Opening Up the Middle East

Opening Up the Middle East

The opening up of the Middle East is synonymous with the rise of Calouste Gulbenkian. His father and uncle were petty merchants who became responsible for collecting revenues for the Sultan’s Privy Purse in Mesopotamia (present day Iraq). This gave them an opportunity to found a merchant bank to finance transactions between Constantinople and Baghdad.³³ The reward for Gulbenkian’s father’s service to the Sublime Porte was the governorship of Trebizond, where he became involved with kerosene imports from Baku on behalf of the Turkish government. Subsequently he was able to enrich himself as a private merchant handling kerosene imports into the Ottoman Empire through contacts developed with Baku oil exporters when he represented the Turkish Crown.

His son Calouste, educated in Britain, was sent to the Caucasus to learn about oil as a young man in the 1890s. This spurred his lifelong interest in oil and he wrote a book about his experiences, including an assessment of the Baku oil industry, which attracted the attention of the Turkish Crown. Gulbenkian was commissioned to do a report on oil prospects in Mesopotamia. The book was a compilation of existing sources plus observations from railroad engineers who had been in Mesopotamia, a part of the world that Gulbenkian was never to visit. The book whetted the Sultan’s appetite and induced him to transfer enormous land holdings from the government to the Crown for his personal aggrandizement should oil be discovered.

Fleeing Turkey with his family during the Armenian massacre of 1896, Gulbenkian appeared on the world stage of oil as the London representative of Mantachoff, a leading Armenian Russian oil magnate. Gulbenkian worked with Frederick Lane, who he considered father of the British oil industry, to bring Russian oil interests into the Royal Dutch-Shell Group. Gulbenkian’s experience led him to believe in the importance of pooling oil resources, production, and marketing to achieve price stability, an idea shared by others who created the oil industry. Unlike his father, Gulbenkian had no interest in the business aspects of oil. He saw himself as a creative architect of corporate structures. His failure to seize upon an early opportunity to get involved with an oil concession in Persia, which became the foundation for the Anglo-Persian Oil Company, led him to adopt his lifelong business obsession: never give up an oil concession!

The 1908 oil strike in Persia whetted Gulbenkian’s interest in Mesopotamia. Gulbenkian convinced Deterding to open a Constantinople office with Gulbenkian in charge, while continuing to act as financial advisor to Turkish embassies in Paris and London and the Turkish government. However, others shared Gulbenkian’s intuitive insight of oil waiting to be discovered in Mesopotamia. Anglo-Persian Oil Company and Ottoman-American Development Corporation had their eyes on Mesopotamia. Germany was eager to build a railroad to Baghdad that would give it oil rights for about 13 miles on both sides of the track. British government, alarmed over growing German influence in Turkey, needed someone known to European oil interests who spoke the language, had the contacts and knowledge of the oil industry, plus possessed the business acumen, skills, and foresight to represent their interests in the Near East. Gulbenkian was ready-made for this position.

In 1910, in addition to his other activities with Shell and the Turkish government, Gulbenkian became an adviser to British financial interests when they formed the National Bank of Turkey for the purpose of making loans within the Ottoman Empire. Working under the auspices of the National Bank of Turkey, Gulbenkian formed the Turkish Petroleum Company in 1912 where Deutsche Bank held 25 percent of the stock, Gulbenkian 40 percent, and National Bank of Turkey 35 percent. To entice Shell into the deal, Gulbenkian gave Shell a 25 percent interest, reducing his to 15 percent. Curiously, neither the National Bank of Turkey nor the Turkish Petroleum Company had any Turkish investors.

When Anglo-Persian Oil became interested in pursuing an oil concession in Mesopotamia, Gulbenkian rearranged the shareholding in the Turkish Petroleum Company to include Anglo-Persian Oil. Gulbenkian believed that it is better to embrace rather than fight a potential rival. The chairs on the deck of the good ship Turkish Petroleum Company were again rearranged with Anglo-Persian Oil having a 47.5 percent share, Deutsche Bank 25 percent, Shell 22.5 percent, and Gulbenkian 5 percent, with the Turkish National Bank no longer on board. In 1914, just before the outbreak of the First World War, the Ottoman government wrote a letter to the British and German ambassadors in Constantinople acknowledging that the Turkish Petroleum Company had an oil concession in the provinces around Baghdad and Basra.

After the War, Britain and France proceeded to carve up the Middle East as spoils of war, excluding the US because it had not officially declared war on Turkey. The British government agreed with Gulbenkian’s assertion that the concession granted to Turkish Petroleum Company by the Ottoman government was still valid, even though the Ottoman Empire no longer existed. The British government wanted to turn Deutsche Bank’s quarter share over to Anglo-Persian Oil. To avoid giving too much power to Anglo-Persian Oil, Gulbenkian inveigled the French government to take over the German quarter share interest in the Turkish Petroleum Company as a war prize. In 1922, the US government, concerned over a potential shortage of crude oil, negotiated an interest in the Turkish Petroleum Company in the name of the Near East Development Corporation (again based on Gulbenkian’s penchant to embrace potential rivals rather than fight them). The corporation did not specifically name any US oil companies, but was eventually represented by six, which subsequently was reduced to two, Exxon and Mobil. Under Gulbenkian’s architectural skill to construct business structures, the shareholdings in Turkish Petroleum Company were again rearranged with an even split among the Near East Development Corporation, French government, Shell, and Anglo-Persian, which accepted halving its share for a 10 percent overriding royalty, with Gulbenkian managing to hang on to his 5 percent share. This would become a bone of contention from this point forward between Mr. Five Per Cent and his corporate brethren within the Turkish Petroleum Company even though there was not a single drop of oil reserves. Without any activity in oil production and marketing, the oilmen, working out of luxury hotel suites, no longer saw value in Gulbenkian’s creative corporate designs. Gulbenkian noted this lack of gratitude by remarking that “oil friends are slippery!”

In 1925, the new nation of Iraq signed an agreement with the Turkish Petroleum Company, to be renamed the Iraq Petroleum Company, whereby the government of Iraq would receive a royalty on any oil produced, if any were discovered, until 2000. At some point in the discussions, the government of Iraq was promised 20 percent participation, but the promise was excluded from the final agreement. This would become a bitter point of contention between Iraq Petroleum Company (IPC), at that time owned by oil companies, and the host government of Iraq for nearly half a century.

All this maneuvering was merely an academic exercise because IPC was a scrap of paper until the 1927 discovery of one of the world’s largest oil fields. Gulbenkian now insisted that the concession granted by the Ottoman Empire was not restricted to Iraq, but included all the lands under the former empire. Gulbenkian took a map and drew a red line over what he thought was the former Ottoman Empire, which included all of the Middle East (Turkey, Syria, Jordan, Palestine, Iraq, and Saudi Arabia) except Kuwait and Iran. Although the Ottoman Empire did control the religious centers along the Red Sea that would eventually become part of Saudi Arabia, its control over the vast emptiness of deserts inhabited by nomads was nominal, to say the least. No one, including Gulbenkian, foresaw the implications of having what was to become Saudi Arabia within the Red Line Agreement. Signed in 1928, Red Line Agreement stipulated that no oil field within the red line could be developed unless there was equal participation by the companies owning IPC, which, of course, included Gulbenkian’s five percent.

As the only oil company with operating experience in producing Middle East oil, BP initially handled Iraqi oil production. Exxon and Mobil soon became more actively involved as did Compagnie Francaise de Petroles (CFP), a national oil company organized by the French government in 1924 and modeled after BP, to handle its share of IPC. The world of oil now had three governments involved with oil. They were British government’s half interest in an independently run BP with a concession in Iran and Iraq, French government’s wholly owned interest in an independently run CFP with a concession in Iraq, and Soviet Union, which had commandeered absolute control over its oil resources.

In addition to opening up the Middle East and playing second fiddle to Frederick Lane in bringing in Russian oil interests to the newly formed Shell Group, Gulbenkian played a prominent role in the commercial development of the Shell Group. He brought Shell into the Turkish Petroleum Company and helped raise money for Shell as an intermediary with New York investment bankers. He arranged contracts for Shell to supply French and Italian governments with petroleum products during the war. In 1918, he orchestrated Shell takeover of Mexican Eagle Oil Company, the start of Shell’s activities in Mexico. To further cement his relationship with Shell, Gulbenkian arranged for his son, Nubar, to become Deterding’s personal assistant. It was rumored at the time that Nubar might be in line to succeed Deterding, but his son’s career with Shell abruptly ended some years later when Gulbenkian yanked him away to become his personal assistant.

Gulbenkian was asked to act on behalf of British investors with an oil concession in Venezuela called, appropriately, Venezuela Oil Concessions (VOC). Gulbenkian brought this investment opportunity to Deterding’s attention, which ended up with Shell owning two-thirds of VOC and Gulbenkian and other shareholders, including Venezuelans, with the remaining third. Deterding believed that any investment made by Shell was to be controlled and run in the best interests of Shell. Deterding practiced what he preached. As majority and controlling owner, Shell was in a position to determine the price of oil exported from Venezuela. It was in Shell’s financial interests to set a low price for the exported oil, but not in the financial interests of the minority VOC shareholders. Despite Gulbenkian’s history of “good deeds,” his failure to reach an agreement with Deterding on behalf of himself and other minority shareholders eventually led to a breach between the two.

After the Second World War, Exxon and Mobil, two remaining US shareholders in the Iraq Petroleum Company, took on the decades-old task of squeezing out Mr. Five Percent. During these discussions, Walter C. Teagle (Exxon’s president) referred to Gulbenkian as an oil merchant, to which Gulbenkian angrily responded that he was a business architect, not an oil merchant, a perfect description of his role in oil. To show his lack of knowledge about the oil business, Gulbenkian once pointed to a strange looking ship in a harbor and asked what it was and had to be told that it was a tanker probably carrying his oil! While oilmen had a jaundiced view of Gulbenkian, so was Gulbenkian’s view of oilmen as cats in the night. “By their sound no one can tell if they’re fighting or making love!”

Failing to squeeze out Mr. Five Percent, the oil companies informed him that the 1928 Red Line Agreement was void as it violated American antitrust legislation, an interesting tactic on the part of oil companies, who were occasionally threatened by Congress for violating the same legislation. For Gulbenkian’s alleged violation, Exxon and Mobil stated that they were no longer bound by the 1928 Agreement. The revised 1948 Agreement left Exxon and Mobil free to develop Saudi Arabian oil reserves without Mr. Five Percent. Between 1948 and 1954, Gulbenkian created a replacement for the Red Line Agreement from his various hotel suites and a court decision confirmed his final version in 1954 along with his five percent interest in the Iraq Petroleum Company. Much to their chagrin, the oil companies had to reimburse Gulbenkian for his previous unpaid receivables.

Gulbenkian’s annual succession of 17- and 18-year-old mistresses ended with his death in 1955 at the age of 86. After his death, he bequeathed the bulk of his wealth and future revenue to a foundation based in Lisbon. In the end, the oilmen won. Gulbenkian’s five percent share was wiped out with the nationalization of IPC in the 1970s; but so too were theirs. Nevertheless the Gulbenkian Foundation continues to prosper with income from his various investments including a Middle East oil company.

1^ History of Lighting Web site www.historyoflighting.net/lighting-history.

2^ Two-sleep is not entirely gone–it is not unusual for not-so-young individuals to watch television after dinner, fall asleep, awaken around midnight or so, watch more television or converse with a family member before retiring to bed.

3^ Mir Yusif Mir-Babayev, “Azerbaijan’s Oil History: A Chronology Leading up to the Soviet Era,” Azerbaijan International, Web site www.azer.com.

4^ Incendiary Weapons–History Web site www.globalsecurity.org/military/systems/munitions/incendiary-history.htm.

5^ “The History of the Oil Industry: Oil through the Ages, 347 BC to 1859,” Web site www.sjgs.com/history.html. See also “Abraham Gesner Developed the Fuel Kerosene,” Web site suite101.com/a/abraham-gesner-developed-the-fuel-kerosene-a368581.

6^ History of Oil Drilling Web site www.stlpipesupply.com/blog/when-octg-pipe-suppliers-used-bamboo-and-other-fun-history-facts.

7^ Reinventing the wheel, so common in the past, is less likely in today’s world of global communications and organizations whose purpose is to track innovation and innovative ideas. Nevertheless it is interesting that a new idea can spring spontaneously and simultaneously to different individuals with no connection to one another as though technology itself dictates its next stage of development.

8^ An excellent example of rut thinking where the old way perseveres with no thought of there being a better way and anyone who dares to challenge the old way is ostracized until proven right!

9^ Early Petroleum History Web site little-mountain.com/oilwell.

10^ Founders of the Union Pacific railroad were merchants who accumulated enough capital from selling supplies to miners during the California gold rush to start a railroad.

11^ J. T. Henry, The Early and Later History of Petroleum (New York, NY: Augustus M. Kelley, 1970); first published in 1878 by Jas. B. Rodgers Co., Philadelphia.

12^ James S. Robbins, “How Capitalism Saved the Whales,” Web site www.alts.net/ns1625/gesner.html.

13^ Amazing how wealth can shake skeletons out of a closet!

14^ Unless otherwise noted, the primary source for the life of John D. Rockefeller is Grant Segall’s, John D. Rockefeller: Anointed with Oil (New York, NY: Oxford University Press, 2001).

15^ Carl Hoffman, Savage Harvest: A Tale of Cannibals, Colonialism and Michael Rockefeller’s Tragic Quest for Primitive Art (New York, NY: Harper-Collins, 2014) from author’s “Journey into the Kingdom of the Spirits”, March 2014 issue of Smithsonian Magazine. The richest individuals on earth have a net worth approaching $80 billion in current dollars. Where Rockefeller stands in current dollars depends on what inflationary factor is built into the evaluation of what he was worth during his heyday. Another correction could be wealth in terms of GDP as today’s economy is so much larger than what it was during Rockefeller’s day. Expressing wealth in terms of GDP may make Rockefeller the richest man in history, but who’s counting?

16^ Dorie McCullough Lawson, “Who Wants to Be a Billionaire?” Smithsonian Magazine (June 2004), describes John D. Rockefeller, Jr.’s philanthropic works.

17^ “ExxonMobil: Rockefeller’s rule,” Financial Times (September 30, 2014), Web site www.ft.com/intl/cms/s/3/6b75fad2-4891-11e4-ad19-00144feab7de.html#axzz3EtuugeMA.

18^ John Schwartz, “Heirs to an Oil Fortune Join the Divestment Drive,” New York Times (September 23, 2014).

19^ Rockefeller considered Flagler the brains behind Standard Oil. After 1885, and while still a director of Standard Oil, Flagler became a prominent Florida developer in St. Augustine, Palm Beach, and Miami. He also organized the Florida East Coast Railroad, which ran the length of the state from Jacksonville to Miami. He extended the railroad to Key West, which was considered an engineering feat of the day. Web site www.flagler.org.

20^ “1879: Tidewater Pipe Company-World’s 1st Successful Oil Pipeline,” Web site www.smethporthistory.org/coryville/oilarticle.html.

21^ History Channel’s TV series “The Men Who Built America” Web site www.thehistorychannelclub.com/articles/articletype/articleview/articleid/1631/the-men-who-built-america.

22^ The power of Wall-Mart over its suppliers can be seen in the bankruptcy of Exide Battery whose loss of the Wall-Mart account contributed to its failure (the California environmental regulators shutting down the company’s lead re-cycling plant was also a major contributor). Web site www.bloomberg.com/news/2013-06-10/exide-technologies-files-for-bankruptcy-in-delaware.html.

23^ Michaeline Skiba and Roy Nersesian “Against the Wall-Mart: Does Market Power Condone Bad Behavior?” Journal of the North American Management Society (Winter 2012).

24^ Forbes Magazine listing of billionaires Web site www.forbes.com/billionaires.

25^ Emma Peters, “How Walmart is behind a job boom in northwest Arkansas,” Yahoo News (July 9, 2015), Web site http://finance.yahoo.com/news/a-look-inside-a-walmart-boomtown-144358704.html.

26^ Unless otherwise noted, the primary source for the life of Marcus Samuel is Robert D. Q. Henriques, Bearsted: A Biography of Marcus Samuel, First Viscount Bearsted and Founder of “Shell” Transport and Trading Co (New York, NY: Viking Press, 1960). The primary source on the formation and development of Shell Oil is Stephen Howarth, A Century in Oil: The “Shell” Transport and Trading Company, 1897–1997 (London: Weidenfeld & Nicolson, 1997).

27^ Shell Oil is an innovator in shipping in building safer and larger tankers. About fifteen of the first twenty Very Large Crude Carriers of over 200,000 deadweight tons delivered in the early 1970s were Shell tankers. Shell has been an innovator in LNG carriers building the first large-sized LNG carriers to ship LNG from a natural gas field in Indonesia to Japan on a life-of-asset basis. The project was equivalent to building an underwater pipeline from Indonesia to Japan, which can’t be done. While higher capacity LNG carriers were subsequently built, Shell paved the way for others to develop large-sized LNG projects to connect stranded natural gas resources in the Middle East and Southeast Asia with Japan and other Asian nations.

28^ James A. Clark and Michel T. Halbouty, Spindletop (Houston, TX: Gulf Publishing, 2004). First published in 1952 by Random House.

29^ As Lord Mayor, Marcus did what he could to counter pogroms in Romania and Russia, warning the Russian ambassador that continued violence against the Jews would lead to the undoing of the czar.

30^ As mentioned, Burmah Oil had the unique status of being, in the eyes of the government, the only true British oil company. This mantle was taken over by BP when it became involved with North Sea oil. Burmah Oil would eventually be without oil producing properties when its Burmese oil fields were exhausted. As a result of speculative investments, Burmah Oil went bankrupt in 1974 and its 20 percent holding in BP was taken over by the Bank of England.

31^ BP Web site www.bp.com/en/global/corporate/about-bp/our-history/history-of-bp.html.

32^ Unless otherwise noted, the primary source on the oil business up to the 1973 oil crisis is Anthony Sampson, The Seven Sisters: The Great Oil Companies and the World They Made (New York, NY: Viking Press, 1975).

33^ Ralph Hewins, Mr. Five Percent: The Story of Calouste Gulbenkian (New York, NY: Rinehart & Co., 1958).See also Nubar Gulbenkian, Portrait in Oil: An Autobiography of Nubar Gulbenkian (New York, NY: Simon & Schuster, 1965).

©Routledge/Taylor & Francis 2016

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