Arabian American Oil Company (ARAMCO)

ARABIAN AMERICAN OIL COMPANY (ARAMCO)

Petroleum partnership between U.S. firms and Saudi Arabia, 1933–1990.

The origins of the Arabian American Oil Company (ARAMCO) go back to the May 1933 signing of an oil concession agreement between Saudi Arabia's finance minister, Shaykh Abdullah Sulayman, and Lloyd N. Hamilton, an attorney representing Standard Oil of California (SOCAL, now Chevron). Oil exploration was begun three months later by CASOC, the SOCAL subsidiary established to operate the Saudi concession.

At that time, SOCAL was seeking a partner to market the oil it was producing in Bahrain and hoped to produce in Saudi Arabia. In 1936 it transferred 50 percent of the Bahrain Petroleum Company (BAPCO) and 50 percent of CASOC to the Texas Company (Texaco), receiving in return $21 million in cash and deferred payments, plus a half interest in Texaco's marketing facilities east of Suez, which were reorganized as a subsidiary of BAPCO and named CALTEX. On 3 March 1938 CASOC brought in its first commercial oil well, Dammam number 7. On 1 May 1939 King Abd al-Aziz was present when the first oil tanker was loaded with Saudi crude oil and sailed from Ras Tanura.

The development of Saudi Arabia's oil fields was hampered, but not halted, by World War II. In 1940 Italian aircraft bombed Dhahran, where CASOC was headquartered, and the war at sea limited shipping to and from the Perisan Gulf throughout the conflict. During the war, fears of oil depletion sparked U.S. government interest in the resources of Saudi Arabia. Although plans for the U.S. government to buy all or part of CASOC eventually were shelved, in late 1943 steel and other rationed materials were allocated to the company to construct a tank farm, refinery, and marine terminal at Ras Tanura, along with a submarine pipeline to the BAPCO refinery on Bahrain.

CASOC had an unusually close relationship with its host government and its personnel made great efforts to be good guests in the kingdom. CASOC also protected its conception of Saudi interests within its parent corporations, primarily by opposing any move that would restrict production. SOCAL and Texaco were equally committed to a long-term relationship with the kingdom. In January 1944, at the suggestion of State Department adviser Herbert Feis, who had taken part in the negotiations over government participation in CASOC, SOCAL and Texaco changed the name of the operating company to the Arabian American Oil Company (ARAMCO). ARAMCO became the chief conduit communicating Saudi Arabia's interests to its parent corporations and to the U.S. government.

ARAMCO's rapid growth was assured once the Red Line Agreement was canceled and the company was able to acquire two new partners, Standard Oil of New Jersey and Socony Vacuum, in December 1948. The infusion of capital fueled the rapid development of Ras Tanura and the construction of the Trans-Arabian Pipeline. That, along with continuing exploration and development efforts, transformed ARAMCO into the largest oil-producing company in the world. In 1978, forty years after oil was discovered in commercial quantities in Saudi Arabia, ARAMCO's cumulative total production exceeded 30 billion barrels.

The concern for and protection of one another's interests by Saudi Arabia and ARAMCO's parent companies were remarkable. A notable instance of efforts made on behalf of Saudi Arabia's government took place in 1973 when the parent companies mounted an intensive campaign in the United States to convince policymakers and the public that the continued failure of efforts to resolve the Arab-Israel conflict could lead to an oil embargo if another war broke out. The success of the oil embargo imposed by the Organization of Arab Petroleum Exporting Countries (OAPEC) during the Arab-Israel War of 1973 was underpinned by ARAMCO's decision to observe its conditions to the letter. The government of Saudi Arabia supported ARAMCO through its oil-pricing policy. In the early 1980s the government kept prices below the OPEC average, thus enabling the ARAMCO partners to earn huge profits through purchase of cheap Saudi oil, some of which was deliberately produced in excess of the OPEC-established quota.

Before the oil revolution of 1970 to 1973, the ARAMCO parents might have hoped to retain some of their equity in ARAMCO's operations, even though "participation" as a concept was developed by the oil minister of Saudi Arabia and a participation agreement was reached between the Persian Gulf producers and their concession holders in 1972. In June 1974 Saudi Arabia took over 60 percent of ARAMCO under that participation agreement. By the end of the year, the government told the unwilling ARAMCO parents that it wanted 100 percent of the company. In 1976 arrangements for the transfer were worked out; in 1980 the government acquired 100 percent participation interest and almost all of the company's assets.

Under Saudi ownership the company commissioned construction of east-west pipelines to carry crude oil and natural gas liquids from the Eastern Province to Yanbu, on the Red Sea, and in 1984 it acquired its first four supertankers. In 1988 the name of the company was changed to the Saudi Arabian Oil Company, or Saudi Aramco. During the 1990s Saudi Aramco took complete control of its domestic oil industry, expanded the capacity of its pipelines, and added to its transport fleet. It began acquiring overseas interests, including shares in the Ssang Yong Refining Company in South Korea and Petron, a Philippine refiner, and established an overseas marketing company, Star Enterprises, with Texaco.

Saudi Aramco has made every effort to train and employ Saudi nationals. Its first Saudi president, Ali al-Naimi, took the company's helm in 1989. By 2000 more than 85 percent of its 54,500 workers were Saudi citizens, and most of its contracts went to Saudi-owned or joint venture businesses.

see also organization of petroleum exporting countries (opec); red line agreement; trans-arabian pipeline.

Bibliography

Anderson, Irvine H. Aramco, the United States, and Saudi Arabia: A Study of the Dynamics of Foreign Oil Policy, 1933–1950. Princeton, NJ: Princeton University Press, 1981.

Barger, Thomas C., and Barger, Timothy J. Out in the Blue: Letters from Arabia, 1937–1940. Vista, CA: Selwa Press, 2000.

Miller, Aaron David. Search for Security: Saudi Arabian Oil and American Foreign Policy. Chapel Hill: University of North Carolina Press, 1980.

Nawwab, Ismail I.; Speers, Peter C., and Hoye, Paul F. ARAMCO and Its World: Arabia and the Middle East. Dhahran, Saudi Arabia: ARAMCO, 1980.

Tétreault, Mary Ann. Revolution in the World Petroleum Market. Westport, CT: Greenwood Press, 1985.

Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon and Schuster, 1991.

Mary Ann TÉtreault