by Anthony Sampson
10
Libyan UltimatumIt seems that it is only in the United States that an almost masochistic attack on the position of its own oil companies persists.
-- John J. McCloy, 1974
IT was not in the established oil countries of the Persian Gulf that the sisters faced their first critical showdown, but in Libya, the upstart oil producer on the edge of the Arab world in North Africa. For Libya broke up the ranks on both sides. It had let in the independents to challenge the sisters; and it was aloof from the cautious attitudes of the rest of OPEC. It was the outsider at both ends and by ignoring the rules it changed them.
Since the Libyan oil began to flow in the early 'sixties, it had a fatal fascination for the West, particularly Europe. By 1969 Libya was supplying a quarter of Western Europe's oil. It was of high quality, with little sulphur, which became more important as the West worried more about pollution: and it was very close to Europe, on the right side of the Suez Canal. That became more significant after the Canal was closed in the 1967 war, and still more so after May 1970 when the 'Tapline' from Saudi Arabia was again breached in Syria, and then carefully not repaired. The closeness of Libyan oil was now still more desirable, and there was no alternative so attractive: Nigeria, two thousand miles further south, was being rapidly developed as a 'safe' new source of oil, but by the middle of 1970 Nigeria was being rent by the Biafra War, and supplies had stopped. Libyan oil was not only the closest, but the cheapest, for the companies made no special allowance to Libya for the cheap transport. Exxon argued that if they paid more because the Suez Canal was closed, they would not be able to reduce the price when it was open again. But many oil experts reckoned that the Libyans were being screwed, and that it was only a matter of time before they realised it.
The rush of Libyan oil, like all sudden oil bonanzas, brought with it great dangers to the big companies. In the first place it threatened, as we have seen, to disturb their delicate balancing act, and to cause bitter resentment with the older producers, particularly Iran and Saudi Arabia. The problem was well put by the International Petroleum Encyclopaedia, for 1970 (p. 36):
It's not hard to see why, as increasing amounts of African oil threaten to grab off even larger chunks of their prime market target (Europe), the Mideast nations become upset. Their very way of life is being threatened -- a way of life they are just becoming used to and one which they don't want to lose. The interests of the producing and the consuming countries are at once the same and exactly the opposite. The role the large international oil companies play as a buffer element between the two is essential to both. It's a role that, if eliminated would throw the two forces face to face and spell disaster for the entire industry. This then is the reason for the 'three-party' system which is of benefit to all.
The dependence on Libyan oil was also more directly dangerous to Europe, for the Libyans could threaten to cut it off to extract better terms; and some experts in the State Department in the late 'sixties were seriously concerned. There was even a proposal for consumer governments to collaborate in an international treaty to safeguard oil supplies. But the governments were at odds, and the companies were complacent, too busy making money out of Libya.
Libya had also become a bitter battleground between the majors and the independents. From the beginning, as we have seen, the Libyans were determined to bring in the outsiders, to speed up exploration. 'We wanted to discover oil quickly', explained the former Petroleum Minister, Fuad Kabazi: 'this is why we preferred independents in the first stage, because they had very little interests in the Eastern Hemisphere outside Libya.' (Multinational Report, 1975, p. 98.) It was true that Exxon once again led the field, producing 750,000 barrels a day from Libya by 1970: but the independents were producing half the oil from Libya, and they had no interest in restricting production or in playing the balancing game. Exxon and the other sisters were alarmed by their reckless expansion, and exasperated because the independents, as they saw it, enjoyed a tax advantage: for the independents paid taxes on the basis of the market price of the oil they sold, while the majors had to pay on the higher posted price. They saw their chance to damage the independents by using OPEC against them -- an ingenious but dangerous game. After OPEC in 1963 had demanded that royalties be included in their expenses, the majors offered the same terms to Libya (who had just joined OPEC) provided all companies were taxed in the same way. The independents fought back bitterly, arguing that they were not involved with OPEC, and could not afford higher taxes. But the new Petroleum Law was duly passed in 1965, and the independents never forgave the majors.
Then, in the round of concessions in 1966, there arrived in Libya the most wily and independent of all the independents; the unique phenomenon of Dr. Armand Hammer. This extraordinary old walnut of a man had a combination of imagination and ruthlessness that made him in some ways more disrupting to the sisters than Getty or Mattei; and his whole career had been based on defying convention. He had made his first fortune in Russia after the Revolution and built up a fabulous collection of Tsarist treasures, the first of several art collections. His first experience of oil was in trying to acquire Russian oil for Germany in the 'twenties, when Exxon and Shell were battling for 'stolen oil' (Armand Hammer: The Quest of the Romanoff Treasure, New York, 1936, p. 143. (The title has little connection with the subject-matter)), and he was thus no great respecter of the sisters. He had come back into oil in 1956, by buying up a sleepy West Coast company called Occidental (or 'Oxy'), and he was now determined to join in the Libyan bonanza.
He made a bid of exceptional generosity, offering an agricultural development project and a joint ammonia-plant; and he wrapped up his bid in red-green-and-black ribbon, the Libyan colours. He also -- according to evidence in a subsequent lawsuit -- recruited a team of entrepreneurs to help him get the bid. He got his concession, and was soon sensationally successful in his discoveries, becoming for a short time the biggest producer in Libya. The advent of Hammer, whose oil was soon flooding across Europe, still further exasperated the majors, particularly Exxon. As the American Ambassador, David Newsome, put it later, with marvellous understatement, 'I think it is safe to say that the advent of Occidental on the scene was not warmly welcomed by all of the other companies'. (Multinational Report 1975, p. 99.) It was not just that Hammer was adding to the glut; Exxon also knew that Hammer was far more vulnerable to pressure from the Libyans. For him, Libyan oil was his life blood.
So long as King Idris was in power in Libya with his corrupt regime, the oil companies were not seriously threatened. The King complained about the low price of oil, but the warning of Mossadeq was still in the background. Everything was changed on September 1, 1969, when ldris was deposed by a band of young army officers, led by Colonel Muamer Qadaffi. They were determined to use oil as an ideological weapon against Israel and to make the West pay for it. They knew the workings of the oil business: the first prime minister, Dr. Suleiman Maghrabi, had taken his doctorate at George Washington University, had worked briefly as a lawyer for Exxon, and was later jailed in 1967 for organising an oil-workers' strike. The new government had no doubt that Libya had been cheated by the oil companies. The 'wild men of Libya' saw oil in the simplest terms, with none of the sophistication of the Shah or Yamani, but with a directness which was to dispel the mystique of the sisters, and revive the whole confidence of OPEC.
Colonel Qadaffi quickly confronted the oil companies; he told the twenty-one companies that unless they agreed to raise prices he would take unilateral action. To show they meant business, the new regime soon made contact with Moscow, to discuss eastern markets for their oil; and they also began talking to the oil companies -- separately, picking them off one by one. They began by talking to Exxon and Oxy. They demanded an extra forty cents a barrel, which was not exorbitant in view of the quality and accessibility of Libyan oil compared to the Persian Gulf. And they received some support from an unlikely quarter, the State Department.
There the oil expert was Jim Akins, a forthright Arabist who was increasingly worried by the prospect of an energy crisis, and will play an important part in the subsequent story. He was a formidable advocate, a tall erect Quaker with uncompromising principles; but he was regarded by many diplomats as being too committed an Arabophile. He was now convinced that the companies must try to come to terms with the Libyan revolutionaries; he talked to the sisters, including Exxon, Texaco and Mobil, and also, through the British Embassy, with BP, advising them all that the Libyan demands were fair. (Multinational Hearings: Part 5, p. 6.) But the big companies, led by Exxon, were adamant: they would not pay more than five cents extra. Many oilmen reckoned that Exxon were being excessively hard-nosed, and that settling now would save trouble later. But Exxon were in a tooth-and-claw mood, and their major interests were anyway outside Libya.
Qadaffi lost no time in reprisals. He struck not at Exxon but at the newcomer Oxy, which he well knew was totally dependent on Libya. In May and June 1970 he ordered Oxy to cut back production from 680,000 to 500,000 barrels a day. Officially it was for reasons of conservation -- the old pretext for cutbacks -- and certainly Oxy was extracting oil at a rate which many oilmen thought was harming the field. But the cutbacks were obviously meant to force Oxy to pay more, and they soon had their effect. Oxy, with their own refineries in Europe waiting for Libyan oil, could not get the oil anywhere else; and Oxy shares were a 'hot stock' which depended on Libya. By July, Armand Hammer was desperate, and he went to see Ken Jamieson, the new chief executive of Exxon. It was a historic meeting between the two opposite sides of the oil business. Hammer told Jamieson he could not withstand the Libyan pressure unless he had an alternative source of crude oil. Could Exxon help? Jamieson was more conciliatory towards the independents than his predecessor, Haider: but he still did not trust them. He was prepared to promise Hammer replacement, at the normal price for third parties. But Hammer wanted oil at close to cost, and Jamieson could not agree. (Jamieson: interview with author, May 1974.) Thus Exxon rejected the first opportunity for a common front; it was some time before Jamieson realised the extent of the common danger.
Dr. Hammer was thus left on his own. He himself negotiated with the revolutionaries through August, flying back from the sweltering heat each night to Paris in his private plane. But he had no real leverage, for both sides knew that he could not do without the Oil. Finally he agreed to pay thirty cents more, going up a further two cents a year for five years, and to raise the tax rate from 50 percent to 58 percent.
Other company men were appalled: as a Shell man put it, 'from that point on, it was either a retreat or a rout.' Two weeks later the Libyans made a similar deal with the Oasis consortium, whose shareholders included three independents, Continental, Marathon and Amerada-Hess. But another of the shareholders was Shell; and Shell with their huge interests elsewhere, were in no mood to give in. Their chairman since 1967 was an outspoken aristocrat, Sir David Barran, who was a figure of stature in the oil world: he was precisely articulate, wore a monocle and had the style of a cultivated country squire. He believed that, even though Shell depended heavily on Libyan oil, they must not give in; for that would risk undermining 'the whole nexus of relationships between producing governments, oil company and consumer'. He believed that Shell should 'at least try to stem the avalanche'. (Letter to Senator Church 1974: Multinational Hearings.) Shell therefore refused to sign the agreement. A week later, on September 25, all its share of Oasis production (150,000 barrels a day) was stopped.
In New York, the American companies were now thoroughly alarmed, and they turned again to the master-lawyer who had served as their legal adviser off and on for the past decade: John Jay McCloy. After he had told President Kennedy about the dangers of OPEC in 1960, McCloy had warned successive attorney-generals that the oil companies might eventually have to act together; when in late 1970 the seven sisters saw OPEC threatening them with a succession of escalating demands, they looked naturally to McCloy. He was now seventy-five, with a unique experience of governments and oil policy, working from his own law firm at the top of the Chase Manhattan skyscraper in Wall Street. He represented not only all seven of the sisters, but nearly all the biggest independents, too. Administrations, trust-busters, and chief executives came and went, but McCloy carried on, as the memory of the industry, and its link with each government.
Three days after Oxy had given in to the Libyan demands, McCloy went to Washington with the heads of the oil companies to talk to the State Department. They saw the Secretary of State, William Rogers, Under-Secretary Alexis Johnson and Jim Akins the oil expert. They agreed that the position was serious, but reached no decision. Two weeks later the heads of the two British oil companies, both involved in Libya, came over to New York: Sir David Barran of Shell and Sir Eric Drake of BP. They lunched together with the British Foreign Secretary, Sir Alec Douglas-Home, who was attending the United Nations, and Barran explained to him the gravity of the crisis and the danger of an avalanche. (Barran: interview with author, October 1974.) They told Sir Alec that they thought the oil companies should try to hold out, even at the risk of losing their Libyan concessions. They reckoned that without Libyan oil the companies should be able to supply Europe with 85 to 90 percent of its needs for at least six months, probably without need of rationing; by that time there would probably be either a settlement, or further alternative sources. Sir Alec was sympathetic and said he would consult his European counterparts at the U.N.: but having done so later, he reported a noticeable lack of preparedness among them to risk any cutting-off of Europe's oil. The prospect of a common stand was thus already dim; for without the governments behind them, the companies knew their position was perilous. If the companies were nationalised, the Europeans might well buy the 'hot oil' direct from the Libyans, and thus undermine them: with the growth of the independents and national companies the majors were no longer in the position to enforce a boycott, as they had been in Iran twenty years earlier.
Just after their lunch, Sir David and Sir Eric flew on to Washington to attend a further meeting at the State Department, headed by Alexis Johnson, and attended by McCloy and the heads of the American sisters. The British pair found it an astonishing meeting. For the first hour, the oilmen were lectured about the problem of Jordan and the Palestinians, with the implication that a Middle East settlement would also settle the oil problem. At last Barran was able to put his case, that the seven must stand together over Libya: Shell's experience in Libya gave his argument, as he put it, 'a rather specially keen cutting edge' (Letter to Senator Church: August 16 1974), and he even suggested that the American companies should dare the Libyans to nationalise. He was supported first by Drake of BP, and then by the chairman of Mobil, Rawleigh Warner; and by Mobil's president, Bill Tavoulareas, now making his debut in oil diplomacy.
But it was now clear that the 'terrible twins' among the seven, Socal and Texaco, were in no mood for a showdown: they had a joint concession in Libya which was threatened, and they changed quickly from their customary hawkish position to a dovish one. As for Jamieson of Exxon, he sounded statesmanlike, holding the balance between the doves and the hawks, without giving an opinion. Some of the American oilmen seemed infected by Sir David's boldness, and by his assumption -- so contrary to anti-trust principles -- that companies and governments should work closely together. But Jim Akins, for the State Department, was against provoking the Libyans. Akins, according to one of the British oilmen 'was hypnotised by the Saudi Arabians. He said that there was no question of Saudi Arabia following Libya. I said you must be joking and nearly walked out.'
Sir David flew back to New York in the Exxon plane, with Jamieson and McCloy, and told them his suspicions of Socal and Texaco; he thought the game was up. Shell stuck it out for a few weeks, but soon Socal and Texaco did cave in, on terms very similar to Oxy's. Their colleagues suspected that they were not averse to putting up the price to undermine the independents: it was anyway Aramco they cared about, far more than Libya. The surrender by the two sisters was more significant than Hammer's; and the others soon followed. Sir David and his board decided that 'continued resistance, and consequent isolation, became pointless'. The Libyans had decisively won the first round, and the companies were in visible disarray.
The demands for higher prices were now rapidly spread beyond Libya, with the 'leapfrog' effect which the oilmen had always dreaded. The frog leapt to Iraq, Algeria, Kuwait and Iran, which all quickly claimed an increased tax rate of fifty-five percent. And in December 9, 1970 the members of OPEC met in Caracas in a mood of new militancy. As one OPEC official later put it: 'The Libyan success was an embarrassment to other OPEC countries. It rendered further silence almost impossible.' (Abdul Amir Kubbah: OPEC Past and Present, Vienna, September 1974, p. 54.) The more radical members saw the Libyan tactics with the technique of the cut-off as preparing the way to new victories.
At the same time there were now the first signs since the formation of OPEC of a world shortage of oil. OPEC's report saw 1970 as a turning-point, with the buyer's market turning to a seller's market. What the moderate leaders of OPEC had failed to achieve in ten years, the tactics of the wild revolutionaries of Libya were apparently achieving in a few months. At Caracas it was decided that there was now a 'change of circumstances' as a result of the market situation, which justified revising agreements: and a new resolution was adopted, declaring 55 percent as the minimum tax rate on profits, advocating higher posted prices, and eliminating discounts for companies. OPEC also resolved on 'concerted and simultaneous action', and proposed a new round of negotiations with the companies in Teheran in the New Year. But even these proposals were not militant enough for the Libyans, and soon after Caracas, the frog leapt again: Libya demanded another fifty cents a barrel, with retroactive claims and an extra twenty-five cents for 'reinvestment requirement'.
The avalanche was now rolling. But in the meantime some of the oilmen were trying again to form a barrier against it. Dr. Hammer, realising that his own capitulation had begun the retreat, was in touch with Sir David, to explain his predicament (it was Hammer's habit to ring up his fellow oilmen from California, unaware that he was waking them up in the middle of the night). At the end of 1970 he asked Sir David whether Shell would be able to help out the independents with a 'safety-net' in the next showdown (as he had asked Jamieson six months before). Sir David wasn't sure about the legal aspects, but promised that if the rest of the industry agreed to a plan, Shell would join in. After observing the escalating demands from Caracas and Tripoli, Sir David was convinced that this was the last chance for bold action. He wrote a 'New Year Letter' to all the oil companies concerned with Libya, proposing a meeting to discuss a joint policy and suggesting they should all decline to deal with the producers except on a total, global basis.
As a result on January 11, 1971, the representatives of twenty-three oil companies assembled in New York in the lush offices of John McCloy. All seven sisters were represented, as were the leading independents, CFP, theJapanese Arabian Oil Company, the Belgium Petrofina and the German Elverath. The immediate problem was the anti-trust laws, on which McCloy was expert, and he was soon able to show his influence. In his anteroom, decorated with signed photographs of every past President since Roosevelt, were waiting two men from Washington. One was Jim Akins from the State Department, the other was Dudley Chapman from the anti-trust division: and McCloy explained that they would inspect any agreement and prepare for a clearance from theJustice Department. Over the next three days, the company executives continued meeting in New York -- in McCloy's office, in the Mobil skyscraper in 42nd Street, in the heavy palazzo of the University Club (which since the first Rockefeller joined it, has been a haven for oilmen) -- while the government men waited to refer drafts of their agreement back to Washington.
It was the collaboration between government and companies for which McCloy had been holding himself in readiness for ten years. His justification was persuasive, for the oil companies were now up against a more formidable potential cartel than themselves. As he put it: 'the idea that you can't confront a highly organised cartel of sovereign states is rather silly.' (Interview with author: September 1974.) But the collaboration marked a total reversal of the ostensible principles of anti-trust. Now (as in Iran in 1954) anti-trust appeared as a luxury which could be dispensed with in time of crisis. And more important, the collaboration assumed that OPEC could only be dealt with by confrontation. The separation of interests which had begun in 1960 had now developed into a full-scale clash between two armies.The 'Poisoned Letter'
The oilmen now had two aims before the Teheran meeting: the first was to write a joint letter to OPEC, proclaiming their common front. The second was to sign a 'safety net agreement' to help each other out, in case they were again picked out one by one. The letter was finally approved in the middle of the night in the Mobil headquarters, and signed by the representatives of twenty-three companies taking part. The letter marked a remarkable reversal from the companies' first attitude to OPEC ten years ago. Then, they were refusing to recognise its existence; now, they were insisting that it must be effective and binding on all its members. In confronting each other, the two cartels were building each other up.
The letter began mildly enough with the words: 'We wish to place before OPEC and its member countries the following proposal', but it came quickly to the point: 'we have concluded that we cannot further negotiate the development of claims by member countries of OPEC on any other basis than one which reaches a settlement simultaneously with all producing governments.'
This accomplished, the companies then discussed the terms of the safety net, and prepared the 'Libyan Producers' agreement -- a document which was kept secret for the following three years. (It was only eventually released under strong protest from the State Department: see Multinational Hearings: Part 5, p. 100.) Each party promised not to make any agreement with the Libyan government without the assent of the others; and if the Libyan government ordered one to cut back, all the others would share the cutback in specified proportions. John McCloy had obtained Washington's approval in the form of a temporary 'business review letter' from the head of the anti-trust division, Richard McLaren. It was not (McCloy insisted) the same as a waiver; it was 'pretty left-handed'. But in effect it guaranteed that the justice Department would not interfere with the collaboration. For McLaren, who at this time appeared to be embarking on an anti-trust crusade, notably against ITT, this was a striking concession to the oil companies.
McCloy had also taken a new diplomatic initiative. On January 15 he again went to Washington together with several heads of the oil companies to visit the Secretary of State, William Rogers, on the eighth floor of the State Department. The other diplomats present included Alexis Johnson, Jim Akins and Jack Irwin (now U.S. Ambassador in Paris), a former lawyer with Sullivan and Cromwell, who had just joined the Department. McCloy explained that, in addition to the message to OPEC and the safety-net agreement, 'it would be wise if the government could enter into this thing and get the heads of the countries involved to moderate their demands'.
The oilmen suggested that the State Department might send a diplomat to the Middle East. Secretary Rogers asked who, and someone suggested Jack Irwin. (Irwin was under the impression that McCloy suggested him, but McCloy denied it; in any case the idea apparently originated with the oil companies. See Multinational Hearings: Part 5, pp. 147, 155, 263.) Rogers discussed it with President Nixon the same day, who then gave a personal message through Irwin to the Shah of Iran, the King of Saudi Arabia and the Sheikh of Kuwait, expressing his interest in the Persian Gulf and his concern about oil supplies. The very next day Irwin flew out to the Middle East: 'My mission,' as he explained it, 'was to stress to the leaders of the countries the concern the United States would feel if oil production were cut or halted.'
In the meantime the companies' letter to OPEC members had rapid repercussions. In Libya, the representatives of the two most threatened independents, Oxy and Bunker Hunt, had stormy interviews with the Oil Minister, who alternated threats with enticements to break away from the other oil companies, and harangued them about the 'poisoned letter' to OPEC. But they stood firm. The Bunker Hunt representative, Henry Schuler, was a tough-minded young Princetonian who was convinced that the companies could out-stare the countries, and his boss Bunker was right behind him. Schuler believed that the Libyan bravado was bluff. (Multinational Hearings, 1974: Part 5, pp. 75-101.)
In Iran too the reaction was explosive. The finance minister, Dr. Amouzegar, was now in charge of oil policy, a sophisticated and cosmopolitan diplomat, articulate in several languages, with a disarming humour: he had studied hydraulics at Washington University, and had married a German wife. Dr. Amouzegar immediately protested. A single negotiation, he warned, would be disastrous for the oil companies, for the other OPEC countries could not stop the Libyans making 'crazy demands', and would then be committed to following them. The Libyans would not join the Gulf States, and the Gulf States could not wait. The joint approach was a 'dirty trick' which could lead to the oil from the whole Persian Gulf being shut down.
Two days later Jack Irwin arrived in Iran, at the beginning of his tour, and went to see the Shah, accompanied by the American Ambassador, Douglas MacArthur (the son of the general). The Shah reiterated Amouzegar's arguments. The American diplomats were persuaded with remarkable speed, in view of the strong language of the letter to OPEC which they were supposedly supporting: McCloy suspected that MacArthur was suffering from the ambassadors' ailment of 'localitis', becoming more Persian than the Persians. MacArthur quickly recommended to Secretary Rogers in Washington that the companies should have two separate negotiations.'Beware the Oil Kings'
The day after this setback for the companies, the two sides gathered in Teheran to begin bargaining. OPEC had appointed a formidable trio, all educated in America: Dr. Amouzegar, for Iran; Sheikh Zaki Yamani, the Saudi oil minister; and Saadoun Hammadi, the austere chairman of the Iraq National Oil Company, who had taken his Ph.D. in agricultural economics at Wisconsin University. The companies, on their side, had chosen two chief negotiators: the first was George Piercy, who had recently taken over from Howard Page as the director of Exxon concerned with the Middle East, and who from now on was probably the single most important figure in oil diplomacy. He had shown himself adaptable and conciliatory in dealing with Middle East politics, but he lacked Page's intuitive understanding of the Arab attitudes, and particularly of Yamani; and he was still new at the job. The other was Lord Strathalmond, the son of the former chairman of BP, who had just succeeded to his father's title and was now a managing-director of BP. (He was to be appointed as a director of Burmah Oil in 1975 to help rescue the company after it had asked for government aid.) The second Baron was a much more genial man than his dour father. He had begun as a lawyer, and had made his name in BP by arranging for the tax paid by BP in Kuwait to be exempted from British taxation. He kept racehorses, enjoyed night-life, had a house in Tobago and an American wife. He was on excellent terms with both sides; he enjoyed arguing over gin and caviar with Amouzegar till two in the morning, and he got on very well with 'Groucho', as he called the Kuwaiti oil minister, Atiqi. But he was not the intellectual equal of his opponents, and he freely admitted that Amouzegar had a far finer brain. (BP Shield, 1974.) Some of the Iranians were understandably confused by his arrival, since they associated his name with their bitter negotiations fifteen years before.
They arrived in Teheran at short notice in some confusion, of which the details, as recorded in the cables, have recently been painfully revealed. (See McCloy's testimony in Multinational Hearings: Part 5, p. 62-73.) Piercy, having helped to prepare the letter to OPEC, was surprised by Ambassador McArthur's recommendation, and he cabled back to New York that it would violate the companies' letter. (See cables reproduced in Multinational Hearings, 1974: Part 6, pp. 60-65.) He soon realised that the diplomats had undermined the companies' strategy, and the next day the two negotiators cabled to headquarters: 'it was perfectly clear that Dr. Amouzegar believes he and His Imperial Majesty have convinced American Government in recent discussions of the correctness of their position on a Gulf negotiation coming first, with the result that our negotiating stand on the procedure to be adopted is by no means an easy one.'
The State Department had already hindered rather than helped the companies ('We weren't too impressed' said McCloy), who now had the worst of two worlds. Their common front had first provoked OPEC and then broken in two. In the muddle the Shah was soon able to drive a wedge between the companies and the government, and gave the oil companies a two-day deadline to abandon their global approach. Piercy tried to enlist the support of Yamani, explaining that they had a mutual problem over Libya's preposterous demands, which were not in anyone's interests. Yamani was sympathetic, but said that OPEC could not control the Libyans, and he warned Piercy significantly: 'George, you know the supply situation better than I. You know you cannot take a shutdown.'
Yamani also confirmed to Piercy a rumour that he had already heard: that at the OPEC conference at Caracas, six weeks before, there had been a plan to enforce a world oil embargo to strengthen their demands, which (said Yamani) had the blessing of both the Shah and King Feisal. Piercy said the companies were astounded, and warned Yamani about the effects of an embargo, and 'what it will do to the prestige of these producing countries'. But Yamani explained -- as he was to explain many times later -- 'I don't think you realise the problem in OPEC. I must go along.' (Multinational Hearings: Part 6, p. 71.)
Strathalmond and Piercy cabled in bewilderment now hoping that OPEC, their old enemy, would hold together: 'It is not easy to advise what should be done. If we commence with Gulf negotiations, we must have very firm assurances that stupidities in the Mediterranean will not be reflected here. On the other hand, if we stick firm on the global approach, we cannot but think ... that there will be a complete muddle for many months to come. Somehow we feel the former will in the end be inevitable.'
In New York, in the meantime, 'the Chiefs' of the companies were assembling daily, usually in the Mobil offices by Grand Central Station, still hoping that a common front could hold together. With them periodically was John McCloy, now playing a double role; being both the companies' lawyer and the agent of the Justice Department to 'monitor' the discussions to make sure that they did not connive beyond their agreement.
At the same time in London senior executives were assembling for the new committee formed as a result of the joint agreement, called The London Policy Group, or LPG. They met at the new skyscraper of BP, Britannic House, and American oilmen were struck by the smooth organisation; it was like a peace conference of diplomats. Through the thickly carpeted foyer with its models of tankers, past an anteroom full of refreshments and handouts, they entered the great BP conference room in the basement with a row of fifty black leather chairs facing the tables with another row of chairs behind for advisers.
It was a gathering of oilmen unique in the history of the industry. (I am indebted to an eyewitness for the following description.) At the head was the veteran Joe Addison, the chairman, just retiring as head of the Iranian Oil Participants, with beside him Bill Jackson from McCloy's office. On the right were the American companies, headed by Exxon, Mobil and Texaco, going down to Occidental at the end. On the left was Shell, followed by BP, Marathon, Gelsenburg, Hispanoil and CFP. BP and Shell, untroubled by past memories of anti-trust, dominated the meetings with their quiet assurance and copious information; when for instance the Americans were worried that OPEC might be planning changes in their currency demands, Shell were able to reassure them that their men had been watching the OPEC offices in Vienna: no monetary experts had come in, and no OPEC economists had gone out. There were no diplomats present, but Jim Akins was in London and kept himself informed.
The assembly included some of the best brains in the oil business -- Tavoulareas of Mobil, far more incisive than his American colleagues; Jean Duroc Danner, the brilliant director of CFP; David Steel, the lawyer who was heir-apparent of BP. George Piercy of Exxon arrived with a retinue of experts worthy of a summit conference. Laurence Folmar of Texaco lived up to his company's dogged reputation. The frictions between the majors, and between them and the independents, were very soon evident, and the independents quickly showed their anxiety. 'Smokey' Shafer of Continental veered between industrial statesmanship and preoccupation with his company's dependence on Libya. George Williamson, the brash young representative of Oxy, faithfully reflected the toughness of Dr. Hammer. It was very clear that the companies did not altogether trust each other, with some reason. In later London meetings the mood was not improved by the discovery that the Libyan ministers, Jalloud and Mabruk, appeared to have full knowledge of the terms of reference of the company negotiators. Someone in the room, it seemed, had been leaking.
For three weeks confused cables passed between the four bases (Teheran, London, New York, later Tripoli) and executives flew across the Atlantic and the Mediterranean. But the cross-purposes became still more apparent. At the first London meeting, the oil companies had already backed down from their global approach without actually admitting it. (It has never been the intention that the individual negotiations of the several companies with the several governments [said the agenda for January 20 in stately prose] should be carried out to the last detail by a central, and therefore monstrous, overall negotiation (though this was the implication of their letter to OPEC).) The independents, led by Schuler of Bunker Hunt, protested at the climb-down, but did not use their veto. The meeting concluded that 'we would not exclude that separate (but necessarily connected) discussions could be held initially with groups comprising fewer than all OPEC members'. But the phrase 'necessarily connected', as Schuler complained, was a moving target; 'it kept changing its significance as we encountered one round of resistance after another.' (Multinational Hearings: Part 5, p. 132.)
The London Policy Group now drafted a new letter to OPEC, including the possibility of separate-but-necessarily-connected discussions, and cabled it to Strathalmond and Piercy, in Teheran. Dr. Amouzegar described it as a 'poor lawyers effort', and Strathalmond was inclined to agree. Amouzegar insisted that the companies must start negotiating immediately with the Gulf countries.
Piercy flew back to New York, Strathalmond flew to London, and the two sides exchanged intercontinental missiles. In Teheran the Shah, now in his element, gave a press conference for two-and-a-half hours attacking the oil companies for enlisting the support of their governments -- 'a precise example of what is called economic imperialism'. He threatened to remove the companies altogether: 'the conditions of the year 1951 do not exist anymore. No-one in Iran is cuddled under a blanket or has shut himself in a barricaded room.' But he also gave his fellow-members of OPEC a pregnant warning: 'if the oil producing countries suffer even the smallest defeat, that would be the end of OPEC. And then, nations will not dare to gather together and to rise against these giants.' He recalled how he had once been told: 'Beware the Oil Kings and what they might do.' But now, he made clear, the companies had lost their old power.
In New York, McCloy was worried by the apparent retreat. He took a tougher line than any of his clients, and while they explained to him that it was their money that was at stake, he insisted that if the producing governments held together, the companies must hold together too. (Interview with author.) Moreover the anti-trust chief, McLaren, warned McCloy that his anti-trust clearance only related to the original message to OPEC, insisting on a single negotiation. In the meantime the U.S. government conceived a special meeting of OECD in Paris where the consuming nations made clear that they were in no mood to resist higher prices.
But the oilmen were now alarmed that the Gulf countries might take unilateral action, and they clung to the hope of 'separate-but-necessarily-connected'. They took refuge in a new notion, that the Gulf settlement could be a 'hinge' for a settlement in Libya, with no leap-frogging between them. So they agreed to split into two teams: one to stay in Teheran, led by Strathalmond, to treat with the Gulf states; the other, led by George Piercy, to go to Tripoli to negotiate with the Mediterranean states, led by Libya.
In Teheran on January 28, Strathalmond at last began the formal negotiations; the Gulf countries had now set a five-day deadline. Strathalmond proposed the companies offer, including an increase in the posted price of $0.15 per barrel, and allowances for inflation: Dr. Amouzegar demanded an extra $0.54 a barrel, and a much higher inflation factor. The producing countries threatened a world-wide shutdown and the Libyans refused to negotiate in Tripoli until the Teheran terms were agreed. The team returned to London to consult.
The London Policy Group now discussed enlisting their governments' support; but having consulted with the 'Chiefs' in New York, they decided instead to put their faith in assurances from OPEC. Henry Schuler was horrified by the retreat, and at a dinner on January 30 he argued his case hotly, backed up by his colleague, Norman Rooney, who burst out: 'You're selling us down the river!' Next day he even talked on the telephone to the chiefs in New York, at the invitation of Jamieson of Exxon, and protested that the retreat would destroy the companies' credibility on all sides. But only the German Gelsenburg supported him (Multinational Hearings: Part 5, p. 135); and reluctantly he gave in, while putting his opinion on record. As he put it later: 'the OPEC countries were confident of their ability to face-down the oil companies ... and the companies had reverted to an attitude of narrow self-interest.'
The companies' ineffectual contacts with governments now provided useful ammunition for OPEC. On January 30 the LPG gave details of proposed terms, in a cable sent through the Foreign Office in London to the British Embassy in Teheran, which thus routinely carried the signature of Sir Alec Douglas-Home. But a public relations man left a copy of it on a table, and the text appeared in full in the Teheran morning papers, to the intense embarrassment of the companies. Sir Alec's signature was removed, but Dr. Amouzegar made the most of it in private, commenting that if the censorship were removed, it would become clear that the British government was running the negotiations.
The deadline expired on February 2, and negotiations were broken off. OPEC then held its own conference, ending with a menacing resolution that each country would legislate new terms if the companies did not accept by February 15, and would embargo any country which did not accept the terms. The companies faced a simple choice: settle, or be settled.
But the majors were desperate to avoid unilateral action, or nationalisation. The team returned to Teheran, where the Shah was now less menacing, but still firm: 'all the oil producing countries know that they are cheated,' he told the BBC, 'otherwise you would not have the common front ... the all-powerful six or seven sisters have got to open their eyes, and see that they're living in 1971, and not in 1948 or 9.'
On St. Valentine's Day, February 14, a day engraved.in the memory of the oil industry, the Teheran agreement was signed. It allowed for an extra $0.30 on the posted price, escalating to $0.50 by 1975: a minuscule increase compared to what happened later, but regarded at the time as almost ruinous. The Shah pledged that there would be no leap-frogging, but the agreement specifically excluded any commitment to oil prices in the Mediterranean. The 'hinge' was either broken or, worse still, the door might now swing back again the wrong way.
McCloy insisted that it was a kind of victory, justifying the combined action. He told McLaren in a long letter in July: 'while the cost of settlement was extremely high, the companies by virtue of their common stand were able to resist the joint threats of OPEC ...' But many of the oilmen believed that the balance had now turned. The Oil Kings were no longer the companies, but the countries.The House of Cards
Four days after the Teheran agreement, talks began in Tripoli. The Libyans were determined not to face the companies en bloc. George Piercy of Exxon had arrived three weeks earlier to lead the companies' team, but the Libyans ignored him, and were determined to deal with the companies one by one. The Libyans were backed up by all the Mediterranean oil countries, Algeria, Iraq, and Saudi Arabia, who soon threatened a Mediterranean embargo if the companies did not agree with Libya's terms. Two of the countries, Iraq and Saudi Arabia, were also Gulf producers: the Saudis, who had earlier been friendly to the companies, were now worried by the danger of their pipeline being blown up by Palestinian guerrillas if they did not join the embargo. The enmity to Israel was adding to the unity.
The Libyan team was headed by the fiery Major Abdul Salaam Jalloud, translated by the veteran diplomat, Ali Mabruk. The Libyans, they pointed out, had survived for 5,000 years without oil, and could quite well do without it, but the companies couldn't. They invited the company representatives, one by one, to negotiate, which meant long waiting followed by insults and speechmaking. When the representatives of Socal and Texaco came to see them with their offers, they looked at them and then threw them to the floor: the oilmen meekly picked them up -- a symbolic obeisance from the terrible twins. There was now a visible divergence between the majors, whose main interest was outside Libya, and the independents who desperately needed to keep their Libyan oil cheap. Many independents suspected that the majors would not be too worried to see them suffer.
By March 1971 the companies agreed on a figure of $3.30 per barrel for the Libyan posted price -- an increase of 76 cents, together with other fringe benefits. The Mediterranean oil ministers insisted on $3.75, and threatened to cut off all supplies. OPEC made a display of solidarity: the Syrian deputy prime minister flew to Tripoli, Nigeria said it would join OPEC, and eventually Yamani of Saudi Arabia flew into Libya.
The Libyan ministers, Jalloud and Mabruk, at last asked the German representative of Gelsenburg, Enno Schubert, to negotiate on behalf of all the companies, presumably expecting that a German would feel specially dependent on Libya. Schubert asked to be joined by the Mobil man, Andrew Ensor, a patient ex-diplomat with a long experience of oil policies. The two then spent seven hours with the two Libyans in a marathon haggle, with Ensor entering into the spirit of the game, until finally they narrowed down to two cents, in a classic dialogue:
Mabruk: The Major (Jalloud) really appreciates your putting your cards on the table.
Ensor: That's where they are, all right. It's most frustrating to be only two cents apart -- one permanent, one temporary.
Jalloud: Well, I will move to my final final final. I may be killed but I will make both cents temporary.
Ensor: [after further pause] Major, you have been extraordinarily accommodating. You know our situation. We are already 1-1/2 cents beyond what we have. All the same, you have been so helpful that we must make one last effort to close the gap. If you can, here and now split the difference at $3.29 we will. I can only get fired once. If I would have been fired at 1.5 cents, I might as well risk that for 2.5 cents.
Jalloud: You have been very frank. I will be, too. I absolutely cannot go below $3.30. I told the Revolutionary Council we would get $3.45 but I can persuade them it is necessary to go below that, but absolutely not below $3.30. You must understand this is psychological. $3.29 sounds much lower than $3.30. So, I appreciate your offer but I cannot accept it. I would be killed.
Ensor: That is too bad, but I do understand. I must withdraw the offer and we remain 2 cents apart on temporary. If you could agree to a recess of an hour or so, we would recommend it. We shall tell them how hard you have tried to accommodate us and we should hope to come back with the two cents.
Jalloud: Very well. To go lower would be prison, at least for me ...They adjourned for food, then went on till one in the morning. They agreed on the posted price of $3.30, with premiums bringing it up to $3.45.
On April 2, six weeks after the Teheran agreement, the Libyan government signed the five-year Tripoli agreement with the fifteen companies: agreements with Nigeria, Iraq and Saudi Arabia (characteristically the last) followed in the subsequent weeks.
The two agreements in Teheran and Tripoli were meant to hold good for five years, until 1976. They survived for two years, but their weakness was apparent from the start. The Shah was furious when he heard the Libyan terms, realising that he, too, could have got more, and he soon obtained an extra premium for port costs; the door was swinging back again already.
The companies had revealed at Teheran and Tripoli their fundamental weakness, that they could not collaborate either with each other, or with their governments. The collapsed common front had underlined their disability. OPEC had called their bluff and found a new confidence: as one Shell director put it 'they were on the pig's back, and they knew it'. Moreover, there was now a serious possibility of world shortage, or at least a lack of surplus capacity: the projects outside OPEC, in Alaska or the North Sea, were not developing fast enough to satisfy the West's hunger for oil. As Yamani had warned Piercy, the companies could not face a shut-down in one critical country.
The more far-sighted oilmen reallsed that the agreements were very fragile: that they were, in the phrase ofJohn D. Rockefeller 1, 'ropes of sand'. As one delegate put it, Teheran was 'a house of cards', waiting to be blown down by the next high wind: and Walter Levy, the oil consultant in New York, warned that the oil industry was facing a 'hurricane of change'. What the agreements did was to buy time, for both companies and consumer governments to face up to the next crisis. But almost nothing was done. The more public-minded of the sisters, notably Shell and Mobil, did try to warn their governments and their public. But most of them preferred to present themselves as masters of the situation. They were still playing Atlas, with the world on their shoulders; but privately they suspected that it was beyond their control.
NOTE
Some company men saw the fault as lying more seriously with Western governments, who were now more visibly unprepared to take responsibility. This is the comment of one of the company negotiators, on reading this chapter:
Consuming governments preferred to wring their hands, to acknowledge their lack of staff qualities for this sort of negotiation, and their desire to 'keep these matters out of politics', to bicker among themselves and to contemplate sauve qui peut initiatives against one another. The Italians, French and Japanese on the whole saw the weakness of the companies, and planned separate initiatives vis-a-vis OPEC; the Americans, British, Germans and Dutch preferred to hope that the hurricane would pass without causing much more damage.
But none of them saw what was really needed -- solidarity among all of them -- to be a practical policy aim. The French were too anti-American, the British too bemused by their debt to Pompidou, the Italians too much governed by Mattei's legacy of dislike for the seven sisters, and the Japanese too scared of the OPEC reaction for any discussion to get started towards what was needed.
All these governments had no conception of the scale of the disaster to which their lack of initiative and solidarity was exposing them. In this climate, the companies had no sound alternatives; they saw themselves as damned if they did, and damned if they didn't. Certainly, to have publicly drawn attention to their own weakness, as some critics now say they should have done, would not only have been against the grain (no one readily acknowledges he is a broken reed); more important, it could only have hastened the debacle. It would have publicly invited OPEC to drive on further and faster.
Next: 11 - The Crunch
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