Source: Vincent Ferraro (2009)
Although it was clear straight away that SOCAL was interested in the concession, the company needed to confirm the credibility of Karl Twitchell. In this, they turned to their parent government for a reference. Here, an American Minister in Cairo, William M. Jardine reported in a telegram to Washington:
“Mr. K. S. Twitchell, a mining engineer of New York City who has spent the last two or three years in the Hedjaz building roads and water systems and making reconnaissance oil and mineral surveys – being financed by Mr. Charles R. Crane to carry on this work in the interest of Hedjaz people… Twitchell impresses all of us as a genuine man and thoroughly imbued with the desire to render serve to the Hedjaz people” (Jardine 1931: 41).
Apart from background of Twitchell, the minister also reported Twitchell’s visit to the states for the purpose of employing half a dozen oil and mining experts for the Hedjaz government (now Saudi Arabia) to carry on a more or less detailed survey for oil and minerals in the country. According to the Honourable Jardine, Twitchell “seems to have won the complete confidence of the Hedjaz governmental authorities… [and therefore convinced the ministry] of the absolute authenticity of all that [he] is claiming for the Hedjaz, and of the authority which has been invested in him” (ibid.: 41). Thus, not only did the minister’s telegram indicate that Twitchell was a trustworthy person, it also highlighted that Twitchell had gained a tremendous amount of legitimate authority from the Saudi government. Having this authority implies that there is some form of uncoerced consent or recognition of authority on the part of the Saudi government. Therefore, as discussed in Chapter 2 that this consent can be seen as a product of trust (section 2.2.1 and 2.5.1), I would argue that Twitchell’s position of authority in the case did not come about only through his technical ability but his trustworthiness. For this very reason, we can view Twitchell’s practices and activities in the US here as part of the process that lead to private authority being exercised. Also, as Pamela Burke argues that “states may abdicate their responsibilities and authority to private actors under certain conditions” (Burke 1999: 230), these practices and activities further highlight the transfer of authority from state actor (the Saudi government) to private actor (Karl Twitchell) implying that states are facilitating the private authority of actors.
Despite the assurance on credibility of Twitchell from the US government as mentioned above, the company was still unsure about the political situation in the region which at the time was far from stable. As a result, they again turned to their parent government, writing a telegram to the Secretary of State with several enquiries:
“Standard Oil Company of California contemplates entering into a contract with Ibn Saud to search for and produce petroleum found in commerce quantities in the Persian Gulf coastal regions of Hasa. Has United States [sign] a treaty with Sheikh of Arabia? What protection could we expect in case of disorders in Arabia or in case the present government is overthrown and its successor were disposed to break our contract without just cause? Could legal aspects of controversy be adjudicated in any of the established international tribunals or elsewhere outside of Arabia or would we be wholly at mercy of arbitrary sovereign? Is there any likelihood that the United States Government may establish diplomatic relations with Ibn Saud as Great Britain, Holland and some other governments have done?” (Loomis 1932: 48).
Having received the letter, the Department of State promptly replied. Although they did not ensure any protection but did indicate the on-going process and more possibility of future diplomatic work in the form of a treaty with Saudi Arabia, depending on the character and growth of American interests in the country. Here, the detail response stated in the telegram dated October 26, 1932:
“This Government has no treaty with Ibn Saud but it has agreed to negotiate a treaty of commerce and navigation. Meanwhile, in an exchange of notes which is now in the process of negotiation provision in made that American national in Saudi Arabia shall enjoy the fullest protection of the laws and authorities of the country and that they shall not be treated in regard to their persons, property, rights and interest in any manner less favourable that the nationals of any other country… [Any future diplomatic effort or] the eventual establishment of representation will, of course, depend upon the character and growth of American interests in the Arabian Kingdom” (Department of State 1932b: 49).
Regardless of a lack of comprehensive protection from its parent government, the company continued to pursue for the oil concession in Saudi Arabia. The next section discusses the completion stage of the negotiations demonstrating the importance of welfare issues in the process of gaining the concession. In term of interactions between public and private actor, two main observations can be found
from the analysis in this section regarding the relationship between the oil company (SOCAL) and its parent government (US). First, the way in which SOCAL turn to the US government for help as they began pursuing for the oil concession in Saudi Arabia is a prime example of the vital role that the imperialist power played in dealing with the oil concession at the time. It illustrates that despite the resources and expertise of the oil company, they have to rely heavily on the diplomatic effort by the state and the legal framework of the international tribunal. Second, the situation highlights the ever presence of public/private cooperation between the government and oil company in the process of gaining the concession. This, I would argue, led to the transfer of authority which eventually results in the emergence of private authority.
3.7 The Concession Agreement: National Welfare and Emerging forms of “Moral Authority”
Through authority given by the Saudi government, Karl Twitchell and John Philby (the King’s principal advisers) entered talks with SOCAL with a good understanding of the Kingdom’s financial situations, the possibility of discovering oil and most importantly the King’s intentions. Such knowledge, I would argue, helped the oil company in the process of gaining the concession tremendously. According to the record from the Department of State, Washington, the negotiating team planned to leave for Jeddah during the first part of January, 1933. And as part of the negotiations with the Arabian government regarding a concession for the development of petroleum resources, it was recorded that Twitchell suggested that “it would be desirable for him to have some sort of an official document indicating that the Standard Oil Company of California was an American corporation of good reputation” (Department of State 1932a: 59). As a result, the Department of State requested the authorities of the State of Delaware, in which state the company is incorporated, to issue a certificate in proper form for use in Arabia. This assistance which signifies support of the US government again highlights public/private cooperation between the two actors.
As the negotiation started, a coordinated plan was now worked out to achieve the concession. The first move was that Lloyd N. Hamilton of SOCAL’s legal staff would go to Jiddah to negotiate with ‘Abd Allah Al Sulaiman Al Hamdan, the King’s finance minister. In this, he would be accompanied by Twitchell as technical advisor. Philby, on retainer to SOCAL, would remain in the background as advisor to both parties (Anderson 1984). From the observation, the negotiation highlighted the company’s understanding of the situation through the help of John Philby by taking on board what the Sheikh had expressed on the issue of his people’s welfare and adjusts their strategies to accommodate such view. This is reflected in the company’s mandate not only at the time but for years to come:
“In order to do its job well in a distant part of the world, the company [now Aramco] had to become a grocer, road builder, druggist, chef, school teacher, corner movie-house operator, dry cleaner, laundryman, industrial gas manufacturer and community planner, it got thoroughly involved in around-the-world purchasing … [the best practice], the company believed, was to encourage the development of a rational Saudi economy” (Arabian American Oil Company 1962).
Acknowledging the continuing importance of the welfare for the nation would be a central theme of the negotiation and the company aimed to make sure that they could provide it. As noted in the mandate, in encouraging the development of a rational Saudi economy, the company tends to get heavily involved in social welfare practices and activities of the country. This is a further example of John Allen’s sense of a kind of governing from a distance, but one that pays close attention to culture and ways of life (Allen 2003).
From the outset, due not only to the Kingdom’s financial difficulties but also the King’s belief that there were no real minerals or oil to be found in his land, it was evident that a key element in the negotiations would be the amount of cash the companies were willing to pay up front for the concession rights. As the negotiation proceeded, it became clear again that the King’s principal concern was the size of the cash advance that could be obtained against future royalties. Negotiations started on February 19, 1933 where in the first meeting in Jiddah, Lloyd N. Hamilton of SOCAL original offer was $50,000 against the King’s desire as Shaykh al-Sulayman
opened the negotiations by suggesting the equivalent of £100,000 in gold (about $500,000) for the concession (Anderson 1984; Sampson 1975). After over three months of intense negotiations and hard bargaining between the two sides, an agreement was finally reached. Here, on May 29, 1933, Lloyd N. Hamilton of the Standard Oil Company of California (SOCAL) and ‘Abd Allah Al Sulayman Al Hamdan, finance minister of Saudi Arabia, signed an agreement giving SOCAL exclusive rights to extract petroleum from an area larger than the state of Texas, the eastern half of Saudi Arabia (Pledge et al. 1998). This historic signing is captured in the photograph below (Figure 3.3):
Figure 3.3: His Excellency Shaikh ‘Abd Allah al-Sulayman, Saudi Finance Miniter, and Mr. Lloyd N. Hamilton, Lawyer and Negotiator for Standard Oil of California (SOCAL), Sign the Concession Agreement, May 29, 1933, in Khuzam Palace in Jiddah
Source: Kyle L. Pakka (2006: 5)
In return for signing the agreement, the King received an initial cash advance of £50,000 (immediate loan of £30,000 with another loan of £20,000 eighteenth months later), an annual rent of £5,000 – all in gold – until oil was discovered, a further cash advance of £100,000 after discovery, and royalties at the rate of 4 shillings per ton ($0.10 a barrel in 1933) (Anderson 1984; Sampson 1975). Philby was rewarded with
a salary of £1,000 a year from SOCAL (Sampson 1975). Following the completion of the agreement, the Finance Minister, ‘Abd Allah Al Sulayman, began talks with Twitchell over arrangements on the arrival of the company’s geologists for the purpose of surveys and explorations of the Kingdom. Upon receiving the first initial payment, he also sent a letter dated August 27, 1933, to acknowledge receipt of the payment and to promise “every possible facility and assistance” for the geologist team in the search for oil (see Figure 3.4 for a copy of the letter in full):
“I have the pleasure of informing you that I have day before yesterday received… the sum of thirty five thousand gold sovereigns… as per the agreement signed between His Majesty’s Government and your company… I wish to assure you that we shall not fail to provide every possible facility and assistance we can” (Ministry of Finance 1933).
The promise of every possible facility and assistance that the minister of finance gave to the company here, as it turned out, would not only be in the form of physical assistance but also in the form of power and authority. What I mean by this is the power and authority that the Saudi government would be willing and promise to give to the oil company as means to achieve their ultimate goal, the prosperity of the country. This signifies the transfer of power from public to private actor giving private actor a more important role in the local and national community. According to Pamela Burke (1999), this is seen as a foundation which leads to private actor taking a “quasi-public” role in the society involving a higher level of control and regulatory power and authority in responsibilities traditionally associated with state/public such as political policy settings. Through their position here, the company led the country in both the development and maintenance of its oil market. From exploration, production, transportation and refining to distribution, they were at the forefront. As a result, the company had “market authority” in the form of regulatory power at their disposal. This situation I would argue reflects the view of Michael Webb who has argued that “public and private forms of market management can sometimes serve as substitutes for each other” (Webb 1999: 54). He explains that this is done through a private actor drawing on the legitimate authority that national governments have to develop rules for all actors in the market place.
Figure 3.4: Letter from Ministry of Finance, the Saudi Arab Kingdom to the President, the Standard Oil Company of California dated August 27, 1933
Apart from activities involving the operation in the oil market itself, SOCAL was also involved in activities such as providing for social services, health services and education, all of which again traditionally linked to state/public responsibilities (Burke 1999: 231). As mentioned (Section 3.3 and 3.5), this position would in turn contribute to the company being placed in the privileged position where the government have to rely on the oil company to carry out some of their own tasks and responsibilities. Thus, the influence of the company over the nation’s social development would then gradually increase. In this, it is important to recognize that such an influential position gained from both sets of activities in oil and social development mentioned above cannot be achieved without the resource and expertise of the company.
The importance of expertise here does not only apply to this case. To many scholars such patterns also apply to the historical nature of the social development in undeveloped countries. For instance, in examining the role of expertise in the historical development of Egypt, Timothy Mitchell (2002: 50) argues that if rural society were to be developed, it required “the dynamic activity of technical development, which required the application of scientific and social scientific expertise”. He goes on to argue that such projects “began to arrange the world as one in which science was opposed to nature and technical expertise claimed to overcome the obstacles to social improvement” (Mitchell 2002: 51). Therefore, I would concur with Mitchell and argue that it is this notion of technical expertise and social development that helps explain the reason behind the Saudi government’s decision to allow the company to operate in their country. Again, this is in believing that knowledge and expertise would be the main ingredient in the solution for social welfare development.
With the interests of population welfare, economic competiveness and growth of the nation as a whole, the process of gaining the concession agreement has seen the Saudi government yield a substantial amount of their domestic regulatory authority to private actors as they believed this to be beneficial to the nation. As already pointed out in the earlier parts of this section, this authority stems from the basic cooperation and support given by the Saudi government through the signing of the concession which then leads private authority being exercise through different
development projects alongside the main oil operation. Such authority when exercised represents a form of “moral authority” mainly because the activities and decisions that the company made through such authority would be seen by the population as authority which is exercised to better their welfare, hence to do good for the nation (Section 2.5.3). Ultimately therefore, the government hopes for better social well-being through cooperation with the oil company would not only aid the company in gaining the concession, it would also put them in a positive position with the locals when carrying out their tasks in the country for years and years to follow. The last section of the chapter here focuses on providing an example of social development projects as part of the analysis of private authority. In this, the section aims to demonstrate how this case study can help highlight the argument made by Lipschutz and Fogel (2002: 124) that it is possible to transfer “functional responsibility and authority” of state actor to private actor.
3.8 Social Development Projects: Exercise of Private Authority
Although signed on May 29, the 1933 Saudi oil concession was made effective by publication in the official journal of the Saudi Arabian government on July 14. In November of the same year, the company was assigned to California Arabian Standard Oil Company (CASOC), a company owned and formed by SOCAL under the laws of Delaware. The company operated under that name for the next 10 years before changed on January 31, 1944, to the present name of Arabian American Oil Company (ARAMCO) (Lebkicher and Arabian American Oil Company 1952: 135). Oil was discovered in commercial quantities on October 16, 1938. In that year the company produced 495,135 barrels of crude oil (Ministry of Petroleum and Mineral Resources 1963: 8). The production then continued to increase and so does the royalty payment to the Saudi government. The following table (Table 3.1) shows the amounts of crude oil produced and the royalty payment annually from 1939 to 1949, obtained from a document produced by the Ministry of Petroleum and Mineral Resources Riyadh, Saudi Arabia (see Appendix 3.1 for the full statistical data up to 1990):
Table 3.1: Amounts of crude oil produced and the royalty payment annually from 1939 to 1949
Year Barrels of Crude Oil Royalty Payment ($)
1939 3,933,902 3,212,565 1940 5,074,838 4,661,001 1941 4,310,110 3,448,571 1942 4,530,492 3,414,326 1943 4,868,184 1,317,520 1944 7,794,419 3,204,270 1945 21,310,996 3,618,170 1946 59,943,766 10,408,531 1947 89,851,646 22,341,998 1948 142,852,989 35,316,594 1949 174,008,629 39,831,089
Source: Ministry of Petroleum and Mineral Resources (1963: 8)
As a result of the continuous rise in oil income, Saudi Arabia’s ever increasing reliance on its oil industry was clear. According to the Ministry of Petroleum and Mineral Resources, by 1946 the oil revenue exceeded other sources of government income such as the custom services or the pilgrimage (ibid.). The new found revenues were then utilized in many development projects originally laid down through cooperation with the oil company ever since the concession was signed. Here, the Ministry stated in their report of 1963:
“it could be said that oil income has set the initiative for conceiving a wide plan of development in the future based on the expectation of a growing income from oil and whatever economic stability could be insured thereafter from this new flow of money” (ibid.: 13).
This high expectation and reliance on oil revenue would ultimately result in the Saudi government giving more power and authority to the oil company in order to ensure steady growth of the country. This power and authority of the oil company as
discussed briefly earlier is also transferred through various development projects as the company gained more control over the overall social development. Some of the projects associated with the company exercising such private authority in its early days of operations in Dhahran (1934-1940) included the construction of hospitals