoke Wednesday at a conference in Riyadh, the latest in a series of joint appearances that underscore their deepening ties.”
Good question, EMichael. Sorry I have been slow to reply. On road last few days with bad internet connections.
This is definitely an interesting development. Prior to the fall of the communist regime and the end of the Soviet Union, KSA had no diplomatic or business dealings with UAAR/Russia due to its official atheism. That has very gradually loosened over time. I do not know when they first got diplomatic relations, but their first business dealings date back about 20 years with the Saudis buying some specialized pipes they use for their smallish oil production in the Empty Quarter, the reserves and nature of that long held as a seriously deep state secret by KSA. Of course, neither the USSR nor Russia (nor any other former USSR republic) is or has ever been a formal OPEC member.
Anyway, for a long time Russia, KSA, and the US have been the wolrd’s largest oil producers, with the US surging in production in recent years, although still importing on net well over a third of the oil it cosumes. KSA has since the 1950s or thereabouts been, and still is, the world’s largest exporter, although Russia has managed to move into second position on that, given cutbacks for various reasons in and Iraq, who were the next two easily back in 1973 when OPEC first asserted itself by imposing a quadrupling of world oil prices. Their 1980s war with each other did not help either one of them, although both remain top OPEC producers.
So, it is not surprising that after the oil piece collapsed from its USD 100+ per barrel price a few years ago down to a low in the $30 range, the Saudis, still led by the late King Abdullah, and the Russians, led by Putin, began talking about together essentially setting the world oil price between the two of them, with OPEC long weakened for a variety of reasons, and a smaller proportion of world production and exports anyway, and with the US shale oil surge a serious challenge.
As tt was it took some time for the two to finally manage to make agreements and stick to them, with this I think not really happening until after Abdullah was replaced by Salman, and MbS got into the action and became the most important player on the Saudi side, with crucial meetings involving him meeting with Putin. This was also after the oil price had on its own begun to rise and had gotten into the $40 range, making it easier to cut a deal that involved some restraint of production on both sides.. Since then their cooperation has been more important and probably was crucial to the Brent crude price going above $60 and even up briefly to $70, reportedly their common target price.
However, reportedly the trigger price for increasing US shale production is in the $55-60 range, which probably explains why the price has fallen back from $7- into the lower to mid-60s, where it has been hovering and fluctuating most recently.
So, anyway, it is not surprising the Russians want in with ARAMCO, not to mention China for both financial and geopolitical reasons. However, so do lots of other nations, and for all the recent cooperation on oil pricing, the Saudis remain far friendlier to the US and UK than either Russia or China. Keep in mind Russia is friendly with Iran, and for MbS this is the top foreign policy priority. And I stick with my prediction that wherever the IPO is launched, a big chunk of the eventual owners will end up being wealthy Saudis, at least those who are in the good graces of MbS, with reportedly as many as 200 still remaining in some form of semi-destitute semi-confinement.
I left out Iran at a second point, who was No. 2 in oil production and exports in OPEC in 1973, with Iraq in third place. What triggered the second oil price shock in 1979 was the collapse of oil production in Iran due to the Islamic revolution. Its production revived somewhat and has been up and down, most recently up again after the nuclear deal, but never up to the 6 mbpd it was at in the early 1970s.
Thank you for the run down.