The Final End Of The As-Is/Red Line Agreement

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.

Barkley Rosser