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Exxon Background Series t, CO ast,@/,ZOne Cef7ter MIDDLE EAST OIL HD 9576 N36 EBS 8/76 E8 1976 TABLE OF CONTENTS A POSITION OF DOMINANCE .............................................. 2 FUNDAMENTAL CHANGES ................................................ 4 HISTORY OF OPERATIONS ................................................. 7 Iran ............................................. :-- ...... 7 Iraq ......................................................................... 10 Bahrain ..................................................................... 12 Kuwait ...................................................................... 12 C@ Saudi Arabia .............................................................. :.12 Neutral Zone ................................................................ IS Qatar ........................................................................ IS Abu Dhabi .................................................................. 18 ,_U L0 A Libya ....................................................................... 20 Egypt ....................................................................... 21 a C\J U Other Countries ............................................................. 22 @D C-) W co Cf) RECENT DEVELOPMENTS ................................................. 26 44 The Birth of OPEC ........................................................... 26 0 A New Concept of Oil Pricing ............................................... 28 C@, >1 4J CHANGE AND PROGRESS .................................................. 30 Cf> I 0 TAB LES k Middle East Re ion Oil Reserve and Discovery Data ....................... 4 C.) P4 9 Middle East Region Oil Production Data ................................... 7 Middle East Region Geographic and Oil Revenue Data ........... ......... 10 Cost and Profitability of Middle East Oil: 1948-1975 ........................ 15 Number of Oil Companies in The Middle East: 1940-1976 ................... 20 Large Middle East Oil Fields ............................................ 24-25 Le CHARTS 1414-1 % World Distribution of Oil Reserves: January 1, 1976 ........................ 3 Y - 4 4_2 Oil Reserves of Major Producing Countries: January 1, 1976 ............... 5 World Crude Oil Production: 1940-1975 ...................................... 9 Middle East Region-Oil Production: 1940-1975 ............................. 13 Components of Middle East Crude Oil Prices: 1970-1975 ..................... 19 Middle East Region- Govern m ent Take From Oil: 1950-1975 ............... 21 Principal International Oil Movements: 1965 and 1975 ...................... 23 Middle East Region-Oil Production Needed to Balance Anticipated World Demand: 1960-1990 ................................... 27 Discovery of World Crude Oil Reserves: 1930-1990 .......................... 29 Imports From The Middle East and United States Oil Supply: 1960-1990 ... 31 MAP The Middle East Region-Oil Fields and Other Facilities ................. 16-17 A background paper prepared by the Public Affairs Department of Exxon ftb 49 Corporation in cooperation with other Exxon departments and affiliates for Exxon and affiliate use. A POSITION OF DOMINANCE 2 Crude oil reserves are the most impressive assumed greater importance as a source of measure of the importance of the Middle energy supply. By 1965, when production East* Recent published estimates put the re- amounted to 9,700,000 b/d, the Middle East gion's proved reserves at about 400 billion region had replaced the United States as the barrels, 60 percent of the world total (See world's largest producer. In 1973 and 1974, oil Charts 1 and 2 and Table 1) and its produc- production in the Middle East was approxi- tive capacity at nearly half the world total. mately 23,000,000 b/d, about 40 percent of the worldwide total. In 1975, affected by the It is this verv fact of great oil productive ca- great price increases and worldwide reces- pacity, based on vast proved reserves, plus sion, production dropped to about 21,000,000 the probability of huge undiscovered poten- b/d. (See Chart 4) tial, which gives the Middle East region a pre-eminent position in any forecast of f u- It is characteristic of the Middle East oil ture oil supplies. fields that the underground rock formations which form the reservoirs for crude oil have The emergence of the Middle East as the qualities permitting extremely high produc- world's leading oil producing area is a com- tion rates for individual wells. In Iran, for paratively recent development. Oil was dis- instance, the average well produces about covered in Iran in commercial quantities as 12,600 b/d, compared to only 17 b/d in the long ago as 1908, but it was not until after United States. (See Table 2) The United World War 11 that the region assumed its States average is reduced by many small present dominant position as a source of sup- @tstripper" wells, but even in one of the most ply. (See Chart 3) prolific U.S. regions, the Gulf of Mexico off Louisiana, average per-well production is The restoration and subsequent rapid expan- only 150 b/d. In contrast, there are wells in sion of war-shattered industry in Western Iran regularly producing more than 50,000 Europe and Japan after World War 11 led to a b/d. tremendous increase in the demand for pe- troleum. The development of the oil industry Producing costs in the Middle East, exclusive in the Middle East was in direct response to of payments to governments, are relatively that demand. Fields that had been discov- low because of the high productivity of the ered before the war were brought into pro- fields and their proximity to deep water duction quickly, and intensive exploration marine terminals. Despite the great dis- soon uncovered large new oil fields. tances to those places where Middle East oil is used, the construction of larger and larger From a production rate of 700,000 barrels a tankers has reduced transportation costs in day (b/d), or less than one-tenth of the recent years. world's output in 1946, the region steadily The industrialized world, particularly West- ern Europe and Japan, is heavily dependent *The term "Middle East" in this report refers to the upon oil from the Middle East to fill its en- countries surrounding the Gulf (the "Persian Gulf;'as it ergy needs. The United States, which for is known in Western countries and Iran, but in Arab years has obtained the bulk of its oil imports countries called the "Arabian Gulf"), plus Egypt and Libya. from Canada and Venezuela, now, too, gets an important-and growing-share from the Middle East. As recently as 1973, Canada and Venezuela together supplied about 40 percent of U.S. crude and product imports while the Middle East provided about 15 per- cent. By the third quarter of 1975, the two CHART I 3 WORL; +, hrNI, RITE-S I RE-SERVU.TS" NORTH AMERICA OF"GII ry SOUTH AMERICA as --b anuary, L, 19-76v- EUROPE COMMUNIST COUNTRIES @...,WoRLDWOETOTAL OTHER ASIA/ PACIFIC @656,61L`00u`, OTHER AFRICA BA@kL& s MIDDLE EAST REGION M . .. ...... ... W Source@ Adapted trom The Oil & Gas Journal regions were about even, Canada's and Ven- The Arab oil embargo during the winter of ezuela@s share having f allen-and the Middle 1973-1974, and the fourfold increase in oil East's having risen-to about 25 percent of a prices imposed by the Organization of Petro- relatively unchanged imports rate of 6 mil- leum Exporting Countries (OPEC), served to lion b/d focus attention on the extent to which the world was becoming dependent upon sup- *Calculated from U.S. Bureau of Mines statistics, these plies of oil from the Middle East. The em- data include only direct imports. They understate U.S. bargo was brought on by the Arab-Israeli reliance on the Middle East because indeterminate vol- war of October 1973, and tensions still exist. umes of products, credited to Caribbean countries It seems almost inevitable that the depen- where they were refined, were made from Middle East crudes. (During this period, Saudi Arabia's share of U.S. dence of energy consuming countries on oil imports rose from 8 to 11 percent, placing it third be- from the Middle East will grow rather than hind Canada, down from 21 to 14 percent, and Nigeria, diminish, with the result that political devel- up from 7 to 12 percent. Venezuela, which had been sec- ond in 1973, fell to fourth as its share dropped from IS opments in that region could have an in- to 10 percent.) creasingly profound impact on world energy supplies. FUNDAMENTAL CHANGES 4 Oil production is the preponderant source of As awareness of the economic significance of the Middle East governments' total reve- petroleum, their principal natural resource, nues-about 75 percent in Iran, and more has grown, governments of the Middle East than 90 percent in Saudi Arabia, Kuwait, have introduced measures aimed at obtain- and several others. (See Table 3) ing the greatest possible benefit from it, now and in the future. They also have devel- In addition to direct government revenues oped an increasing interest in having a from oil operations, the economies of the greater working knowledge of the opera- producing countries derive significant bene- tions of the oil industry. The consequence of fits from oil-related activities, such as pur- these trends is that the industry is operating chases of goods and services from local mer- in the Middle East today under business con- chants and contractors by oil companies and ditions that differ sharply from those of the their employees, and the community devel- past. opment programs that the companies conduct. TABLE 1 MIDDLE EAST REGION OIL RESERVE AND DISCOVERY DATA (Billions of barrels) Cumulative Total Discoveries: Oil Produced Estimated Oil Reserves (Reserves +Cum. Prodn.) Country As of 12131175' 1950" 19653 1975 3 12131175 BAHRAIN 0.6 0.3 0.2 0.3 0.9 IRAN 21.8 13.0 40.0 64.5 86.3 IRAQ 10.6 8.7 25.0 34.3 44.9 KUWAIT* 16.6 15.0 68.7 71.2 87.8 OMAN 0.9 - 0.5 5.9 6.8 QATAR 2.4 1.0 3.0 5.9 8.3 SAUDI ARABIA* 25.6 10.0 66.2 151.8 177.4 UNITED ARAB EMIRATES 3.7 - 10.0 32.2 35.9 TOTAL GULF AREA 82.2 48.0 213.6 366.1 448.3 EGYPT 1.2 0.2 2.0 3.9 5.1 LIBYA 9.0 - 10.0 26.1 35.1 TOTAL REGION 92.4 48.2 225.6 396.1 488.5 UNITED STATES 112.1 25.3 31.4 33.0 145.1 *Includes 1/2 of Neutral Zone 'Adapted from The Oil & Gas Journal 2World Oil 'The Oil & Gas Journal Fundamental changes have occurred in the The original Middle East oil exploration and 5 relationships between oil-producing coun- production concession agreements contained tries, the international oil companies, and provisions that the governments were to re- the consuming countries-and further ceive from the companies an agreed fixed change seems inevitable. payment for each barrel of oil produced. In CHART2 PROVED CRUDE OIL RESERVES OF MIDDLE EAST NATIONS Comparison with Other Principal Oil Producing Nations As Of January 1, 1976 Middle East Region Billions of Barrels O.P.E.C. Member V '5 :n"' A" n-f" Z x", 21;1`:"@'@ z" "'v Mf; 0z' t Z' a :Ae@ K",- X z", "M .. . . . . A"' ,N "5 n, 32 2, z ta", Z 0 U) < < < < 2 < 0 < < LU z ir F_ < < Ld Uj -1 0 Z7,5 L) F C/5 cc LLI - q < z < CL < < < LLI LLI X W < 3: C) F- F- (5 z LLJ Z DC N 0 < N C) Lij @,20 2 < D U) z Lu z 0 < C) _j Lu z < 0 z < t: LU Cc$ D LU LU C' < F- Z > LLI p U) :D LU z ca Source: The Oil& Gas Journal 6 the early 1950s, that concept was changed, Perhaps the most fundamental change of all and in most producing countries profits from has been the manner in which crude oil the sale of the oil thereafter were shared prices are determined. Until 1973, free-mar- 50/50 by the companies and the host govern- ket forces were the key element in determi- ments. (See Table 4) nation of price levels; they reflected changes in supply and demand as well as changes in In the early 1970s, after two decades of rela- costs. When producing governments wanted tive stability in royalties, taxes and oil to change the bases for determining their prices, conditions became ripe for OPEC to take in order to raise their revenues from oil, begin to assert its underlying strength. such changes were negotiated with the com- Following negotiations in Tehran, Iran, be- panies. Today, however, these governments tween the OPEC governments and the oil establish the price of oil unilaterally at peri- companies, what was to be a five-year agree- odic meetings of OPEC. On October 1, 1975, ment was signed in February 1971. It the OPEC nations decreed their most recent increased the posted or "list" price of oil, increase-one of 10 percent, which brought raised tax rates, and boosted the govern- the price of a barrel of Arab Light Crude to ment take for each barrel by more than $11.51 or 27.4 cents per gallon. In 1970, the one-third. price of this same oil was about $1.40 per barrel, or 3.3 cents per gallon. (In May 1976, In September 1971 OPEC directed its OPEC met again to consider oil prices, but did members to "establish negotiations with the not raise them.) oil companies, either individually or in groups, with a view to achieving effective As a result of the oil price increases, there participation.. " in their operations. Shortly has been a radical change in the level of pro- thereafter, several governments of the Gulf ducing-country revenues. While their per- area raised the issue of participation in own- barrel incomes grew modestly during the ership of oil and in December 1972, the oil 1960s, by the end of 1975 they were approxi- companies concerned reached agreement on mately $11 per barrel-more than ten times this question with representatives of the what they had been in 1970. This, combined governments of Kuwait, Saudi Arabia, Abu with increased volumes of production Dhabi, and Qatar. It provided that the gov- brought total Middle East government oil ernments ultimately would achieve control- revenues in 1975 to about fourteen times the ling ownership interest in the crude oil 1970 level. (See Charts 5 and 6) operations and facilities within their borders. Over a period of years, the level of On the other hand, average oil company government ownership would rise, and the profits from each barrel of Middle East oil companies would purchase a portion of production have been declining over the the governments' share of the oil at a price period. In 1975, they were generally less than reached by mutual agreement. It was 25 cents per barrel, compared to about 35 agreed, also, that the companies would be cents in mid-1973. (See Table 4) compensated for unrecovered investments, with due allowance for inflation that has occurred since the investments were made" HISTORY OF OPERATIONS European countries became interested in Since then, however, over one hundred com- 7 Middle East oil long before the United panies have become active in Middle East oil States did, not only because the area was operations. They have been granted conces- closer to them, but also because in the first sions in Libya, in the offshore regions of sev- half of this century the United States was eral countries, and on relinquished portions more than self-sufficient in oil. Oil companies of the original concession areas. They in- combined their resources in a number of clude 95 independent oil companies and 24 joint ventures or partnerships in order to ex- government oil entities. (See Table 5). plore concessions. This was done to spread exploration risks and costs and to raise the Iran large amounts of capital needed for opera- In Iran, the search began in 1901, when the tions in a region which was, at the time, ex- country was known as Persia. That year tremely remote and presented difficult William D'Arcy, an enterprising British oil operating and living conditions. hunter who had made a fortune in Austra- lian gold mining, received from the ruler a The bulk of oil in the Middle East still is pro- concession that covered most of the country, duced from portions of the original conces- except for five northern provinces. After sion areas which were granted to major Eu- seven years of arduous and fruitless explora- ropean and American oil firms prior to 1940. TABLE2 MIDDLE EAST REGION OIL PRODUCTION DATA Oil Production Average 1975 looo's barrels/day 1975 1000's barrels1day Productive' Spare Producing Daily Avg. Country 1950 1965 1975' Capacity Capacity Oil Wells' Bbl.lWell BAHRAIN 30 60 61 70 9 202 300 IRAN 663 1,887 5,350 6,800 1,450 425 12,600 IRAQ 137 1,351 2,240 3,000 760 156 14,400 KUWAIT 345 2,351 2,055 3,500 1,445 917 2,200 OMAN - - 342 400 58 208 1,600 QATAR 33 230 441 700 259 88 5,000 SAUDI ARABIA 548 2,205 7,075 11,500 4,425 935 7,600 UNITED ARAB EMIRATES - 282 1,695 2,340 645 273 6,200 TOTAL GULF AREA 1,756 8,366 19,259 28,310 9,051 3,204 6,000 EGYPT 45 123 230 250 20 319 700 LIBYA - 1,219 1,488 2,500 1,012 851 1,700 TOTAL REGION 1,801 9,708 20,977 31,060 10,083 4,374 4,800 UNITED STATES 5,407 7,804 8,400 8,800 400 495,000 17 *Includes Y2 of Neutral Zone 'The Oil & Gas Journal 2Platt's Oilgram 8 tion D'Arey and his associates were about to ties and to handle oil operations, but these abandon the search, when they finally dis- almost ground to a halt for lack of overseas covered oil in commercial quantities near the markets. head of the Gulf at Masjid-i-Suleiman. In 1909, the D'Arcy group formed Anglo- After the Mossadeq regime was ousted by Persian Oil Company, Ltd., and the first ship- supporters of Shah Reza Pahlavi in August ments of oil from the Middle East were 1953, the U.S. government asked a group of made in 1912 from Abadan, where a refinery American companies to join a consortium had been completed in the same year. with British, M-ench and Dutch interests. The consortium reached an agreement with In those early years, oil from Persia did not the new Iranian government in October make a major impact on the world petroleum 1954, by which the consortium would conduct scene, although it was used to fuel some operations for, and share revenues with, British naval and merchant ships operating N10C. The original 100 percent British Petro- east of Suez. But with the outbreak of World leum concession ownership was reduced to a War 1, Persian production assumed sudden 40 percent holding in the consortium. Ameri- importance as a secure source of fuel oil for can companies (five majors and a group of the British Navy. At the urging of Sir Win- smaller companies) held another 40 percent, ston Churchill, then First Lord of the Admi- and the remaining 20 percent was divided ralty, the British government in 1914 ac- between Compagnie Francaise des P6troles quired a majority interest in the Anglo- and Royal Dutch Shell. Exxon Corporation Persian Oil Company Production and refin- has held a seven percent interest in the con- ing capacity tripled during the war. sortium since 1954. By 1938, after the country@s name had been Production in Iran soared in the wake of the changed and Anglo-Persian had become the 1954 agreement, and Iran now ranks second Anglo-Iranian Oil Company, production among the major oil-exporting countries in amounted to 215,000 b/d. (The company's the world. (See Chart 4) name again was changed, to British Petro- leum in 1954, in order to reflect its enlarged Since 1957, Nioc has entered into agree- scope of operations.) Military needs became ments with a number of both private and paramount again during World War 11, and government-owned companies of the United producing and refining facilities were en- States, Europe, India and Japan. These larged further with the aid of American agreements granted rights to explore and lend-lease funds. develop uncommitted territory, both onshore and in the Gulf, and were structured from Production in Iran expanded significantly the beginning as either 50/50 joint ventures after the conclusion of World War 11, rising with N10C, or with the outside party acting to more than 700,000 b/d at the beginning of as a contractor for N10C. 1951. That was nearly half of all Middle East production at the time. But operations were In July 1973, the Iranian government and disrupted that year by the culmination of a the consortium arrived at a new 20-year prolonged dispute between the Anglo-1ran- agreement to replace that of 1954 under ian Oil Company and the Government of which the consortium had been established. Iran over a revision of concession terms. Under the new agreement, Iran assumed op- erational control of producing areas that it A tentative agreement had been reached had owned since 1954, but which had been earlier, but it was rejected by the Iranian operated by the consortium, and the consor- Majlis (Parliament) led by Premier Mo- tium established Oil Service Company, Iran hammed Mossadeq, and in March 1951, the (OSCO) to act as contractor for exploration Majlis nationalized the company The Na- tional Iranian Oil Company (NIOC) was created to take over the nationalized proper- CHART3 WORLD CRUDE OIL PRODUCTION Millions of Barrels Per Day 1-111`11,f,t@ 1,17IF"T"11,111",q Total World . . . . . . . . . . South America 1.111't@@,"111@@, "Ell.", . . . . . . . . . . . N't Vt tt@ 4@ % p_ North America . .. ....... ..I 5 Total Eastern W Hemisphere 0 Communist Countries 'XI An W 3z @MSlt, Mp4 `av@@, "t"",g N Other Eastern Q`Z"M, n@g Hemisphere @11 Y'10111",@, "Ali %2'11 1,11,11 _71,1_11 Middle East "EM Region 1 *01 IVI ""M N a gap SSW qJ 1940 1945 1950 1955 1960 1965 1970 1975 and producing activities in the agreement net financial consequences for both sides are &W-.1 A, area. The consortium companies were given comparable. However, because of the great 4u exclusive rights to purchase all the crude oil operating and fiscal changes which have produced in this area, except quantities re- occurred since it was written, the companies quired for internal consumption and for ex- are seeking to modify the 1973 agreement. port by N10C. Although the provisions of the 1973 agreement differ in form from partici- Iran also exports large quantities of natural pation agreements between oil companies gas. In 1970, a major pipeline system was and other governments in the Gulf area, the completed, designed to transport 800 million TABLE3 MIDDLE EAST REGION GEOGRAPHIC & OIL REVENUE DATA Area: Population: Population Government Revenue OilRevenue: Oil Revenue as square Millions Density per from Oil: Millions $ (est.) $ per capita %of Total Govt. Country miles' 1975 est.' square mile 1950 1965' 19753 1975 Revenue-1975 est. BAHRAIN 230 0.24 1,043 2 17 280 1,170 80 IRAN 636,000 34.35 54 45 522 19,900 580 75 IRAQ 168,000 10.77 64 30 375 7,600 705 85 KUWAIT 7,800 0.99 127 12 671 7,900 7,980 90 OMAN 82,000 0,75 9 - - 900 1,200 95+ QATAR 4,000 0.18 45 1 69 1,800 10,000 95+ SAUDI ARABIA* 873,000 7.01 8 110 655 26,700 3,810 95 UNITED ARAB EMIRATES 32,000 0.66 21 - 33 6,500 9,850 95+ TOTAL GULF AREA 1,803,030 54.95 30 200 2,342 71,580 1,300 - EGYPT 387,000 36.42 94 2 40 700 20 10 LIBYA 680,000 2.35 3 - 371 5,200 2,210 95+ TOTAL REGION 2,870,030 93.72 33 202 2,753 78,080 830 - UNITED STATES 3,615,000 214.30 59 not available 29,000' 135 7 *Includes V2 of Neutral Zone World Almanac and Census data 'Petroleum Economist 'U.S. Treasury Department, Middle East Economic Digest, Exxon estimates 'Federal plus State tax revenues-Exxon estimates cubic feet per day of gas which is produced The oil produced by oSco is about evenly di- in association with oil. Most of this gas is de- vided between light crude, mainly from the livered to the Soviet Union, and the rest Agha Jari and Marun fields, and medium goes to Tehran, the capital, and to other crude, with principal sources in the Gach cities in Iran for industrial and residential Saran and Abwaz fields. All of the crude ex- use. Natural gas liquids, extracted from the ported from the 0sco area is loaded at a sin- gas to prepare it for pipeline delivery, are ex- gle terminal located on Kharg Island in the ported by consortium members. Gulf. Other crudes, as well as products, are exported from terminals at Bandar Mar As of 1975, more than 90 percent of Iran's Shahr, Abadan, and Lavan Island. production came from properties operated for Nioc by osco. The balance was from four Iraq of the newer offshore producing areas in the Competition among rival European entre- Gulf, held by non-consortium companies, preneurs for oil exploration rights in Iraq plus a small amount produced inland by N10C began early in this century After World War 1, itself. During 1975, Iran's production averaged about 5.4 million b/d. the lbrkish Petroleum Company, owned by In 1938, a third company, Basrah Petroleum British, French and Dutch interests and Company (BPC), also owned by the ipc group, formed before the war, began exploration in was granted a concession covering the south- northern Iraq. In the 1920s, the United ern part of Iraq. Basrab Petroleum Company States government urged the British and began production in 1951 from the Zubair FWnch governments to afford American discovery, and later developed the Rumaila companies "equality of commercial opportu- field. nity" in the Middle East. The American ob- jective was to obtain exploration and produc- Relations between oil-producing companies ing rights in Iraq near discoveries that had and the Iraq government became strained in been made in neighboring Iran. the late 1950s. After several years of fruit- less negotiations regarding acreage relin- In October 1927, during the course of the ne- quishment, government participation in gotiations aimed at introducing an Ameri- ownership and other issues, the situation can interest into the company, oil was discov- came to a head in 1961. In December of that ered in what was to become one of the great year, the government expropriated, without oil fields of the world-Kirkuk. This, of compensation, more than 99.5 percent of the course, heightened American interest in the total concession areas held by Iraq Petro- venture, and the following year an agree- leum and its associated companies, leaving ment was concluded under which a group of the companies free to operate only in the five American companies obtained an inter- limited areas where wells then were in ac- est in the Turkish Petroleum Company. tual production. Attempts to settle the dis- The company subsequently was renamed pute by arbitration, as provided in the con- Iraq Petroleum Company (iPC). Three of the cession agreement, were frustrated by the American companies later sold their inter- government's failure to name its arbitrator. ests, leaving Mobil and Exxon holding equal portions of the American share (23.75 per- In July 1965, after two years of negotiations, cent) in IPC. The other shareholders were the companies and Iraq's oil minister, with British Petroleum (23.75 percent), Shell the approval of a ministerial committee set (23.75 percent), Compagnie Fran@aise des up for the purpose, reached a compromise P6troles (23.75 percent) and the Gulbenkian agreement, including provision f or a joint interests (5.0 percent).* company/ government exploration venture in the disputed areas. However, a political Through the succeeding years, im's fields in coup occurred, the new government failed to northern Iraq accounted for the greater part approve the agreement, and negotiations of the country's oil exports. In 1932, Iraq ceased. In 1967, the government assigned to granted a concession for the area west of the the state-owned Iraq National Oil Company Tigris River and north of the thirty-third (iNoc) exclusive rights to the expropriated parallel to a company that subsequently sold acreage. Subsequently, INOC reached an its interest to the owners of ipc. After an ex- agreement with a F@rench government com- tensive exploration effort, oil in commercial pany, ERAP, under which the latter would ex- quantities was discovered at Ain Zalah in plore and develop a portion of the area on a 1939, and later at Butmah. This operating contract basis. company came to be called the Mosul Petro- leum Company (mpc). Calouste S. Gulbenkian, one of the original owners of lbrkish Petroleum, had negotiated with the government of the old Turkish Empire for the concession in Iraq. 12 In June 1972, IPC operations in northern Iraq Oil of California (Socal), struck oil with its were nationalized. In February 1973, a set- first well in 1932. Four years later, Texaco be- tlement was negotiated, and iPC received came, and remains, a half-interest partner in compensation for its properties. At the same Bahrain Petroleum Company. Bahrain's time, the Mosul company interests were re- crude production (about 60,000 b/d) never linquished because the owners were unable has been a major factor in the Middle East to meet the minimum production rate speci- total, but Bahrain Petroleum has constructed fied in the terms of the concession. a large export refinery on the island for pro- cessing both local production and crude oil In October 1973, Iraq began nationalizing delivered by pipeline from Saudi Arabia. portions of Basrah Petroleum Co. Percent- ages corresponding to the interests of Exxon Kuwait and Mobil Oil Corp., the Dutch 60 percent of The Kuwait Oil Company (KOO), owned in Shell's interest, and the 5 percent share held equal share by Gulf Oil Corporation and by Gulbenkian's Participation and Explora- British Petroleum, obtained a concession in tion -Company were successively taken. Kuwait in 1934. The prolific Burgan field These actions closely followed the outbreak was discovered in 1938, but development was of Arab-Israeli hostilities, and were directed suspended before production could begin against companies whose home governments because of World War 11. As soon as the war were considered by Iraq to be supporting ended, development of the field was re- Israel. In December 1975, Iraq reported that sumed, and the first export shipment of it had nationalized the British and French crude oil was made in 1946. interests in BPC. In the 1970s, ownership of the Kuwaiti oil Iraq's production averaged over 2,200,000 fields shifted from KOO to the government. b/d in 1975. In southern Iraq, the Basrah After the Kuwait National Assembly failed Petroleum Company's production averaged to ratify the 1972 participation agreement, about 1,000,000 b/d from the southern por- negotiations with the company led to a re- tion of the Rumaila field. Export shipments vised agreement that was ratified, providing are made from the offshore Khor-al-Amaya for 60 percent government participation in terminal at the northern tip of the Gulf. The KOO, effective January 1, 1974. In 1975, the government began production late in 1972 government acquired a 100 percent interest from the northern portion of the Rumaila in the KOO properties for a reported payment field and in 1975 exported 140,000 b/d of $60 million. through the shallow-draft port of Fao on the Shatt-al-Arab River. There now are seven oil fields in the KOO con- cession, including Burgan, one of the largest In the north, the government company pro- in the world. In 1975, production in Kuwait duced over 1,000,000 b/d, primarily from the averaged 1,800,000 b/d, making it, despite Kirkuk field. This oil is delivered by a 550- its small land area (about the size of New mile pipeline to eastern Mediterranean ter- Jersey), fourth among major exporting coun- minals in Syria and Lebanon, or by a new tries on the Gulf, surpassed only by Saudi 500-mile pipeline recently completed, to Arabia, Iran and Iraq. terminals at Fao and Mina al Bakr. Saudi Arabia Bahrain Although sharing in the ipc ventures in Iraq The discovery of major reserves of oil in Iran and elsewhere in the Gulf gave American and Iraq stimulated exploration elsewhere in companies access to Middle East oil, it served the Middle East, including the island of to limit Exxon's activities in the area for Bahrain, 25 miles off the Gulf coast of Saudi Arabia. The Bahrain Petroleum Company, then a wholly-owned subsidiary of Standard CHART 4 MIDDLE EAST REGION OIL PRODUCTION 13 & CALENDAR OF SIGNIFICANT EVENTS Bohons ol BYrels )1 B@rr,@iS Per Y,@ar Per Da 9 1975 24 Kuwait Oil Company national ized-March Suez Canal re-opened-June Iraq nationalized remainder of B.P.C.-December PAL@L 8- 1974 22 Several governments acquire 60% interest in oil production- March /June Embargoes and production cuts ended-March I BYA 1973 Libya nationalized 51 % of oil properties-September 20 Fourth Arab-Israeli War-October 7 - Arab governments order production cutbacks-October Arab embargoes of U.S.A., Netherlands, etc.-October Iraq nationalized U.S. owners in B.P.C.-October O.P.E.C. quadrupled the price of crude oil-October /January '74 18 1972 Iraq nationalized I.P.C.-June 'KUWA 6 - Several governments acquire 25% interest in oil 3 production effective 1-73-December -16 1971 Tehran Agreement-Governments take role insetting oil prices for the first time-February 14 5 - 1967 Third Arab-Israeli War-June Suez Canal closed by war-June 12 SAM 1961 ARABIA Iraq nationalized 99+q6 of I.P.C., M.P.C., B.P.C. 4- concession areas-December 1960 -10 O.P.E.C. formed-September 1956 L 3- Suez Canal national ized-Ju ly Second Arab-Israeli War-October ___8 1954 IRAQ, Iranian Consortium formed-October Y/ 6 2 1951 Iranian oil fields national ized-March @Z" 1948 -4 Exxon obtained a 30% interest in Aramco-November First Arab-Israeli War-May IRAN. 1945 World War 11 -2 ends-August 0 % -0 1940 1945 1950 1955 1960 1965 1970 1975 14 many years. The reason was that before the bia. Construction proceeded despite the American companies obtained their interest many problems associated with a wartime in the Turkish Petroleum Company, the origi- project nearly half-way around the world nal owners had reached an agreement that from the sources of materials and equip- none of the partners would act indepen- ment. The refinery was placed in operation dently "directly or indirectly in the produc- in the fall of 1945, just as the war was tion ... of crude oil" in the region that ex- ending. tends from what is now Turkey and Iraq to the southernmost extremity of the Arabian In the immediate post-war period, further Peninsula. The objective of this agreement exploration in Saudi Arabia clearly indicated had been to help ensure that only the origi- the huge potential of the area. There also nal companies, which had taken the initia- was a need for a massive infusion of capital, tive to explore in this new and difficult area, men and equipment to develop that poten- would participate in future developments in tial, and to find market outlets to absorb the the vast, unexplored portions of the region. growing production. The two original However, by 1948 this agreement ceased to partners in Aramco were receptive to admit- be in effect. ting other participants in their venture. At the same time, as the post-war demand for The IPC group as a whole competed for con- oil spurted, major international petroleum cession rights in Saudi Arabia. It was outbid companies increasingly felt the need for new by Standard Oil of California (Socal), which sources of crude. By 1948, Exxon and Mobil was not in the IPC group and thus was free to were free to seek an interest in the Aramco act alone. In 1933, King Abdul Aziz ibn Saud venture. Accordingly, they negotiated granted that company a concession covering with Socal and Texaco, and each acquired an a large area in eastern and central Saudi equity interest. Socal, Texaco and Exxon Arabia. This later was extended offshore into then owned 30 percent each, and Mobil 10 the Gulf. Texaco joined Socal's venture in percent. In April 1975, Mobil agreed to in- 1936. In 1938, the company, later to be named crease its ownership of Aramco to 15 percent Arabian American Oil Company (Arameo), over a five-year period. At the end of that made the first important oil discovery in the period, Exxon, Socal and Texaco each are ex- nation, at Dammam. pected to own 281/3 percent. The first Saudi Arabian crude was shipped in Aramco's production increased rapidly, rising May 1939. World War 11 began in September from about 500,000 b/d in 1949 to more than of that year, and Arameos operations grad- 3,000,000 b/d in 1969, and even more rapidly ually came to a halt. Shipping became diffi- since. In 1975, the company's production cult, there were tanker shortages, enemy ac- averaged about 6,800,000 b/d of three major tion made markets inaccessible, and there grades of crude oil: Arabian Light, Arabian was little demand for oil in the Indian Ocean Medium and Arabian Heavy. Of these, Ara- area. Operations continued only to the ex- bian Light crude is by far the most impor- tent needed to supply about 15,000 b/d to the tant. The producing country governments refinery in Bahrain. have agreed that is the "marker" crude oil whose price is the standard to which prices By the autumn of 1943, the United States for other OPEC crudes are related. The princi- government had become concerned that war- pal sources of this oil are the giant Ghawar time petroleum requirements were creating and Abqaiq fields, which together stretch a tremendous drain on American oil fields. north and south for a distance of 170 miles in The government decided to allocate the ma- eastern Saudi Arabia. The Arabian Medium terials needed for a 50,000 b/d refinery at crude comes mainly from the smaller Khur- Ras Tanura on the Gulf coast of Saudi Ara- saniyah field lying along the Gulf shore north of Abqaiq, and an offshore field called Zuluf. Arabian Heavy is produced from the offshore Saf aniya and Manifa fields. Most of TABLE4 COST AND PROFITABILITY OF MIDDLE EAST OIL Historical Data Illustrating Trends Year-End 1948 1951 1960 1970 19731 1974 1975 PARTICIPATION, ROYALTY, TAXES Host Government Share of Production 0% 0 C/o 00/0 0% 250/c 60% 60% Host Government Royalty Rates 2 2 12 1h Vo 12%% 12 1/2 % 20% 2001o Host Government Tax Rates 0% 5 0 clo 5061o 50% 55% 85% 85% PRICES-Dollars per barrel Posted Price (i.e., list price) 2.05 1.75 1.80 1.80 2.90 11.25 12.40 Typical Sales Price 2.05 1.75 1.80 1.40 2.30 10.45 11.50 COSTS-Dollars per barrel Operating Cost (Explor. & Prod.) (.60) (.20) (.20) (.10) (.15) (.15) (.25) Host Government Take' (.25) (.75) (.80) (.95) (1.80) (10.10) (11.00) PROFITS-Dollars per barrel Oil Company Producing Profit Margin 1.20 .80 .80 .35 .35 .20 .25 'June-prior to large price increases in October. 2Many original coricession agreements called for a fixed payment in gold for each ton of oil exported. A to n of oil contains about 7Y2 barrels or 315 gallons. Includes royalties, taxes and other payments, but excludes receipts from sales of govern ment-own ed oil to non-concession holders (third parties). the production is exported as crude oil in petitive with other oil routes and it has only tankers loaded at Ras Tanura. been operating periodically at reduced levels. Utilization of natural gas produced in associ- The 1972 f our-country participation agree- ation with the crude oil is becoming increas- ment provided a 25-percent interest in the C.D. ingly important in Saudi Arabia. Aramco crude oil producing assets of Arameo for the has installed facilities to extract over 300,000 Government of Saudi Arabia. A second 91@4 b/d of liquids from the natural gas. The agreement increased the government's in- =.A Saudi Arabian government has under way terest to 60 percent, effective on January 1, a= huge projects to collect, distribute and utilize 1974, but many important aspects of imple- the gas which is associated with Arameo oil menting this agreement were left for later eg;t production. negotiations. Then, in mid-1974, the govern- ment made known its desire to increase its In 1950, the 30-inch-diameter T@ans-Arabian interest to 100 percent. Since that time Pipeline (Tapline) was completed. It extends Aramco and the government have been ne- from oil fields near the Gulf, across Saudi gotiating the terms of the takeover. While Arabia, Jordan and Syria, to a tanker termi- the final terms have not yet been resolved, it nal at Sidon on the Mediterranean coast in is expected that Aramco will have a role in Lebanon. It was built to reduce transporta- tion costs to Europe by eliminating the long haul around the Arabian Peninsula and through the Suez Canal. However, low tanker rates in 1975 made Tapline shipment uncom- IV 9 1- 7 - J, F W'@ 6- g 7 A t 'q V % rip T % 'Sido.@ E -T I" TUN ISIA f' -Tobruk,,.,,, I SR A El, 4, -.M'ars&e1--B,r.e`gat( Benghazi Zueitina ',SUEZ % Es Sidr j= Nasser (Zelten) 8ANA C a @ir o6', L S U M E\D\ ", Arnal S\ 0 a PIPELIRES Nafoora Augila L I B YA 'R Intisar d"' I ip oa. , 8 Raguba U Bu-Attifel w ha El Morgan e av Gialo Sarir E G Y P T %,Masjid-i-Suleiman @h aft Ke I waz IRAO Marun Paris A Karanj'% badan Agha Jari maila A Ramshir bnclar ach Saran ari'@. ubairrk kc -Bibi Hakimeh, 0 h6hro" IR A IV iin al'-,Kh a Bdkr-'.',,aI m a ya,-,- @, i, rgan ,R g-e-Safid ar' Island Fereidoon Wafra NEUTRA 01 Z N E I f Zu U "M Safaniya @M6 I a-', @Z,KhOrsanlyaih,_- 4 K Bar Abu Hadriya f .&.Sa aN, Fadhili 61,Ras'Tanura, ava L nIsland Qatif Darnnna m B A HI R,A,i,: 6M AN 7, j, M an, Awa11,,,',' Mah'za'm",, S U D A N Abqaiq assar 7J-;, 4@, Khurais F h BUVHinine, Fateh- Q A TTA @R@ k Ghawar U, uam D kh '@',Dqbai 411@0 X U'h 14 R I k 07a bu A P7 h Dhab' Je b -'SAU'D1"A'R'ABIA-' 1-Dha a @U N I TE D Asab u Ha A R X13 Ira EMIRATES OMAN 100, 200 Miles 0 Z@arraia Shaybah Yibal 04fi-elds and facilities based on the @i@i@r-'nat"io'na'l'-Petr"o-l-eu m' E'n-c y-clo'pedia11975- footnote page 2. -'C"A S,P"`iF,,-,,A- U S S R Is'-"t A I"-ej Ain Zalah K rku Lo,T6hrari- i k ,@anias S YR EBANON I R A N -'Baghdad l,R A P 'A F, ANISTAN See inset map 0 J 0 RD N NEUTR ZONE -oo T@,@ @ @, K U-WAl, --k - 0 E ZONE PAKISTAN A'' u ai D - b' b V, Riyadh -"Dh@tbi -,o 44 A N -01 UNITED V ARAB -Mina,al:' EMIRATESI \ah d Fabla-I 01M A S A U Dt A R'A B I A S j3 0 @A @8,1, T'A @@'N P. D. R, ff - -S E-, A: Y E YEMEN M E N A A. R.-,? 'T6rininals-,@ Vain' Q- 'Majar0iffield" 2 S P mcioal Pipelines!,-' c" Refineties N S 0 M-A L I A i"OLiffied-Natural:Gas Plant N te.-,,,.@,Some,@.bpund'ar,.,i@s@ace-notful,ly,@-,,defined,-,, vk ETH 10 P I A, 0 400- Mil es is operating the oil fields for the government, A 60-pereent participation agreement be- and will have access to substantial volumes tween the operating companies and the Gov- of Saudi crude oil. ernment of Qatar became effective in 1974, and the government has expressed its intent Saudi ArabialKuwait Neutral Zone to increase this interest to 100 percent. A disputed area of some 5,700 square miles between Saudi Arabia and Kuwait was Abu Dhabi designated as the Kuwait/Saudi Arabia Abu Dhabi is one of seven Arab States on Neutral Zone in 1922. In 1971, the zone was the southeastern Trucial Coast of the Gulf, divided geographically for administrative joined together in a federation called the purposes, with Kuwait and Saudi Arabia tak- United Arab Emirates. In 1939, the Ruler of ing responsibility for the northern and Abu Dhabi granted a 75-year concession southern portions, respectively. covering all his land area, coastal waters, and islands in the Gulf to the Abu Dhabi Petro- Concessions in the Zone have been granted leum Company (ADPC), owned by the ipc to three different companies, each operating group of companies. independently. Kuwait granted its onshore rights to the American Independent Oil The war in Europe and boundary disputes Company (Aminoil) in 1948, and Saudi Ara- with Saudi Arabia precluded any intensive bia's onshore rights are held in a concession exploration and development efforts until granted in 1949 to the Getty Oil Company. 1950. It was not until 1960 that oil was found The rights to the entire Neutral Zone off- in commercial quantities, and three years shore area were acquired in 1958 from both later exports began. A participation agree- countries by the Arabian Oil Company ment, giving Abu Dhabi a 60-percent inter- (A.O.C.), a Japanese firm. In 1975, A.O.C. pro- est in ADPC, became effective in 1974, and duced approximately 325,000 b/d from the the government, has said it currently has no Hout and Khafji fields. The latter is an ex- desire to increase its share of participation tension of Aramco's Safaniya field. Onshore, above this level. Aminoil and Getty produced 170,000 b/d from the Wafra field. A concession covering offshore rights apart from the islands and coastal waters was Qatar granted in 1953 to Abu Dhabi Marine Areas, Qatar (pronounced like "gutter") occupies a Ltd. (ADMA), a company owned by British Pe- peninsula jutting northward into the Gulf troleum and Compagnie F@raneaise des from its southern coastline. A 75-vear on- P6troles. Oil was discovered in this conces- shore concession was obtained in i935 by sion in 1958 and exports began in 1962. Qatar Petroleum Company (QPC), another in the ipc group of companies. In the 15 years since commercial production was established, output has increased rap- QPC discovered the Dukhan field in 1940 and, idly, and Abu Dhabi ranks fifth among the after a war-imposed delay, began production Middle East's crude exporting countries. in 1949. Output averaged about 175,000 b/d ADPC produced an average of about 900,000 in 1975, but by year-end was nearly 300,000 b/d during 1975 from its onshore acreage. b/d as the oil companies sought to replace This production comes largely from the Bu the oil lost by nationalization in southern Hasa, Asab and Murban fields located east Iraq. and southeast of the marine terminal at Jebel Dhanna. The offshore areas of Qatar are under conces- sion to Shell, and production there from the Idd El Shargi, Maydan-Mahzam and Bul Hanine fields, all discoveries made since 1960, averaged 260,000 b/d in 1975. CHART5 COMPONENTS OF MIDDLE EAST Typical Selling Price 19 Producing Government Revenue CRUDE OIL PRICES AND (Income taxes, Royalties, "Buy-back" oil) MAJOR ACTIONS AFFECTING THEM Average Exploration (USING "ARAB LIGHT" AS AN EXAMPLE) &Production Cost Company Producing Dollars Per Barrel profit-average 12.00 I uu ,,'V ct;N V fA a 0? 3 y 'v, 1000 t' ""td- `60 WIT, ;'jv crfjde@ N N104i ,"f6"r--1'1' r",' 8.00 % @,Vf W, 7.00 TIRT -d" _-4 ;0 6.00 A71 ,@@qp n q A F71,111 1;Th t"""' ... -d 25,9%',@_jn 5.00 @z" R1,4:, AU fin- m Ta" _g Ocl? p r RAVI 4.UU U g, �:q or K if 3 uo 'N K' Q- A h6 200 M Xv, N " Mr. 1.00 V W'v r 0 1970 1971 1972 1973 1974 1975 20 Abu Dhabi Marine Areas, Ltd. (ADMA) pro- When Libya was opened for oil exploration duced over 400,000 b/d during 1975 from two in the 1950s, concessions were acquired by a offshore fields, Zakum and Umm Shaif. The number of American companies that were oil is pumped through underwater pipelines newcomers to overseas operations, as well as to a terminal on Das Island. by major international companies already active in the Middle East. By 1970, interests Another offshore concession is held by Abu in Libyan production were held by 21 compa- Dhabi Oil Company (ADOC), owned by three nies. Among them were Continental, Mara- Japanese companies. It began production thon, Occidental, Amerada Hess, W, R. from the Mubarraz field in 1974, and 1975 Grace, Phillips, and American Oil Company production is estimated to have been about (Amoco), as well as Exxon, Mobil, Socal, Tex- 20,000 b/d. aco, British Petroleum, and Shell. Libya In 1955 and 1956, Exxon was granted conces- In the 1960s, Libya made the dramatic tran- sion rights to almost 38,600 square miles, sition from a nation with few resources to and in 1957, the company drilled the first oil one with major production of oil and gas. discovery well in Libya. With a flow of 500 After reaching a peak of 3,700,000 b/d in b/d, it would have been an attractive com- April 1970, Libya's oil production has de- mercial discovery in many parts of the clined to an average of less than 1,500,000 world, but at a remote desert location on b/d in 1975, largely because of depletion of Libya's western border, 400 miles from the older fields and govern ment-i mposed conser- Mediterranean coast, it was considered too vation measures. small to be commercially viable. By the end of 1958 the oil industry had spent about $100 million in the Libyan search, with nothing to TABLE 5 show for it but a string of dry or non-com- mercial wells. However, in April 1959, after Number of Companies with drilling for 113 days at a location near Bir Active Exploration and/or Zelten in north central Libya, Exxon struck Producing Interests oil in commercial quantities. in the Middle East Region Promising as the Zelten field (now renamed Category Nasser by the government) appeared to be, of Company 1940 1950 1960 1970 1976 it also was remote from any port. The next Major Oil task was to build a pipeline'across the desert, Companies 7 7 7 7 7 as well as the terminal and tanker facilities Independent needed to export Zelten oil. Three years Oil Companies- later, on September 12, 1961, at the newly U.S. constructed port of Marsa el Brega on the Independents 0 10 22 36 46 Mediterranean. Exxon loaded a tanker with Non-U. S. the first oil to be shipped from Libya. Pro- Independents 2 2 9 34 49 duction from Exxon's concessions reached a peak of 670,000 b/d in 1968 and 1969. Government Oil Entities 0 0 3 15 24 Along with the oil, there was associated gas Total 9 19 41 92 126 production. Facilities were constructed to Sources: transport gas 100 miles to the coast by pipe- Multinational Corporations and U.S. Foreign Policy, line, cool it to 2600 below zero Fahrenheit in Hearings before the Subcommittee on Multinational Corporations, U.S. Senate Committee on Foreign order to liquefy it, ship the liquefied gas by Relations, March 28, 1974, p. 345. SOCAL presentation Bulletins of The American Association of Petroleum Geologists Petroleum Economist, June 1976 CHART6 MIDDLE EAST REGION- GOVERNMENT TAKE FROM OIL 21 Dollars Per Barrel Billions ol Dollars 10 8 6 4 2 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 70 80 1975 1974 1973 J@, @i 4@ 4 1972 0, m_@, I Uz- Lt 1971 1970 1969 dk@ 1968 Fiz, 4 'J 1967 6 1 6 96 @@,Ah N 1965 1964 C 1963 t 1962 1961 1 7F-77-7, 1960 - I @ -, I _,@11E, 1959 1958 [Ftece S U_ 4@ It Iver 'q totarmeceil -aarrer-, T 517 77777w,Jp 1956 4vtl com 6dlel Epa Pop% %Ni el%1@0@ -A 1955 .@a rre 101 laxpoftedY_ Wt e I "c'- jI J@ I, t _.iL al 4' 1 r "dl 6_ye 0 1954 j @drs@ r4f, 7, 1953 Y,Y 4 _j ii 950@s' 66'swiddle EgW, 1952 otf: A 4- ,pl so or, j 1951 9 4 4 1950 refrigerated tankers across the Mediterra- Exxon, the nationalization occurred in Sep- nean to Europe, and there to regasify it for tember 1973, when the government took use by customers. The total cost of this proj- over 51 percent of its affiliate's oil field opera- ect was about $400 million, of which Exxon's tions. Some of the companies, including share was about $230 million. The system, Exxon, later worked out agreements for con- started in 1969, has the capacity to supply tinuing operations in existing areas, and for 345 million cubic feet of gas a day to custom- acquiring new acreage, including, for the ers in Spain and Italy, and to produce 25,000 first time, offshore areas in the Mediterra- b/d of natural gas liquids. nean Sea. After a long series of negotiations, during Egypt which the companies attempted to reach Centuries ago, oil seepages at Gebel el Zeit, agreement compatible with the terms near the mouth of the Gulf of Suez, earned agreed upon with other countries, the Libyan that ridge the Roman name Mons Petroleus, government nationalized all or part of each but the first commercial oil well was not of the companies operating there. For drilled until 1909. 22 In 1937, the government provided a great other vessels. After a period of clearing and impetus to exploration by relaxing the reclamation, the canal was reopened on highly restrictive regulations then in force June 5, 1975. (See Chart 7) and many companies, including Exxon, ap- plied for exploration permits. In 1949, after Construction has started on twin 42-inch 12 years of exploration work and the expen- Suez- Medi terran ean (SUMED) pipelines, diture of about $16 million, Exxon discontin- scheduled to have an initial capacity of ued its exploration activities in Egypt when 1,600,000 b/d. VLCCs are to be used to deliver unfavorable legislation was enacted. crude oil to a Gulf of Suez terminus, and the pipelines,are to carry it to other VLCCs at the A decade later, Egypt again sought to en- Mediterranean end. courage foreign oil investment, and in 1963 signed agreements with several foreign oil Other Countries companies. A number of new fields were dis- Since World War 11, discoveries have been covered, but as they were being developed, made and oil production initiated in several several of them came under the control of other parts of the Gulf area. In Oman, on the Israeli occupying forces starting in 1967 and easternmost tip of the Arabian Peninsula, lasting to the end of 1975. In the interim, and about 150 miles inland from the coast, Egypt asked for bids on new exploration oil was discovered in the early 1960s, and acreage in 1973, and Exxon was one of the after construction of a pipeline, production successful contenders, reaching agreement began in 1967. In 1975, output averaged for exploration and possible development of about 340,000 b/d. Among the newer produc- tracts offshore in the Mediterranean near ing areas, Dubai on the Trucial Coast at- the Nile Delta and in the Red Sea. tained an output of 250,000 b/d in 1975 from offshore fields. Dubai is a member of the From a level of about 100,000 b/d in 1966, United Arab Emirates. Another of these, Egyptian production grew to a peak of Sharjah, produces about 40,000 b/d from an 400,000 b/d in 1970 and 1971 (including offshore field discovered in 1972. about 100,000 b/d under Israeli control). The Sinai war caused output to decline to about Refining and Other Activities 250,000 b/d in 1973 and 1974, but by early Although dwarfed by oil producing and ex- 1976, when control of all the Sinai @elds had porting operations, refining and natural gas been returned to Egypt, output had risen processing in the Middle East are above 300,000 b/d. The government expects substantial. that by 1980 Egyptian production will rise to a level of about one million b/d. Refineries in the area can process more than 3,000,000 b/d. Output of the refineries is Egypt's Suez Canal played an important role marketed principally in the Middle East, in for many years in the international oil trade. East Africa, and in Southeast Asia. Until its closure following the 1967 Arab- Israeli hostilities, the canal was a major ar- Increasing use is being made of the gas pro- tery for the shipment of oil from the Middle duced in association with crude oil. In the East to Western Europe and other markets. Gulf area, there are a number of facilities A round-trip voyage from the Gulf to Europe for extracting liquefied petroleum gas and .or North America is about 9,500 miles longer natural gasoline from this gas, and many around Africa's Cape of Good Hope than via more are planned. the Suez Canal. Very Large Crude Carriers (VLCCS), many of which have been built since 1967, cannot transit the canal, but it is eco- nomically attractive for smaller tankers and CHART7 PRINCIPAL INTERNATIONAL OIL MOVEMENTS 23 -fbloolloll,@,' V" '2,!;@r Z@Io 0-0 W A A, T q, A A W-1-WA i 40,11, gggr nfi gp'4 AMU, A,, A, J 4 MR AM. R,Ii@ Y tT; 641 4- v ri IAI 15 ;,o A Of T@Iil U. 1 "JU -iR kiv io Io, 'j,X I-, Uff #Ao 1'*@ F.WV @bf, K-A ", U, A_ E W J5 '4k; V -A 1q, @;Atj AM" fi", W. tit - off "g, FA fj o Ai, X V -@@rg o@ W-w4 y I --%P, vr & ilk- MR&A, A,4`,3, PNE NA 4 .4 -At t' -0 0 0 k 'i 1W 0 @jr Ar WII A W', 164 MA, -- VVP! fi 1.1 -Ot _70 Wlh 67, 5- 11 ff @ 4111@ CAC 'grog, h U W N 'Jig lt 71', @.tg, A-q 5 LU VP -Iqv,;@i-oll 1XI, '73E, t @,j V Mai Dom -MV '40 A 4.1 49, V, 001 jin ory! N g'Wim", A z AN 1,32 R W '? rg n r", N-7 A RM, V dr -4- low -Z i ri, A W- Ao W- dRIWO XW M TY ro' PART saw V:, oy g -11-@, I, ., ,- a o-, "Z@X', o o AIR Exports from the Middle East region expanded rapidly as world leum products moved in international trade. The patterns oil consumption grew. The widths of the arrows in the maps changed significantly when the Suez Canal was closed to above are proportional to the volumes of crude oil and petro- shipping in 1967. TABLE6 24 LARGE MIDDLE EAST OIL FIELDS (Data as of Mid-Year 1975) Source: Adapted from The Oil & Gas Journal, Dec. 29, 1975 Production Date of Oil field Daily Cumulative Number of Oil Gravity Discovery Name Operating Company (1000's b/d) (Million bbl.) Producing Wells *A.Pl. BAHRAIN 1932 Awali Bahrain Pet. Co. 63 580 202 33 EGYPT 1@65 El Morgan* GUPCO (AMOCO/Govt.) 81 457 24 27-32 IRAN 1936 Agha Jari osco (Consortium) 800 6,047 50 34 1958 Ahwaz OSCO 1,052 1,625 42 24-32 1961 Bibi Hakimeh OSCO 310 1,171 22 30 1961 Darius* IPAC 88 342 12 34 1937 Gach Saran OSCO 808 3,612 34 31 1927 Haft Kel OSCO 28 1,676 12 38 1963 Karanj OSCO 195 565 7 34 1963 Marun OSCO 1,152 2,402 37 33 1908 Masjid-i Suleiman Osco 11 1,354 37 40 1964 Paris OSCO 130 635 9 34 1964 Rag-e-Safid OSCO 240 298 14 29 1966 Sassan* LAPCO 179 382 19 34 IRAQ 1927 Kirkuk Iraq Nat'l Oil Co. (formerly Iraq Petroleum Co.) 959 6,757 45 36 1953 Rumaila BPC/INOC 950 2,340 60 34-35 1949 Zubair Basrah Petroleum Co. 200 739 33 34 KUWAIT 1938 Burgan Kuwait Oil Co. NA NA 374 31-32 LIBYA 1959 Amal Mobil 51 493 81 36 1968 Bu-Attifel AGIP 84 117 24 41 1969 Defa Oasis Oil Co. 117 364 60 36 1961 Gialo Oasis Oil Co. 118 1,133 156 36 1967 Intisar A Occidental Pet. Co. 67 515 12 45 1967 Intisar D Occidental Pet. Co. 138 549 18 40 1965 Nafoora-Augila Govt. (formerly Amoseas) 51 533 28 36 1959 Nasser (Zelten) Exxon 90 1,709 130 38 1961 Raguba Exxon 44 ' 418 40 43 1961 Sarir. Govt. (formerly BP/Hunt) 175 857 68 37 1960 Waha Oasis Oil Co. 72 543 46 36 *Offshore or partly offshore TABLE 6 (continued) 25 LARGE MIDDLE EAST OIL FIELDS (Data as of Mid-Year 1975) Source: Adapted from The Oil & Gas Journal, Dec. 29, 1975 Production Date of Oil field Daily Cumulative Number of Oil Gravity Discovery Name Operating Company (1000's b1d) (Million bbl.) Producing Wells *A.Pi. NEUTRAL ZONE 1953 Waf ra Aminoil/Getty 118 883 296 19-24 1961 Khafji*' Arabian Oil Co. 273 1,251 106 28 OMAN 1964 Fahud Pet. Dev. (OMAN) 105 434 76 33 1962 Yibal Pet. Dev. (OMAN) 92 131 65 40 QATAR 1970 Bul Hanine* Shell Co. of Qatar 145 148 6 35 1940 Dukhan Qatar Petroleum Co. 172 1,532 56 41 1963 Maydan Mahzam* Shell Co. of Qatar 122 422 11 38 SAUDI ARABIA 1940 Abqaiq Aramco 763 4,915 60 38 1940 Abu-Hadriyah Aramco 49 307 8 35 1963 Abu-Sa'f ah* Arameo 60 260 14 30 1964 Berri* Arameo 334 792 45 33-38 1938 Dammam Aramco 18 541 18 34' 1948 Ghawar Aramco 4,205 11,638 391 35 1956 Khursaniyah Arameo 55 483 14 31 1945 Qatif * Arameo 66 463 21 31 1951 Safaniyah*' Aramco 827 3,176 92 27 1965 Zuluf Aramco 82 142 12 32 UNITED ARAB EMIRATES 1965 Asab Abu Dhabi Pet. Co. 246 134 32 38-40 1962 BuHasa Abu Dhabi Pet. Co. 428 1,149 49 38-40 1966 Fateh* Dubai Marine Areas, Ltd. 149 254 36 32 1970 Southwest Fateh* Dubai Marine Areas, Ltd. 103 97 18 33 1958 Umm Shaif Abu Dhabi Marine Areas, Ltd. 162 513 36 38 1964 Zakum* Abu Dhabi Marine Areas, Ltd. 224 619 46 40 *Offshore or partly offshore 'Note: Safaniyah/Khafji Combined reservoir 1,100 4,427 198 .27-28 RECENT DEVELOPMENTS 26 An understanding of the recent major The Birth of OPEC changes in the relationships between oil In September 1960, government oil officials companies and the producing countries of of Saudi Arabia, Venezuela, Iran, Iraq and the Middle East requires an historical Kuwait met in Baghdad, Iraq. TWo principal perspective. resolutions were adopted at that meeting: As mentioned earlier, when the first conces- > The first stated that the five producing coun- sion agreements were negotiated, it was the tries could "no longer be indifferent to the custom to pay the host government a fixed attitude adopted by the oil companies in ef- annual rental until oil was discovered and fecting (posted) price modifications:' de- then a royalty for each barrel of oil produced. manded that the oil companies "maintain These fixed payments provided the govern- their prices steady and free from all unnec- ments with an income irrespective of the essary fluctuations," and declared their in- profitability of the venture. In the early tention to "study and formulate a system to 1950s, per-barrel royalties were supple- ensure the stabilization of prices by, among mented by a 50/50 profit-sharing concept. other means, the regulation of producing... Through most of that decade, the producing > The second resolution advised that the "Con- country governments were satisfied with ference decided to form a permanent organi- payments they received under the 50/50 ar- zation called the Organization of Petroleum rangement. Production rose sharply year Exporting Countries...," and that "the prin- after year. In addition, government revenues cipal aim of the organization shall be the per barrel increased as a result of declining unification of petroleum policies for the production costs, augmented by a general in- member countries and the determination of crease in the oil companies' posted prices in the best means for safeguarding the inter- 1957. But the situation changed abruptly ests of member countries, individually and early in 1959 when, to meet market competi- collectively." tion, the companies reduced posted prices. Another drop in posted prices came in the With approval of the resolutions later that fall of 1960, again in response to market year by each of the respective governments, forces. the Organization of Petroleum Exporting Countries (OPEC) officially came into being. The governments of the producing nations expressed alarm over the price reductions, During its first ten years, OPEC expanded its which reduced their per barrel oil revenues. membership, with new countries being In 1960 the governments'per barrel reve- added in this sequence: Qatar in 1961, Indo- nues averaged 78 cents, compared to 80 cents nesia and Libya in 1962, Abu Dhabi in 1967, in the previous year and a high of 86 cents in Algeria in 1969, Nigeria in 1971, and Ecua- 1957. However, total government revenues dor in 1973. Gabon became an associate increased each year during the same period member in 1973 and a full member in 1975. because of the growing volume of exports. (See Chart 6) In its early days, OPECs principal objective was to insulate its members'per barrel reve- nues (government take) from the general depression in crude oil market prices that occurred during the 1960s. The cohesion demonstrated by OPEC gave strength to the countries' position that posted prices for crude oil should be held stable in this period of declining market prices. OPEC also was in- CHART8 MIDDLE EAST REGION Productive Capacity 27 Spare Productive Oil Production Needed To Balance Capacity Anticipated-World Demand Production Forecastof Mi Ilion Barrels Per Day Production 45 Xhl,@ 40 .......... "N' . ... . ... "'O'K @nN AQ, 35 - ------------ R,t mR 4 30 9k, A- 25 20 ---------- -- ------------------ - _ -- @p -------------- 15 10 -- - - ------ --- ------------------ - 5 K, 0 1960 1965 1970 1975 1980 1985 1990 strumental in effecting certain changes in As a result of these changes and continued the basis for the computation of producing declines in operating costs, even though the country revenues. The most important of companies' posted prices remained un- these, which increased government revenues changed, average per barrel revenues to by about fivE, cents per barrel, was to treat Middle East countries rose from 78 cents in the 12.5 percent royalty payments as an item 1960 to 85 cents in 1968. (See Chart 6) By of expense, rather than a tax credit when 1970, OPEC was in a strong position to de- calculating income tax payments. mand sharply increased oil revenues from 28 the companies. Several circumstances had October Arab/Israeli war and the subse- combined to shift the balance of negotiating quent embargo of oil shipments from Arab power in f avor of the producing countries: States to the United States, the Netherlands an unexpected surge in world oil demand, a and several other countries. rupture and close-down of Tapline for most of 1970, production cutbacks ordered by Determination of the total revenues accru- Libya, and a tight transportation situation ing to the Middle East governments from oil brought about by these events and the closed has become quite complex. Participation Suez Canal. means that the governments acquire an in- terest in the operation which normally car- After extensive negotiations, new price and ries rights to a proportionate. share of the oil tax agreements were reached late in 1970 produced. To date they have been selling and early in 1971 between the oil companies much of this oil back to the international oil and the major producing countries of the companies while marketing a portion to Gulf area and Libya. The agreements pro- their own customers. Thus, the countries' vided increases of from 20 to 35 percent in total oil revenues now consist of royalties, the posted prices of crude oils, and subse- taxes and other payments made by the com- quent annual escalations to reflect inflation. panies, plus what the go 'vernments make by Combined with higher tax rates and other selling their own oil. provisions, this meant immediate revenue increases to the governments of from 30 to By the end of 1975, the net effect of in- 50 percent. creases in tax and royalty rates, changes in posted prices and revenues from the sale of The 1971 agreements marked the first time participation oil had increased the income of that Middle East posted prices had been es- host governments of the region to approxi- tablished by negotiation between the oil mately $11 per barrel. In 1973, that income companies and several of the producing gov- had been about $2 per barrel, and early in ernments as a group. The terms were sup- 1970, it had been only about $1 per barrel. posed to remain in effect for approximately (See Chart5) This precipitous price rise had five years. But they did not. a serious impact on the world's economy and created grave financial difficulties for lesser A New Concept of Oil Pricing developed countries. In the fall of 1973, the Gulf producing members of OPEC became dissatisfied with One result has been a worldwide reduction in the 1971 price and tax agreements, although petroleum consumption as oil users seek to these had been modified as recently as the minimize the impact of higher prices spring of that year to reflect currency through conservation measures. Thus, for changes and inflation. the first time in history, Middle East produc- tion levelled out in 1974 and declined in 1975. The countries sought to revise the 1971 As world economies strengthen, output will agreements and, after a brief abortive nego- undoubtedly rise again, but probably not as tiating session with the oil companies, on rapidly as might have been anticipated prior October 16, 1973, decreed unilaterally an in- to the events of 1973-4. (See Chart 8) crease of about 70 percent in the posted prices for their crude oil. Shortly thereafter, they met again and once more raised posted prices, effective January 1, 1974, this time to a level about four times what they had been just three months earlier. These events roughly coincided with the outbreak of the CHART9 RATE OF DISCOVERY Middle East 29 Discoveries OF WORLD' CRUDE OIL RESERVES Discoveries Outside Middle East Annual Averages For 5 Year Periods Estimated Future Discovery Rate Billions of Barrels Per Year Production 30 0 2, K R@_ 0- t 3[`,- X' M01 2-,"@@@;@"' 51,11IN? tttr _,_E -'_tte_ '11-1-z"'fl 2 1`01 I C@ g 'M g x":11 !@',,Klttlt@ txla@'IIKI@I?t _0,15-7t, -K Z ME, 0 2 C", 3, A-' 3!, al 0 Ktr!, X X x N't, J.. 'A, Tftl@-t@,'@@" 10 "X &H, "off 0 1930 '35 '40 '45 150 '55 '60 '65 '70 '75 180 '85 190 Over the last several decades, oil has been discovered in the ever, production had begun to exceed discoveries, and re- non-Communist world at an annual rate of 15-20 billion bar- serves had to be drawn down. It seems unlikely that the pace rels. Most of this oil was found in the prolific fields of the Mid- of discovery can be raised in the future beyond about 15 bil- dle East. In the last two decades, the discovery rate outside lion barrels per year. the Middle East increased over earlier periods, reflecting in- At the same time, it is certain that production cannot exceed creased exploration activity in other areas in pursuit of greater discoveries indefinitely. Consequently, there is a significant diversification of supply sources. chance that world oil demand could be limited by the avail- Prior to 1970, discoveries greatly exceeded production, and ability of supply starting in the late 1980s. proved reserves were accumulated. By the mid-1970s, how- -EXCLUDING COMMUNIST AREAS CHANGE AND PROGRESS The discovery and production of oil have had health care, sanitation, schools, banking and a far-reaching and dramatic impact on eco- housing. Over the decades, however, the oil nomic and social conditions in the Middle companies began to divest themselves of East. Not only have the oil companies been these auxiliary services, as local economies responsible for dramatic changes in the im- expanded and government and local private mediate areas of their operations, but reve- enterprise could take over many of them for nues from oil operations have provided the the benefit of the whole populace, as well as governments with the means for intensive oil industry employees. national development programs. The governments have recognized that it is For. centuries, trade, animal husbandry and in the best interests of the region to use agriculture were almost the only means of their oil revenues to build, to the fullest ex- livelihood in the Middle East. Industry was tent possible, strong, diversified economies almost nonexistent. Governments and local that will support future generations. To this business lacked capital to improve condi- end, they have begun marshalling their tions. In 1932, for example, the total govern- huge, recently acquired financial resources to ment income in Saudi Arabia was about $2.4 expand the needed infrastructure (roads, million, derived partly from customs duties power systems, communications networks, and local taxes, but principally from a head fresh water supplies, etc.), as well as estab- tax collected from pilgrims to Mecca. Saudi lishing large-scale agricultural and indus- Arabia!s income from oil in 1975 was 10,000 trialization projects. times its total 1932 revenues. On a per capita basis, revenues of some of the smaller coun- Changes in the economic conditions and tries, such as Abu Dhabi and Qatar now ex- quality of life in these countries brought ceed those of the most highly industrialized about by development of their prime natural countries of the world. resource -petroleum -have been remarkably swift. The leaders of the area are pressing When private oil companies entered the re- vigorously to expand and hasten economic gion, first to explore and later to build pro- and social progress, and the people of the ducing, shipping and refining facilities, they area appear to be adapting to the rapid mo- found local labor untrained in the trades re- dernization taking place in their societies. quired. The companies in those early years had to import all the skills and technology The role of the oil companies in the Middle needed to carry on operations, while local East is still changing, and at this writing workers received on-the-job training, and their future is uncertain. Nevertheless, often were sent abroad for higher technical Exxon, which has been in the Middle East education. for more than 50 years, expects to be there for years to come, exploring, operating 'Besides importing skilled workers, the fields, exporting oil, and providing technol- operating companies had to establish service ogy and other services that will assist in the enterprises both to conduct their activities internal development of the region as well as and to sustain the work force. They found assuring adequate supplies of petroleum to themselves in the food supply business, the Exxon customers. utility and refuse collection businesses, the hardware and clothing businesses, all based on massive imports. They provided commu- nities with such services as roads, irrigation, CHART 10 IMPORTS FROM THE MIDDLE EAST AND THEIR SIGNIFICANCE TO 31 UNITED STATES OIL SUPPLY -HISTORY AND OUTLOOK Million Barrels Per Day 25 MT 2 p V- -.1 Imports from East UP A0, Region 20 ;@ - " I @ I " k_,@ i i I P, ,' V N11 M m m L I At WYmNOU" "'W g' E n N - Mi ,,, -b@, IN 10 k, pj Vn 'Z 2, @g, iVV- 4 q 44 V Other T= i4M Mri Imports 0 -W 15 ___ik "ok -4) (Principally Canada, V enezuela, V _k Nigeri '14 y! "j _ I a gr W ;Xj "@t_ Synthetics pf NO 10 Aj Domestic In OV"O'z Production from Future Discoveries V@ n" '2222 5 Domestic Production from Existing Reserves S."iti", VIIF I Ir 0 1960 1965 1970 1975 1980 1985 1990 U. S.Oil SUPPly As the most versatile and the most readily Imports Over the forecast period, U.S. oil demand will grow available energy source, only oil is capable of taking up the much more rapidly than domestic oil supply. Consequently, slack created bythe shortfall of any otherfuel. Consequently, the U.S. will require increasing quantities of imports to fill the sl ower-than-f o recast growth in coal, nuclear, or gas would gap between domestic supply and demand. Oil imports are rapidly translate into additional oil imports. forecast to increase from 44% of total oil supply in 1976 to Domestic oil supply leveled off in the early 1970's and is about 50% of supply by 1980, then maintain about this share now declining. This decline is likely to continue until late 1977 through 1990. when North Slope oil will begin moving through the trans- Alaska pipeline. North Slope production will reach 2.0 million barrels per day in the mid-80's. Over half of 1990 domestic oil production must come from reserves yet to be discovered. Total U.S. Oil Supply (million barrels/day) Most of these new discoveries must come from "frontier" 1960 1976 1980 1990 areas of Alaska and the Outer Continental Shelf. Leadtimes between initial exploration and peak production in some of Domestic (conventional) 8.2 10.3 10.0 11.8 these frontier areas may be longerthan ten years. Domestic (synthetic) Synthetic Oil Oil from shale and coal will not become com- Oil Shale - - - 0.5 mercially available for several years. By 1990 combined syn- Coal - 0.2 thetics liquids production from these sources is expected to Imports 1.8 8.0 10.5 12.2 be 0.7 million barrels per day and will account for about 3% TOTAL 10.0 18.3 20.5 24.7 of total oil supply. The following papers in the Exxon Background Series are available upon request from the Public Aff airs Department, Exxon Corporation, 1251 Avenue of the Americas, New York, N. Y 10020. Reducing Tanker Accidents Environmental Conservation-A Progress Report The Offshore Search for Oil and Gas Very Large Crude Carriers (VLCCs) m 4 1 - e A'412-0 @@w 6Zi @4.e & 0%.@ @ ! t W 45- 4# lkv ce JW-19 lQW: DI@7E DUE 3 6668 14107 2274