GEO ExPro

The Emergence of the Arabian Oil Industry

In terms of petroleum reserves and production, the Middle East is second to none. The stories behind the first discoveries in Bahrain, Saudi Arabia and Kuwait in the 1930s are also intriguing.
This article appeared in Vol. 5, No. 6 - 2008

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Satelite view of the Middle East. Photo: NASA The petroleum industry in Middle Eastern countries has come a long way, and its early history was marked by several hard-earned benchmarks. In 1908, the first oil well in the Middle East was successfully drilled in Iran ("Persia 1908," GEO ExPro, No.4/2008). In 1927, the Kirkuk oil field was discovered in Iraq. But it was the 1930s oil discoveries in Bahrain, Saudi Arabia and Kuwait that put the vast part of Arabian lands on the world's petroleum map and brought American oil companies to this strategic region.

Abu Naft: Father of Petroleum


Mesozoic-Cenozoic stratigraphy of eastern Saudi Arabia. Illustration by Rasoul Sorkhabi Major Frank Holmes (1874-1847), known in the modern Arab history as “Abu Naft” (Father of Oil), a British-New Zealander gold miner, an army officer, and oil entrepreneur who obtained oil concessions in Saudi Arabia, Kuwait and Bahrain in the 1920s. Illustration: Setsuko Yoshida Major Frank Holmes (1874-1947), a tough and patient British-New Zealander, also has an Arabic title: "Abu Naft," the "Father of Petroleum." Although he served in the British navy during World War I, Holmes was originally a mining engineer who had worked in gold mines around the world. He was convinced that the Middle East possessed rich oil resources and was committed to profit from this oil trade. In 1920, Holmes helped set up the Eastern and General Syndicate in London to develop oil ventures in the Middle East. Years later, when he was asked how he, a non-geologist, could be so confident of the Middle East's oil riches while some eminent geologists had voted against such ventures, Holmes pointed to his nose and said, "This was my geologist!"  

In 1922, Holmes went to Arabia to negotiate an oil concession with Sultan Abdul Aziz Ibn Saud (1880-1953) who then ruled the eastern parts of the Arabian Peninsula. At that time, the British exerted a dominant influence in Middle Eastern affairs, and Ibn Saud received funds from the British High Commissionaire Sir Percy Cox (1864-1937) to side with the British against the Ottoman Turks. Incidentally, in 1922, Cox was also meeting with Ibn Saud to discuss his kingdom's borders with Kuwait which was resolved by the formation of a Neutral Zone between the two countries. Cox was alarmed by Holmes' presence in Arabia and, hoping that the Anglo-Persian Oil Company (later British Petroleum) would gain an oil concession in Arabia, discouraged both Holmes and Ibn Saud from signing any oil deal. As it happened, an American- Lebanese Ameen Rihani (1876-1940), was also Ibn Saud's guest and was following the events with interest. Rihani, as later discussed in his book Ibn Saoud of Arabia (1928), resented Cox's colonialist attitude and recommended Holmes' deal to the Sultan.  

In 1923, Ibn Saud awarded a concession to Holmes to explore for oil in the eastern Al-Hasa region in return for a rental payment of £2,500 a year. The Eastern and General Syndicate thus began its ill-equipped exploration in a very remote region. They hired a Swiss geologist Arnold Albert Heim (1882-1965) who visited Arabia in 1924, and two years later, submitted a report to the effect that drilling in the region would be "pure gamble." In 1927, Holmes silently halted the company's activities in Al-Hasa and discontinued paying the annual rent without formally canceling the agreement. There was no rush: The Anglo-Persian Company had also come to the same negative conclusion that there was no oil in Arabia, and this would later cost them dearly.

It Began in Bahrain

Harry St. John (“Jack”) Bridger Philby (1885-1960), also known as Sheikh Abdullah (after he became a Moslem), a British colonial officer, born in Sri Lanka and served in India, and later became an eminent geographic explorer, writer and businessman in the Arabian Peninsula. He helped the American company Socal to obtain an important oil concession in Saudi Arabia in 1933. Author of many books on Arab lands and history, he died in Beirut. Illustration: Setsuko Yoshida Holmes had moved to the small island of Bahrain (665 square km in size) in the Persian Gulf. Back in 1908, Guy E. Pilgrim of the Geological Survey of (British) India had reported on the stratigraphy and oil seepages of the island, but Sheikh Hamad al-Khalifa (1874-1942) of Bahrain was more interested in water. Holmes drilled artesian water wells in Bahrain; in return, the Sheikh awarded an oil concession to the Eastern and General Syndicate in 1925. But the Syndicate was then in financial trouble. Holmes went to London to raise funds and even offered the concession to the Anglo-Persian and Shell, but no company was willing to listen to him, and as one English businessman later recalled, "People ran when they saw Holmes coming."  

Equipped with an attractive geological report and oil-saturated rock samples from Bahrain, Holmes went to the U.S. in search of the "big New York Sheikhs." Only one company, the Gulf Oil Corporation, was interested in the deal; and they first dispatched a geologist, Ralph Rhoades, to confirm the geological report. Rhoades recommended drilling immediately. In 1927, The Gulf Oil accepted to purchase Holmes' concession and appointed him as their manager in Bahrain.  

But soon troubles emerged. Following the oil discovery in Iraq (Mesopotamia, then part of the Ottoman Empire) in 1927, the Turkish (later Iraq) Petroleum Company was restructured as a consortium of several companies including the Anglo-Persian, Royal Dutch-Shell, the French Oil Company, the American group, and "Mr. Five Percent" Calouste Gulbenkian (1869-1955) - an Armenian-Turkish-British businessman who had brought all these companies together. During a meeting in 1928, Gulbenkian drew a red line on a map of the Middle East showing the boundaries of the former Ottoman Empire, and according to this Red Line Agreement, no member of the Iraq Petroleum consortium would operate independently within the thus defined territory. The Gulf Oil was a signatory to the Red Line agreement, and Bahrain was included in that territory. The Iraq Petroleum consortium was not interested in any venture in Bahrain and did not allow the Gulf Oil to act on its own, either. Therefore, the Gulf Oil sold its Bahrain concession for $50,000 to the Standard Oil of California (Socal) which, in 1929, established a Canadian subsidiary, the Bahrain Petroleum Company (Bapco), to run their operations in Bahrain with Holmes still as their man in the field. Bapco, with the help of U.S. Secretary of State, obtained the British government's non-objection to their exploration work in Bahrain.  

In October 1931, Socal/Bapco drilled a well on an anticline structure, called Jabal Dukhan, "Mountain of Smoke" because of a nearby seepage, near the town of Awali. On June 1, 1932 the well struck light crude (38 degrees API gravity flowing at 9,600 barrels a day) in a limestone reservoir of Cretaceous age (Wasia Group) at depths of 600-750 meters.  

In 1934, Bahrain produced 39,000 tons (285,000 barrels) of oil and began its export. Two years later, a refinery with a capacity of 10,000 barrels per day was built on the island. Bahrain's original concession gained its government 3.5 rupees (14%) per ton of produced oil, but this share increased to 10 rupees (19%) in 1950. Two years later, a 50-50 profit-sharing agreement was signed, and Bahrain was then producing 11 million barrels annually (30,000 bopd).  

The Anglo-Persian's chairman, Sir John Cadman (1877-1941), was furious to see that Bahrain had slipped out of his hands, even though this island sheikhdom was under British Protectorate. His geologists had made a serious mistake: They had only considered the Oligocene-Miocene reservoir rocks, similar to the 1908 Persian oil field, which were outcropped in Bahrain. But the Bahrain pay zones were from older sediments.  

One Socal geologist, Fred A. Davies, had a visionary idea: Reservoirs similar to those of Bahrain also lay underground in the Arabian Peninsula, only 32 kilometers to the east. He persuaded his home office in San Francisco to explore onshore Arabia.

Enter Jack Philby


Discovery well Dammam No. 7 (1938), Saudi Arabia. Source: Saudi Aramco Mr. Abdullah Sulaiyman, Saudi Finance Minister, and Mr. Llyod N. Hamilton, lawyer and negotiator for Socal, signing the historic oil concession agreement on May 29, 1933 in Khuzam Palace, Jeddha. Photo by Karl S. Twitchell. Source: Saudi Aramco In 1932, having conquered, unified and named the country of Saudi Arabia, Ibn Saud enthroned as the King with Riyadh as his capital. But his state faced huge financial problems. The Western world was in the Great Economic Depression, and Arabia's traditional revenue from pilgrims to Mecca was dwindling. Ibn Saud had a British friend, Harry St. John Bridger "Jack" Philby (1885-1960), who, in 1925, had given up his career at the Indian Civil Service to pursue business and geographic exploration in Arabia. He detested British colonialism in the Middle East, and out of his fondness for Arab culture, Philby had even become a Muslim - given the name of Abdullah by the Saudi king himself.  

In his posthumous book The Arabian Oil Ventures (1964), Philby recalls that in the autumn of 1930 during a car drive in the desert, he persuaded Ibn Saud to utilize his country's hidden oil resources. The following year, Philby introduced an American millionaire and philanthropist, Charles R. Crane, to the King in the town of Jeddah where Philby had an automobile trading company. Crane, an expert in irrigation, had made a successful business of planting Egyptian dates in California. Ibn Saud was interested in finding artesian water in his country. Out of his gratitude to the King's hospitality, Crane commissioned his engineer in Yemen, Karl Twitchell, to investigate water prospects in Saudi Arabia. Twitchell's 1932 report had no good news for water prospects, but it pointed out the importance of oil seeps in the Al-Hasa region. Indeed, Twitchell returned to the U.S. with Ibn Saud's blessing to invite American oil companies to invest in Arabian oil exploration.  

After the 1932 Bahrain discovery, Socal was sending messages to Holmes in Bahrain to set up meetings with the Saudi King for an oil concession. But knowing that he was a (un)wanted man in Saudi Arabia because of his failed 1923 concession Holmes was reluctant to get involved in Saudi Arabia once again.  

Meanwhile, Francis Loomis, a former United State Department's diplomat and Socal's advisor on foreign relations, had sent a letter to Philby in 1932 to seek his help to obtain an oil concession in Saudi Arabia. During a luncheon party in Washington D.C. in late 1932, Loomis happened to meet Twitchell. Shortly later, Socal's manager M.E. Lombardi hired Twitchell as an advisor and dispatched him along with their lawyer Lloyd Hamilton to the Saudi kingdom. The two men and their wives arrived in Jeddah on a ship on February 20, 1933. They contacted Philby and secretly put him on Socal's payroll as an advisor. Philby, nonetheless, wanted to obtain a better bargain for his friend the King, and therefore, urged the Anglo-Persian and the Iraqi Petroleum (which were both under British influence) to send a negotiator for an oil bid. The British sent Stephen Hemsley Longrigg (later author of Oil in the Middle East). Longrigg, as Philby soon found out, was authorized to pay no more than £6,000 for the concession. The American team was willing to pay more. After long negotiations, it was agreed that Socal would pay £35,000 in gold upfront (including the first year's rent of £5,000), a second loan of £20,000 after eighteen months, rental fee of £5,000 a year, and a royalty of 4 shillings per ton of oil produced. The concession, valid for 60 years, was signed on May 29, 1933 by L.N. Hamilton and Saudi finance minister Abdullah al-Sulaiman al-Hamdan who had been advised by King Ibn Saud: "Put your trust in god and sign." On August 25, 1933 Karl Twitchell and Abdullah Sulaiman counted, one by one, 35,000 gold sovereigns Socal officials had purchased from London's black market and had shipped to Jeddah. (In 1951, Twitchell published his informative book on Saudi Arabia.)

Dammam No. 7

Max Steineke, an American petroleum geologist who led the discovery of the Dammam oil field in Saudi Arabia in 1938. Socal’s Chief Geologist in Saudi Arabia from 1934-1946, he was awarded the prestigious Sidney Powers Memorial Medal by the American Association of Petroleum Geologists in 1951, only a year before his death. Steineke was not only an excellent geologist but also a friendly and popular person with Arabs. Illustration: Setsuko Yoshida In the autumn of 1933, Socal founded the California Arabian Standard Oil Company as its subsidiary to operate in Saudi Arabia, and sent its geologists, R.P. "Bert" Miller, S.B. "Krug" Henry, J.W. "Soak" Hoover, Thomas Koch, Art Brown, and Hugh Burchfield to the country. Escorted by Saudi soldiers and guides, these geologists began reconnaissance mapping of the eastern Arabia. They identified the Dammam Dome, about 8 kilometers from the port village of Dammam. This anticline structure was locally called Jabal ("Hill") Dhahran. In the spring of 1934, the company sent a Fairchild 71 airplane for aerial mapping, and its pilot, Dick Kerr, was a geologist himself. In the fall of 1934, a very able field geologist Max Steineke joined the geologists' team in Saudi Arabia, becoming the chief geologist two years later (he held this position until 1946).  

After months of mapping "jabals" (rocky hillocks) in the concession area, the geologists decided to drill their first well, Dammam No. 1, on the western slope of Jabal Dhaharan. The operation was led by Guy S. Williams (driller) and Floyd W. Ohliger (petroleum engineer). The well was spudded in on April 30, 1935; by December it had penetrated the Eocene "Bahrain zone" with only minor shows of gas and oil; the drilling thus stopped at a depth of 976 m.  

Dammam No. 2 was drilled in February 1936 but struck salty water only. Number 3 vomited highly viscous sulfur-rich oil (good enough for covering the desert roads the men were building). Number 4 (707 m deep) and No. 5 (630 m deep) were both dry. Number 6 was never drilled because Max Steineke had found a better site, Dammam No. 7, for drilling. Number 7 was spudded in on December 7, 1936, and Steineke was optimistic and confident about this well.  

In the spring of 1937, while the drilling was going on, the first American wives and children came to Dhahran and air-conditioned cottages were setup for the American families. On December 31, 1937 Dammam No. 7 blew out, and a jet of gas sent the rig high in the air. This was a bad news on a New Year's Day for the company officials back home, but Steineke pressed on: "Dig a bit deeper." On March 4, 1938 (nearly three years after Dammam No. 1), 1,585 barrels of oil - the black gold that Socal and the Saudis were waiting for so long - began to flow out of the well. The oil flow increased to 3,690 barrels three days later, and the well was completed at 1441 m deep at the Upper Jurassic Arab zone. This 130-m thick carbonate reservoir (with a porosity of 20-25%) yielded good quality oil - having 34-35 degrees API gravity and 1.5% sulfur content.  

In 1939, a 63- km pipeline was laid from the Dammam field to the port of Ras Tanura. (A year later, a small 3000-barrel refinery was also built at Ras Tanura). On May 1, 1939 King Abdul Aziz Ibn Saud made a grand visit to the Socal tankerD.G. Scofield at Ras Tanura that was to carry the first oil cargo from Ras Tanura. By the end of 1939, Saudi's oil export amounted to 521,000 tons (3.9 million barrels; i.e. 10,700bopd).  

On May 31, 1939 Socal's representative William J. Lenahan succeeded in signing a supplement agreement with the King, extending the concession from 830 thousand square km. to 1.14 million square km; in return, £140,000 (in gold) was paid to the Saudi government, the rental fee increased to £25,000 a year, £100,000 was promised if new oil field discovery were made, and per ton royalty remained the same as before. (These terms underwent further changes in later decades.)  

In 1936, the Texaco Company (Texaco) bought 50% interest in the California Arabian Standard Oil Company. In 1944, the company's name changed to Aramco (Arabian American Oil Company). In 1948, Standard Oil of New Jersey and Socony-Vacuuum (both now ExxonMobil) bought interests in Aramco. In 1980, the Saudi government completed the phased purchase of Aramco's assets (25% in 1973 and 60% in 1974), and thus began a new life for "Saudi Aramco" (Saudi Arabian Oil Company).  

In 1982 (after 45 years), Dammam No. 7 was shut in, having produced 32 million barrels of oil (averaging about 2000 bopd).

Meanwhile in Kuwait ...

Wellhead of discovery well Burgan No. 1 (1938), Kuwait. Source: Kuwait Oil Company In 1921, Sheikh Ahmad al-Jaber al-Sabah (1885-1950) became the Amir of Kuwait (an Arabic word meaning "fortress close to water"). Pearl export traditionally supplied Kuwait's major revenue, but by 1930 a Japanese businessman, Kokichi Mikimoto, had established a successful trade of artificially-cultured cheap pearl. Kuwait was thus in dire need of money, and oil, especially after the Bahrain discovery, offered a lucrative opportunity.  

Kuwait lay outside the Red Line Agreement; therefore, the Gulf Oil was free to operate in that country. Moreover, the Gulf Oil was supported by a powerful American diplomat and oilman - the 77-year-old Andrew Mellon who was then the U.S. ambassador in London and viewed himself as the godfather of the Gulf Oil (for one thing, Gulf's chairman William Mellon was his nephew). Nevertheless, the British still had a considerable influence over Kuwait and did not wish to loose Kuwait's oil even though there was less demand for oil during the Great Depression of the 1930s. From 1930-32, the Gulf Oil and the Anglo-Persian approached the Amir of Kuwait independently for an oil concession, and the Sheikh was more than glad to play one side off against another in order to secure a better bargain. But once Cadman realized that the Amir was more inclined to make a deal with the Gulf Oil's representative Major Frank Holmes, he was convinced that both companies should unite as one buyer and offer one deal.    

In 1933, Holmes and the Anglo-Persian representative Archibald Chisholm agreed to establish a 50-50 joint venture in London called the Kuwait Oil Company. On December 23, 1934 Sheikh Ahmad signed an oil concession (covering the entire 15,800 square km of Kuwait for 75 years) to this new company and appointed Major Holmes as his representative in London. The Sheikh received in Indian rupees an equivalent of £35,700 upfront (Rs. 47,000), an annual rental fee of £7,150 (Rs. 95,000), and the royalty of three rupees per ton of oil produced with an annual minimum of Rs. 250,000. This was, of course, far less than what the Sheikh had hoped for. (In 1950, Kuwait entered into a 50-50 profit sharing agreement, and in the 1970s, the Kuwait Oil Company was nationalized)  

In 1935, geologic exploration started in Kuwait, and on May 31, 1936, the first well was spudded in at Bahrah, but even at depth of 2,442 m the well proved to be dry. The company then decided to conduct a seismic survey of Kuwait. A second location for drilling was selected near a famous bitumen seep in the Burgan area, about 42 kilometers south of Kuwait City. Drilling began on October 16, 1937, and sediments below 1000 m had oil shows. On February 23, 1938, at a depth of 1120 m, the drill hit a high-pressure sand zone (Middle Cretaceous Burgan Formation) from which oil and gas erupted to the surface (oil flow rose to 4,343 barrels a day and had 32.5 degrees of API gravity). The well was controlled with great difficulty and completed on May 14th. Subsequent drills proved the Burgan anticline structure to be one of the largest oil fields in the Middle East.

A New Era

Although oil exploration and production in Arabian lands were halted during World War II to avoid German occupation of the oil fields, the industry grew rapidly after World War II. The 1938 oil discoveries in Saudi Arabia and Kuwait (now 70 years ago) with the involvement of American oil companies opened a new era in the economic and geopolitical history of the Middle East; these stories also illustrate a dramatic chapter in the history of petroleum industry.

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