The Prize Chapter 10: Opening the Door on the Middle East: the Turkish Petroleum Company
Consider the following questions:
- How would you describe Gulbenkian?
- What do you think of Gulbenkian’s view of competition and cooperation?
- What were some of the cultural differences between Teagle and Gulbenkian?
- What do you think of Gulbenkian’s statement that "Oil friendships are very slippery"?
- What can you say about the fact that Mr. 5% was the Talleyrand of oil but had never seen an oil tanker?
- What do you think of the Red Line Agreement?
The Key to post WWI Oil Concessions in Mesopotamia: Calouste Gulbenkian
After the "blood of victory" oil became linked to postwar politics, as petroleum became central to the strategies of nations. Both Britain and France wanted control and influence of Mesopotamia (Iraq), as it was believed the area had significant oil potential. The British believed they had secured their supplies through the Anglo-Persian oil; however, the political makeup of the region had changed. The French had secured access in the Mosul region of what is now Northern Iraq. In 1912, even before WWI, the British became suspicious and concerned when they found the Turkish Petroleum Company (TPC) also in the area with interests in concessions. The Deutsche Bank and Royal Dutch/Shell each owned a quarter of the shares of the TPC and the remaining 50% was owned by the Turkish National Bank (TNB). Interestingly, the TNB was a British controlled bank with minority (30%) to the Armenian millionaire, Calouste Gulbenkian. Who had the "right" to authorize access to the petroleum? With the Ottoman Empire defunct, who could negotiate access?
Gulbenkian was a second generation man in the oil business; however, his view of the oil industry was as a business architect. He studied mining engineering, published a book on oil in 1891, and was a world oil expert by age 21. Yet, he had no great passion for oil and was more interested in money and collecting coins and art pieces. He was a suspicious and skillful negotiator. He trusted no one and even had two sets of doctors to check on each other regarding his health. He learned to negotiate as a young boy in the bazaar of Constantinople, now Istanbul. Not being a very sociable youth, he took to learning the art of negotiation and the ability to hold out until he got what he wanted. His 30% holding in the Turkish National Bank gave him, overall, 15% of the Turkish Petroleum Company.
The Turkish Petroleum Company and the "Self-Denying Clause"
Gulbenkian, a major stockholder in the Turkish National Bank, brought together the British (Anglo-Persian) (50%), German (Deutsche Bank) (25%) and Royal Dutch/Shell (25%) into the entity, Turkish Petroleum Company, in 1914 after long negotiations. In essence, he sold the shares of the TNB to Anglo-Persian. Under the agreement of March 19, 1914, Anglo-Persian and Royal Dutch Shell each gave Gulbenkian "beneficiary interest" of 2.5% each for a total of 5% (hence the name "Mr. Five Percent"). Gulbenkian put the entire deal together. It wasn’t like he was running around getting all the parties to agree, as the major part of the negotiation was Gulbenkian making sure he had his interest (5%) secured. The British, German, and Royal Dutch/Shell common goal was to get as much access as possible to the speculated petroleum. Under the agreement, the TPC became the only entity with access to concessions in the area within the Ottoman Empire, and all oil production had to be done jointly as all parties had to agree to the "self-denying clause." This clause required all parties included in the agreement to work together or not at all. The investment would be shared, and the profits would be shared. The only areas of the Ottoman Empire exempted from the clause were Egypt, Kuwait, and territories on the Turco-Persian border.
WWI put a rift between Anglo-German cooperation in Mesopotamia, and during and after the war access to oil supplies became the top objective of the British. To ensure this, the British captured Mosul after the peace treaty of WWI was signed with Turkey.
Anglo-French Relation in Mesopotamia
Before World War I, French Prime Minister Clemenceau counted on oil always being available at the local grocer. After the war, France realized the importance of access to oil. They wanted a stake in the Mesopotamian oil. They sought to make an agreement with Britain. As mentioned earlier, France had a claim on Mosul (currently northern Iraq) and some parts of modern day Syria. Britain supported the French mandate over Syria if they gave up their claim to Mosul. So, on December 1, 1918, France surrendered its claim to Mosul to the British and, in turn, the British gave its support to the French over Syria in addition to guaranteeing to share any oil discovered in Mesopotamia with the French. Later, the two parties signed the San Remo agreement in 1920 that gave France 25% of the Mesopotamia oil through the acquisition of the German portion of the Turkish Petroleum Company.
France, realizing the national security implications of oil access, established a new company, Compagnie Francaise de Petroles (CFP), that would be entirely French. Unlike the British that controlled Anglo-Persia 51%, the French government appointed two directors and approved all others, but left the company completely private with little or no room for private foreign shareholders in CFP. This company struck for a balance between free market and state monopoly by creating a hybrid of both. It used, according to the Prize, "a quota system under which the state allocated market shares to various private refining companies in order to assure diversity of supply and guarantee the viability of French refining companies." CFP was launched in 1924 and secured the French shares in the Turkish Petroleum Company that originally belonged to the Germans.
Shell & Anglo-Persian Dance
The British government had always been interested in changing the 60-40 split of Dutch-British interest in Royal Dutch/Shell in favor of British dominance and pushed the idea of merging Royal Dutch/Shell and Anglo-Persian. Do you remember all the "Shell Menace" and all the animosity between these companies when the British Navy was planning on converting their coal to oil? Royal Dutch/Shell saw benefits of a merger that included gaining control of Anglo-Persian, strengthening of Shell, the ending of the preferential treatment by Britain of Anglo- Persian as the fuel oil supplier, and the elimination of the potential of wasteful duplication in the industry. Robert Cohen of Shell put the proposition to Churchill for him to bring together these two companies. Churchill who was a recently defeated member of the British Parliament, and therefore out of a job in summer 1923, was to convince Anglo-Persian and the British parliament to merge with Royal Dutch/Shell. The political carrot he was to use was the possibility of British control over a worldwide oil system. The main opposition to the merger idea was however from the Admiralty and Anglo-Persian. Before Churchill could lobby for the merger, he returned to politics as a Conservative, but the idea was defeated in parliament.
America's Entry into the Middle East
America, fearing the exhaustion of petroleum under their own land and the return of "Gasolineless Sundays", sought access to the brightest prospects – the Middle East. To add to the fears, demand for oil in America increased 90% from 1911-1918 and the number of registered cars went from 1.8 to 9.2 million from 1914-1920. George Otis Smith, the director of the U.S. Geological Survey, warned that the known American reserves would be gone in exactly nine years and three months-which would have been before 1930. This influenced the price of oil to increase and encouraged the government to support the oil companies in their quest for foreign supplies. Thus, the fear of shortage and competition helped to push American companies to now explore for oil wherever they could find it with support of the US government - and that meant the Middle East.
The British reacted by firmly denying the American companies access into the Middle East, and the U.S. Government responded by invoking the "Open Door" policy (equal access for American capital and business) and passing the Mineral Leasing Act of 1920. The law reciprocated by denying access to drilling rights on public lands to foreign interests who denied similar access to U.S. companies and was aimed specifically at the Dutch in the East Indies and the British in the Middle East. Clearly, this time, the US government was a supporter of the oil companies and not an adversary as had been seen in prior years.
The British had much economic and strategic collaboration with the US and was not willing to jeopardize its relationship with America and reconsidered. Besides, they also realized that entry of American capital and technology would accelerate the development, and the presence of America would also improve the political climate and strengthen the position of the companies in any political conflict. In the words of the Permanent Undersecretary of the British Foreign Office, according to the Prize, "it would be better to have the Americans inside than outside competing and challenging the concessions."
The Man to Lead US entry into the Middle East: Walter Teagle
Herbert Hoover, the Secretary of Commerce, suggested a syndicate of companies be formed to operate in Mesopotamia. It felt remarkably like the dragon that had been slain by the Supreme Court was back to life… and Standard Oil of NJ sat at the top! A few years back, the group would have been a target of the government for antitrust and restraint of trade, but now they were being cheered on as the champions for promoting the Open Door policy! Walter Teagle, the President of SO of NJ, was to act as spokesman of the American oil companies and carry out the negotiations with Deterding (Royal Dutch/Shell), Greenway (Anglo-Persian), Mercier (CFP), and Gulbenkian.
Walter Teagle was born into the oil business on both sides of his family. He was second generation oil man on his father’s side and third generation on his mother’s side. His maternal grandfather was actually Maurice Clark, Rockefeller’s original partner. Teagle studied petroleum technology at Cornell. He took the chair of H. H. Rogers as director of Standard Oil in 1909 at the age of 31 and rose through the ranks at Standard Oil, eventually to be the President of Standard Oil NJ in 1917 at age 39. Unlike Rockefeller, he put more effort in considering public relations and the company’s reputation. To compete, Standard Oil of NJ and the other US companies needed to gain access to foreign sources of petroleum. While they might share a similar heritage in the oil industry, in personality, Mr. Teagle seemed a direct opposite of Mr. Gulbenkian. Where Teagle was big, Gulbenkian was small, where Teagle was loud and friendly, Gulbenkian was quiet and suspicious.
The British as King Makers
The British realized that political stability was of the utmost importance to developing and establishing an oil concession. The British incited an Arab revolt against the Turks, led by the Sharif of Mecca, Hussein, and thereafter installed Hussein and his sons as Kings or rulers of the partitioned sections of the Turkish Empire. For example, his third son Faisal was initially put on the throne in Syria but was deposed when the French took control of Syria and was subsequently installed as King of Iraq in 1921. His brother Abdullah was put in charge in Transjordan. The challenges Faisal faced were enormous and are similar to those that the current Iraqi government and the U.S. Government are facing 80 years later. Having a collection of diverse groups (Shia Arabs, Sunni Arabs, Jews, Kurds, Christians and Yazidis) who responded mainly to local sheiks, religious leaders and tribal leaders without strong and common political history and affiliation does not lend itself to a ready-made country.
Kirkuk Oil Production and Signing of the Red Line Agreement
The US constantly refused to recognize the 1914 granting of concession to the Turkish Petroleum Company. Eventually, however, a new concession agreement was signed on March 14, 1925 between the Turkish Petroleum Company and the Iraqi government that satisfied the Open Door policy after lengthy and contentious negotiations especially with Gulbenkian. At one time during the negotiations, Gulbenkian even got upset when Teagle referred to him as an "oil merchant" when he considers himself as a "business architect". Despite all the controversy between the oil companies, ethnic groups, and British appointed king, a joint geological expedition in Iraq started drilling in April 1927. Six months later in October 1927 at Baba Gurgur, six miles northwest of Kirkuk, oil was gushing 50 feet above the derrick into the air. The oil flowed until capped at 95,000 bpd.
With the availability of oil in the area proved, final settlement of the negotiations that was to bring the American companies into the TPC had to be completed with urgency. This happened on July 31, 1928 with Royal Dutch/Shell, Anglo-Persian, the CFP (French), and the Near East Development Company (which held the interests of the American companies) each receiving 23.75% with the remaining 5% going to Gulbenkian. As expected, the man who only cared about money and not oil, Gulbenkian, agreed to quickly sell his petroleum to the French (CFP) at market price.
Mr. Five Percent & the Red Line Agreement
The "self-denying" clause still remained, and at one of the negotiation meetings Gulbenkian took a red pencil and drew a line around the old Ottoman (Turkish) Empire and the "self-denying" clause became known as the "Red Line Agreement." Within the Red Line that included the entire Middle East, except Kuwait and Persia, the group was bound to operate together. As expected, the Red Line Agreement continued to be a focus of tension and bitter conflicts for many years to come, as it constrained exploration and development by requiring all the partners to work together in all oil production. The final agreement with the Turkish Petroleum Company including the Red Line Agreement was a great victory for Gulbenkian after 37 years of persistence and tenacity. The man who was 59 years before he saw an oil tanker in the Mediterranean, off the coast of Morocco, after being in the oil business almost all his life, certainly got his wish: a "small slice of a big pie" rather than a "big slice of a small pie"!
Note that the events in this chapter were between the two world wars when countries had found out in WWI that access to oil was of critical strategic importance to national security and strategies. Also, note that Kuwait and Iran were the only parts of the Middle East not included within the Red Line.