Half & Half

In the garden of his modern home two miles outside Jedda, Saudi Arabia's shrewd old (60) Finance Minister Abdullah El Suleiman sat down to wait for a visitor. For greater comfort in the muggy 80DEG heat, he slipped off his sandals. When a U.S. car rolled up, barefooted Abdullah arose, greeted Arabian American Oil Co.'s Executive Vice President Fred A. Davies and ushered him inside.

There, over small earthenware cups of tea and thick coffee, they scratched their signatures to a historic document. When the news of its contents came out last week, it delighted other oil-rich Middle Eastern nations, but it dismayed Great Britain. Davies,* in revising Aramco's 17-year-old agreement with Saudi Arabia's King Ibn Saud, had given him the most generous deal ever made in all the turbulent history of Middle Eastern oil.

In effect, Aramco made old Ibn Saud an equal partner, who would share & share alike in all of Aramco's profits, including 1950's whopping net (before royalties) of $180 million. For Ibn Saud and Saudi Arabia, it meant a kingly take of $90 million, 50% more than the $60 million that would have been paid under the old royalty payments of 34-c- a barrel. If, as expected, Aramco rings up an operating profit of $200 million in 1951, Ibn Saud will get half of that.

What dismayed the British was that they had been closely bargaining for months with the Iranian government to accept much lower royalties from the Anglo-Iranian Oil Co. (TIME, Jan. 8). The British government, which controls Anglo-Iranian, feared that the Iranians, who now get considerably less than half of Anglo-Iranian's profits, would never settle for less than a 50-50 split. In addition, Anglo-Iranian and the five other owners of the Iraq Petroleum Co. had just about completed long negotiations with Iraq on a new contract. Now that deal, too, seemed certain to blow skyhigh.

"Take a Law." Actually, Aramco had had little choice in its deal. Ibn Saud, faced with heavy drains on his exchequer to keep up his luxurious standard of living and pay for public works, had been demanding more money for two years. Abdullah Suleiman had imported a U.S. tax expert, John Greaney, to help him get it. In November Ibn Saud, who passes his own laws, suddenly promulgated an income-tax decree which would take half of Aramco's profits now and possibly a bigger slice later.

For two months Aramco's Davies and his lawyers argued with Abdullah, protesting that the decree violated their 1933 agreement. Unimpressed, Abdullah said that even rich nations like the U.S. find that they have to boost their taxes now & then. Furthermore, he said, Standard Oil Co. (N.J.), one of Aramco's owners, had made a 50-50 split five years ago with Venezuela.

Davies then offered the flat 50-50 split in return for two important concessions: Abdullah promised in the written contract that the arrangement would be his top demand; he also agreed that Aramco, instead of paying entirely in U.S. dollars and sterling as before, could pay Saudi Arabia in the currencies it takes in from sales. With this assurance, Davies believed that Aramco could do more business in Italy, France and other soft-currency markets (95% of Aramco's market is outside the U.S.).

Take a Lesson. Aramco was reasonably happy with the deal. After investing $400 million in Saudi Arabia, it had boosted production 46-fold in a decade, to a rate of 650,000 barrels daily (equal to 11% of all U.S. domestic production). With the prospect of an expanding market, and with its development work largely completed, Aramco recognized that Saudi Arabia was entitled to a bigger share than it had gotten during the years of exploration work.

Moreover, Aramco preferred to make a generous deal now--and win the prospect of a long period of good feeling--rather than to haggle and build up resentment. It had not forgotten that accumulated resentment caused Mexico to expropriate U.S. oil companies in 1938. It also knew that Jersey Standard's generous 1945 settlement with Venezuela had built immense good will. Ibn Saud also was shrewd enough to learn his own lesson from the Mexican affair: Mexico's oil production plummeted after it drove the U.S. companies out. And Ibn Saud, with no one else to turn to but Britain, which he dislikes, and Russia, which he fears, wanted to keep Aramco happy, too.

* No kin to American Independent Oil Co.'s President Ralph Davies, now drilling for oil in adjoining Kuwait.

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