Introduction international business diplomacy
Introduction international business diplomacy
Saudi Arabia has one quarter of the world's known reserves and is the largest exporter and second-largest producer (after the former Soviet Union) of petroleum. By the early 1990s one company, Aramco, accounted for over 90 percent of the Saudi production and more than double the output of the two next-largest oil firms in the world, Royal Dutch Shell and Exxon. Aramco's ownership, policies, and division of earnings from the outset have depended on interactions among: (1) the private oil companies participating in Aramco, (2) the U.S. government, and (3) the Saudi government. As the objectives and power of these three parties have evolved, so have the operations of Aramco. To understand these changing relationships, we will review some events that preceded Aramco's first oil output in 1939.
U.S. policy toward U.S. oil firms historically has seemed contradictory because governmental objectives have involved trade-offs as well as changing priorities among the objectives. U.S. objectives have included preventing domestic monopolistic practices by oil firms, ensuring sufficient and cheap oil supplies for U.S. needs, and strengthening the U.S. political position in strategic areas worldwide. On the one hand, U.S. action dismembered the Standard Oil Trust in order to stimulate domestic competition; on the other hand, the U.S. government allowed, even encouraged, joint actions abroad by oil firms when those actions would help achieve the latter two objectives.
At least as far back as 1920 the United States realized that in the long run its domestic oil supplies would be insufficient. In the short term, though, worldwide oil supplies could not easily be sold as rapidly as they could be produced. In this environment, U.S. oil firms were in a position to serve both U.S. and Middle East interests. In the 1920s and 1930s the U.S. government wanted U.S. oil companies to gain concessions in the Middle East with the result that "representatives of the industry were called to Washington and told to go out and get it." Concessions would help assure a long-term U.S. supply,
and an American presence would weaken the relative positions of the British and the French. The U.S. firms were welcomed in the Middle East as competitors to Shell Oil Company, British Petroleum (BP), and Compagnie Franchise des Petroles (CFP) from Britain and France. They also were welcomed because they offered some sales in the United States that would otherwise be impossible. During the 1920s and 1930s some of the U.S. oil companies also made secret arrangements abroad that proved unpopular with the U.S. public. For example, Exxon (formerly called Esso, or Standard Oil of New Jersey) agreed with BP and Shell to a system of world prices based on the U.S price of oil . Exxon's chief executive was forced to resign in 1942 after exposure of his restrictive agreements with the I. G. Farben Company, a major participant in Hitler's World War II efforts. In situations such as these, the oil companies were not acting as instruments of American foreign policy as
they were originally conceived to do; instead, they were acting independently of any government. Later they were accused of becoming captive to Middle Eastern Arab policies.
The first two companies to participate in Saudi Arabian oil production were Socal (Standard Oil of California) and Texaco, which formed a joint venture and negotiated large concessions. The U.S. government had no representatives in Saudi Arabia at this time, and the two companies conducted some quasi-official diplomacy that continued throughout World War II. They organized construction of a pipeline to the Mediterranean in 1945 and received permission from the U.S. government to use steel, which was in very scarce supply. In 1948 Exxon and Mobil joined the original Socal and Texaco in what became known as Aramco. Mobil owned 10 percent, and each of the others held a 30 percent interest.
These four firms, along with three others (Gulf, Shell, and BP), were known as the Seven Sisters. Before the 1970s they collectively controlled such a large share of the world's oil from multiple sources that they were nearly invulnerable to the actions of any single country. By 1950 the United States was entrenched in the cold war, and although it held military supremacy over the former Soviet Union, the Truman Administration wished to maintain cordial relationships with strategic countries. When King ibn-Saud demanded substantial revenue increases from Aramco, the U.S. government became directly involved in the negotiations. A plan was devised in 1951 whereby the oil companies would maintain their ownership but would pay 50 percent of Aramco's profits as taxes to Saudi Arabia. The companies then could deduct those taxes from their U.S. tax obligations so that, in effect, the increase in revenue to Saudi Arabia was entirely at the expense of the U.S. Treasury.
In 1952 Saudi Arabia learned from Iran's experience what might happen if demands on Aramco were pushed further. Iran expelled Shah Reza Pahlevi and nationalized British oil holdings. All major oil companies boycotted Iranian oil and brought the Mossadegh government to the brink of economic collapse. With CIA support, the Shah returned, and the Seven Sisters shared in 95 percent of the ownership of the new Iranian oil company.
Both Presidents Eisenhower and Kennedy proclaimed the importance to U.S. foreign policy of the oil firms' Middle East activities and intervened to prevent antitrust action against them in their joint dealings abroad. In addition to preventing Soviet entry in the Middle East, the United States was able to sidestep certain Arab-Israeli conflicts by being publicly pro-Israel and having the Aramco partners perform most of the direct interactions with Saudi Arabia. Saudi Arabia was unhappy with U.S. policies toward Israel but could not influence them.
When the Seven Sisters gained 95 percent of the Iranian oil holdings, the other 5 percent went to smaller independent U.S. companies that previously had depended on the Seven Sisters for supplies. This marked the beginning of greater competition among distributors; it also meant that countries could make agreements with the independents to gain a greater portion of the spoils. Yet as late as 1960 the producing countries were still unable to prevent the major firms from unilaterally abrogating concessions by reducing the price they paid for oil. This price decrease, which reduced government revenues of petroleum exporting countries, led to a meeting in Caracas of five governments and the resultant formation of the Organization of Petroleum Exporting Countries (OPEC). OPEC's purposes were to prevent companies from unilaterally lowering prices, to gain a greater share of revenues, and to move toward domestic rather than foreign ownership of the assets. Still, in the early 1960s OPEC lacked the power to flex its muscles.
In the 1960s three new trends weakened the Seven Sisters and strengthened Saudi Arabia's position in Aramco. First, there was continued emergence of other oil companies that made concessions in countries previously not among the major suppliers, such as Occidental in Libya, ENI in the former Soviet Union, and CFP in Algeria. These smaller companies lacked the Seven Sisters' diversification of supplies and thus were less able to move to other supply sources if a country tried to change the terms of agreement unilaterally.
Second, because of rapidly expanding industrial economies, oil demand was growing faster than supply; the earlier oil glut was quickly becoming an oil squeeze. Not even the Seven Sisters could afford any longer to boycott major supplier countries as they had earlier boycotted Iran.
Third, there was a lessened threat of military intervention to protect oil investors. The failure of the United States to support the abortive efforts of the British and French to prevent the Egyptian takeover of the Suez Canal demonstrated that the major Western powers were unlikely to unify their efforts. Although it had invaded Lebanon successfully in 1958, the United States was less prone to intervene again in the Middle East because the Soviet Union had grown stronger since 1958, thus presenting a greater risk of a major war resulting from intervention. The United States also was increasing its military involvement in an unpopular war in Vietnam, so it was less able to lend military support to its oil firms in the Middle East.
In 1970 Muammar el-Qaddafi of Libya demanded increased prices from Occidental. Since Occidental was almost completely dependent on Libya for crude, the company relented. Qaddafi then confronted the major firms that no longer had sufficient alternative supplies and gained concessions from them as well. Libya's success was noted in other countries, which used OPEC to further strengthen their negotiating positions by dealing collectively with the oil firms. The Teheran Agreement of 1971 immediately increased prices. The embargo by Arab OPEC members in 1973 demonstrated that they had sufficient power to impose further economic demands and to
cause Western powers to modify their political positions, particularly in relation to Israel. OPEC now had eleven members and controlled about 93 percent of the world's oil exports.
As the largest OPEC producer, Saudi Arabia has been able to utilize its new-found strengths in several ways. Between 1972 and 1980 the government of Saudi Arabia bought a 100 percent ownership in Aramco operations. As smaller firms gained a larger share of the world oil sales and as national governments in Sweden, the former West Germany, Japan, and France began buying directly from oil-producing countries, Saudi Arabia has increased the number of customers for its crude from the original four Aramco partners.
How has Aramco's government-owned status affected Exxon, Texaco, Socal, and Mobil's operations in Saudi Arabia? The companies have been able to exploit their many assets successfully in order to maintain a profitable presence vis-a-vis Saudi Arabia. They have realized that Saudi Arabia's increased oil revenues enable the Saudis to be a lucrative customer; they also know that Saudi Arabia is closely allied to the West, particularly the United States, on whom it depends for technical and defense assistance.
The four oil companies continue to help manage the Saudi oil industry because they can make contributions that the Saudis cannot acquire easily from other sources. As the major employer before government purchase into Aramco, the American partners had demonstrated an ability to attract qualified personnel from abroad, to train Saudis, and to run an efficient operation. As Aramco has expanded and moved into new activities, the oil firms have been able to continue these efforts through lucrative contract arrangements. For example, in 1990 Mobil was a joint venture partner in a refinery and a petrochemical complex with the Saudi government, each worth over $1 billion. By 1991 about 12,000 (one quarter) of Aramco's employees were non-Saudi workers, but foreigners had been replaced in nearly all top managerial positions. There was a near consensus that foreigners would be needed in increasingly technical positions, such as in finding and extracting oil, but engineering firms, such as Bechtel and Fluor, were competing with the oil firms for major contracts.
The oil firms' contributions to Aramco's success thus include some continued day-to-day management, the contracting of foreign workers, the infusion of technology, the training of Saudi personnel, and the marketing of crude oil exports when sales are not made directly to a foreign government. The marketing contribution took on more importance in the late 1980s, when there was a glut brought about by new supplies (e.g., from Mexico) and decreased demand. To ensure future sales, in 1988 Aramco entered a joint venture by buying a 50 percent interest in Texaco's refining assets and marketing system in 23 U.S. states. However, in 1990 Saudi Arabia's future ability to supply petroleum was brought into question when Iraq occupied Kuwait and amassed its armed forces on the Saudi Arabian border. The
threat to Saudi oil supplies was an important factor in the U.S. decision to push for the United Nations' 1991 liberation of Kuwait.
The oil firms also have been important in molding U.S. foreign policy through lobbying and advertising campaigns that proclaim, "We would like to suggest that there is only one realistic possibility: that the United States adopt a neutral position on the Arab-Israeli dispute and a pro-American rather than a pro-Israel policy in the Middle East." Given these contributions to Saudi Arabia, the oil companies have been able to sell their Aramco interest at prices reported to be above the net book value of assets. They have successfully secured a continued source of crude oil, although sometimes at a contract price above the world spot price, and have profited from management and technical contracts.
In the aftermath of Kuwait's liberation, the future strength of the Seven Sisters is in question. The destruction of oil facilities in Iraq and Kuwait may make consumers (including the oil firms) even more dependent on Saudi oil, thus strengthening the Saudi government's power in relationship to consumers. But there was no shortage of world oil during the war with Iraq. At the same time, the growing dependence of Saudi Arabia on U.S. military assistance might lead to more government-to-government negotiations, thus bypassing the Seven Sisters.
The Aramco case illustrates that the terms under which companies operate abroad are greatly influenced by both home- and host-country policies and that the terms change over time as governmental priorities shift and the relative strengths of the parties evolve. The relative strengths were shown to be affected by such factors as competitive changes, the resources that parties have at their disposal, validating public opinion, and joint efforts with other parties.
As discussed in Chapter 12, companies' foreign operations may have diverse effects on home and host countries, but there is substantial disagreement as to what these effects are and how to deal with them. There is, however, agreement on the point that governments and businesses frequently attempt to follow conflicting courses. In fact, a discord, if carried to the extreme, may result in a cessation of the particular business-government relationship, as either (1) firms refuse to operate in the locale, or (2) governments refuse to grant original or continued operating permission. Short of the extreme are practices that, although not deemed ideal by either party, nevertheless are sufficiently satisfactory to permit an evolving relationship. This chapter examines the means by which international businesses and governments attempt to improve their own positions vis-a-vis one another.
Saudi Arabia has one quarter of the world's known reserves and is the largest exporter and second-largest producer (after the former Soviet Union) of petroleum. By the early 1990s one company, Aramco, accounted for over 90 percent of the Saudi production and more than double the output of the two next-largest oil firms in the world, Royal Dutch Shell and Exxon. Aramco's ownership, policies, and division of earnings from the outset have depended on interactions among: (1) the private oil companies participating in Aramco, (2) the U.S. government, and (3) the Saudi government. As the objectives and power of these three parties have evolved, so have the operations of Aramco. To understand these changing relationships, we will review some events that preceded Aramco's first oil output in 1939.
U.S. policy toward U.S. oil firms historically has seemed contradictory because governmental objectives have involved trade-offs as well as changing priorities among the objectives. U.S. objectives have included preventing domestic monopolistic practices by oil firms, ensuring sufficient and cheap oil supplies for U.S. needs, and strengthening the U.S. political position in strategic areas worldwide. On the one hand, U.S. action dismembered the Standard Oil Trust in order to stimulate domestic competition; on the other hand, the U.S. government allowed, even encouraged, joint actions abroad by oil firms when those actions would help achieve the latter two objectives.
At least as far back as 1920 the United States realized that in the long run its domestic oil supplies would be insufficient. In the short term, though, worldwide oil supplies could not easily be sold as rapidly as they could be produced. In this environment, U.S. oil firms were in a position to serve both U.S. and Middle East interests. In the 1920s and 1930s the U.S. government wanted U.S. oil companies to gain concessions in the Middle East with the result that "representatives of the industry were called to Washington and told to go out and get it." Concessions would help assure a long-term U.S. supply,
and an American presence would weaken the relative positions of the British and the French. The U.S. firms were welcomed in the Middle East as competitors to Shell Oil Company, British Petroleum (BP), and Compagnie Franchise des Petroles (CFP) from Britain and France. They also were welcomed because they offered some sales in the United States that would otherwise be impossible. During the 1920s and 1930s some of the U.S. oil companies also made secret arrangements abroad that proved unpopular with the U.S. public. For example, Exxon (formerly called Esso, or Standard Oil of New Jersey) agreed with BP and Shell to a system of world prices based on the U.S price of oil . Exxon's chief executive was forced to resign in 1942 after exposure of his restrictive agreements with the I. G. Farben Company, a major participant in Hitler's World War II efforts. In situations such as these, the oil companies were not acting as instruments of American foreign policy as
they were originally conceived to do; instead, they were acting independently of any government. Later they were accused of becoming captive to Middle Eastern Arab policies.
The first two companies to participate in Saudi Arabian oil production were Socal (Standard Oil of California) and Texaco, which formed a joint venture and negotiated large concessions. The U.S. government had no representatives in Saudi Arabia at this time, and the two companies conducted some quasi-official diplomacy that continued throughout World War II. They organized construction of a pipeline to the Mediterranean in 1945 and received permission from the U.S. government to use steel, which was in very scarce supply. In 1948 Exxon and Mobil joined the original Socal and Texaco in what became known as Aramco. Mobil owned 10 percent, and each of the others held a 30 percent interest.
These four firms, along with three others (Gulf, Shell, and BP), were known as the Seven Sisters. Before the 1970s they collectively controlled such a large share of the world's oil from multiple sources that they were nearly invulnerable to the actions of any single country. By 1950 the United States was entrenched in the cold war, and although it held military supremacy over the former Soviet Union, the Truman Administration wished to maintain cordial relationships with strategic countries. When King ibn-Saud demanded substantial revenue increases from Aramco, the U.S. government became directly involved in the negotiations. A plan was devised in 1951 whereby the oil companies would maintain their ownership but would pay 50 percent of Aramco's profits as taxes to Saudi Arabia. The companies then could deduct those taxes from their U.S. tax obligations so that, in effect, the increase in revenue to Saudi Arabia was entirely at the expense of the U.S. Treasury.
In 1952 Saudi Arabia learned from Iran's experience what might happen if demands on Aramco were pushed further. Iran expelled Shah Reza Pahlevi and nationalized British oil holdings. All major oil companies boycotted Iranian oil and brought the Mossadegh government to the brink of economic collapse. With CIA support, the Shah returned, and the Seven Sisters shared in 95 percent of the ownership of the new Iranian oil company.
Both Presidents Eisenhower and Kennedy proclaimed the importance to U.S. foreign policy of the oil firms' Middle East activities and intervened to prevent antitrust action against them in their joint dealings abroad. In addition to preventing Soviet entry in the Middle East, the United States was able to sidestep certain Arab-Israeli conflicts by being publicly pro-Israel and having the Aramco partners perform most of the direct interactions with Saudi Arabia. Saudi Arabia was unhappy with U.S. policies toward Israel but could not influence them.
When the Seven Sisters gained 95 percent of the Iranian oil holdings, the other 5 percent went to smaller independent U.S. companies that previously had depended on the Seven Sisters for supplies. This marked the beginning of greater competition among distributors; it also meant that countries could make agreements with the independents to gain a greater portion of the spoils. Yet as late as 1960 the producing countries were still unable to prevent the major firms from unilaterally abrogating concessions by reducing the price they paid for oil. This price decrease, which reduced government revenues of petroleum exporting countries, led to a meeting in Caracas of five governments and the resultant formation of the Organization of Petroleum Exporting Countries (OPEC). OPEC's purposes were to prevent companies from unilaterally lowering prices, to gain a greater share of revenues, and to move toward domestic rather than foreign ownership of the assets. Still, in the early 1960s OPEC lacked the power to flex its muscles.
In the 1960s three new trends weakened the Seven Sisters and strengthened Saudi Arabia's position in Aramco. First, there was continued emergence of other oil companies that made concessions in countries previously not among the major suppliers, such as Occidental in Libya, ENI in the former Soviet Union, and CFP in Algeria. These smaller companies lacked the Seven Sisters' diversification of supplies and thus were less able to move to other supply sources if a country tried to change the terms of agreement unilaterally.
Second, because of rapidly expanding industrial economies, oil demand was growing faster than supply; the earlier oil glut was quickly becoming an oil squeeze. Not even the Seven Sisters could afford any longer to boycott major supplier countries as they had earlier boycotted Iran.
Third, there was a lessened threat of military intervention to protect oil investors. The failure of the United States to support the abortive efforts of the British and French to prevent the Egyptian takeover of the Suez Canal demonstrated that the major Western powers were unlikely to unify their efforts. Although it had invaded Lebanon successfully in 1958, the United States was less prone to intervene again in the Middle East because the Soviet Union had grown stronger since 1958, thus presenting a greater risk of a major war resulting from intervention. The United States also was increasing its military involvement in an unpopular war in Vietnam, so it was less able to lend military support to its oil firms in the Middle East.
In 1970 Muammar el-Qaddafi of Libya demanded increased prices from Occidental. Since Occidental was almost completely dependent on Libya for crude, the company relented. Qaddafi then confronted the major firms that no longer had sufficient alternative supplies and gained concessions from them as well. Libya's success was noted in other countries, which used OPEC to further strengthen their negotiating positions by dealing collectively with the oil firms. The Teheran Agreement of 1971 immediately increased prices. The embargo by Arab OPEC members in 1973 demonstrated that they had sufficient power to impose further economic demands and to
cause Western powers to modify their political positions, particularly in relation to Israel. OPEC now had eleven members and controlled about 93 percent of the world's oil exports.
As the largest OPEC producer, Saudi Arabia has been able to utilize its new-found strengths in several ways. Between 1972 and 1980 the government of Saudi Arabia bought a 100 percent ownership in Aramco operations. As smaller firms gained a larger share of the world oil sales and as national governments in Sweden, the former West Germany, Japan, and France began buying directly from oil-producing countries, Saudi Arabia has increased the number of customers for its crude from the original four Aramco partners.
How has Aramco's government-owned status affected Exxon, Texaco, Socal, and Mobil's operations in Saudi Arabia? The companies have been able to exploit their many assets successfully in order to maintain a profitable presence vis-a-vis Saudi Arabia. They have realized that Saudi Arabia's increased oil revenues enable the Saudis to be a lucrative customer; they also know that Saudi Arabia is closely allied to the West, particularly the United States, on whom it depends for technical and defense assistance.
The four oil companies continue to help manage the Saudi oil industry because they can make contributions that the Saudis cannot acquire easily from other sources. As the major employer before government purchase into Aramco, the American partners had demonstrated an ability to attract qualified personnel from abroad, to train Saudis, and to run an efficient operation. As Aramco has expanded and moved into new activities, the oil firms have been able to continue these efforts through lucrative contract arrangements. For example, in 1990 Mobil was a joint venture partner in a refinery and a petrochemical complex with the Saudi government, each worth over $1 billion. By 1991 about 12,000 (one quarter) of Aramco's employees were non-Saudi workers, but foreigners had been replaced in nearly all top managerial positions. There was a near consensus that foreigners would be needed in increasingly technical positions, such as in finding and extracting oil, but engineering firms, such as Bechtel and Fluor, were competing with the oil firms for major contracts.
The oil firms' contributions to Aramco's success thus include some continued day-to-day management, the contracting of foreign workers, the infusion of technology, the training of Saudi personnel, and the marketing of crude oil exports when sales are not made directly to a foreign government. The marketing contribution took on more importance in the late 1980s, when there was a glut brought about by new supplies (e.g., from Mexico) and decreased demand. To ensure future sales, in 1988 Aramco entered a joint venture by buying a 50 percent interest in Texaco's refining assets and marketing system in 23 U.S. states. However, in 1990 Saudi Arabia's future ability to supply petroleum was brought into question when Iraq occupied Kuwait and amassed its armed forces on the Saudi Arabian border. The
threat to Saudi oil supplies was an important factor in the U.S. decision to push for the United Nations' 1991 liberation of Kuwait.
The oil firms also have been important in molding U.S. foreign policy through lobbying and advertising campaigns that proclaim, "We would like to suggest that there is only one realistic possibility: that the United States adopt a neutral position on the Arab-Israeli dispute and a pro-American rather than a pro-Israel policy in the Middle East." Given these contributions to Saudi Arabia, the oil companies have been able to sell their Aramco interest at prices reported to be above the net book value of assets. They have successfully secured a continued source of crude oil, although sometimes at a contract price above the world spot price, and have profited from management and technical contracts.
In the aftermath of Kuwait's liberation, the future strength of the Seven Sisters is in question. The destruction of oil facilities in Iraq and Kuwait may make consumers (including the oil firms) even more dependent on Saudi oil, thus strengthening the Saudi government's power in relationship to consumers. But there was no shortage of world oil during the war with Iraq. At the same time, the growing dependence of Saudi Arabia on U.S. military assistance might lead to more government-to-government negotiations, thus bypassing the Seven Sisters.
The Aramco case illustrates that the terms under which companies operate abroad are greatly influenced by both home- and host-country policies and that the terms change over time as governmental priorities shift and the relative strengths of the parties evolve. The relative strengths were shown to be affected by such factors as competitive changes, the resources that parties have at their disposal, validating public opinion, and joint efforts with other parties.
As discussed in Chapter 12, companies' foreign operations may have diverse effects on home and host countries, but there is substantial disagreement as to what these effects are and how to deal with them. There is, however, agreement on the point that governments and businesses frequently attempt to follow conflicting courses. In fact, a discord, if carried to the extreme, may result in a cessation of the particular business-government relationship, as either (1) firms refuse to operate in the locale, or (2) governments refuse to grant original or continued operating permission. Short of the extreme are practices that, although not deemed ideal by either party, nevertheless are sufficiently satisfactory to permit an evolving relationship. This chapter examines the means by which international businesses and governments attempt to improve their own positions vis-a-vis one another.
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