Master of Advanced Studies in International Oil and Gas Leadership
Oil industry and markets pre 1969
Giacomo Luciani
IEA Energy Training Week
Paris, April 5, 2013
The Oil Industry
• The system of companies constitutes the organisation of
the industry
• Key issues: vertical integration and horizontal
concentration
• The industry has gone through several waves of
integration/dis-integration, and
concentration/fragmentation
2
Vertical integration
• Vertical integration is a consequence of the
presence of a “strategic segment”
• If markets do not work properly companies
controlling the strategic segment have an
opportunity and incentive to integrate
upstream/downstream in the value chain
3
Horizontal concentration
• Historically, oil and gas have been abundant, conditions
for “excessive” competition have existed
• Large up front investment encourages high capacity
utilisation even in negative market conditions
• Periodic waves of financial difficulty lead to
disappearance of companies through mergers and
acquisitions
4
Beginnings in the USA
• Law of capture: low barriers to entry.
• Booms and busts: the rigidity of oil supply and demand
in the short term
• Rockefeller and the strategic importance of pipelines and
refining
• The Standard Oil Trust
• Spindletop and the Texas Railroad Commission
5
Standard Oil Refinery n°1,
Cleveland Ohio, 1889
Spin-offs of the Standard Oil Trust
(1911)
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Standard Oil of New Jersey (SONJ) - or Esso (S.O.) – renamed Exxon, now part of
ExxonMobil. Standard Trust companies Carter Oil, Imperial Oil (Canada), and
Standard of Louisiana were kept as part of Standard Oil of New Jersey after the
breakup.
Standard Oil of New York – or Socony, merged with Vacuum – renamed Mobil,
now part of ExxonMobil.
Standard Oil of California – or Socal – renamed Chevron, became ChevronTexaco,
but returned to Chevron.
Standard Oil of Indiana - or Stanolind, renamed Amoco (American Oil Co.) – now
part of BP.
Standard's Atlantic and the independent company Richfield merged to form
Atlantic Richfield or ARCO.
Standard Oil of Kentucky – or Kyso was acquired by Standard Oil of California currently Chevron.
Continental Oil Company – or Conoco now part of ConocoPhillips.
Standard Oil of Ohio – or Sohio, acquired by BP in 1987.
The Ohio Oil Company – or The Ohio, marketed gasoline under the Marathon
name. The company is now known as Marathon Oil Company, and was often a
rival with the in-state Standard spinoff, Sohio.
The Texas Railroad Commission
• The giant East Texas oilfield was discovered in 1930
• Because of the Law of Capture, a rush to drill and
produce oil immediately occurred, causing a collapse in
the price
• In order to support the price, a prorationing scheme was
enforced by the Texas Railroad Commission, initially
under the form of allocating rail cars for transportation
• The Texas Railroad Commission continued to have a
major influence on oil prices in the US and the world
until the 1960’s
Persian Oil and the UK
Government interest
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D’Arcy acquired a concession covering the whole of
Persia in 1901, for which he paid £20’000.
He subsequently paid £500’000 to finance
exploration, and was ruined and ready to stop in
1907, when oil was finally struck.
He was obliged to call for financial help first from
Burmah Oil, then by the British government
William Churchill, then First Lord of the Admiralty,
convinced Parliament that it was appropriate to
acquire a 50% share in the equity of the new
company, Anglo-Persian Oil Company.
Churchill’s argument
• Churchill’s speech in parliament attacked the combined
monopoly of Standard Oil in the United States and
Royal-Dutch/Shell in the ‘Old World’, and asserted that
Anglo-Persian was one of the very few independent
companies which may allow a major customer, such as
the Admiralty was becoming, to escape inflated prices.
• He also argued that, considering that the Admiralty
contract would greatly increase the value of the
company receiving it, it would be logical for the
government to acquire majority participation, so it would
also reap the benefits.
Calouste Gulbenkian
The Sykes-Picot agreement
The Iraq Petroleum Company
23.75
23.75
Anglo-Persian Oil Company
Royal-Dutch-Shell
Partex
Compagnie Française des Pétroles
Near East Development Corporation
23.75
23.75
5
The Near East Development Corporation
was a consortium of Standard Oil New
Jersey, Standard Oil New York, Gulf Oil
and Atlantic Richfield
The Red Line Agreement (1928)
The Castle at Achnacarry
15
In Saudi Arabia
• A concession was given to
Standard Oil California in
1932. IPC was competing
for the concession, but its
offer was less generous.
Also, H. St. John Philby,
confidant of King
Abdulaziz, helped SoCal in
obtaining the concession.
• A first discovery was
made in 1938.
In Kuwait
• Kuwait was outside of the Red Line agreement
• A concession was disputed between Anglo-Persian and
Gulf Oil
• The Amir played the two companies against each other,
until finally granting a concession to a 50/50 joint
venture of the two in 1934
• The Burgan field was discovered in 1938
The US and Saudi Arabia
• Standard California was overwhelmed by the size of the Saudi
prospect
• They first associated Texaco, a company with which they shared a
joint venture in Asia (Caltex)
• However, even so the investment needed was excessive. They
approached the US government for help.
• Harold Ickes, then Secretary of the Interior, favored direct
involvement of the government.
• However eventually this hypothesis was discarded: instead,
Standard oil New Jersey and Standard Oil New York were associated
to SoCal and Texaco
• ARAMCO was formed: SONY opted to take only 10% of the equity,
the remaining partners took 30% each
The International Petroleum
Cartel
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The Iranian Nationalization
• Mossadegh became Iran’s
Prime Minister on April 28,
1951
• He nationalized Anglo-Iranian
on May 1st
• Anglo-Iranian called for a
boycott of Iranian oil, and
succeeded in stopping all
exports
• As the situation progressively
deteriorated, the CIA and the
MI6 orchestrated a coup, and
Mossadegh was ousted in
1953
The Consequences of the
Nationalization
• This episode demonstrated the power of the Oil Cartel or Seven
Sisters, which were able to act as compact coalition and prevent any
outsider from stepping in.
• Iranian production was substituted for with increases in production
from Kuwait, Iraq and Saudi Arabia
• When Mossadegh was toppled, the nationalization was not
rescinded: the fields remained the property of the National Iranian
Oil Company, but their management was given to a newly
constituted Iranian Consortium
• Anglo-Iranian, renamed British Petroleum, maintained 40% of the
Consortium equity.
• Royal Dutch – Shell got 14%, thus guaranteeing a British majority
(sort of). Five American majors (Esso, Mobil, Gulf, Socal and Texaco)
had 7% each; a group of smaller American companies grouped in
Iricon had 5%. Compagnie Française des Pétroles received 6%
• The Consortium fully embodied the Cartel.
0
22
2001
1997
1993
1989
1985
1981
1977
1973
1969
1965
1961
1957
1953
1949
1945
1941
1937
1933
1929
1925
1921
1917
1913
'000 b/d
Historical Production of 4 Main Gulf Producers
12000
10000
8000
6000
Iran
Iraq
Kuwait
S. Arabia
4000
2000
The slow erosion of the Cartel
• Thereafter, a process of slow erosion of the power of
the cartel began: the high profits that could be
achieved in the oil business attracted new entrants; oil
was discovered in new countries, and smaller
concessions were granted to either individual
companies or smaller consortia
• The case of Libya was especially interesting: several
concessions were given to companies that had no oil
elsewhere (Occidental, Hunt).
• In parallel, some industrial countries created National
Oil Companies to reduce the bargaining power of the
cartel. Notable examples are ENI and ELF.
• Some important concessions were made to producing
countries to avoid conflict: e.g. the 50/50 agreement
in Saudi Arabia, which became a standard
The Cartel’s Pricing Policy
• As most of the oil was traded within the vertically integrated
structures of the Sisters, or exchanged between them, a true
market where arm’s length transactions would take place did
not exist
• Oil was exchanged between Sisters at prices lower than were
available to the rest of players (independent refiners)
• For taxation purposes, the oil companies “posted” an official
price
• Posted prices were kept stable for an extended period of time
• Oil demand grew rapidly, and coal was pushed out of the
system
• Following a unilateral reduction of the posted price, OPEC was
established in 1960, but throughout its first decade it did not
succeed in forcing the companies to the negotiating table
1969-70
• In 1969 Muammar Qadhafi deposed the monarchy in Libya
and assumed power.
• The new government decided that it was not interested in
expanding production, and in fact moved to unilaterally
impose a reduction across the board.
• This was partly the outcome of debates within OPEC, which
had been considering the need to slow down exploitation of
resources, in order to extend their lifetime horizon.
• It was also connected to the United States’ fiscal and balance
of payments crisis, which undermined confidence in the dollar
and appetite to hold dollar assets – in exchange for the real
asset that was oil in the ground. (August 1971: end of dollar
convertibility into gold)
• The US was embroiled in the Vietnam war and losing power.
• Anti-US sentiment was high in the region following the 1967
war.
Occidental and Exxon
• Qadhafi first put pressure on Occidental, oredring
a decrease in production and requesting an
increase in prices.
• The CEO of Occidental sought the support of
Exxon to make up for the lost production and
resist the request.
• Exxon refused.
• Occidental caved in, effectively opening the door
to a flood of concessions.
• The Shah immediately requested equal treatment.
• Eventually this led to the so-called Tehran-Tripoli
agreements
Tehran/Tripoli timeline
• January 12: Negotiations begin in Tehran between 6 Persian
Gulf oil producing countries and 22 oil companies.
• February 3: OPEC mandates "total embargo" against any
company that rejects the 55 percent tax rate.
• February 14: Tehran agreement signed. Companies accept 55
percent tax rate, immediate increase in posted prices, and
further successive increases.
• February 24: Algeria nationalizes 51 percent of French oil
concessions.
• April 2: Libya concludes five weeks of negotiations with
Western oil companies in Tripoli on behalf of itself, Saudi
Arabia, Algeria and Iraq. Agreement raises posted prices of oil
delivered to Mediterranean from $2.55 to $3.45 per barrel;
provides for a 2.5 percent annual price increase plus inflation
allowance; raises tax rate from a range of 50-58 percent to 60
percent of posted price.