Lecture 1.4

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CRICOS Provider No. 00126G copyright © The University of Western Australia

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BL Oil & Gas History, Economics and Geopolitics OENA8433BL Oil & Gas History, Economics and Geopolitics OENA8433Topic 1, Lecture 4: The rise of the MultinationalsTopic 1, Lecture 4: The rise of the Multinationals

Dr Karin OerlemansDr Karin Oerlemans

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Unit OverviewTopic 1: Introduction – The Founders

Lecture 1: Introduction to course: Oil beginningsLecture 2: The establishment of oil capitalism in the USA Lecture 3: The irresistible rise of John D RockefellerLecture 4: The rise of the multinationals

Topic 2: The Global StruggleTopic 3: War and StrategyTopic 4: Oil and Gas EconomicsTopic 5: Oil and Gas Technology in contextTopic 6: The Energy Industry Today


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Recommended ReadingYergin, D. (1991). The prize: The epic quest for oil, money and power. New York: Free Press.Economides, M. & Oligney, R. (2000). The colour of oil. Katy: Round Oak.

Other References:http://www.azer.com/aiweb/categories/magazine/ai102_folder/102_articles/102_oil_chronology.htmlwww.shell.com


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Lecture OutcomesUpon successful completion of this lecture you should be able to:

Retell the rise of some of the major competitors for StandardCompare their development in the light of the growing demand for oilUnderstand the impact of their growth on StandardComprehend the significance of this growth in the light of emergent international trade markets


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RussiaRussia was the most promising new market for Standard Oil

BakuZoroastrians worshipped the Baku ‘eternal pillars of fire’C14 – Marco Polo treated camels for mange with oil seepage from a spring in Baku1813 – Baku annexed to Russia1829 – Russian state monopoly oil company tiny production – oil produced from 82 hand dug pits1871 – Entrepreneurial oil companies – wells drilled and 20 refineries built

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Robert NobelChemist

His younger brother sent him, with money, to purchase walnut wood for making rifle stocks

“The Walnut Money”: 1873 – He passed through Baku to buy walnut wood, saw the potential of the booming oil industry and bought a refinery with the money instead!

Modernized the refinery to improve efficiency

Oct 1876, 1st shipment of Branobel illuminating oil arrived in St Petersburg


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The Rise of Russian Oil

Ludwig Nobel was a great industrial leader, equal to Rockefeller, became the ‘Oil King of Baku’Harnessed science, innovation and business planning for maximum efficiency and profitabilityEmployed a full time Petroleum GeologistRussian oil surpassed American

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The Rise of Russian OilTransportation:

Wooden barrels (costly – US wood!)

Baku to Astrakan – 600 miles by ship

Transferred to barge at the Volga river

Transferred to train for St Petersburg


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The Rise of Russian Oil1878 – Bulk shipping – Ludvig Nobel design – compartmentalised tanker the ‘Zoroaster’

Ludwig Nobel developed the most technologically advanced refinery in the world

The Nobel Brothers' oil wells in Balakhani, a suburb of Baku. The derricks were so close to each other, making the risk of fire eminent, and the noise level horrendous.

Photo: Asbrink Collection Source: http://www.azer.com/aiweb/categories/magazine/ai102_folder/102_articles/102_oil_chronology.html

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The Rise of Russian Oil‘Nobel Brothers’Petroleum Producing Company:

WellsPipelinesRefineriesTankersBargesStorage depotsRailroadRetail distribution networkMultinational workforce

1874 1876 1878 1880 1882 1884

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The Rise of Russian Oil1880 – Baku 200 refineries

‘Nobel Brothers Petroleum Producing Company’ produced half of Russian kerosene

American kerosene completely forced out of the market

But:No export out of Russia – 2000 miles of boats, barges and trains

Severe winter weather shut down shipping between October and March

Russian demand was not strong – ‘vast peasantry’

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The Rise of Russian Oil

‘Bunge’ and ‘Palashkovsky’convinced the Government to let them build a railway from Baku to Batumi, in Turkey


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The Rise of Russian OilBut:

The oil price fell and they ran out of money

They were rescued by Rothschilds who (1886) formed ‘The Caspian and Black Sea Shipping Company’ (BNITO)

The railway was completed in 1883

Overnight Batum became the World’s most important oil port

The door was open to the West for Russian Oil…..

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The Challenge of Standard OilThe Nobels suddenly faced a major competitor BNITO, as they competed in European markets with American Kerosene

Standard Oil tried to purchase Nobel stock – Ludwig was not interested

Russian oil production increased 10 fold (to 23MMbbl) between 1879 and 1888

Equivalent to 80% American production


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The Challenge of Standard OilIn response Standard Oil:

Slashed prices in Europe

Started rumours about the quality and safety of Russian kerosene

Resorted to sabotage and bribery

Rothschilds set up importing and distribution companies in Britain

Nobels copied

24 days later – Standard Oil set up ‘Anglo-American Oil Company’ – a truly multinational enterprise.

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The Challenge of Standard OilThe railway from Baku to Batum was bottlenecked (3000ft peak over 78 miles with 6 carriages)

1889 – Nobel brothers completed a 42 mile pipeline, through the mountain (using 400 tons of their brother’s product –dynamite)

Year 1888 1891America 78% 71%Russia 22% 29%


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The Son of the Shell MerchantRothschild's needed to dispose of kerosene and set its sights on Asia, a market they knew nothing about

Introduced to Marcus Samuel

Had a business he called ‘The Shell Shop’Sold exotic sea shells imported from the orient

©1991 D Yergin

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The Son of the Shell MerchantIn 1878, Marcus Samuel Junior began handling consignments of cased kerosene

In 1890, noticed the harbour at Constantinople was jammed with tanker ships loading oil

Realized there was more money in oil than in sea shells –ordered construction of eight tankers


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Suez Canal

Source: http://people.hofstra.edu/geotrans/eng/ch1en/conc1en/suez.html

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Suez Canal

The Suez Canal, An artificial waterway running from north to south, across the isthmus of Suez in north-eastern Egypt Connects Port Said on the Mediterranean Sea with the Gulf of Suez, an arm of the Red Sea

The Suez Canal from Spacehttp://www.navis.gr/canals/su_space.htm


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Suez CanalPlanned by the French, constructed by the British, opened in 1869

It brought a new era of European influence in Pacific Asia, by reducing the journey:

London to Bombay by 41%

London to Shanghai by 32% (about 6,000 km)

It also avoided ‘Rounding the Cape of Good Hope’

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Source: http://www.wwnorton.com/college/history/ralph/resource/39suez.htm

Suez Canal


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The Telegraph Cable1870 direct cable from London to Bombay completed

Shortly after Japan, China, Singapore and Australia also connected

Global communications and deals could be made in advance of ships arriving in port

Telegraph chart, America and Europe, by Charles Magnus, 1858, from LCSource: history.sandiego.edu/ gen/media/newjournalism.html

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The Coup of 1892On January 5, 1892, the Suez Canal gave its official approval to passage of tankers, built according to M. Samuel's new design:

Hull subdivided into various compartments which allowed for expansion and contraction of the kerosene

Engine and boiler rooms positioned aft, protected by a fireproof bulkhead

Lloyd’s registered

Steam cleaned for the return trip with other goods

Murex, 1892Source: www.shell.com


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The Coup of 1892Samuel made the first shipment of BNITO oil, to Singapore and Bangkok in August 1892

Standard Oil were caught by surprise, they could no longer cut prices in one market and subsidize by raising prices elsewhere

By the end of 1893, Samuel had 10 more boats transporting 90% of the oil through the Suez Canal

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‘The Struggle to the Death’Oil Wars (undercutting, apportioning world markets, mergers and acquisitions):

Standard

Rothschilds

Nobel brothers

Other Russian Producers

http://www.jonchristianryter.com/IMAGE/Oil%20giants.jpg


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‘The Struggle to the Death’In 1892, they all came close to becoming one company. It only failed when Standard Oil could not bring the American independents into the deal, despite having 85% control of American oil

Standard tried to make a deal – with Samuel, but he wanted to retain his independence

Standard then went to Russia, to form the grand alliance, where Standard would receive 75% profits and Russians 25% – the Russian Government opposed this

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‘Royal Dutch’Standard looked towards moving production closer to Singapore, to compete with Russia – it found ‘Royal Dutch’ in Sumatra (Dutch East Indies)

http://www.dornier24.com/images/pictures/Indonesia.jpg


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‘Royal Dutch’In 1880, Aeilko Jans Zijlker, a manager of the East Sumatra Tobacco Company, noticed the natives using torches

The pond where they fueled the torches, smelled of kerosene. He sent a sample to Batavia (Jakarta) for analysis – 60% Kerosene

Zijlker raised funds through the former head of the central bankof the East Indies. Based on this support, the Dutch King, William III granted the use of the title ‘Royal’

The Royal Dutch company floated in 1890, and was oversubscribed 4 times

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‘Royal Dutch’Kessler took over after the death of Zijlker

1892, Marcus Samuel sent his 1st cargo through the Suez, and Kessler was selling 20,000 cases of ‘Crown Oil’ kerosene per month

The Dutch Government excluded the ‘Tank Syndicate’ from the East Indies ports

Royal Dutch Petroleum Company Share certificateSource: http://www.clintonhollins.com/img/x7920.jpg


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‘Royal Dutch’‘Dutch Obstacles’:

Standard Oil was distressed by the new Crown Oil and Russian Oil in Asia. They were impressed with Kessler and the Royal Dutch Company

Samuel and Royal Dutch negotiated, but could not come to terms, although they saw that ‘ruinous competition’ would take place if they did not collaborate

Standard Oil offered Royal Dutch a formal proposal, which would see stock quadruple in value – the board rejected

To prevent Standard Oil acquiring stock, Royal Dutch created a preference stock (for invitation only) which paid 15% of company profits

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‘Royal Dutch’ – Emerging ProblemsSumatran Wells watering outShare price plummetedDrilled 110 new dud wells in SumatraPerlak

Modern Aceh provinceHugo Loudon and group of geologistsDiscover oil, Dec, 1899

http://plasma.nationalgeographic.com/mapmachine/


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‘Royal Dutch’

1900 Henri Deterding appointed ‘interim’ manager on death of Kessler

Sought cooperation for strength

Stability

Price setting arrangements

“Unity gives power”Sir Henri Wilhelm Deterding (1866-1939)

Managing Director of Royal Dutch Petroleum Companyhttp://grancorona.blogspot.com/2004_08_15_grancorona_archive.html

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Shell

1891 Trademark symbol for Marcus Samuel & Co kerosene

1897 Samuel forms Shell Transport & Trading Company

1897:Shell discovers oil in Kutei, East Borneo

Mussel shell logo, c1900

www.shell.com

Pecten shell logo, 2000

www.shell.com


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Shell Borneo Oil:

First gusher – April, 1898

This oilHeavier Kerosene? X Fuel √Significance? Challenge coal for train and naval fuel (driver of Industrial Revolution)

www.santos.com

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Shell – Emerging ProblemsRussia

Famine & economic depression→Domestic kero consumption ↓Russian kero exports↑ → glutWorld Price ↓

China – Boxer rebellionLoss of potential marketShell facilities pillaged

Glut – Freight Rates droppedBorneo

Production slowAccidents etc ↑

Sumatran Oil Rig, 1900


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Shell and Royal DutchWeakness of Royal Dutch?

Start-up company: Small capitalNo infrastructureNo contractsMarket organization

Weaknesses of Samuel's positionDependent on Russian OilDidn’t have refineries – no ownership of productionDistance to markets (but shorter than Standard)Dependence on Rothschilds’

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Shell and Royal DutchStrength of Royal Dutch?

Closeness to Asian MarketGovt backing (Monopoly)Own source of oil

Strength of Samuel’s position?Marketing/distribution system in place + transportAccess to Suez canalCompany was well establishedInnovation


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Shell and Royal DutchIf you were Samuel, what would you do

Go into production elsewhere (where?)Go into refineriesGrow (need capital from where)Protect your markets (make life difficult for competitors especially Standard Oil)

If you were Royal Dutch what would you do?Need to break into a market – compete on prices? Quality? New market? Where is not obvious Maintain monopoly in Sumatra (Dutch East Indies) & in HollandFind more oil

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Compete against one another ‘ruinous competition’!!

Form a partnership 1901 the British Dutch agreement

Shell Transport Royal Dutch Petroleum Company50/50 share holding

1902 Asiatic Petroleum Company Include the Rothschilds 1/3rd owned by each partyHenri Deterding as managing director – 21 years

Solutions


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Royal Dutch Shell Group1907 ROYAL DUTCH SHELL Group of companies

60% owned by Royal Dutch40% by ShellOil production and refining assets lodged in Batavia Petroleum Company (Dutch)Transport and storage in Anglo-Saxon Petroleum Company (English)

www.shell.com

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To America! Competition between Standard Oil and Royal Dutch/Shell Group

Standard Price cutting campaign in Europe Dutch subsidiary in Sumatra

Royal Dutch/Shell Group1912 West Coast sell gasolineOklahoma – established Roxana Petroleum1913 California oil production

Original Roxana Petroleum sign

http://www.wrrhm.org/pages/tour.htm


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More to come …Ongoing acquisitions in Africa, Asia and America 1919 flight across Atlantic on Shell Fuel

Shell Aviation Services established

1929 move into chemicals1950s & 60s supplier of 1/7th of world oil products1970s North Sea oil & gas discoveries1980s introduction of unleaded petrol2005 unification of Royal Dutch and Shell Transport to form Royal Dutch Shell Company

Shell shaped petrol station, 1930

http://www.oldgas.com/info/ws_shell.htm

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A Global Company

Blue areas signify where Shell has a presenceUpstream – Exploration/production of oil and/or natural gas – LNG production and supply, gas to liquids production, and power and gas marketingDownstream Manufacturing – Refineries – Petrochemical facilities Downstream – Sales of oil and/or petrochemicals – Retail stations


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Oil Breakouts1895 Pure Oil company – Pennsylvania trust to be “champions of independence”Oil discovered in

TexasOklahomaColoradoKansasCalifornia

Early 1890s LA field San Joaquin Valley

1893 470,000 barrels 1903 24 million barrels1910 73 million barrels22% of world production

Unocal (Union Oil of California)

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Dissolution of Standard Oil1906 President Roosevelt's attacks on Rockefeller and Standard Oil escalate

Rockefeller singled out as one of the "malefactors of great wealth" Anti-Rockefeller sentiment is at all-time high

1908 U.S. government launches its largest antitrust suit to date, targeting Standard Oil

1911 May 15: U.S. Supreme Court announces decision to dismantle Standard Oil. The company is ordered to divest itself of its subsidiaries within six months


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Dismantling Standard OilHalf total net value Standard Oil of New Jersey – Esso (now Exxon)9% Standard Oil of New York – MobilStandard Oil California – ChevronStandard Oil of Ohio – Sohio then BPStandard Oil of Indiana – AmocoContinental Oil – ConocoAtlantic – ARCO then Sun

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The New Century1879 Edison invented the light bulb1882 threw a switch in office of banker near Wall Street starting an electric generator plant1885 250,000 light bulbs in use1902 18 million!Electricity took over from kerosene and gas for lightingBut …


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The Automobile1885 – Gottlieb Daimler invented what is often recognized as the prototype of the modern gas engine - with a vertical cylinder, and with gasoline injected through a carburettor (patented in 1887). Daimler first built a two-wheeled vehicle the ‘Reitwagen’(Riding Carriage) with this engine and a year later built the world's first four-wheeled motor vehicle

1886 – On January 29, Karl Benz received the first patent (DRP No. 37435) for a gas-fuelled car 1889 – Daimler built an improved four-stroke engine with mushroom-shaped valves and two V-slant cylinders 1890 – Wilhelm Maybach built the first four-cylinder, four-stroke engine

Daimler four wheelerhttp://inventors.about.com/library/weekly/aacarsgasa.htm

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In SummaryGrowth of the modern oil industry

Establishment of oil capitalism in USA

Rise of Russian oil

Nobel Brothers

Marcus Samuel

Shell


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Lecture ConclusionThis is the end of Topic 1, Lecture 4You may now wish to review the lecture before attempting the one of the following online discussion questions, and progressing to Topic 2

Outline and explain clearly the strategies used by Rockefeller to achieve domination by Standard Oil of the oil industry. You should explain why each strategy used by Standard oil was effective in the various scenarios that Rockefeller employed. How effective wouldthese strategies have been in the modern industry?Discuss the strategy of vertical integration and explain some of the economic benefits of such a strategy in general and for the companies in oil industry in particular. Use illustrative examples where possible and debate whether such a strategy is still relevant in the changing scenarios of the 21st century?Explain the conditions under which the dissolution of Standard Oil took place. Explain the significance of this dissolution to the modern oil industry.

The maximum length should be between 300 and 500 words


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Documents

Lecture 1.4