Saudi Arabian Oil Company

Post Office Box 5000
Dhahran 31311
Saudi Arabia
Telephone: (966) 3-72-0115
Fax: (966) 3-873-8190
Web site: http://www.saudiaramco.com

State-Owned Company
Established: 1988
Employees: 56,500 (2001 est.)
Sales: $58.2 billion (2001 est.)*
NAIC: 324110 Petroleum Refineries; 213112 Support Activities for Oil and Gas Operations; 541360 Geophysical Surveying and Mapping Services; 213111 Drilling Oil and Gas Wells
*This number represents Saudi Aramco’s revenues from crude oil exports only. It does not take into account Saudi Aramco’s revenues from other product lines, nor its domestic revenues.

With production capacity of about ten million barrels of crude oil per day, the state-owned Saudi Arabian Oil Company (also known as Saudi Aramco) is without question the world’s largest producer of crude oil. In the years immediately preceding and following the Persian Gulf crisis, the company worked to broaden its operations from the wellhead to include refining, marketing, distribution, and even retailing. By the mid-1990s, Saudi Aramco considered itself “a fully integrated global oil enterprise.” In addition to its largely domestic quest for vertical integration, the oil company pursued joint ventures to extend its geographic reach into North America, Asia, and Europe.

Saudi Aramco is responsible for exploration, development, and production in a tract of land, which covers some 16 percent of the 2.2 million square kilometers that constitute the Saudi Arabian peninsula. The company’s 260 billion barrels (bbl) of recoverable crude oil reserves constituted 26 percent of the world’s total reserves in the early 1990s. Clearly, Aramco’s crude oil operations, which account for 95 percent of total production, are vital not only to the Saudi Arabian economy but also global energy needs. The state-owned business also had natural gas reserves of 180 trillion cubic feet (tcf). Its assets include the world’s largest onshore and offshore oilfields. Revenues generated through the export of Aramco crude oil production constitute over half of total Saudi government revenues, and have helped transform the country from, as one observer has noted, “a third world country in an inhospitable desert region, to one that is on the threshold of joining the ranks of developed nations.”

Early-20th-Century Origins

The incorporation of Saudi Aramco on November 13, 1988, was largely a cosmetic operation, performed in order to remove the final legal attachments of the Arabian American Oil Company (Aramco) to the original U.S. company, registered in Delaware on January 31, 1944. However, the history of the Aramco concession, upon which the company’s fortune has been forged, dates back to the early 1930s. In 1932 Standard Oil (California) (Socal), now known as Chevron, employed the energies of Harry St. John B. Philby, a close friend of Saudi King Ibn Saud, to obtain permission for Socal to conduct a geological survey in the eastern parts of the Saudi Peninsula. Although granting rights over Saudi Arabia’s natural resources to a foreign company was against King Ibn Saud’s better judgment, his need for money left him no alternative. King Ibn Saud insisted that no geological appraisal could take place until the full terms of a concession had been agreed. The king’s fear was that Socal would discover that Saudi Arabia was barren before it had committed any capital. On May 29, 1933, the concession agreement was signed by the king’s minister for finance, Abd Allah al Sulaiman, and the Socal representative, Lloyd N. Hamilton, at the royal palace in Jiddah.

In November 1933, the California Arabian Standard Oil Company (Casoc) was formed to manage operations within the concession on behalf of Socal. The original concession stretched from the Persian Gulf up to, and including, the western province of Dahna. In 1939, the concession was further enlarged to around 440,000 square miles to include Saudi Arabia’s share of the neutral zone.

However, before any crude oil was discovered in its new Saudi concession, Socal was already experiencing problems in marketing its growing Bahraini oil production. Socal opted for the quickest solution to this problem, which was to merge operations with a company that owned marketing facilities near the source of production, but that was short of crude. In 1936 Socal struck a deal with the Texas Company, now known as Texaco. The new joint venture was named Caltex and was charged with managing all of Texaco’s marketing assets from the Middle East to the Pacific. As a part of the deal, Texaco was given half ownership of Casoc.

It took three years before the exploratory drilling of the Dammam Dome, a group of prominent limestone hills near what is presently called Dhahran, was rewarded. In March 1938, the seventh exploration well drilled on the Dammam Dome identified the Arab Zone, as the explorers named it. Crude oil exports started in the same year. The oil was piped from the well to the makeshift port of al-Khobar and from there was transported by sea to the Bahrain refinery. In the following year the now prolific Ras Tanura export terminal was used for the first time by Socal’s tanker, the D.G. Schofield.

World War II

The advent of World War II impeded Casoc’s operations. Production at the newly constructed Ras Tanura refinery lasted only six months before it was closed in June 1941 and all dependents of U.S. employees were sent home for the duration of the war.

The war years from 1940 to 1944 were significant, however, for the progressive rationalization of Casoc’s management structure under the guidance of its new president, F.A. Davies. Davies had visited Saudi Arabia as a Socal representative in 1930 and had been closely involved in operations ever since. His election, together with that of a new board of directors in August 1940, marked the company’s first step toward independence from Socal. Casoc set up its headquarters in San Francisco at 200 Bush Street. Symbolically, the final confirmation of the company’s new identity came on January 31, 1944, when Casoc was renamed the Arabian American Oil Company.

The postwar years of the late 1940s witnessed the scramble to expand production from the Aramco concession and to establish a market for it. Between 1944 and 1949, Aramco expanded capacity in all spheres of operation, in no small way aided by the military cooperation in allocating materials and even providing transport. The strategic importance of oil had been proven in the defeat of Adolf Hitler, and the U.S. government had even set aside funds for possible direct investment in the Middle East to secure supplies. Aramco shunned the offer of direct government involvement but with its aid achieved a 25-fold increase in crude oil supply from 20 thousand barrels per day in 1944 to 500 thousand barrels per day in 1949. The Ras Tanura refinery’s distillation capacity was expanded from 50 thousand barrels per day to 127 thousand barrels per day between 1945 and 1949, in part to supply the increasing requirements of the U.S. Navy.

Secure access to world markets was fostered in two ways. First, with regard to the European market, Aramco attempted to improve the competitiveness of its crude oil vis-a-vis Soviet and U.S. exports by cutting down on the time and, ultimately, costs of transporting crude from the Persian Gulf. In 1946 Aramco began to build, through its affiliate, the Trans-Arabian Pipe Line Company (Tapline), a 1,068-mile-long pipeline connecting the Abqaiq oilfield to the Mediterranean port of Sidon, Lebanon.

Second, Aramco tried to merge operations with the Standard Oil Company of New Jersey, later Exxon, and the Socony-Vacuum Oil Company, now known as Mobil. Harry Collier, the chairman of Socal at that time, supported the choice of these two companies not only because of their unrivaled marketing assets in the Far East, but also because the choice satisfied King Ibn Saud’s explicitly stated wish that Aramco should remain American to avoid an extension of British influence in the region. Between 1946 and 1948, the two companies wrestled with the legal obstacle posed to the merger by the Red Line Agreement. This obstacle was overcome in December 1948. The companies’ shares in Aramco and Tapline were divided as follows: Socal, Texaco, and Standard Oil of New Jersey each owned 30 percent and the Socony-Vacuum Company owned the remaining 10 percent.

Also in 1948, Aramco gave up its concessionary rights over the Saudi Arabian part of the neutral zone. This move was made in response to the severe terms accepted by the American Independent Oil Company (Aminoil) in the auction for the concession rights over the Kuwaiti half of the neutral zone. Unwilling to match Aminoil’s offer, Aramco decide to preempt similar demands by the Saudi king by giving up the land. In return for this unilateral gesture, Aramco received a reaffiirmation of its offshore concession rights in the Persian Gulf. In the auction that resulted from Aramco’s cessation, the Pacific Western Oil Company agreed to terms even more onerous than those applied to Aminoil.

Company Perspectives:

These ten Corporate values have been the guiding principles by which Saudi Aramco has achieved extraordinary success: Excellence: We pursue excellence in everything we do. Human Resources: We encourage continuous learning and strive to develop our people to their highest potential. Fairness and Integrity: We strive for fairness and adhere to the highest ethical standards. Teamwork: We support each other and work together to achieve our business objectives successfully. Safety: We strive to maintain the highest levels of safety, security, health, and environmental standards. Responsiveness: We are responsive to the expectations of the government and our customers. Stewardship: We are proud of our company and are committed to preserving its assets and resources. Trust: We place authority where responsibility lies. Accountability: We are accountable for our actions. Citizenship: We support our communities and serve as a role model for others.

However, Aramco did not completely avoid compensating the government for the dramatic increase in the value of its concession. During the late 1940s and the first half of the 1950s, Aramco was progressively forced to relinquish small parts of its concession. Also, on December 30, 1950, following the example of Venezuela in 1948, the Saudi government authorized an increase in the government’s share to 50 percent of Aramco’s profits net of exploration, development, and production costs.

Growth Slows in 1950s

The expansion of Aramco’s operations continued through the 1950s, albeit at a slower pace. Crude oil production only increased from 761 thousand barrels per day in 1960 to 1.2 million barrels per day in 1959, despite an increase of 38 billion barrels to a total of 50 billion barrels in the Saudi Arabian proven recoverable reserves during the same period. This expansion of oil reserves was primarily attributable to two discoveries made by Aramco, the onshore Ghawar and the offshore Safaniya oil fields, in 1951. The onshore and offshore discoveries were the largest on record at the time and have remained unequaled to this day. 1951 marked Tapline’s first full year in operation. By 1965, Tapline enabled Aramco to market some 44 percent of its total crude oil exports to Europe, a greater share than that of nearer markets in Asia.

Aramco’s activities during the 1950s were distinguished from those of the postwar years by the mature approach that underlay them. Aramco did not ignore the U.S. lesson of the waste caused by over-rapid exploitation of oil reservoirs. In the early 1950s, Aramco began to implement oilfield pressure maintenance programs. At the Abqaiq oilfield, gas reinjection facilities started operation in March 1954, and, in February 1956, a similar water program was started. An added advantage with the gas program was that not only was Aramco able to utilize associated gas but that also the associated gas could be stored instead of burned off at the source.

Corporate Control at Issue in 1960s

Both Aramco’s and Saudi Arabia’s revenues increased dramatically during this period as a result of the expansion of crude oil exports and of rising posted prices. Like Aramco, Saudi Arabia ploughed these revenues into the development of infrastructure. As Saudi Arabia was overwhelmingly dependent on oil for revenues, it was vitally important that revenue stability was achieved to foster long-term development plans. Unlike the Aramco partners, however, the Saudi government had no influence on the two factors, production and price, that determined their revenues. The struggle for control, or the “participation” issue, emerged strongly in the 1960s.

Even though the general office had been moved to Dhahran and two representatives from the Saudi government were included on the board of directors, control of Aramco still rested firmly with the four partners. On August 9, 1960, the chairman of Standard Oil of New Jersey, Munroe Rathbone, decided unilaterally to shave 14 percent off the posted price, a cut of some 7 percent, in order to increase its competitiveness in Europe vis-a-vis Soviet crude exports. Not only did the chairman refuse to consult the Aramco board, but he also rejected the advice given him from, among others, the New Jersey company’s representative on the Aramco board, Howard Page. Other companies followed suit with the price cut and fueled the outrage of the oil-exporting countries. One dissenting voice that rose above the rest was that of Sayyid Abdullah H. Tariki, the Saudi director general of petroleum and mineral affairs and member of the Aramco board. Tariki immediately set about arranging secret negotiations with other producer countries. The preparatory negotiations proved instrumental in the formation of OPEC in 1960. As it turned out, the formation of OPEC was to be decisive in the battle for control of Aramco.

On November 30, 1962, the General Petroleum and Mineral Organization of Saudi Arabia (Petromin) was founded. Its aim was to foster Saudi participation in all areas of the oil industry, including operations in the Aramco concession. Although Petromin was not producing any crude oil, by 1970 it had joint interests in many concessions and operated a refinery at Jiddah and a fertilizer plant in Dammam. The evolution of Petromin over the 1960s was central to the government’s attempts to wrest control from the Aramco partners.

Key Dates:

1933:

Standard Oil of California (Socal, later Chevron) is granted an oil concession to prospect Saudi Arabia’s eastern parts. Socal forms The California Arabian Standard Oil Company (Casoc).

1936:

The Texas Company (later Texaco) obtains 50 percent ownership in Casoc.

1938:

Oil is discovered on Dammam Dome, near today’s Dhahran.

1944:

Casoc’s name changes to Arabian American Oil Company (Aramco).

1945:

The Ras-Tamura refinery begins continuous operations.

1948:

Standard Oil Company of New Jersey (later Exxon) and Socony-Vacuum (later Mobil) obtain partial ownership in Aramco.

1973:

The Saudi Arabian government acquires 25 percent of Aramco.

1974:

The Saudi Arabian government increases its share in Aramco to 60 percent.

1980:

The Saudi Arabian government obtains 100 percent ownership of Aramco.

1988:

Aramco becomes a state-owned company, and renamed Saudi Arabian Oil Company (Saudi Aramco).

1993:

Saudi Aramco takes over the Saudi Arabian Marketing and Refining Company (Samarec).

1995:

Saudi Aramco’s President and CEO, Ali al-Naimi, is named Saudi Arabia’s minister of Petroleum and Mineral Resources.

1998:

Saudi Aramco joins Shell and Texaco in creating Motiva Enterprises LLC, a refining and marketing operation in Eastern and Southern United States.

2002:

Saudi Aramco and Shell complete a buyout of Texaco’s shares in Motiva, assuming a 50-50 ownership of this joint venture.

The weakness of the crude oil market continued through the 1960s, due to the emergence of Iran as the second major producer in the region. The freezing of posted prices over the 1960s meant that an oil exporter’s only means to protect its revenues from being eroded by inflation was to increase production. The companies operating in the Gulf, including the Aramco partners, were each put under a great deal of pressure by concessionaire governments to increase production and maintain prices. These incompatible aims could only be satisfied if incremental world demand could be equitably divided between the producers. Howard Page was so concerned to appear to be representing the Saudi case for an increase in its market share that he refused the opportunity to involve Standard Oil of New Jersey in the very profitable exploration strategy being conducted in Oman, fearing that the company might be identified as aiding a direct competitor to enter the market. Between 1960 and 1970, Iran’s production increased by 258 percent or 2.8 million barrels per day compared to the Saudi increase of 189 percent or 2.5 million barrels per day. However, by 1970, both Saudi and Iranian oil production had reached around 3.8 million barrels per day.

Aramco’s fortunes were, and always have been, inextricably bound with those of the Saudi government. One way for both to overcome the constraint on revenue expansion imposed by the glutted crude oil market of the 1960s was to diversify into other markets. Expansion and progressive modernization of the Ras Tanura refinery increased crude oil throughput to 380,000 barrels per day in 1970, improved the quality of products, and enabled the blending of new products such as aviation gasoline. Aramco also began to establish the infrastructure necessary for the sale of liquid natural gas (LNG). Between 1962 and 1970, production of LNG increased 18-fold from 2,900 barrels per day to 52,100 barrels per day.

Tightening Markets Presage Gradual Government Takeover

The supply conditions in the crude oil market became markedly tighter in the early 1970s. In 1972, Aramco managed not only to increase production by an unprecedented 1.2 million barrels per day to six million barrels per day but also succeeded in increasing the posted price. The market conditions placed the government in a much stronger position from which to negotiate with the Aramco partners over Saudi participation.

In March 1972, after employing every delaying tactic possible, Aramco accepted the principle of 20 percent state participation in order to preempt unilateral action. The principle was worked out in detail in October 1972, when it was agreed that Saudi participation should be phased in from 25 percent on January 1, 1973, to 51 percent on January 1, 1982, and that compensation should be made for the updated book value of Aramco’s assets.

By 1973, however, other oil-exporting countries had obtained or imposed terms far in excess of the Saudi government’s demands. Negotiations restarted and continued through to 1980. In 1974, the Saudi interest in Aramco was increased to 60 percent. Between 1976 and 1980, the 100 percent Saudi takeover of Aramco was agreed upon and the financial provisions were made retroactive to January 1, 1976. By the terms of the agreement, the Aramco partners received a service fee of 18 to 19 cents per barrel and were obliged to market the crude that Petromin could not sell through its own channels.

The oil price rises of 1973-1974 had a dramatic effect on revenues. The effect on government revenues of increases in the oil price, taxation, and production—from 3.8 million barrels per day in 1970 to an all-time high of 9.9 million barrels per day in 1980—was such that the economy could no longer absorb the funds available to it and was, therefore, generating a surplus.

With their newly acquired interest, the Saudi government began to involve Aramco in the reinvestment of that surplus. In 1975, Aramco was given the task of constructing and operating a gas system that could fuel Saudi Arabia’s drive towards industrialization. The master gas system (MGS), as it came to be known, started operation in 1980. In January 1977, Aramco formed a subsidiary, the Saudi Consolidated Electric Company (SCECO), to construct and operate an electric grid system for the Eastern Province. As a result of the agreement between the government and Aramco, SCECO became an independently managed company on January 1, 1983.

Although Aramco had become state-owned, the close ties between the original Aramco partners and the government were not lost. Their relationship was fostered through joint ventures outside Aramco’s scope of operations. Mobil continued to hold a 29 percent interest in Petrolube and a 30 percent stake in Luberef. Both the Saudi-American joint ventures were formed to build lubricating oil refineries in Jiddah in the 1970s, and are still responsible for their operation. The other three of the original Aramco partners, Exxon, Texaco, and Gulf, are involved in industrial projects with the Saudi Arabian Basic Industries Corporation (SABIC) in Jubail.

Revenues, Profits and Production Fall in 1980s

However, Aramco’s boom years of the 1970s and early 1980s did not last. The oil price rises of 1973 and 1979-1980 led to inter-fuel substitution, such as the substitution of oil for gas, and conservation measures being implemented by the Organization for Economic Cooperation and Development (OECD) countries that brought about a collapse in world oil demand. Coupled with the sharp increase in oil supplies from non-OPEC regions, such as the North Sea, from 32.9 million barrels per day in 1980 to 37.8 million barrels per day in 1985, Saudi Arabia was faced with the no-win choice of either cutting production to maintain the official selling price or cutting prices and flooding the market. Between 1980 and 1985, Saudi Arabia cut production from 9.9 million barrels per day to four million barrels per day.

By 1985, Saudi Arabia was tired of shouldering the full burden of price defense and looking on as its revenues declined. In September 1985, Sheikh Yamani, in conjunction with the Aramco partners, instituted a dramatic change of policy to regain Saudi Arabia’s share of the crude oil market. Between August 1985 and August 1986, Saudi Arabian production increased from 2.2 million to 6.2 million barrels per day, and the spot price of many world crudes fell to less than $10 from their previous 1985 levels of around $26 to $29 per barrel. The real price of oil had returned to levels not seen since before the oil price shocks of 1973-1974.

Aramco did not emerge unscathed from the drastic fall in oil revenues. Between 1982 and 1989, Aramco’s personnel fell from 57,000 to 43,000. Following the meeting of the Aramco board of directors in San Francisco on April 8 and 9, 1987, the decision was taken to cut its own membership from 20 to 13. Three Americans and four Saudis, among them the ex-oil minister Sheikh Yamani, were removed, leaving two representatives from each of the four original Aramco partners and five Saudi officials.

The trauma of the 1986 oil price crash led to a change in management, Hisham Nazer replacing Sheikh Yamani, and a change in oil policy. The primary aim of Saudi policy after the unbridled competition of 1986 was to secure market share just as it had been in the oil market glut of the 1960s. To secure long-term supply contracts, Hisham Nazer depended heavily on the close relationship between Aramco and the original shareholders. In his first attempt Nazer signed a 1.25 million barrels per day long-term supply arrangement with the four majors involved in the formation of Aramco, Chevron, Texaco, Mobil, and Exxon, on February 3, 1987. This agreement soon broke down, however, in the face of further price competition, and Nazer turned his attention to the possibility of securing market share through downstream integration—ownership of all phases of the industry from the wellhead to the service station.

In 1988, the first overseas downstream joint venture was concluded by the newly incorporated Saudi Aramco. On November 10, 1988, Saudi Aramco and Texaco signed an agreement committing themselves to the conditions of the joint venture named Star Enterprise. Aramco’s share of the joint venture was to be managed by its subsidiary Saudi Refining Incorporated. From January 1, 1989, U.S.-based Star Enterprise was given the responsibility of operating Texaco’s refining, distribution, and marketing assets in the east and gulf coasts. Texaco’s assets were substantial in these areas and included three refineries—Delaware City, Convent, and Port Arthur—with combined distillation capacity of 625,000 barrels per day and, most importantly, 11,400 service stations. In return Saudi Aramco paid $1.5 billion and committed itself to supplying up to 600,000 barrels per day and to supplying a 30 million barrel inventory. By the mid-1990s, Star Enterprise ranked as the U.S.’s sixth-largest gasoline marketer. Aramco made subsequent acquisitions of 35 percent of South Korea’s Ssangyong Oil and a 40 percent stake in Petron, the Philippines’ leading refiner and marketer.

King Fahd Ibn Abdulaziz Al-Saud formally incorporated Saudi Arabian Oil Company by Royal Decree in 1988. The decree established a monarch-chaired Supreme Council and a board of directors led by the country’s minister of petroleum and mineral resources. In addition to domestic government officials and top Aramco managers, the board included Exxon and Chevron chairmen into the early 1990s.

Persian Gulf Crisis, Management Shift Highlight Early 1990s

As a result of the 1990 Persian Gulf crisis, Saudi Aramco emerged as one of the most influential participants in the global oil industry. Within just a few weeks of Iraq’s invasion of Kuwait, Saudi Aramco increased its daily production by over 2.5 million barrels per day. The conflict devastated Kuwait’s oil-producing infrastructure and international sanctions prevented Iraq from trading oil, thereby eliminating over 4.5 million barrels of oil production per day and triggering what Oil and Gas Journal called “one of the most severe crises in the world’s oil supplies since World War II.” In fact, Petroleum Economist magazine asserted that Saudi Aramco “rescued the world from an oil supply crisis” by accelerating its plan to increase crude oil production capacity to ten million barrels per day from a target date of 1995 to 1992.

The company resumed its quest for vertical integration in the aftermath of the war, merging another state-owned firm, Saudi Arabian Marketing & Refining Co. (Samarec) in June 1993. Oil and Gas Journal’s L.R. Aalund noted that Samarec has “passed an acid test during the Gulf War when they supplied all allied air, land, and sea forces with their total fuel needs.” The merger moved Saudi Aramco into the ranks of the world’s ten largest refiners, and put the company in complete control of Saudi Arabia’s crude oil, from refining to marketing and distribution. Less than one month later, the company added state-owned Petromin to its roster, thereby merging majority interests in Petromin Lubricating Oil Refining Co. (a.k.a. Luberef) and Petromin Lubricating Oil Co. (a.k.a. Petrolube), both joint ventures with Mobil Oil Corp.

After nine years as Saudi Arabia’s minister of Petroleum and Mineral Resources, Hisham Nazer was succeeded by Saudi Aramco President and CEO Ali al-Naimi in 1995. The appointment by King Fahd was interpreted as an acknowledgement of the company’s growing clout, and as a sign of a new emphasis on the domestic petroleum industry. Aramco Vice-President for International Operations Abdullah Jum’ah advanced to acting president and CEO of Aramco upon al-Naimi’s promotion.

Moving into a New Millennium

The year 1998 was turbulent for oil-producing countries, and Saudi Arabia was no exception. The Asian financial crisis, combined with a warm winter, drastically reduced the demand for oil worldwide. The Saudi economy, so completely dependent on oil exports, was badly shaken as a result. At that time, Crown Prince Abdullah began talks that would eventually lead to the reopening of the country’s oil and gas industry to foreign companies (the industry was closed to foreign competitors since 1975, when the oil and gas fields were nationalized). Also in 1998, the company joined forces with Texaco and Shell to form Motiva Enterprises LLC. The new joint-venture consolidated the refining and marketing efforts of the three companies in the southern and eastern United States. Three years later, as part of the Texaco-Chevron merger talks, Saudi Aramco and Shell bought Texaco’s share in Motiva, and the company became a 50-50 joint venture.

Oil prices rebounded in 1999, but following the terrorist attacks on the United States on September 11, 2001 oil prices dipped sharply again. The economic roller coaster in Saudi Arabia underlined the country’s need for economic diversification. In addition, Saudi demand for natural gas was increasing as the kingdom’s industrial base grew. In May 2001, Saudi Arabia announced three major natural gas projects, totaling $25 billion, in which Saudi Aramco is an equity holder (Saudi Arabia holds approximately 4 percent of the world’s gas reserves). Eight foreign companies were selected to participate in these projects. Saudi Aramco has been developing the kingdom’s gas industry since the 1970s, but with no foreign investment.

Early in 2001, Petroleum Intelligence Weekly (PIW) named Saudi Aramco the top oil company in the world for the thirteenth consecutive year. PIWs report also pointed out that the petroleum industry and Saudi Aramco’s competition are both changing. Responded Abdullah Jum’ah, Saudi Aramco’s President and CEO: “Increasing competition will encourage us to remain at our best in all respects and to maintain a high level of cooperation with key players in the petroleum industry.” True to this sentiment, the company keeps pushing ahead with new and ambitious projects that will take several years to complete.

In 2000, Saudi Arabia established the Supreme Petroleum Council (SPC), which took over some responsibilities from Saudi Aramco. Although there are talks of increasing privatization in the Saudi oil sector, and despite recent decades’ wholesale changes in the ownership, management, and function of Aramco, its place in Saudi Arabia and the world seems secure for the foreseeable future.

Principal Subsidiaries

Aramco Services Company (U.S.A.); Saudi Refining Inc. (U.S.A); Aramco Overseas Companies B.V. (various); Vela International Marine Limited (100%); Petromin Lubricating Oil Refining Co. (70%); Saudi Arabian Lubricating Oil Company (Petrolube) (71%).

Principal Competitors

Petroleos de Venezuela; ExxonMobil.

Further Reading

Aalund, L.R., “Saudi Arabia,” The Oil and Gas Journal, August 16, 1993, pp. 38-44.

“Energy: $3.8 billion Sale Clears Way for Chevron-Texaco Merger.” Chicago Tribune, October 10, 2001, p. B2.

George, Dev, “Safaniya, POEC, and the Saudi Power Play,” Offshore (incorporating The Oilman), November 1991, p. 11.

Gutkin, S., “Belt Tightening in Oil Nations,” Associated Press, March 23, 1998.

“King Of Oil Surges Ahead,” Petroleum Economist, December 1991, pp. 6-9.

Longrigg, S.H., Oil in the Middle East, Oxford, England: Oxford University Press, 1969.

Mangan, David, Jr., and Marshall Thomas, “Saudi Aramco Report Stresses Join Ventures,” The Oil Daily, June 21, 1991, pp. 1-2.

Mollet, Paul, “Aramco Man Gets the Top Job,” Petroleum Economist, September 1995, p. 36.

Naimi, A.I., “Saudi Aramco Staying On Course with Strategy for the ‘90s,” The Oil Daily, November 21, 1991, p. 5.

O’Sullivan, E., “Saudi Aramco Flexes its Muscles,” Middle East Economic Digest, July 22, 1994, 38:29, pp. 8-9.

“Saudi Aramco Describes Crisis Oil Flow Hike.” The Oil and Gas Journal, December 2, 1991, pp. 49-51.

Saudi Aramco tops Industry in PIW List, Dhahran: Saudi Aramco, 2002.

“Saudi Arabia in Pacts with Nine Global Oil Firms,” Los Angeles Times, June 4, 2001, p. B2.

“Saudi Arabia Market Overview,” Energy Information Administration, http://www.eia.doe.gov, accessed March 15, 2002.

Seymour, I., OPEC: Instrument of Change, London: Macmillan Press Ltd., 1980.

Yergin, D., The Prize: The Epic Quest for Oil, Money and Power, New York: Simon & Schuster, 1990.

—Adam Seymour—updates: April Dougal Gasbarre; Adi Ferrara

Saudi Arabian Oil Company

Post Office Box 5000
Dhahran 31311
Saudi Arabia
(3) 673-5002
Fax: (3) 873-8190

State-Owned Company
Incorporated: 1988
Employees: 43,248(1989)

The state-owned Saudi Arabian Oil Company, also known as Saudi A rameo, is the largest company in the world in terms of crude oil and liquid natural gas (LNG) production. Saudi Aramco is responsible for exploration, development, and production in a tract of land which covers some 16% of the 2.2 million square kilometers that constitute the Saudi Arabian peninsula. A rameo's crude oil operations, which account for 95% of total production, are vital to the Saudi Arabian economy, and in 1989 generated US$2.99 billion in sales. The revenues generated through the export of Aramco crude oil production constituted around 56% of total Saudi government revenues in 1988. Saudi Aramco also holds substantial interests in downstream activities, such as operation of the crude oil and gas distribution networks, and of the Ras Tanura refinery. Furthermore, Saudi Aramco is broadening its perspective to that of a multinational oil company. Through subsidiaries, Saudi Aramco holds an interest in the U.S. refining and marketing company Star Enterprise and may be on the verge of concluding a similar deal with Ssangyong Oil in South Korea.

The incorporation of Saudi Aramco on November 13, 1988, was largely a cosmetic operation, performed in order to remove the final legal attachments of the Arabian American Oil Company (Aramco) to the original U.S. company registered in Delaware on January 31, 1944. However, the history of the Aramco concession, upon which the company's fortune has been forged, dates back to the early 1930s. In 1932 Standard Oil (California) (Socal), now known as Chevron, employed the energies of Harry St. John B. Philby, a close friend of Saudi King Ibn Saud, to obtain permission for Socal to conduct a geological survey in the eastern parts of the Saudi Peninsula. Although granting rights over Saudi Arabia's natural resources to a foreign company was against King Ibn Saud's better judgment, his need for money left him no alternative. King Ibn Saud insisted that no geological appraisal could take place until the full terms of a concession had been agreed. The king's fear was that Socal would discover that Saudi Arabia was barren before it had committed any capital. On May 29, 1933, the concession agreement was signed by the king's minister for finance, Abd Allah al Sulaiman, and the Socal representative, Lloyd N. Hamilton, at the royal palace in Jiddah.

In November 1933 the California Arabian Standard Oil Company (Casoc) was formed to manage operations within the concession on behalf of Socal. The original concession stretched from the Persian Gulf to, and including, the western province of Dahna. In 1939 the concession was further enlarged to around 440,000 square miles to include Saudi Arabia's share of the neutral zone.

However, before any crude oil was discovered in its new Saudi concession Socal was already experiencing problems in marketing its growing Bahrain! oil production. Socal opted for the quickest solution to this problem, which was to merge operations with a company which owned marketing facilities near the source of production, but which was short of crude. In 1936 Socal struck a deal with the Texas Company, now known as Texaco. The new joint venture was named Caltex, and was charged with managing all of Texaco's marketing assets from the Middle East to the Pacific. As a part of the deal, Texaco was given half ownership of Casoc.

It took three years before the exploratory drilling of the Dammam Dome, a group of prominent limestone hills near what is presently called Dhahran, was rewarded. In March 1938 the seventh exploration well drilled on the Dammam Dome identified the Arab Zone, as the explorers named it. Crude oil exports started in the same year. The oil was piped from the well to the makeshift port of al-Khobar and, from there, was transported by sea to the Bahrain refinery. In the following year the now prolific Ras Tanura export terminal was used for the first time by Socal's tanker, the D.G. Schofield.

The advent of World War II impeded Casoc's operations. Production at the newly constructed Ras Tanura refinery lasted only six months before it was closed in June 1941 and all dependents of American employees were sent home for the duration of the war.

The war years from 1940 to 1944 were significant, however, for the progressive rationalization of Casoc's management structure under the guidance of its new president, F. A. Davies. Davies had visited Saudi Arabia as a Socal representative in 1930 and had been closely involved in operations ever since. His election, together with that of a new board of directors in August 1940, marked the company's first step toward independence from Socal. Casoc set up its headquarters in San Francisco at 200 Bush Street. Symbolically, the final confirmation of the company's new identity came on January 31, 1944, when Casoc was renamed the Arabian American Oil Company.

The postwar years of the late 1940s witnessed the scramble to expand production from the Aramco concession and to establish a market for it. Between 1944 and 1949 Aramco expanded capacity in all spheres of operation, in no small way aided by the military cooperation in allocating materials and even providing transport. The strategic importance of oil had been proven in the defeat of Adolf Hitler, and the U.S. government had even set aside funds for possible direct investment in the Middle East to secure supplies. Aramco shunned the offer of direct government involvement but with its aid achieved a 25-fold increase in crude oil supply from 20 thousand barrels per day in 1944 to 500 thousand barrels per day in 1949. The Ras Tanura refinery's distillation capacity was expanded from 50 thousand barrels per day to 127 thousand barrels per day between 1945 and 1949, in part to supply the increasing requirements of the U.S. Navy.

Secure access to world markets was fostered in two ways. First, with regard to the European market, Aramco attempted to improve the competitiveness of its crude oil vis-a-vis Soviet and U.S. exports by cutting down on the time and, ultimately, costs of transporting crude from the Persian Gulf. In 1946 Aramco began to build, through its affiliate, the Trans-Arabian Pipe Line Company (Tapline), a 1,068 mile-long pipeline connecting the Abqaiq oilfield to the Mediterranean port of Sidon, Lebanon.

Secondly, Aramco tried to merge operations with the Standard Oil Company of New Jersey, later Exxon, and the Socony-Vacuum Oil Company, now known as Mobil. Harry Collier, the chairman of Socal at that time, supported the choice of these two companies not only because of their unrivaled marketing assets in the Far East but also because the choice satisfied King Ibn Saud's explicitly stated wish that Aramco should remain American to avoid an extension of British influence in the region. Between 1946 and 1948 the two companies wrestled with the legal obstacle posed to the merger by the Red Line Agreement. This obstacle was overcome in December 1948. The companies' shares in Aramco and Tapline were divided as follows: Socal, Texaco, and Standard Oil of New Jersey each owned 30% and the Socony-Vacuum Company owned the remaining 10%.

Also in 1948 Aramco gave up its concessionary rights over the Saudi Arabian part of the neutral zone. This move was made in response to the severe terms accepted by the American Independent Oil Company (Aminoil) in the auction for the concession rights over the Kuwaiti half of the neutral zone. Unwilling to match Aminoil's offer, Aramco decide to preempt similar demands by the Saudi king by giving up the land. In return for this unilateral gesture, Aramco received a reaffirma-tion of its offshore concession rights in the Persian Gulf. In the auction that resulted from Aramco's cessation, the Pacific Western Oil Company agreed to terms even more onerous than those applied to Aminoil.

However, Aramco did not completely avoid compensating the government for the dramatic increase in the value of its concession. Over the late 1940s and the first half of the 1950s Aramco was progressively forced to relinquish small parts of its concession. Also, on December 30, 1950, following the example of Venezuela in 1948, the Saudi government authorized an increase in the government's share to 50% of Aramco's profits net of exploration, development, and production costs.

The expansion of Aramco's operations continued through the 1950s, albeit at a slower pace. Crude oil production only increased from 761 thousand barrels per day in 1960 to 1.2 million barrels per day in 1959, despite an increase of 38 billion barrels to a total of 50 billion barrels in the Saudi Arabian proven recoverable reserves during the same period. This expansion of oil reserves was primarily attributable to two discoveries made by Aramco, the onshore Ghawar and the offshore Safaniya oil fields, in 1951. The onshore and offshore discoveries were the largest on record at the time and have remained unequaled to this day. 1951 marked Tapline's first full year in operation. By 1965 Tapline enabled Aramco to market some 44% of its total crude oil exports to Europe, a greater share than that of nearer markets in Asia.

Aramco's activities during the 1950s were distinguished from those of the postwar years by the mature approach that underlay them. The U.S. lesson of the waste caused by over-rapid exploitation of oil reservoirs was not ignored by Aramco. In the early 1950s Aramco began to implement oilfield pressure maintenance programs. At the Abqaiq oilfield, gas rein-jection facilities started operation in March 1954, and in February 1956 a similar water program was started. An added advantage with the gas program was that not only was Aramco able to utilize associated gas but that also the associated gas could be stored instead of burned off at source.

Both Aramco's and Saudi Arabia's revenues increased dramatically during this period as a result of the expansion of crude oil exports and of rising posted prices. Like Aramco, Saudi Arabia ploughed these revenues into the development of infrastructure. As Saudi Arabia was overwhelmingly dependent on oil for revenues, it was vitally important that revenue stability was achieved to foster long-term development plans. Unlike the Aramco partners, however, the Saudi government had no influence on the two factors, production and price, that determined their revenues. The struggle for control, or the “participation” issue, emerged strongly in the 1960s.

Even though the general office had been moved to Dhahran and two representatives from the Saudi government were included on the board of directors, control of Aramco still rested firmly with the four partners. On August 9, 1960, the chairman of Standard Oil of New Jersey, Munroe Rathbone, decided unilaterally to shave 14C off the posted price, a cut of some 7%, in order to increase its competitiveness in Europe vis-a-vis Soviet crude exports. Not only did the chairman refuse to consult the Aramco board, but he also rejected the advice given him from, among others, the New Jersey company's representative on the Aramco board, Howard Page. Other companies followed suit with the price cut and fueled the outrage of the oil-exporting countries. One dissenting voice that rose above the rest was that of Say y id Abdullah H. Tariki, the Saudi director general of petroleum and mineral affairs and member of the Aramco board. Tariki immediately set about arranging secret negotiations with other producer countries. The preparatory negotiations proved instrumental in the formation of OPEC in 1960. As it turned out, the formation of OPEC was to be decisive in the battle for control of Aramco.

On November 30, 1962, the General Petroleum and Mineral Organization of Saudi Arabia (Petromin) was founded. Its aim was to foster Saudi participation in all areas of the oil industry, including operations in the Aramco concession. Although Petromin was not producing any crude oil, by 1970 it had joint interests in many concessions and operated a refinery at Jiddah and a fertilizer plant in Dammam. The evolution of Petromin over the 1960s was central to the government’s attempts to wrest control from the Aramco partners.

The weakness of the crude oil market continued through the 1960s due to the emergence of Iran as the second major producer in the region. The freezing of posted prices over the 1960s meant that an oil exporter’s only means to protect its revenues from being eroded by inflation was to increase production. The companies operating in the gulf, including the Aramco partners, were each put under a great deal of pressure by concessionaire governments to increase production and maintain prices. These incompatible aims could only be satisfied if incremental world demand could be equitably divided between the producers. Howard Page was so concerned to appear to be representing the Saudi case for an increase in its market share that he refused the opportunity to involve Standard Oil of New Jersey in the very profitable exploration strategy being conducted in Oman, fearing that the company might be identified as aiding a direct competitor to enter the market. Between 1960 and 1970 Iran’s production increased by 258% or 2.8 million barrels per day compared to the Saudi increase of 189% or 2.5 million barrels per day. However, by 1970 both Saudi and Iranian oil production had reached around 3.8 million barrels per day.

Aramco’s fortunes were, and always have been, inextricably bound with those of the Saudi government. One way for both to overcome the constraint on revenue expansion imposed by the glutted crude oil market of the 1960s was to diversify into other markets. Expansion and progressive modernization of the Ras Tanura refinery increased crude oil throughput to 380,000 barrels per day in 1970, improved the quality of products, and enabled the blending of new products such as aviation gasoline. Aramco also began to establish the infrastructure necessary for the sale of LNG. Between 1962 and 1970 production of LNG increased 18-fold from 2,900 barrels per day to 52,100 barrels per day.

The supply conditions in the crude oil market became markedly tighter in the early 1970s. In 1972 Aramco managed not only to increase production by an unprecedented 1.2 million barrels per day to six million barrels per day but also succeeded in increasing the posted price. The market conditions placed the government in a much stronger position from which to negotiate with the Aramco partners over Saudi participation.

In March 1972, after employing every delaying tactic possible, Aramco accepted the principle of 20% state participation in order to preempt unilateral action. The principle was worked out in detail in October 1972, when it was agreed that Saudi participation should be phased in from 25% on January 1, 1973, to 51% on January 1, 1982, and that compensation should be made for the updated book value of Aramco’s assets.

By 1973, however, other oil-exporting countries had obtained or imposed terms far in excess of the Saudi government’s demands. Negotiations restarted and continued through to 1980. In 1973 the Saudi interest in Aramco was increased to 60%. Between 1976 and 1980 the 100% Saudi takeover of Aramco was agreed and the financial provisions were made retroactive to January 1, 1976. By the terms of the agreement the Aramco partners received a service fee of 18C to 19C per barrel and were obliged to market the crude that Petromin could not sell through its own channels.

The oil price rises of 1973-1974 had a dramatic effect on revenues. The effect on government revenues of increases in the oil price, taxation, and production—from 3.8 million barrels per day in 1970 to an all-time high of 9.9 million barrels per day in 1980—was such that the economy could no longer absorb the funds available to it and was, therefore, generating a surplus.

With their newly acquired interest, the Saudi government began to involve Aramco in the reinvestment of that surplus. In 1975 Aramco was given the task of constructing and operating a gas system that could fuel Saudi Arabia’s drive towards industrialization. The master gas system (MGS), as it came to be known, started operation in 1980. In January 1977 Aramco formed a subsidiary, the Saudi Consolidated Electric Company (SCECO), to construct and operate an electric grid system for the Eastern Province. As a result of the agreement between the government and Aramco, SCECO became an independently managed company on January 1, 1983.

Although Aramco had become state-owned, the close ties between the original Aramco partners and the government were not lost. Their relationship was fostered through joint ventures outside Aramco’s scope of operations. Mobil currently holds a 29% interest in Petrolube and a 30% stake in Luberef. Both the Saudi-American joint ventures were formed to build lubricating oil refineries in Jiddah in the 1970s, and are still responsible for their operation. The other three of the original Aramco partners, Exxon, Texaco, and Gulf, are involved in industrial projects with the Saudi Arabian Basic Industries Corporation (SABIC) in Jubail.

However, Aramco’s boom years of the 1970s and early 1980s did not last. The oil price rises of 1973 and 1979-1980 led to inter-fuel substitution, such as the substitution of oil for gas, and conservation measures being implemented by the Organization for Economic Cooperation and Development (OECD) countries that brought about a collapse in world oil demand. Coupled with the sharp increase in oil supplies from non-OPEC regions, such as the North Sea, from 32.9 million barrels per day in 1980 to 37.8 million barrels per day in 1985, Saudi Arabia was faced with the no-win choice of either cutting production to maintain the official selling price or cutting prices and flooding the market. Between 1980 and 1985 Saudi Arabia cut production from 9.9 million barrels per day to 4 million barrels per day.

By 1985 Saudi Arabia was tired of shouldering the full burden of price defense and looking on as its revenues declined. In September 1985 Sheikh Yamani, in conjunction with the Aramco partners, instituted a dramatic change of policy to regain Saudi Arabia’s share of the crude oil market. Between August 1985 and August 1986 Saudi Arabian production increased from 2.2 million to 6.2 million barrels per day, and the spot price of many world crudes fell to less than $10 from their previous 1985 levels of around $26 to $29 per barrel. The real price of oil had returned to levels not seen since before the oil price shocks of 1973-1974.

Aramco did not emerge unscathed from the drastic fall in oil revenues. Between 1982 and 1989 Aramco’s personnel fell from 57,000 to 43,000. Following the meeting of the Aramco board of directors in San Francisco on April 8 and 9, 1987, the decision was taken to cut its own membership from 20 to 13. Three Americans and four Saudis, among them the ex-oil minister Sheikh Yamani, were removed, leaving two representatives from each of the four original Aramco partners and five Saudi officials.

The trauma of the 1986 oil price crash led to a change in management, Hisham Nazer replacing Sheikh Yamani, and a change in oil policy. The primary aim of Saudi policy after the unbridled competition of 1986 was to secure market share just as it had been in the oil market glut of the 1960s. To secure long-term supply contracts, Hisham Nazer depended heavily on the close relationship between Aramco and the original shareholders. In his first attempt Nazer signed a 1.25 million barrels per day long-term supply arrangement with the four majors involved in the formation of Aramco, Chevron, Texaco, Mobil, and Exxon, on February 3, 1987. This agreement soon broke down, however, in the face of further price competition and Nazer turned his attention to the possibility of securing market share through downstream integration—ownership of all phases of the industry from the wellhead to the service station.

In 1988 the first overseas downstream joint venture was concluded by the newly incorporated Saudi Aramco. On November 10, 1988, Saudi Aramco and Texaco signed an agreement committing themselves to the conditions of the joint venture named Star Enterprise. Aramco’s share of the joint venture was to be managed by its subsidiary Saudi Refining Incorporated. From January 1, 1989, U.S.-based Star Enterprise was given the responsibility of operating Texaco’s refining, distribution, and marketing assets in the east and gulf coasts. Texaco’s assets were substantial in these areas and included three refineries—Delaware City, Convent, and Port Arthur—with combined distillation capacity of 625,000 barrels per day and, most importantly, 11,400 service stations. In return Saudi Aramco paid $1.5 billion, committed itself to supplying up to 600,000 barrels per day and to supplying a 30 million barrel inventory. A further deal was negotiated between Aramco and Ssangyong Oil of South Korea.

As a result of the 1990 Persian Gulf crisis, Saudi Aramco’s plans have been altered. Its plan to increase crude oil production capacity by around two million barrels per day to ten million barrels per day by 1995 has been brought forward to 1992. Since proven recoverable reserves are currently estimated at around, 258 billion barrels, this increase in capacity, if utilized, will not dramatically shorten Saudi Arabia’s productive time horizon. Saudi Aramco’s future seems further ensured by Petromin’s inability to usurp Aramco’s responsibilities. This situation is exemplified by the fact that the management of the east-west pipeline was passed from Petromin to Aramco in January 1984. Despite the radical changes in both the ownership and function of Aramco, its place in Saudi Arabia is assured for the foreseeable future.

Principal Subsidiary

Aramco Services Company (U.S.A.).

Further Reading

Longrigg, S.H., Oil in the Middle East, Oxford, Oxford University Press, 1969; Seymour, I., OPEC: Instrument of Change, London, Macmillan Press Ltd., 1980; Yergin, D., The Prize: The Epic Quest for Oil, Money and Power, New York, Simon & Schuster, 1990.

—Adam Seymour

Saudi Arabian Oil Company

Post Office Box 5000
Dhahran 31311
Saudi Arabia
(3) 673-5002
Fax: (3) 873-8190
Internet:http://www.careermosaic.com/cm/aramco

State Owned Company
Incorporated: 1988
Employees: 50,000
SICs: 2911 Petroleum Refining; 1382 Oil & Gas Exploration Services; 1381 Drilling Oil & Gas Wells

With production capacity of about ten million barrels of crude oil per day, the state-owned Saudi Arabian Oil Company (also known as Saudi Aramco) is without question the world’s largest producer of crude oil. In the years immediately preceding and following the Persian Gulf crisis, the company worked to broaden its operations from the wellhead to include refining, marketing, distribution, and even retailing. By the mid-1990s, Saudi Aramco considered itself “a fully integrated global oil enterprise.” In addition to its largely domestic quest for vertical integration, the oil company pursued joint ventures to extend its geographic reach into North America, Asia, and Europe.

Saudi Aramco is responsible for exploration, development, and production in a tract of land which covers some 16 percent of the 2.2 million square kilometers that constitute the Saudi Arabian peninsula. The company’s 260 billion bbl of recoverable crude oil reserves constituted 26 percent of the world’s total reserves in the early 1990s. Clearly, Aramco’s crude oil operations, which account for 95 percent of total production, are vital not only to the Saudi Arabian economy but also to global energy needs. The state-owned business also had natural gas reserves of 180 trillion cubic feet (tcf). Its assets include the world’s largest onshore and offshore oilfields. Revenues generated through the export of Aramco crude oil production constitute over half of total Saudi government revenues, and have helped transform the country from, as one observer has noted, “a third world country in an inhospitable desert region, to one that is on the threshold of joining the ranks of developed nations.”

Early-20th-Century Origins

The incorporation of Saudi Aramco on November 13, 1988, was largely a cosmetic operation, performed in order to remove the final legal attachments of the Arabian American Oil Company (Aramco) to the original U.S. company registered in Delaware on January 31, 1944. However, the history of the Aramco concession, upon which the company’s fortune has been forged, dates back to the early 1930s. In 1932 Standard Oil (California) (Socal), now known as Chevron, employed the energies of Harry St. John B. Philby, a close friend of Saudi King Ibn Saud, to obtain permission for Socal to conduct a geological survey in the eastern parts of the Saudi Peninsula. Although granting rights over Saudi Arabia’s natural resources to a foreign company was against King Ibn Saud’s better judgment, his need for money left him no alternative. King Ibn Saud insisted that no geological appraisal could take place until the full terms of a concession had been agreed. The king’s fear was that Socal would discover that Saudi Arabia was barren before it had committed any capital. On May 29, 1933, the concession agreement was signed by the king’s minister for finance, Abd Allah al Sulaiman, and the Socal representative, Lloyd N. Hamilton, at the royal palace in Jiddah.

In November 1933 the California Arabian Standard Oil Company (Casoc) was formed to manage operations within the concession on behalf of Socal. The original concession stretched from the Persian Gulf to, and including, the western province of Dahna. In 1939 the concession was further enlarged to around 440,000 square miles to include Saudi Arabia’s share of the neutral zone.

However, before any crude oil was discovered in its new Saudi concession Socal was already experiencing problems in marketing its growing Bahraini oil production. Socal opted for the quickest solution to this problem, which was to merge operations with a company which owned marketing facilities near the source of production, but which was short of crude. In 1936 Socal struck a deal with the Texas Company, now known as Texaco. The new joint venture was named Caltex, and was charged with managing all of Texaco’s marketing assets from the Middle East to the Pacific. As a part of the deal, Texaco was given half ownership of Casoc.

It took three years before the exploratory drilling of the Dammam Dome, a group of prominent limestone hills near what is presently called Dhahran, was rewarded. In March 1938 the seventh exploration well drilled on the Dammam Dome identified the Arab Zone, as the explorers named it. Crude oil exports started in the same year. The oil was piped from the well to the makeshift port of al-Khobar and, from there, was transported by sea to the Bahrain refinery. In the following year the now prolific Ras Tanura export terminal was used for the first time by Socal’s tanker, the D. G. Schofield.

World War II

The advent of World War II impeded Casoc’s operations. Production at the newly constructed Ras Tanura refinery lasted only six months before it was closed in June 1941 and all dependents of American employees were sent home for the duration of the war.

The war years from 1940 to 1944 were significant, however, for the progressive rationalization of Casoc’s management structure under the guidance of its new president, F.A. Davies. Davies had visited Saudi Arabia as a Socal representative in 1930 and had been closely involved in operations ever since. His election, together with that of a new board of directors in August 1940, marked the company’s first step toward independence from Socal. Casoc set up its headquarters in San Francisco at 200 Bush Street. Symbolically, the final confirmation of the company’s new identity came on January 31, 1944, when Casoc was renamed the Arabian American Oil Company.

The postwar years of the late 1940s witnessed the scramble to expand production from the Aramco concession and to establish a market for it. Between 1944 and 1949 Aramco expanded capacity in all spheres of operation, in no small way aided by the military cooperation in allocating materials and even providing transport. The strategic importance of oil had been proven in the defeat of Adolf Hitler, and the U.S. government had even set aside funds for possible direct investment in the Middle East to secure supplies. Aramco shunned the offer of direct government involvement but with its aid achieved a 25-fold increase in crude oil supply from 20 thousand barrels per day in 1944 to 500 thousand barrels per day in 1949. The Ras Tanura refinery’s distillation capacity was expanded from 50 thousand barrels per day to 127 thousand barrels per day between 1945 and 1949, in part to supply the increasing requirements of the U.S. Navy.

Secure access to world markets was fostered in two ways. First, with regard to the European market, Aramco attempted to improve the competitiveness of its crude oil vis-a-vis Soviet and U.S. exports by cutting down on the time and, ultimately, costs of transporting crude from the Persian Gulf. In 1946 Aramco began to build, through its affiliate, the Trans-Arabian Pipe Line Company (Tapline), a 1,068-mile-long pipeline connecting the Abqaiq oilfield to the Mediterranean port of Sidon, Lebanon.

Secondly, Aramco tried to merge operations with the Standard Oil Company of New Jersey, later Exxon, and the Socony-Vacuum Oil Company, now known as Mobil. Harry Collier, the chairman of Socal at that time, supported the choice of these two companies not only because of their unrivaled marketing assets in the Far East but also because the choice satisfied King Ibn Saud’s explicitly stated wish that Aramco should remain American to avoid an extension of British influence in the region. Between 1946 and 1948 the two companies wrestled with the legal obstacle posed to the merger by the Red Line Agreement. This obstacle was overcome in December 1948. The companies’ shares in Aramco and Tapline were divided as follows: Socal, Texaco, and Standard Oil of New Jersey each owned 30 percent and the Socony-Vacuum Company owned the remaining ten percent.

Also in 1948 Aramco gave up its concessionary rights over the Saudi Arabian part of the neutral zone. This move was made in response to the severe terms accepted by the American Independent Oil Company (Aminoil) in the auction for the concession rights over the Kuwaiti half of the neutral zone. Unwilling to match Aminoil’s offer, Aramco decide to preempt similar demands by the Saudi king by giving up the land. In return for this unilateral gesture, Aramco received a reaffirmation of its offshore concession rights in the Persian Gulf. In the auction that resulted from Aramco’s cessation, the Pacific Western Oil Company agreed to terms even more onerous than those applied to Aminoil.

However, Aramco did not completely avoid compensating the government for the dramatic increase in the value of its concession. Over the late 1940s and the first half of the 1950s Aramco was progressively forced to relinquish small parts of its concession. Also, on December 30, 1950, following the example of Venezuela in 1948, the Saudi government authorized an increase in the government’s share to 50 percent of Aramco’s profits net of exploration, development, and production costs.

Growth Slows in 1950s

The expansion of Aramco’s operations continued through the 1950s, albeit at a slower pace. Crude oil production only increased from 761 thousand barrels per day in 1960 to 1.2 million barrels per day in 1959, despite an increase of 38 billion barrels to a total of 50 billion barrels in the Saudi Arabian proven recoverable reserves during the same period. This expansion of oil reserves was primarily attributable to two discoveries made by Aramco, the onshore Ghawar and the offshore Safaniya oil fields, in 1951. The onshore and offshore discoveries were the largest on record at the time and have remained unequaled to this day. 1951 marked Tapline’s first full year in operation. By 1965 Tapline enabled Aramco to market some 44 percent of its total crude oil exports to Europe, a greater share than that of nearer markets in Asia.

Aramco’s activities during the 1950s were distinguished from those of the postwar years by the mature approach that underlay them. The U.S. lesson of the waste caused by over-rapid exploitation of oil reservoirs was not ignored by Aramco. In the early 1950s Aramco began to implement oilfield pressure maintenance programs. At the Abqaiq oilfield, gas reinjection facilities started operation in March 1954, and in February 1956 a similar water program was started. An added advantage with the gas program was that not only was Aramco able to utilize associated gas but that also the associated gas could be stored instead of burned off at the source.

Corporate Control at Issue in 1960s

Both Aramco’s and Saudi Arabia’s revenues increased dramatically during this period as a result of the expansion of crude oil exports and of rising posted prices. Like Aramco, Saudi Arabia ploughed these revenues into the development of infrastructure. As Saudi Arabia was overwhelmingly dependent on oil for revenues, it was vitally important that revenue stability was achieved to foster long-term development plans. Unlike the Aramco partners, however, the Saudi government had no influence on the two factors, production and price, that determined their revenues. The struggle for control, or the “participation” issue, emerged strongly in the 1960s.

Even though the general office had been moved to Dhahran and two representatives from the Saudi government were included on the board of directors, control of Aramco still rested firmly with the four partners. On August 9, 1960, the chairman of Standard Oil of New Jersey, Munroe Rathbone, decided unilaterally to shave 140 off the posted price, a cut of some seven percent, in order to increase its competitiveness in Europe vis-a-vis Soviet crude exports. Not only did the chairman refuse to consult the Aramco board, but he also rejected the advice given him from, among others, the New Jersey company’s representative on the Aramco board, Howard Page. Other companies followed suit with the price cut and fueled the outrage of the oil-exporting countries. One dissenting voice that rose above the rest was that of Sayyid Abdullah H. Tariki, the Saudi director general of petroleum and mineral affairs and member of the Aramco board. Tariki immediately set about arranging secret negotiations with other producer countries. The preparatory negotiations proved instrumental in the formation of OPEC in 1960. As it turned out, the formation of OPEC was to be decisive in the battle for control of Aramco.

On November 30, 1962, the General Petroleum and Mineral Organization of Saudi Arabia (Petromin) was founded. Its aim was to foster Saudi participation in all areas of the oil industry, including operations in the Aramco concession. Although Petromin was not producing any crude oil, by 1970 it had joint interests in many concessions and operated a refinery at Jiddah and a fertilizer plant in Dammam. The evolution of Petromin over the 1960s was central to the government’s attempts to wrest control from the Aramco partners.

The weakness of the crude oil market continued through the 1960s due to the emergence of Iran as the second major producer in the region. The freezing of posted prices over the 1960s meant that an oil exporter’s only means to protect its revenues from being eroded by inflation was to increase production. The companies operating in the gulf, including the Aramco partners, were each put under a great deal of pressure by concessionaire governments to increase production and maintain prices. These incompatible aims could only be satisfied if incremental world demand could be equitably divided between the producers. Howard Page was so concerned to appear to be representing the Saudi case for an increase in its market share that he refused the opportunity to involve Standard Oil of New Jersey in the very profitable exploration strategy being conducted in Oman, fearing that the company might be identified as aiding a direct competitor to enter the market. Between 1960 and 1970 Iran’s production increased by 258 percent or 2.8 million barrels per day compared to the Saudi increase of 189 percent or 2.5 million barrels per day. However, by 1970 both Saudi and Iranian oil production had reached around 3.8 million barrels per day.

Aramco’s fortunes were, and always have been, inextricably bound with those of the Saudi government. One way for both to overcome the constraint on revenue expansion imposed by the glutted crude oil market of the 1960s was to diversify into other markets. Expansion and progressive modernization of the Ras Tanura refinery increased crude oil throughput to 380,000 barrels per day in 1970, improved the quality of products, and enabled the blending of new products such as aviation gasoline. Aramco also began to establish the infrastructure necessary for the sale of liquid natural gas (LNG). Between 1962 and 1970 production of LNG increased 18-fold from 2,900 barrels per day to 52,100 barrels per day.

Tightening Markets Presage Gradual Government Takeover

The supply conditions in the crude oil market became markedly tighter in the early 1970s. In 1972 Aramco managed not only to increase production by an unprecedented 1.2 million barrels per day to six million barrels per day but also succeeded in increasing the posted price. The market conditions placed the government in a much stronger position from which to negotiate with the Aramco partners over Saudi participation.

In March 1972, after employing every delaying tactic possible, Aramco accepted the principle of 20 percent state participation in order to preempt unilateral action. The principle was worked out in detail in October 1972, when it was agreed that Saudi participation should be phased in from 25 percent on January 1, 1973, to 51 percent on January 1, 1982, and that compensation should be made for the updated book value of Aramco’s assets.

By 1973, however, other oil-exporting countries had obtained or imposed terms far in excess of the Saudi government’s demands. Negotiations restarted and continued through to 1980. In 1973 the Saudi interest in Aramco was increased to 60 percent. Between 1976 and 1980 the 100 percent Saudi takeover of Aramco was agreed upon and the financial provisions were made retroactive to January 1, 1976. By the terms of the agreement the Aramco partners received a service fee of 18 to 19 cents per barrel and were obliged to market the crude that Petromin could not sell through its own channels.

The oil price rises of 1973-1974 had a dramatic effect on revenues. The effect on government revenues of increases in the oil price, taxation, and production—from 3.8 million barrels per day in 1970 to an all-time high of 9.9 million barrels per day in 1980—was such that the economy could no longer absorb the funds available to it and was, therefore, generating a surplus.

With their newly acquired interest, the Saudi government began to involve Aramco in the reinvestment of that surplus. In 1975 Aramco was given the task of constructing and operating a gas system that could fuel Saudi Arabia’s drive towards industrialization. The master gas system (MGS), as it came to be known, started operation in 1980. In January 1977 Aramco formed a subsidiary, the Saudi Consolidated Electric Company (SCECO), to construct and operate an electric grid system for the Eastern Province. As a result of the agreement between the government and Aramco, SCECO became an independently managed company on January 1, 1983.

Although Aramco had become state-owned, the close ties between the original Aramco partners and the government were not lost. Their relationship was fostered through joint ventures outside Aramco’s scope of operations. Mobil continued to hold a 29 percent interest in Petrolube and a 30 percent stake in Luberef. Both the Saudi-American joint ventures were formed to build lubricating oil refineries in Jiddah in the 1970s, and are still responsible for their operation. The other three of the original Aramco partners, Exxon, Texaco, and Gulf, are involved in industrial projects with the Saudi Arabian Basic Industries Corporation (SABIC) in Jubail.

Revenues, Profits and Production Fall in 1980s

However, Aramco’s boom years of the 1970s and early 1980s did not last. The oil price rises of 1973 and 1979-1980 led to inter-fuel substitution, such as the substitution of oil for gas, and conservation measures being implemented by the Organization for Economic Cooperation and Development (OECD) countries that brought about a collapse in world oil demand. Coupled with the sharp increase in oil supplies from non-OPEC regions, such as the North Sea, from 32.9 million barrels per day in 1980 to 37.8 million barrels per day in 1985, Saudi Arabia was faced with the no-win choice of either cutting production to maintain the official selling price or cutting prices and flooding the market. Between 1980 and 1985 Saudi Arabia cut production from 9.9 million barrels per day to four million barrels per day.

By 1985 Saudi Arabia was tired of shouldering the full burden of price defense and looking on as its revenues declined. In September 1985 Sheikh Yamani, in conjunction with the Aramco partners, instituted a dramatic change of policy to regain Saudi Arabia’s share of the crude oil market. Between August 1985 and August 1986 Saudi Arabian production increased from 2.2 million to 6.2 million barrels per day, and the spot price of many world crudes fell to less than $10 from their previous 1985 levels of around $26 to $29 per barrel. The real price of oil had returned to levels not seen since before the oil price shocks of 1973-1974.

Aramco did not emerge unscathed from the drastic fall in oil revenues. Between 1982 and 1989 Aramco’s personnel fell from 57,000 to 43,000. Following the meeting of the Aramco board of directors in San Francisco on April 8 and 9, 1987, the decision was taken to cut its own membership from 20 to 13. Three Americans and four Saudis, among them the ex-oil minister Sheikh Yamani, were removed, leaving two representatives from each of the four original Aramco partners and five Saudi officials.

The trauma of the 1986 oil price crash led to a change in management, Hisham Nazer replacing Sheikh Yamani, and a change in oil policy. The primary aim of Saudi policy after the unbridled competition of 1986 was to secure market share just as it had been in the oil market glut of the 1960s. To secure long-term supply contracts, Hisham Nazer depended heavily on the close relationship between Aramco and the original shareholders. In his first attempt Nazer signed a 1.25 million barrels per day long-term supply arrangement with the four majors involved in the formation of Aramco, Chevron, Texaco, Mobil, and Exxon, on February 3, 1987. This agreement soon broke down, however, in the face of further price competition, and Nazer turned his attention to the possibility of securing market share through downstream integration—ownership of all phases of the industry from the wellhead to the service station.

In 1988 the first overseas downstream joint venture was concluded by the newly incorporated Saudi Aramco. On November 10, 1988, Saudi Aramco and Texaco signed an agreement committing themselves to the conditions of the joint venture named Star Enterprise. Aramco’s share of the joint venture was to be managed by its subsidiary Saudi Refining Incorporated. From January 1, 1989, U.S.-based Star Enterprise was given the responsibility of operating Texaco’s refining, distribution, and marketing assets in the east and gulf coasts. Texaco’s assets were substantial in these areas and included three refineries—Delaware City, Convent, and Port Arthur—with combined distillation capacity of 625,000 barrels per day and, most importantly, 11,400 service stations. In return Saudi Aramco paid $1.5 billion and committed itself to supplying up to 600,000 barrels per day and to supplying a 30 million barrel inventory. By the mid-1990s, Star Enterprise ranked as America’s sixth-largest gasoline marketer. Aramco made subsequent acquisitions of 35 percent of South Korea’s Ssangyong Oil and a 40 percent stake in Petron, the Philippines’ leading refiner and marketer.

King Fahd Ibn Abdulaziz Al-Saud formally incorporated Saudi Arabian Oil Co. by Royal Decree in 1988. The decree established a monarch-chaired Supreme Council and a board of directors led by the country’s minister of petroleum and mineral resources. In addition to domestic government officials and top Aramco managers, the board included Exxon and Chevron chairmen into the early 1990s.

Persian Gulf Crisis, Management Shift Highlight Early 1990s

As a result of the 1990 Persian Gulf crisis, Saudi Aramco emerged as one of the most influential participants in the global oil industry. Within just a few weeks of Iraq’s invasion of Kuwait, Saudi Aramco increased its daily production by over 2.5 million barrels per day. The conflict devastated Kuwait’s oil-producing infrastructure and international sanctions prevented Iraq from trading oil, thereby eliminating over 4.5 million barrels of oil production per day and triggering what Oil and Gas Journal called “one of the most severe crises in the world’s oil supplies since World War II.” In fact, Petroleum Economist magazine asserted that Saudi Aramco “rescued the world from an oil supply crisis” by accelerating its plan to increase crude oil production capacity to ten million barrels per day from a target date of 1995 to 1992.

The company resumed its quest for vertical integration in the aftermath of the war, merging another state-owned firm, Saudi Arabian Marketing & Refining Co. (Samarec) in June 1993, moving into the ranks of the world’s ten largest refiners. Oil and Gas Journal’s L.R. Aalund noted that Samarec has “passed an acid test during the Gulf War when they supplied all allied air, land, and sea forces with their total fuel needs.” Less than one month later, the company added state-owned Petromin to its roster, thereby merging majority interests in Petromin Lubricating Oil Refining Co. (a.k.a. Luberef) and Petromin Lubricating Oil Co. (a.k.a. Petrolube), both joint ventures with Mobil Oil Corp.

After nine years as Saudi Arabia’s minister of Petroleum and Mineral Resources, Hisham Nazer was succeeded by Saudi Aramco President and CEO Ali Naimi in 1995. The appointment by King Fahd was interpreted as an acknowledgement of the company’s growing clout, and as a sign of a new emphasis on the domestic petroleum industry. Aramco Vice-President for International Operations Abdullah Jumaa advanced to acting president and CEO of Aramco upon Naimi’s promotion. Despite recent decades’ wholesale changes in the ownership, management, and function of Aramco, its place in Saudi Arabia and the world is assured for the foreseeable future.

Principal Subsidiaries

Aramco Services Company (U.S.A.); Petromin Lubricating Oil Refining Co. (50%); Petromin Lubricating Oil Co. (50%).

Further Reading

Aalund, L.R., “Saudi Arabia,” The Oil and Gas Journal, August 16, 1993, pp. 38-44.

George, Dev, “Safaniya, POEC, And The Saudi Power Play,” Offshore Incorporating The Oilman, November 1991, p. 11.

“King Of Oil Surges Ahead,” Petroleum Economist, December 1991, pp. 6-9.

Longrigg, S.H., Oil in the Middle East, Oxford, England: Oxford University Press, 1969.

Mangan, David, Jr., and Marshall Thomas, “Saudi Aramco Report Stresses Join Ventures,” The Oil Daily, June 21, 1991, pp. 1-2.

Mollet, Paul, “Aramco Man Gets The Top Job,” Petroleum Economist, September 1995, p. 36.

Naimi, A.I., “Saudi Aramco Staying On Course with Strategy for the ’90s,” The Oil Daily, November 21, 1991, p. 5.

“Saudi Aramco Describes Crisis Oil Flow Hike,” The Oil and Gas Journal, December 2, 1991, pp. 49-51.

Seymour, I., OPEC: Instrument of Change, London: Macmillan Press Ltd., 1980.

Yergin, D., The Prize: The Epic Quest for Oil, Money and Power, New York: Simon & Schuster, 1990.

—Adam Seymour

—updated by April Dougal Gasbarre