October 28, 2005

Saudi Arabs, Americans and Oil

An interesting article.. the question is why isn't this success replicated in other areas of the Saudi economy? And before we gloss over, the inefficiencies within this system are quite large. Work out the math and Aramco's research and development has not kept up with that of western oil companies, who are forced to invest more and be resourceful with their R & D.


Human Resources

In 1949, when Harry Snyder was hired to head up the training of Saudi Arabs for Aramco, James Terry Duce, a company executive in New York, told him what was expected:

Your task at Aramco is to train Saudis as quickly and as soundly as possible to operate the Saudi oil industry. Inevitably, the Saudi Arab Government will eventually nationalize the industry. When that occurs, we want the young Saudis to have attained the proficiency that will enable them to operate the oil industry efficiently and with goodwill toward Aramco. Thus they will be serving their country's best interests and will be protecting the interests of our parent companies.1

This vision of the training mission and its ultimate result might have appeared reasonably attainable if recruits were available from local schools, knew a bit of English, and had some exposure to industrial practices. But those conditions did not exist when the concession agreement was signed in 1933, nor in 1949 as the postwar development of Saudi Arabia's petroleum resources gathered momentum. Tom Barger, a geologist who arrived in Arabia in 1937 and rose to board chairman before retiring in 1969, recalled many years later:

[One] aspect that impressed me was the enormous, inordinate poverty of the inhabitants. As I found out later, nearly everybody was hungry most of the time. . . . There's no education, obviously. The few people who could read and write largely had taught themselves. And there were some very learned men, as a matter of fact, among this population, although most of it was illiterate. They had practically no mechanical skills. We had new employees who couldn't get out of a room because they didn't know how to use a doorknob."2

B. C. Nelson, who served Aramco in employee relations for many years, recalled in 1965 what it had been like for Saudis recruited to Aramco in the early years of the enterprise:

Word spread to the desert and townspeople that in exchange for some physical effort the blue-eyed foreigners would give a man a handful of silver! And so they flocked to Aramco's budding oil centers . . . Imagine the effect on a recruit to be plunged into the mechanical age -- none of which fit in with his prior orientation or culture -- with little or nothing in his experience to help him adjust. The most amazing thing about these times in terms of one small facet of an Industrial Relations problem -- absenteeism-was not that, when they were handed their bag of money, they returned to their tribe with their glad tidings, but rather that they ever came back to work. Industrial discipline was practically unknown, so the amazing thing was that there was only a 75 percent turnover in the first few years.3

On-the-job training began on an informal basis in the 1930s and was soon complemented by rudimentary industrial training in classrooms. But without English, Arabic literacy, and basic arithmetic, there was a limit to the progress Saudis could make in job performance and advancement. In 1944, with operations revived after a wartime suspension, the Jabal (meaning "mountain" or "hill") School was opened in Dhahran.

Surely in 1944 no one expected history to remember the humble Jabal School. Yet the little company school endures as a symbol for development -- not for the development of an oil company, but for the development of a generation of very special young men. Many Saudis were introduced to the mystery of letters and numbers at the Jabal School. Among them were future scholars, successful businessmen and powerful executives.4

The Jabal School was the beginning of an ever-evolving, structured program of job-related training and general education that replicated under corporate auspices what an American might have experienced in public institutions, with grade school-junior high (company classrooms in-Kingdom), high school (assignments abroad, often Lebanon), and college (primarily in U.S. institutions).

One Jabal School pupil learned to type at 100 wpm and expressed an early aspiration to become Aramco's "first Saudi secretary." A Bedouin boy, he had been attracted to Aramco in the first place because of the opportunity for schooling, joining in 1947 at the age of 12. Not long after he returned from the U.S. in 1963 with two degrees, including a Stanford M.S. in geology, his name appeared in a lengthy Wall Street Journal article about Aramco. At the time only one Saudi had risen as high as department manager. Asked this time about his aspirations, the 30-year-old Ali Naimi replied, tongue-in-cheek, "Becoming the first Saudi president of Aramco." That was to transpire in 1984, and in 1995 he was named Saudi Arabia's Minister of Petroleum and Mineral Resources.

Naimi's Jabal School classmates, and many who followed later on increasingly sophisticated training and education tracks in modern facilities, began filling jobs at all levels of the company, gradually populating all of the supervisory and upper management positions in addition to drilling the wells, loading the ships, and manning the refinery and other plants, as they had been doing for many years. Throughout the process it was a matter of qualifying for positions, often an arduous, step-by-step progression, in a system of meritocracy.

In 1983 alone, a record half billion dollars was budgeted for training. In that year, 85 percent of all Saudi employees attended training classes, and the company was sponsoring 1,300 Saudis for university studies.

An Evolving Concession

Two provisions of the original 1933 concession agreement were never questioned or changed. One required the concessionaire to employ Saudi Arabs exclusively if they were qualified and available. The other said the company was not to interfere with administrative, political and religious affairs within Saudi Arabia.

But the terms of the original concession agreement between the Kingdom and Standard Oil Company of California were modified and amended for other reasons, mostly involving money and concession area, at the initiation of one or the other. The first alteration was a supplementary agreement signed in 1939 -- commercial quantities of oil had been discovered the preceding year -- that agreed to various additional payments to the government and extended the concession area to its maximum historic size, about 673,000 square miles, and lengthened the concession period from 60 to 66 years.

But by far the most important of the changes was the so-called 50-50 agreement, under which the company agreed to pay income taxes (the original agreement exempted the company from all taxes):

By this agreement [signed in 1950] the Saudi government's income from Aramco's operations came to be linked primarily not to the number of barrels produced and sold, as before, but rather to how much profit the company made. After 1950, therefore, the government showed increasing interest in the prices charged for oil, the cost of running the business, and the accounting methods used in determining these things . . . At the same time, as the government was increasingly successful in developing a group of technically trained oil experts in its Ministry of Petroleum, it also became more and more interested and involved with the actual operations of the company-such things as exploration programs [and] drilling practices . . . 5

By this time, the California Arabian Standard Oil Company (CASOC), the subsidiary to which the concession was assigned by SOCAL, had brought in three other American majors to what had been renamed in 1944 as the Arabian American Oil Company. The Texas Company (later Texaco) was the first, in 1937, with Standard Oil Company of New Jersey (later Exxon) and Socony-Vacuum (later Mobil) joining in 1948.

The keen interest that the Saudi government now had in how Aramco ran its business on a 50-50 basis was expressed in several ways. The company, at the government's request, moved its headquarters from New York to Dhahran in 1952. The government began auditing Aramco's books on a regular basis. And, in 1959, two Saudis were appointed to Aramco's board of directors.

The first sign that the concession was not going to live for its full 66-year period came in 1968, when Oil Minister Ahmed Zaki Yamani first raised the issue of Saudi "participation" in Aramco, whereby the Kingdom would buy into the company in increments, purchasing for itself rights to certain quantities of oil it would market on its own as well as becoming active in management decisions. The first 25 percent interest was acquired by Saudi Arabia in 1973.

At no time did the drive for Saudi ownership imply that something was broken and needed fixing, although increased pressure was now applied on Aramco to accelerate Saudi hiring and training, and for replacement of Americans with Saudis in top management positions.

Full 100 percent ownership of Aramco was reached in 1980, with beneficial financial effect from 1976. In part to reassure the work force that no drastic change was in store, the government did not displace Aramco with its own national oil company immediately -- waiting a full eight years. As symbolic reinforcement that past and present were being merged seamlessly, the government announced that the new entity created in 1988 was to retain the old acronym and be known as "Saudi Aramco." Now the Saudi company was to invite Americans to join its board of directors as the American company had done with Saudi appointments 30 years earlier. The Americans included Harold Haynes and James Kinnear, the retired heads of Chevron and Texaco respectively.

While during the course of the concession there were on occasion sharply divergent positions on the Aramco and Saudi government sides, few left permanent scars, and only once was it necessary to resort to outside arbitration (when Aramco resisted, successfully, the government's interference with the company's prerogative of determining whose tankers would carry oil exports: the Aristotle Onassis dispute). As former Oil Minister Yamani summed up the relationship: "In a closed room we sit down and quarrel, but finally we reach an agreement."6

Character of the Saudi-American Relationship

The fact that Aramco brought on its own redundancy by training and educating Saudis to eventually displace Americans and other nationals was the most important factor in a concession relationship that was generally amiable. Another factor was the nature of the communication between the two parties. Most routine contacts with the government's municipal, provincial and ministry offices were channeled through the company's Government Relations organization. This insured a uniform approach to presenting and resolving problems. Mutual confidence grew out of the Americans making "courtesy calls," when no pressing business issues were tabled, and by the fact that individual American "relations reps" and individual Saudi counterparts would deal with each other over a period of many years, sometimes rising in their respective hierarchies together.

In addition, Aramco found itself fulfilling the role of a quasi-governmental body in its areas of operations because Saudi Arabia, at least until the late 1950s, lacked the money, expertise and structure to implement and manage public works. By this time there was a dual tension at work. Aramco knew the immense magnitude of the oil reserves embraced by the concession and wanted to preserve its exclusive access to them. Saudi Arabia recognized that Aramco had the expertise and personnel on the ground to deliver infrastructure and services beyond what had been envisioned by either side in the concession agreement. Both sides played on advantage and need.

Pressured by the government and prodded by its Saudi employees, the company embarked on an expensive program to build -- and pay the operating costs for -- public schools in the Eastern Province in a number that would accommodate on an ongoing basis a pupil population equal to the number of children of the company's Saudi employees.

There were other of these "community citizenship" programs undertaken by Aramco in the early years, most of them undoubtedly in its self-interest, such as medical care for employees (and, later, their families); health education in surrounding towns and villages; malaria control; trachoma research; farming operations; loans and technical assistance to local contractors and industry; and support for public utility development.

The early Saudi workforce was made up to a large extent of Bedouins drawn off the desert by wages and opportunity, and in the early days they lived without their families in bachelor housing, which contributed to high turnover. To address this problem, the company introduced a home ownership program that, in addition to subsidized loans and free lots, involved creating housing developments complete with utility lines and streets.

Bonds between Americans and Saudis in general also grew over time, in large part because Aramco was a company in its own right, not a consortium made up of staff seconded from member companies for short terms of one to three years. For Americans hired up until the late 1970s, remaining on the payroll was virtually assured -- poor performance cases and cyclical cutbacks excepted -- and careers of 20 to 30 years in the Kingdom were common. Business decisions were no doubt influenced by this "home town" bias, since Aramco management in Dhahran would be more inclined than the shareholder companies in the U.S. to see the value of deploying capital into non-oil activities such as public school construction. Local management could lobby successfully for "good citizenship" expenditures by arguing that such investments prolonged a lucrative investment. On a personal level, friendships and family associations formed in this environment have lasted into retirement for Saudis, Americans and other nationalities, and there are Saudis and Americans in the company today whose parents and grandparents worked together in Aramco.

The Continuing Saudi-American Energy Industry Partnership

The Saudi-owned and run company is a far more complex and far-flung enterprise than the American-owned Aramco. Aramco explored for oil, drilled wells, processed oil and gas, then filled the oil and product tankers that arrived at its loading ports. Saudi Aramco retains all of those functions, while assuming responsibility for all crude oil, gas and product marketing internationally and domestically. Saudi Aramco bought or built 21 tankers through its Vela International Marine subsidiary and entered into joint venture refining-marketing operations in the U.S., Philippines, South Korea, and Greece.

Saudi Aramco maintains business relationships with all of the former "Aramco Four." Its first joint venture abroad (through its U.S. subsidiary Saudi Refining, Inc.) was in 1988 with Texaco in what was named Star Enterprise, which included refineries and a network of Texaco gasoline stations. (Later, Star gave way to Motiva, a partnership with Shell Oil Company, and Texaco was bought out as a consequence of federal regulations relating to the Texaco-Chevron merger.) Continuing associations with former Aramco shareholders include a joint venture refinery in Yanbu (originally with Mobil, now ExxonMobil), joint ventures for in-Kingdom lubricating oil production and distribution (originally Mobil, now ExxonMobil), and an on-shore concession agreement in the Saudi Arabia-Kuwait Neutral Zone (originally Texaco -- which had bought out Getty -- now ChevronTexaco).

In 1998, Crown Prince Abdullah invited bids on projects to develop the Kingdom's natural gas resources in what amounted to competition with state-owned Aramco, fracturing the long-held assumption in the industry that inviting international oil companies to return to upstream involvement was taboo. ExxonMobil has the lead role in a proposal for developing the South Ghawar Area, potentially a multi-billion dollar project if negotiations move forward successfully.


Much has been written about the sheer size of Saudi Arabia's oil industry, its 100-plus years of oil reserves, and the excess (and costly) oil production capacity that it can deploy to moderate price shocks, as demonstrated during the 1991 Gulf War. Yet the more compelling story is how these assets have come to be managed in such a brief span of time by a previously unindustrialized people.

The definitive study of human resource development across Saudi Arabia up until the mid-1980s was written by Joy Winkie Viola, who was Dean of the Office of International Affairs at Northeastern University when her book was published in 1986.7 In it, she quotes Oil Minister Yamani in his foreward to Aramco's 1982 Annual Report: "Relations between the government of Saudi Arabia and Aramco, like all complex associations, were not without their ups and downs, but wisdom and rationality have always dominated." The Minister went on to recount "the creation [by Aramco] of a Saudi staff who are pioneers in the understanding of the mysteries of the petroleum industry."

Viola went on to observe:

These are not the words of an embittered government, nor are they the angry charges of a government that sought to nationalize its natural resources without compensation to the company that developed them -- as has been the case in more than one developing nation. . . . . As many scholars have attested, the Aramco experience remains the one single collaborative effort and force that cemented the economic foundation of a new nation in the 1930s and vastly contributed to the "special relationship" that still exists between Saudi Arabia and the United States today.

1.  James Terry Duce speaking to Harry Snyder as recounted in Saudi Aramco and Its People: A History of Training, Aramco Services Company, 1998, p. 42.
2.  The Mulligan Papers, Special Collections, Georgetown University Library, "Presentation on International Oil," speech by T.C. Barger, Shreveport, LA, April 1977.
3.  Notes provided by B.C. Nelson to R. L. Norberg.
4.  Saudi Aramco and Its People: A History of Training, p. 19.
5.  Aramco and Its World, Arabian American Oil Company, Washington, D.C., 1980, p. 235.
6.  Ibid.
7.  Human Resource Development in Saudi Arabia: Multinationals and Saudization, International Human Resources Development Corporation, 137 Newbury Street, Boston, MA 02116. Also see Saudi Aramco and Its People: A History of Training, Aramco Services Company, Houston, Texas, 1998.


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