EGEE 120
Oil: International Evolution

The Prize Chapter 15: The Arabian Concession- The World that Frank Holmes Made

PrintPrint

Consider the following questions:

  • How did Saud create his country?
  • What did he do to maintain loyalty & unity?
  • Why did the Saudi prefer the Americans?
  • What are your impressions of Saudi Arabia in the 1930s?

"Abu Naft", the "Father of Oil", Major Frank Holmes

Major Frank Holmes, who was born in New Zealand and had worked as a mining engineer in South Africa and other mines around the world, was on a beef-buying expedition in Ethiopia in 1918 when he first heard about oil seepages in Arabian coast on the Persian Gulf. After the war, he set up a company – the Eastern and General Syndicate – to develop business opportunities in the Middle East in the 1920s. He was convinced the Arabian coast would be a fabulous source of petroleum. The Arabs called him "Abu Naft", the "Father of Oil." He referred to his nose and its ability to sniff out oil as his geologist.

Holmes set up headquarters on the small island of Bahrain where the Sheikh wanted drilling for fresh water. Holmes drilled for water, struck it, and was rewarded an oil concession in 1925 in appreciation of his work. Holmes, by then, already had other oil rights, as in 1923 he had won an option to a concession in Al-Hasa in the eastern province of Saudi Arabia and in 1924 to the Neutral Zone between Saudi Arabia and Kuwait. Anglo-Persian was alarmed by Holmes’ activities, even though it was convinced there was no oil in the region. The Eastern and General Syndicate was in deep financial trouble, particularly after a report by a Swiss geologist it had hired declared the region had no promise of oil. The Syndicate tried to sell all its concessions to Anglo-Persian but Anglo-Persian said no as the area was not supposed to have oil! After getting rejected from Britain, Holmes turned to the U.S. for financial backing.

The Troublesome Red Line

After more rejection in America by Standard Oil of NJ, Gulf Oil showed a small interest in Holmes’s expedition. Gulf took over the rights claimed by the Eastern and General Syndicate to the Arabian concessions and agreed to help secure a concession in Kuwait. But then, since Gulf was part of the 1928 Turkish Petroleum Company (TPC) and signatory to the Red Line Agreement, it could not search for oil in Saudi Arabia or Bahrain which were in the Red Line. It could, however, pursue oil in Kuwait which was outside the Red Line. Gulf brought the Bahrain concession to the attention of Standard Oil of CA, Socal, which, unlike Gulf, was not bound by the TPC and the Red Line agreement. Socal aggressively committed to developing foreign oil supplies and set up a Canadian subsidiary, the Bahrain Petroleum Co., to hold the concession in Bahrain. Both Socal in Bahrain and Gulf in Kuwait, however, met British opposition to the entry of American companies in the Middle East as the local Sheikhs in the area had made agreements with Britain before World War I that oil development in the area would be done by British interests. This set up nasty negotiations between the British and American governments, and in 1929, the British government reconsidered its position because it viewed positively that the flow of American capital into the area would encourage widespread development of the area. In Oct 1931, the Bahrain Petroleum Co. began drilling, and in May 1932, it hit oil, vindicating the vision and instincts of Major Frank Holmes.

Shows the Red Line Agreement which included the entire Middle East, except Kuwait and Iran.
The Red Line Agreement - (drawn freehand).
Credit: Ferraro, Mt. Holyoke College

Standard Oil of California (Socal) and the Saudi Oil Concession

Black and white photo of King Ibn Saud of Saudi Arabia.
King Ibn Saud of Saudi Arabia.
Credit: Public Domain

Ibn Saud, King of Saudi Arabia, had a very imposing physical appearance and had built and created the nation of Saudi Arabia through conquest. During 1913 and 1914, he brought eastern Arabia under his control and the last critical territories of Saudi Arabia were added after WWI. In 1922, the British High Commissioner, tired of disputes between Saudi and Kuwait, took a red pencil and fixed their borders. In Dec 1925, Ibn Saud captured the Hejaz, the holy land of Islam, and in 1932, the collective area under his conquest and control, the Kingdom of Hejaz and Nejd and Its Dependencies was renamed Saudi Arabia.

During the Great Depression, the major source of the King’s revenues – pilgrimages to Mecca - slowed to a trickle, and the kingdom’s finances fell to a desperate level. Worse still, Ibn Saud had just embarked on major development programs and desperately needed money. While King Ibn Saud was on a car ride with his English friend, Harry St. John Bridger Philby, known as Jack, Jack suggested the possibility the kingdom was rich in petroleum to the King.

Photo of a book entitled Philby of Arabia
Jack Philby.
Credit: Amazon

Jack Philby, an Englishman, was a former official of the Indian Civil Service who quit in 1925 because he was angered by British policy in the Middle East. He remained at odds with Britain and British policy, which he saw as "traditional western dominance in the eastern world". He set himself up as a merchant in Jidda and had converted to Islam, with the Islamic name Abdullah. He was the father of Harold "Kim" Philby, one of the most notorious British double-agents in the 20th century.

Philby had an American acquaintance, Charles Crane, a plumbing tycoon and philanthropist. Crane was invited through Philby to meet with the king about drilling for water and oil in Arabia. Crane made available an American mining engineer, Karl Twitchell, who was working on one of his projects in Yemen. Twitchell investigated the water potential for the kingdom and reported that there were no prospects for artesian wells but that there were some promising oil prospects in the eastern part of the country. The King was hesitant to grant concessions to foreigners, but after Socal hit oil in 1932 in Bahrain, he became much less averse to foreign capital in his kingdom. The King used Karl Twitchell to be his promoter for capital in the U.S. Twitchell returned to Saudi Arabia in Feb 1933 with Lloyd Hamilton, a lawyer for Socal to initiate negotiations with Ibn Saud’s minister of finance, Abdullah Suleiman. Suleiman was a cunning and masterful opponent. He was one of the most important men outside the Saudi royal family. Suleiman wanted a large sum of money and very quickly.

The Iraq (Turkish) Petroleum Co. was also interested in Arabia concession. Philby signed on as an adviser to Socal but kept the arrangement secret. He took pleasure in helping an American company succeed over British interests in the area. For his services to Socal, he was paid $1000/month for 6 months plus bonuses for a contract for a concession & oil discovery. The interests of the competing companies were completely different: Socal needed oil concessions while IPC simply wanted to keep all competitors out of the area. Socal was therefore willing to offer a great deal more money than IPC and on May 29, 1933, an agreement was signed with Socal that provided the King with 35,000 pounds ($175,000) up front (30,00 pounds in loan and 5,000 pounds as the first year’s royalty paid in advance). In addition, a second loan of 20,000 pounds was to be given after 18 months and another loan of 100,000 pounds was to be made after the discovery of oil - all payments made in gold. The concession was good for 60 years and covered about 360,000 square miles. Britain’s loss was definitely America’s gain, though it was slow to be realized at first.

Kuwait Oil Company: The joint venture of Gulf Oil and Anglo-Persian

Kuwait was a small state trying to assure its independence and freedom of action among larger powers as Iraq, Saudi Arabia, and Iran. Britain assumed responsibilities for Kuwait’s foreign affairs after the war and later established a protectorate over the empire. Sheikh Ahmad, the Amir of Kuwait, was upset when exploration effort occurred in Bahrain and not in Kuwait. He was courted by Anglo-Persian and Gulf. Anglo-Persian was skeptical about oil in Kuwait, but didn’t want to take the chance of any other company receiving concessions. Thus, Anglo-Persian’s concession interest in Kuwait was also a defensive strategy.

Sheikh Ahmad, like the other rulers in the Middle East, desperately needed money because Kuwait was suffering severe economic hardship. Its economy had depended on natural pearl, and the development of techniques for cultivating pearls artificially (cultured pearls) by the Japanese had destroyed the demand for natural pearls, which was Kuwait’s #1 industry and principal source of foreign earnings. The Great Depression also crippled the Kuwaiti economy:

The Sheikh was upset with Britain over diplomatic measures involving various controversies with Saudi Arabia and Iraq and believed that an American oil company would bring American political interest, which would bolster his position against Britain and other rivals. On the other hand, he also saw the practical significance of having the Royal Navy in the area. The competition between Gulf and Anglo-Persian for Kuwaiti oil concession continued to increase as the Sheikh played one against the other. A possible alternative to the continuing bidding war was cooperation. While Britain entertained the fear of losing influence and position to America in the area, the last thing it wanted was to have an oil war with the United States. The British also deep down believed American capital could contribute to political stability and economic interests in the area. When, in May 1932, Socal struck oil in Bahrain, it forced Anglo-Persian to quickly change its mind and its interests were no longer defensive but commercial. The bidding war between Gulf and Anglo-Persian in which the Sheikh played the two against each other continued. To the Sheikh, it did not matter what nationality was involved, as long as the stipulated payments in any agreement were made.

Anglo-Persian saw positively America’s wealth and political clout in the area, and Gulf also saw positively the entrenched British power in the region, and they both realized it was in their best interest to reduce the number of buyers from two to one to avoid the Sheikh continuing to play one against the other. By December 1933, the two companies established a 50-50 joint venture called the Kuwait Oil Company. An agreement between the British government and Kuwait Oil Company in March 1934 assured British dominance over development despite the 50-50 arrangement. Sheikh Ahmad proved to be a tough negotiator. Although he was upset with the decision of British dominance, on December 23, 1934, he finally signed an agreement which granted a 75 year concession to Kuwait Oil Co. In return, the Sheikh received an immense amount of royalties in the form of an upfront payment of 35,700 pounds ($179,000) plus 7,150 pounds per year until oil is found, then a minimum of 18,800 pounds per year once oil was found. The Sheikh appointed Frank Holmes to be his representative to the company in London until Holmes’ death in 1947.

The California-Texas Company (Caltex) of Socal and Texaco

Standard Oil of California, Socal, set up California-Arabian Standard Oil Company (Casoc) as its branch in Saudi Arabia with administrative headquarters in Jeddah. The exploration and production experienced many difficulties including extreme daily temperatures (up to 115 degrees during the day and bitter cold at night) and severe sandstorms. Their geologists identified the Dammam Dome and believed it to have been a sure bet for oil, but it ended up being a failure. Socal became increasingly anxious about its Arabian project. Even if it found oil, it had no distribution facilities in the area. Due to oversupply and the Depression, it really didn’t have a market even if it discovered oil. Thus, the question was, what would Socal do if it actually found oil in the Arabian Desert?

Socal actually had to cut back on its production in Bahrain in the second half of 1935 due to the lack of market access. Also, the Bahraini crude had undesirable high sulfur content. While Socal had the crude and no marketing network, Texaco had extensive marketing network in Africa and Asia, but no crude in the Eastern Hemisphere. Thus, a marriage of the two in the form of a joint venture made sense. Caltex – the California-Texas company which was the joint venture formed between Socal and Texaco provided the outlet for both Bahrain production and any oil eventually found in Saudi Arabia. Socal and Texaco delineated their consolidated area by what they called the "Blue Line" in reference to the Red Line.

Oil Discovery in Kuwait and Saudi

Exploration in Kuwait begun in 1935, and it was not till 1936 that seismic work was undertaken. On Feb 23, 1938, petroleum was struck, unexpectedly and with a surprising large flow in Kuwait. Then, in March 1938, large quantities of oil were also struck in Well #7 in the Arab Zone (Dammam #7) in Saudi Arabia at 4727 feet. Immediately after the well was tapped, a pipeline was constructed to link the oilfields to the Saudi coastal and marine terminal at Ras Tanura. King Ibn Saud himself turned the valve through which the first trickle of oil flowed through the pipeline out of Saudi Arabia amid dancing and a joyous celebration. Jack "Abdullah" Philby prospered in Saudi Arabia through the 1930s and continued many other explorations. He died in 1960 in Beirut, Lebanon.