KSA.Speakers.Bureau.Aramco.20110608.01 — page 1

Saudi Aramco: Fueling Progress Since 1933

Mention Saudi Arabia to someone and the first thought that comes to mind most often is oil. The discovery of rich deposits of crude on its territory in 1938 and the flourishing of its

related industries since have transformed the nation, its people and the world in the span of a few generations. In that time, oil has become the indispensable lubricant that keeps the global eco-nomic engine running smoothly. As the leading producer with the largest proven reserves, Saudi Arabia plays a pivotal role in keeping that engine’s cogs from clogging.

From the start, the key player in the development of the Kingdom’s petroleum resources has been the enterprise known today as Saudi Aramco, arguably the premiere oil company in the world. The history of Aramco’s climb to the top of its industry from its early days as a specula-tive venture facing an uncertain future is the latest chapter in a story whose beginning precedes written records.

Oil in its many forms has been a part of human life for over five millennia. Early known uses include as a fuel to stoke fires, as a weapon in warfare, as a medicine for man and beast, as a source of lighting, as a sealant and mortar and more. In the King James version of the Bible, in the Book of Genesis, God commanded Noah to “Make thee an ark of gopher wood; rooms shalt thou make in the ark, and shalt pitch it within and without with pitch.” In the fifth century bce, the Greek his-torian Herodotus described how the ancient Babylonians built the great walls of their city “using for their cement hot bitumen.” The armies of Alexander the Great employed oil in the fourth cen-tury bce in flaming torches to frighten enemy forces while the Chinese plumbed for it as far back as the fourth century ce using metal bits attached to the ends of daisy chains of bamboo lengths to bore deep into the earth’s crust.

Despite its many documented uses, not everyone who encountered oil sang its praises. In partic-ular, farmers and shepherds and anyone else whose wells it fouled considered it a nuisance of no practical value. With supply exceeding demand through the ages, there was little reason to search for more. The consensus was, there was more than enough on hand already.

In the nineteenth century, appreciation of crude oil’s potential value began to grow. It was then that dependence on whale oil for lighting turned problematic as populations plummeted due to over-hunting. The invention of a process to distill kerosene from petroleum in the 1840s and of the kerosene lamp a decade later sparked increased demand for affordable petroleum-based kero-sene as an alternative to increasingly scarce and expensive whale oil. In a classic market response, a scramble ensued to find new supplies.

The world’s first commercial well was drilled in Poland in 1853, where a scientist had recently developed his own method for distilling kerosene from crude. Months later, the first refinery was built in Romania. “Colonel” Edwin Drake’s discovery at Titusville, Pennsylvania in 1857 is generally regarded as the birth of the modern oil industry. Searching for a source of kerosene,

KSA.Speakers.Bureau.Aramco.20110608.01 — page 2

using cable-tool percussion techniques that were normally employed when digging for water or driving piles, he chose as the site for his well a spot close by visible tar-like bituminous seeps adjacent to an aptly-named rivulet, Oil Creek. For the rest of the nineteenth century, locating visual signs of oil seepage à la Drake remained the favored technique employed by prospectors trying to identify likely places to dig.

As a rapidly industrializing world’s appetite for oil grew, exploration spread to far-flung reaches of the globe. The first wells at Lake Maracaibo, Venezuela came in the 1870s. In 1885, the Royal Dutch Petroleum Company struck crude in Sumatra. One year later, the Burmah Oil Com-pany Ltd. was formed in England and began developing oil fields in Southeast Asia. These were just a few of the finds. There were others scattered around the planet, in particular across the United States.

In the U.S., following the Pennsylvania model, a boisterous procession of oil booms—gold rushes of another name and color—took place in Ohio, Texas, Oklahoma, California and a smattering of other states. The first well in the Los Angeles area was sunk 35 miles northwest of the city in 1876, yet another result of the recent shift to kerosene. Several Southern Califor-nia “bonanza fields” rank among the most productive per acre in history. The 2007 Academy Award-winning movie There Will Be Blood is loosely based on Upton Sinclair’s novel Oil, a vivid portrayal of conflict during the California oil boom.

Evidence of petroleum deposits in the Near East was unmistakable. At Kirkuk in northern Iraq, a flaming gas seep known as “Eternal Fire” had been burning for 5,000 years or longer, whetting the imaginations of oil-hungry explorers who finally struck oil there in 1927. In 1908, oil was dis-covered southwest of Kirkuk in the area of Masjid-i-Sulaiman in western Persia (Iran). The next year, the Anglo–Persian Oil Company (forerunner of today’s BP) was formed to develop the field. England moved quickly to secure control of the find in an effort to outflank Czarist Russia, Per-sia’s northern neighbor, in a duel between two empires vying for oil supremacy. Scientific advancements paired with human ingenuity helped shape the pattern, pace and direction of the industry’s growth. Thomas Edison’s invention of the light bulb in 1879 was transformational in a tangential, unexpected way. By the turn of the century, thanks in good part to Edison’s brain child and the pioneering breakthroughs of his close friend and fellow genius inventor, George Westinghouse, electricity had replaced kerosene and coal gas as the main source of lighting, steal-ing away oil’s major market. A steady parade of new applications for petroleum-based products offset that loss, and oil consumption maintained its upward climb, surpassing wood and hydro-electric power as an energy resource by the outbreak of World War I.

In 1903, two landmark events in the history of technology took place. In June, Henry Ford founded his eponymous motor company in Detroit, Michigan while in December, the Wright Brothers flew their first motor-driven airplane at Kitty Hawk, North Carolina. On the ground and in the air, the automobile and the airplane revolutionized travel, in due course exponen-

KSA.Speakers.Bureau.Aramco.20110608.01 — page 3

tially increasing demand for oil. While coal remained the world’s foremost source of energy in 1920—a distinction it had snatched from wood in the 1880s—second-place oil was inexorably closing the gap between them. Coinciding with the arrival of the baby boom generation after World War II, oil at last surpassed coal for the top spot in 1947–8.

The hunt for new fields intensified in the wake of Drake’s discovery at Titusville. In an advance marked by hesitation in some quarters, geology became a key tool in unlocking the mystery of where to look for those elusive deposits. A revealing subplot involved what geologists call anti-clines. Anticlines are geological formations composed of upward-thrusting folds or domes in the earth’s crust where older underlying rock layers have been exposed due to the erosion of the younger top layers that originally comprised their crests. When a government official noticed that some oil seeps in Canada occurred near anticlines, he speculated that similar formations elsewhere might also signal accumulations of hydrocarbons in the earth below. He sent out a geologist to scientifically confirm his hunch. History proved them right—but not immediately.

In the oil business as in most areas of human enterprise, new ideas had to pass muster before people would widely accept and adopt them. Drake’s methods produced indisputable results. Hence, copycats embraced them. Until this novel anticlinal theory did the same, skeptics scoffed. Insights gleaned from the Oil Creek example, loosely coupled with the time-honored, instinct-based, “By guess and by God” method of prospecting ingrained in the habits of veteran wildcatters, made up an approach to exploration commonly seen in the decades before the benefits of science and technology were properly understood and put to use. In 1900, innovation had yet to be insti-tutionalized as a fundamental element of the oil business. That advance in corporate practice came only when the industry had sufficiently matured and companies with the requisite vision had moved to the forefront to lead the way with new rounds of trend-setting successes based on fresh approaches competitors belatedly would emulate.

All doubts about the significance of anticlines vanished as quickly as news travels in Janu-ary 1901 when the first great American gusher “roared in like a shot from a heavy cannon and spouted oil a hundred feet over the top of the derrick,” as one writer put it. This eureka moment took place on the crest of an anticlinal hummock called Spindletop outside the East Texas city of Beaumont. Events at Spindletop signaled the start of the Texas oil industry, securing for America and the Lone Star State permanent leading roles as the saga of modern oil played on. Companies and characters with ties to Texas have been omnipresent in the petroleum world ever since. Post-Spindletop, peculiarities of the drawling Texan patois like ”Y’all,” “fixin’ to,”

“tin cints” (Texan for “ten cents”) and “foah” (Texan for “four”) became familiar sounds in oil precincts from Abilene to Arabia and beyond.

For the first three decades of the twentieth century, anticlinal theory dominated exploration efforts to the sometime detriment of other approaches. Matched with comprehensive geologi-cal mappings, its application led directly to the discovery of new fields in the United States, Mexico, Venezuela and elsewhere. One of the great American finds came in 1921 in the form

KSA.Speakers.Bureau.Aramco.20110608.01 — page 4

of a Spindletop-like gusher blowing in at the anticlinal geological formation known as Signal Hill in present-day Long Beach, California. Soon, a densely-packed grove of over 100 derricks sprouted atop the hill, inspiring observers to compare its appearance from afar to the back of a porcupine.

Thanks to a string of previous U.S. discoveries, by the outbreak of World War I in August 1914, America had overtaken Russia as the leading oil-producing nation in the world. The British and Dutch owed their places on the roster of top oil powers to the output of their overseas colonial possessions. Like the United States to the north, Mexico and Venezuela in contrast won their spots in that elite group based on fields located on their own territory, not on some-one else’s. Until the ascendancy of Middle Eastern oil at mid-century, the outputs of those three countries kept the Western Hemisphere’s northern half in the lead world-wide in oil production.

Commenting on what his generation dubbed “The Great War,” British Foreign Secretary Lord Curzon said afterwards that “the Allies rode to victory on a flood of oil”—not, it must be pointed out, on the backs of horses as conquering armies had done since time immemorial. At the onset of hostilities, military leaders still planned their campaign logistics around horses and mules. Fifty-one months of machine-driven slaughter upended their calculations.

By the time the Armistice was signed in November 1918, the need for fuel to quench the bottomless thirst of trucks and tanks, ships and planes put horses permanently out to pasture in the minds of military strategists. Four legs fueled by straw and oats could not compete with four wheels fueled by gasoline or diesel—neither in war nor in peace, then or now.

Owing to the interaction of science, war, technology and the accidents of geographic location and timing, geopolitical dynamics were forever altered. Oil became a powerful catalyst for change with universal influence. A modern nation’s economic self-preservation now hinges on the vaga-ries of energy supply. Events in any one oil-producing region affect everyone everywhere else. In an interlaced world such as this, competition among companies and countries for secure and reli-able long-term sources of oil is understandably fierce.

In World War I’s aftermath, the triumphant European powers recognized the importance of controlling production in areas of the world where petroleum deposits were known or sus-pected to exist, including the lands of historic Mesopotamia and the Fertile Crescent. Led by England, they formulated their foreign policies accordingly. At an international conference in San Remo, Italy in 1920, the British and French signed a bilateral oil treaty carving up “Ruma-nia, Asia Minor, territories of the old Russian Empire, Galicia, French Colonies, and British Crown Colonies” into defined spheres of influence. In a separate treaty, under the umbrella of the newly-formed League of Nations, the territories of the former Ottoman Empire were divided into mandates to be administered by Britain and France until such time as full inde-pendence was granted. Britain took on the mandates for Persia and Palestine while the French were named for Syria and Lebanon.

KSA.Speakers.Bureau.Aramco.20110608.01 — page 5

A close reading of the Anglo–French oil treaty’s terms led American interests to oppose it as an attempt to exclude them from pursuing an equitable share of the petroleum wealth of Arabic-speaking lands. Consequently, prickly negotiations between Britain and the United States over the issue of oil marked the decade of the ’20s. Driven by uncertainty, determination and self-interest, American companies sought ways to counteract what they considered to be the treaty’s unfair provisions. In one direct response, five U.S. oil companies banded together to form the Near East Development Corporation to protect and further their interests in the region. In 1928, their con-sortium recorded a practical success when it gained a 23.75 percent share in the Iraq Petroleum Company. British, French and Dutch interests each held similar shares.

With the coming of the Great Depression in 1929, the global economy staggered. Thousands of businesses failed, many more cut back production, tens of millions of people lost their jobs and available short- and long-term capital dried up. Nevertheless, oil exploration in the Middle East went on. In 1932, Standard Oil of California (Socal) made a major discovery on the Arabian Gulf island of Bahrain, a short distance from the Arabian Peninsula mainland. On September 23 of that year, the former Kingdom of Hejaz and Hejd became the Kingdom of Saudi Arabia under the leadership of King ’Abd al-Aziz ibn ’Abd al-Rahman Al Faysal Al Saud (known to history as ibn Saud). The next May, after months of negotiations, the Saudi government signed a con-cession agreement in Jiddah with Socal (known today as Chevron). In 1934, Socal passed the concession on to a wholly-owned subsidiary—the California–Arabian Standard Oil Company (Casoc for short).

In recognition of oil’s potential as a valuable export commodity, the Saudis targeted it as a primary producer of revenue for investing in their new nation. Reviewing their long-term prospects for mutual cooperation, they believed their new American partners would be equitable in their dealings with the Kingdom and less consumed by political interests and non-business issues in the future than other suitors—specifically, the British and French, as shown by their actions at San Remo—had been in the recent past. U.S. oil interests in turn found a loyal friend and lasting partner in the House of Saud. The Americans at this stage were acting in a sense as anti-imperialists, in part because they had little choice given the determination of their former allies in war, now economic rivals in peace, to exclude them from post-war oil competition beyond their shores.

In 1938, three months following the signing of the concession, two American geologists arrived in Jubail on the Arabian Gulf coast of the Kingdom to begin a hunt that would change history. In September, they set up camp at Jabal Dhahran, an archetypal anticlinal geological forma-tion (i.e., a dome like Spindletop or Signal Hill) they had spotted while drilling for oil in the nearby island of Bahrain.

For the next few years, a team of Casoc geologists conducted exhaustive geological reconnais-sance across an area of the Eastern Province larger than the state of Texas, adding a Fairchild airplane to their arsenal of tools in March 1934. In 1936, after several disappointing years of drilling dry or poorly-producing wells, Socal formed a fifty-fifty joint venture with The Texas

KSA.Speakers.Bureau.Aramco.20110608.01 — page 6

Company, later known as Texaco, to manage their collective assets in the Middle East. They named their new company Caltex. Caltex in turn took over ownership of Casoc, giving each upstream parent company an equal interest in the Saudi concession.

A return of any kind on their joint investment was anything but guaranteed at the time. Due to the worldwide economic malaise, the price of crude had plummeted to under 50 cents a barrel. The two American speculators (for that is exactly what Socal and The Texas Company were at the time—a pair of Yankee gamblers taking a calculated risk) had already spent millions of dollars and were certain to spend millions more if they continued further down the path they had chosen to hew.

With a skilled Bedouin named Khumayyis ibn Rimthan guiding them, Casoc geologists dis-missed the setbacks and continued to scour the Concession Area—320,000 square miles of mostly unmapped desert—looking for signs of oil. Liking what they saw, they opted to take the odds and press on with their quest, their confidence bolstered by an amassing of clues pointing to the likelihood of hydrocarbon riches lying buried beneath the Kingdom’s sands.

As a fortuitous by-product of their labors, they opened up several sweet water wells while poking around for oil, benefiting farmers and Bedouin nomads and pleasing the Saudi government. Such discoveries could not, however, compensate for the fact that their all-consuming goal remained finding oil, not water. Truth was, they had yet to come remotely close to achieving their ambition.

By early 1938, the team had spent a year and a half drilling a deep-test well named Dammam No. 7 through stubborn layers of rock and sediment. Then, on March 3, as they approached a depth of 4,700 feet, their stout refusal to quit at last paid off. Every day for weeks after the well first pro-duced oil, its volume of flow grew larger until no doubts remained. Delighting anxious corporate types back home in California, the team was finally able to report with absolute confidence that Dammam was a commercial field. Two other wells spudded in earlier and deemed unproductive at the time were deepened to reach the Arab Zone where No. 7 had hit pay dirt with the same welcome result. By year’s end, crude was being barged to a refinery in Bahrain. Casoc reported to ibn Saud their success at Dammam and gladly handed over a previously-agreed-to advance of 50,000 £ in gold. Known forever after as Lucky No. 7, that one well by itself produced 32 million barrels of oil before it was removed from service in 1982.

In April 1939, at the invitation of Casoc, ibn Saud traveled from his capitol at Riyadh to the Ara-bian Gulf port city of Ras Tanura in a caravan of 2,000 people and 500 cars to personally turn the valve that loaded the first Saudi crude oil for export onto the Socal tanker D. G. Scofiel. Four months later to the day, Adolf Hitler sent German troops pouring into Poland, starting World War II and altering the course and pace of development of Saudi oil fields. In 1940, oil production from the Middle East accounted for less than 5 percent of total world production, while the U.S. accounted for nearly two-thirds. The full realization of the region’s oil potential came only after Germany and Japan were defeated.

KSA.Speakers.Bureau.Aramco.20110608.01 — page 7

Despite war raging elsewhere, new discoveries continued to be made by Casoc in Saudi Arabia. In 1940, oil was struck early in the year at Abu Hadriya and late in the year at Abqaiq. Plans were finalized for the construction of a major oil refinery at Ras Tanura, where work began in 1943. The Ras Tanura facility began operation in 1945 and has since grown into the largest oil refinery in the world. On January 31, 1944, another event of note took place: Casoc changed its name to Arabian American Oil Company. Ever on the lookout for new acronyms, people were soon calling it by another name, Aramco.

In February 1945, with the latest world war entering its climactic phase, President Franklin Roos-evelt took a side trip on the cruiser U.S.S. Quincy to the Great Bitter Lake of the Suez Canal. FDR was on his way back from negotiations with Winston Churchill and Josef Stalin at the Yalta Con-ference. His purpose was to meet with ibn Saud in what proved to be a critical moment in setting the future course of U.S.–Saudi relations. Reshaped by events over time, an evolved, deep-rooted Saudi–American bond endures. That bond manifested itself manifold in 1990–1 in the form of Saudi support of America and her allies during the Gulf War against the Iraqi forces of Saddam Hussein.

In 1948, Socal and The Texas Company were joined as investors in Aramco by two new part-ners. Standard Oil of New Jersey (the predecessor of Exxon) purchased a 30 percent share and Socony Vacuum (the predecessor of Mobil) purchased a 10 percent share. The timing of the new partners was serendipitous—for the newcomers. Later that same year, the Ghawar Field was discovered east of Riyadh. In 1956, Aramco confirmed Ghawar as the largest onshore oil field in the world with estimated reserves of 80 billion barrels. Ghawar was just a start. From 1948 on, Aramco’s rate of growth skyrocketed.

Asserting the Kingdom’s right to a fair share of the greatly-expanded oil bounty, in 1950 the Saudis convinced Aramco to agree to an equal split of all profits. Recognizing the new reality, Aramco moved its headquarters from downtown New York City to a location in Dhahran not far from the site of Lucky Number 7—vivid proof of how much circumstances had changed in twelve years. That same year, the 1,200 mile (1,700 kilometers) Trans-Arabian Pipe Line (Tapline) was com-pleted, linking the Eastern Province oil fields to Lebanon and the Mediterranean.

Six years later, in 1956, Aramco officially confirmed Ghawar as the largest onshore field and the Safaniya as the largest offshore field in the world. Five years after that, Aramco began process-ing liquefied petroleum gas (LPG) at its Ras Tanura facility. A decade later, again at Ras Tanura, Aramco opened its “Sea Island” offshore crude oil loading program, greatly easing the task of loading tankers.

In 1973, the Saudi government began a seventeen-year-long move to assume full control of its petroleum resources by purchasing a 25 percent interest in Aramco. As a result, by 1980, virtu-ally 100 percent of Aramco’s assets were owned by the Kingdom. An important point in the Saudi takeover was, Saudi Arabia did not nationalize or expropriate the American’s assets, leav-ing them with essentially nothing, as some governments had done previously—and have done

KSA.Speakers.Bureau.Aramco.20110608.01 — page 8

since—in other parts of the world. Instead, they paid a fair market price for them. Aramco con-tinued to operate the assets on behalf of and for the benefit of the government until November 1988, when, by royal decree, the Saudi Arabian Oil Company was created and the Saudis took full operational control. With that move, the company’s name was formally changed to the one it bears today: Saudi Aramco.

In 1984, Saudi Aramco began operating its first four supertankers, working through its wholly-owned subsidiary, Vela International. In 1989, high-quality oil and gas are discovered south of Riyadh—the first such find outside the operating area originally established in the 1933 conces-sion agreement.

In August 1990 Iraq invaded Kuwait, leading the UN to declare an embargo on Iraq. Allied forces led by America moved en masse to the Arabian Peninsula in a defensive move known as Desert Shield. In January of the next year, the Gulf War (Operation Desert Storm) broke out, and defen-sive Operation Desert Shield morphed into offensive Operation Desert Storm. Iraqi forces set Kuwait’s oil fields on fire, creating a massive economic and environmental disaster. Saudi Aramco played a major role in the response to Gulf War oil spill, the largest in history.