History of Oil Industry in Saudi Arabia

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Saudi Arabia is a leading oil producer and exporter in the world and has approximately one quarter of the known oil deposits in the world. Its oil reserve is estimated at averagely 270 billion barrels. Most of the Saudi Arabia oil reserves are located in the most parts of the Eastern Province. While the largest onshore field is located in Ghawar, the largest offshore filed is located at Safaninya (Jones, 2010). The History of Saudi Arabian oil can be traced back to early 1933 when Standard Oil of California, currently known as Chevron, was granted the right to outlook or prospect for oil reserves in Saudi Arabia by King Abdul-Aziz. This paper examines the history of the oil industry in Saudi Arabia.

Prior to oil discovery in the region

On January 1902, Abdul-Aziz bin Abdulrahman Al-Saud conquered Riyadh, which was occupied by Rashid tribe at the time. Several years later, in early 1913, Abdul-Aziz forces managed to capture Al-Hasa province from the Ottoman Turks. By 1930, Abdul-Aziz had conquered all the provinces in Saudi Arabia, was proclaimed the king of Saudi Arabia in 1932 (Cooper, 2011). His attempt to seek stability in the region was necessary because, without stability, the search for oil reserves would have been extremely cumbersome as was witnessed in the neighboring countries such as Oman and Yemen in their earlier attempt to exploit oil. Prior to early 1938, several factors facilitated the exploration for oil in the country.

Firstly, the Anglo-Persian Oil Company, in 1908, had discovered oil at Masjid-i-Sulaiman in the Northwestern Persia, thus, triggering rumors of potential oil seepage on the Eastern region of Al-Hasa. Secondly, there was high demand for oil throughout the World War I; therefore, it was extremely obvious that the oil would be an important resource in future warfare. Lastly, the commencement of the great depression also played a significant role in search for oil in the country. Before the depression, taxes were the major source of income in Hijaz; however, after depression, the economy of Hijaz was hit significantly and, thus, an alternative source of income was needed in the region (Hertzog, 2010). As a matter of fact, King Abdul-Aziz bin Abdulrahman Al-Saud got extremely serious in his quest to find oil after the onset of Depression.

The Search for Oil in Saudi Arabia

The first search for oil in Saudi Arabia can be traced back to 1923 when King Abdul-Aziz signed a concession with Major Frank Holmes, a mining engineer from New Zealand, allowing Holmes to commence his search for oil deposits in the eastern region of Saudi Arabia. Nevertheless, the quest for oil came to a standstill when the Swiss geologist brought to survey the land revealed that exploitation for oil in Saudi Arabia would be very risky or a pure gamble. This revelation discouraged several major banks that had an interest in financing the exploration from investing in Saudi Arabian oil projects.

In 1925, Holmes negotiated for a concession in Bahrain, as well. He eventually sold the Bahrain Concession to United States based Gulf Oil after failing to interest British firms in the deal. The British did not believe that oil was in the region but were nonetheless opposed to United States activity in the region. Gulf Oil subsequently sold the concession to Standard Oil of California (SOCAL) due to pre-existing agreement in Iraq and Turkey that effectively precluded the gulf oil from working in the region.

Meanwhile, King Abdul-Aziz bin Abdulrahman Al-Saud had dispatched Karl Twitchell, American mining engineer, to assess the possibility of oil deposit in Eastern Arabia. Twitchell, who would later on spend approximately 20 years in Saudi Arabia, discovered a geological structure that indicated the presence of oil deposits in the area and returned immediately to the U.S to report his findings. SOCAL was extremely eager to have its geologists explore the Eastern region of Saudi Arabia. The Anglo-Persian Oil Company was also largely interested in exploring oil in the region. Nevertheless, when the Saudi Arabians demanded 100 thousand dollars in gold for the rights of exploration and extraction, or concession, the Anglo-Persian Oil Company dropped out of contention.

SOCAL, on the other hand, offered 50 thousand dollars in Gold for the concession that was suppose to last for 60 years. Philby, having been paid for his assistance by the SOCAL, largely urged the king to accept the agreement. In addition, King Abdul-Aziz preferred the United States based company over British based company because the United States had no history of colonialism in the region. On May 1933, an agreement, containing anti imperial clause forbidding SOCAL influence on country’s affairs or internal affairs, was initiated (Jordan, 2011). This clause, however, would be difficult for both parties to observe owing to the fluid dynamics of the evolving relations and the needs of the parties. Besides loaning the King 20,000 pounds, the SOCAL was required to pay an annual rental fee of 5000 pounds in Gold. SOCAL managed to create a wholly owned subsidiary known as the California Arab Standard Oil Company (CASOC). This subsidiary was the predecessor to the ARAMCO (Arabian American Oil Company) that was established in early 1944.

Discovery of large oil wells and initial productions

After a period of four months, several Geologists from SOCAL were prospecting, using camels as the means of transport in order transport their equipments. Trucks would arrive several months later. By the begging of 1934, a total of eight experts in oil were already in Saudi Arabia. Two years later, in 1935, the prospectors discovered very promising geological structures. Drilling commenced almost immediately after the discovery. After a series of Unproductive wells in the region, Dammam No. 7 struck oil, eventually producing 1,500 barrels per day.

The first commercial production began in early 1938, and in 1939, the king came to conduct an inspection of the extraction station No. 39 located in Dhahran. The king set up camp of more than 300 tents and remained in the region for several days in celebration of the discovery. On the second quarter of May, the first tanker filled with oil from Saudi Arabia sailed from Ras Tanura. Nevertheless, the Ras Tanura oil terminal, which would later on become Saudi Arabian major oil transfer facility, did not commence operation until in early1945. Half am million barrels of oil were shipped in 1939. Following successful exploration, the oil industry would later on be established in the Kingdom.

This initial discovery of oil in the region, in turn, turned out to be initial of many, in the long run revealing one of the largest sources of oil deposits and reserves in the Middle East region and the world. In regards to the king, revenues from oil became the central source of wealth. Therefore, he no longer relies on taxes from pilgrimages travelling to Mecca. Therefore, this oil discovery would alter not only the oil industry in the region, but also the Middle Eastern political relations.

Modification of the concession and further expansion of oil Industry

In early 1943, SOCAL name was changed to ARAMCO (Arabian American Oil Company). Tandem to this, the King, in conjunction with the newly formed company agreed to make several significant changes to the initial concession. The first modification to the concession gave ARAMCO a greater region to explore or search for oil deposits. In addition, the original contract period was increased by six years. Additionally, the new agreement required ARAMCO to provide the government of Saudi Arabia with free gasoline and kerosene, in tandem with paying higher taxes than originally mandated. Further exploitation would later on expand the oil industry in the country.

Nevertheless, in the early 1950s, the government of Saudi Arabia started to increase its shares of the revenue from various oil productions. By the end of 1950, the two parties had reached an agreement of fifty-fifty profit sharing. On the other hand, significant tax was still levied by the government (Financial Times, 2010). The tax largely increased the revenue of the Saudi Arabia government. This trend continued until in the 1980s when concession area of ARAMCO was officially reduced from 930 thousand square kilometers to 220 thousand square kilometers. In 1988, the Saudi Arabian government officially acquired ARAMCO Company and the company’s name was subsequently changed to Saudi Aramco. Presently, the oil industry in Saudi Arabia is largely dominated by Saudi Aramco.

Conclusion

In conclusion, the Saudi Arabian oil industry has undergone significant evolution from the time the first oil reserve was discovered in the Eastern region to the present day. Today, the value of Saudi Aramco has been estimated to be more than 10 trillion dollars making it the most valuable corporation in the world. Though starting as a small industry, Saudi Arabian oil industry has become a leading oil producer and distributor in the world.

References

Jordan, A. (2011). The making of a modern kingdom: Globalization and change in Saudi Arabia. Long Grove, IL: Waveland Press.

Hertog, S. (2010). Princes, brokers, and bureaucrats: Oil and the state in Saudi Arabia. Ithaca: Cornell University Press.

Cooper, A. S. (2011). The oil kings: How the U.S., Iran, and Saudi Arabia changed the balance of power in the Middle East. New York: Simon & Schuster.

Jones, T. C. (2010). Desert kingdom: How oil and water forged modern Saudi Arabia. Cambridge, Mass: Harvard University Press.

Big Oil, bigger oil. Financial Times. 4 February 2010.

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