Shadow over Aramco

Surely one of history's greatest bargains, ranking with the legendary purchase of Manhattan for $24, is an obscure contract negotiated in 1933. For a loan of exactly $170,327.50, Saudi Arabia's King Abdul Aziz ibn Saud granted the Standard Oil Co. of California a 60-year, exclusive concession to 320,000 sq. mi. of desert. So huge were the oil reserves when finally discovered, and so large the investment needs, that SoCal could not exploit them alone. It took on co-venturers, forming the Arabian American Oil Co.

Aramco now operates under the shadow of nationalization. The company is indeed a plum -- the world's biggest oil producer sitting atop the world's largest reserves. Aramco's average well yields 12,000 bbl. per day, as compared with the average U.S. well's 18 bbl. Its refinery and port complex at Ras Tanura on the Persian Gulf can turn out more product (600,000 bbl. per day), store more oil and load more supertankers than any other facility on the globe.

Most enticing to the Saudis, Aramco's profits are also immense. Though Saudi royalties and taxes have soared to $7 per bbl., production costs average only 120 per bbl. As a result, at present prices Aramco nets more than 500 per bbl.

-- and now is producing 7.3 million bbl. per day.

Aramco neither ships nor markets oil. Those jobs are left to its five owners. Four are major, competing U.S. companies -- SoCal, Texaco and Exxon, each of which has a 22.5% interest, and Mobil, which owns a 7.5% share. The fifth partner is the Saudi government, which bought a 25% share for more than $500 million in 1972 under a "participation" agreement that will turn 51% of Aramco over to the Saudis by 1982.

Now the Saudis have made it clear that they want a bigger piece of the action -- certainly 60% -- and sooner. That demand puts Aramco's managers in an odd position; they will in effect be mediators in the eventual negotiations between Saudi and U.S. owners that will settle their company's fate. Says Chairman Frank Jungers, 47, "Since the Saudi government owns 25% of this company, we can hardly take sides."

What Aramco's U.S. owners want -- and may get -- is continued access to the oil and a fair share of the profits.

The Saudis realize that they do not yet have enough trained personnel to run the company. Also, the Saudis have a generally pro-American, pro-business philosophy. The company's executives have gone to great lengths to stay out of Saudi politics, and to help the country develop.

Home Loans. Aramco has guaranteed loans to Saudi entrepreneurs, and introduced new agricultural techniques. Since the early 1950s, it has provided free health care, schooling and no-interest home mortgage loans to its Saudi employees, while paying them well (average yearly wage: $6,270) and training them carefully. Today 15% of the company's some 260 managers are Saudis. They mingle easily in the company's headquarters town of Dhahran, where Aramco has created a neighborhood of ranch-style houses and tree-lined streets that look a bit like a suburb of Houston.

"We did not do all this to be Big Daddy," explains Mel Lafrenz, Aramco's director of management development. "It was simply a realistic appraisal of what we ought to do to stay here as long as we could." Aramco until recently had steadily stepped up production, from 3.5 million bbl. per day in 1970 to a high of 8.2 million bbl. daily last September and was shooting for 11 million bbl. per day next year.

The Yom Kippur War changed that plan. When the Arabs ordered production cutbacks, Chairman Jungers quickly complied. Similarly, Aramco followed orders to stop exports to "hostile" nations, including the U.S., and went along with a tripling of prices decreed by the Middle Eastern oil-producing countries.

In effect, the U.S. oil companies had lost control over every phase of Aramco's operations.

How big a slice of Aramco will the Saudis demand when they eventually open negotiations? Predicts Chairman Jungers: "Saudi Arabia will negotiate something that all parties can live with."

This file is automatically generated by a robot program, so viewer discretion is required.