Secret meetings and Cartels in world oil: what happened at Ahnacarry castle

Photo by Daniela Mota on Unsplash

A persistent idea is that there is, to quote the musical ‘Hamilton’, “a room where it happened”. Ordinary people often get the sense that secret deals are being made in hidden places. Academics are often quick to pour scorn on these conspiracy theories. Yet sometimes there is solid evidence of the meetings and their impact.

The early years of the international industry witnessed the birth of global competition in the oil industry, the equivalent to what Hedley Bull referred to as an international system.[1] Thus far, it was a case “where a sense of common interests is tentative and inchoate; where the common rules perceived are vague and ill-formed, and there is doubt as to whether they are worthy of the name of rules; or where common institutions — relating to diplomatic machinery or to limitations in war — are implicit or embryonic.”[2] But a meeting in Achnacarry Castle in Scotland in 1928 was to lead to the As Is agreement which was to explicitly develop some of these embryonic institutions.

According to the authors of the Federal Trade Commission Report, American companies led the initiative, but Christopher Tugendhat and Adrian Hamilton argue that Deterding of Shell, an Anglo-Dutch oil company, originated the idea and dominated the meetings.[3] Some recent researches tends to favour the British companies.[4] Granted permission by its majority shareholder, the Chairman of the Anglo-Persian Oil Company, John Cadman began arrangements to pool markets and facilities in India with Shell. Various outstanding issues were finally settled in January 1928 at the same time as the ‘Heads of Agreement’ covered Egypt, East and South Africa.[5] Cadman, “now representing government policy as well as Anglo-Persian, pursued a concordat with the American companies.”[6] On 22 February 1928, he wrote to Teagle, the president of Standard Oil of New Jersey to propose “a small ‘clearing-house’ for matters of the very highest policy, in which the interests of the great Standard Oil, Royal Dutch-Shell and the Anglo-Persian organisations are engaged.”[7] On 7 March 1928 Cadman wrote to Meyer of Socony (Standard Oil of New York) proposing coordination of policy.[8] These overtures culminated in an invitation from Deterding to Cadman, Teagle, Mellon of Gulf and others to Achnacarry Castle in August 1928.[9] American fear concerning the rising British share of international markets due to her relatively cheaper sources of supply shaped the discussions.[10] The importance of the American fears is reflected in the title of the ‘Pool Association’ or As Is Agreement which was agreed to, though never signed.[11]

THE AS IS SYSTEM

The main feature of the As Is system was that each company was given a quota for each market based on its share in 1928. Companies could only keep to the same per centage share but, of course, volumes would increase as markets matured. Companies might also agree to share costs through joint ventures in exploration, refining and marketing. Transportation costs would be kept down through the device of product exchanges, where markets were supplied from the nearest source. The resultant ‘phantom freights’ are discussed extensively in chapter five in the context of continuing wartime As Is inspired activities.[12] The accord was the Pool Association of September 17, 1928 which had seven governing principles. The first was accepting and maintaining the status quo as regards market share; the second was that existing facilities were to be made available to competitors; the third was that new facilities would only be constructed when made necessary by increased demand. The fourth principle was that production should retain the advantage of geographical situation; the fifth was drawing supplies from the nearest geographical area; the sixth was preventing surplus production in any area from upsetting the price structure in any other area. Companies would establish a tanker pool making product exchanges of standardised products to reduce cross-hauling and duplication of facilities. The seventh principle was that there was no public interest in price increases which would reduce consumption.[13]

The cartel administrative agency was referred to as ‘an association’ or ‘the association’. The procedural section of the Achnacarry Agreement had envisioned an association managed by a working representative of each group. This association was to perform the central statistical and sales management functions necessary to carry out the cartel’s objectives and comprised one representative of each group. It made all the necessary subsidiary arrangements and agreements in the fields of quota-making, price-fixing, production-allocating and transport-assigning. It was provided information by each marketing organisation through reports on expected demand for each product. It kept groups informed of the total demand from the marketing organisations. It allocated to each group its quota of each product and directed shipments to the geographically most favourably located areas. Another function was to prepare schedules of relative freight rates from each port of shipment to each port of import for six months in advance. It would administer the pool of member-controlled surplus transportation facilities provided for in the agreement, and furnish transportation facilities from this pool or from outside agencies for product shipments members did not want transported in their own ships.[14]

Through this period, the majors also controlled about two-thirds of the world’s privately owned tanker fleet, and fifty per cent of the world’s total tanker fleet, including all Government as well as privately owned tonnage. Anglo-Persian alone employed fourteen per cent of the world fleet; together with Shell the figure rose to approximately thirty per cent.[15] The cartel not only allocated markets but also set prices. The basis for this was the ‘Gulf Plus System’. Thus, oil shipped from Iran to Italy was to be charged at the prices asked at the Gulf of Mexico with the addition of the freight cost of the journey from the Gulf. Price competition between American and foreign sources of oil was, therefore, ruled out.[16] Given that the real cost of supplying markets in Italy with Iranian oil was far less than the theoretical cost at Gulf of Mexico prices plus freight costs, Anglo-Persian would enjoy excellent profits from supplying to the Italian markets whether as the main retailer or not. In one of the most durable As Is inspired agreements, Anglo-Persian ruled themselves out from any direct marketing in Italy in exchange for the right to supply twenty per cent of the needs of Jersey and Shell local distributing organisations.[17]

A different example is a draft agreement between Anglo-Persian and Texas from 1929. Belgium, Holland and Sweden were designated as group A; England, Scotland, Switzerland, Germany, Denmark, and Norway as group B. They agreed to create a holding company on an equal sharing equity basis called Petrex Consolidated Ltd. This would supply group A countries with benzine, kerosene, gas oil, fuel oil, and diesel oil from Anglo-Persian, and lubricating oils, greases, and asphalt from Texas; and group B countries with lubricating oils, greases, and asphalt from Texas.[18] However, there were problems with the arrangements. Chief among these was that the antitrust rules of the United States forbade applying the agreement to the United States domestic market, and that the American Independents could price themselves a little lower and so nibble at markets. Even if price cutting kicked them from one market, they would then move to another. For instance, American exports amounted to one-third of oil consumed outside America, but the seventeen companies in the Export Petroleum Association never controlled more than forty-five per cent of American oil exports.[19]

The American Petroleum Institute called a series of conferences between 30 July 1928 and 15 March 1929. There was a recommendation that domestic United States production stay at the 1928 level. This was achieved under the rubric of ‘conservation’ by which United States oil production was limited to maintain price levels. As P.H. Frankel puts it, “conservation was the missing link which had to be forged.”[20] The other part of this strategy was limiting exports. Under the Webb-Pomerene Export Trade Act, two United States Petroleum Export Associations were made. The first was the Standard Oil Export Corporation which centralised the production and export activities of all New Jersey subsidiaries. The second organisation was the Export Petroleum Association, Inc. There were fifteen members by 1928, but in 1930 two more joined. These were the Standard Oil Export Corporation, representing New Jersey and Shell-Union Oil Corporation, representing Shell. The breakdown of the Export Petroleum Association was due to one of its procedural rules. This was the requirement for unanimity for decisions. On its central committee which comprised one member of each participating company it appears that one member prevented agreement on export prices in 1930. While it is not possible to establish beyond all doubt which company this was, there is evidence that it may have been Shell. The curtailment of production was breaking down in the United States as higher export prices were encouraging production. Excess oil was leaking through the loophole into world markets. Sabotaging the association may well have been decided in a secret oil conference in August 1929, which was hosted in London, convened to discuss the problem of United States export prices.[21] On 12 November, Basil Jackson from the New York Office wrote to William Fraser, also of Anglo-Persian, that Shell was making waves in the United States since As Is and agreement with the American group required Shell surrendering some share in other markets.[22]

The collapse of the Export Petroleum Association led to the adoption of a more piecemeal approach to global regulation. The Memorandum for European Markets of January 20 1930 provided procedural amendments to cover the application to local areas. Moreover, the three central players realised their domination of world markets was an insufficient basis for effective controls. Anglo-Persian, Shell and Jersey decided that other companies could join their local agreements, if there were consensus among the three. The base year for quotas remained 1928, and members could expand quotas only at the expense of outsiders. Over- and under-trading would be adjusted by a transfer of customers during the year. Should this not be possible, there would be a transfer of ‘net proceeds’ at the end of the year.[23]

However, Soviet and Rumanian exports grew in the 1930s and a new device was needed to accommodate these exports. The text of the Heads of Agreement for Distribution (Heads) of 1932 generally followed the 1930 agreement. The biggest difference was in the policy towards outsiders. An initiative to encourage their participation included new members being able to join with quotas exceeding their share in 1928. Many outsiders had expanded their trade through using cheap Soviet and Rumanian production. However, compensation was agreed: as trade was taken from outsiders, the original members would first regain their market share. Heads was “a guide to representatives on the field for drawing up rules for local cartels or for local Agreements.” It also established global machinery to supervise the local agreements. There were two As Is Committees, one in New York, the other in London.[24]

The New York Committee was responsible for restricting production, particularly in the United States. The London Committee supervised and coordinated the structure of world oil cartel controls and local market agreements. Heads was formulated in London based on meetings held on October 24 and 15, and November 17 and 18, 1932. There was one consolidated minute. At the meetings on 15 and 16 December 1932 when the agreement was adopted, there were representatives from Jersey, Anglo-Persian, Gulf, Atlantic, Texas, Socony-Vacuum, and Shell. The representative from Sinclair wired regret. These appear to have been the representatives of the London Committee. Supporting all As Is activities, it was decided to establish a central As Is secretariat in London with administrative rather than executive functions. All decisions affecting major issues and matters of principle were referred to both London and New York Committees. The Central Committee would collect and maintain statistical data for administration; it would record and circulate decisions made by the two main executive committees, and also settle all disputes under the Heads agreement.[25]

DRAFT MEMORANDUM OF PRINCIPLES

The Heads agreement lasted till 1934, when continuing problems with Rumanian, Soviet and United States production led to over-supply. This led to difficulties in the local agreements in Europe and elsewhere. A conference held in London between April and May 1934 involved the ‘big three’, Anglo-Persian, Shell, and Jersey.[26] Figures for 1928 to 1933 were exchanged by the groups. This exchange paved the way for a revision of As Is quotas.[27] A new agreement, the Draft Memorandum of Principles (Draft) was formed in May 1934.[28] The Draft “is to cover all countries to the extent that it is not contrary to law.”[29] The United States was expressly excluded, but the significant thing is that the geographic scope was global, rather than European. Previously negotiated local agreements would not be disturbed till termination, though when renewed they were expected to follow Draft principles. The parties would agree product by product and country by country on the per centage of the market which was unobtainable. They would then allocate the remainder in the ratio of the existing quota.[30] The London Committee would deal with the arbitration of all disputes in local markets, though local directors and managers would only know of the Draft to the extent that the London Committee thought necessary. The As Is procedures followed worldwide were that if the representatives could not agree on matters affecting each other’s business, they would agree a memorandum setting forth the facts and their differences and submit this to the As Is Central Committee. If this failed the matter was referred to the Directors of the Groups for final discussion and settlement.[31] Article 22 of the Draft states that,

For the purposes of carrying out the purposes of this Memorandum, a committee shall be maintained in London comprising one representative of each participant, and to this committee shall be referred all matters of dispute concerning the interpretation of this Memorandum or any other questions which may arise as regards the operation of this Memorandum…the decision taken shall be binding on all participants…It shall be the duty of the Committee to cement and co-ordinate the relations between the participants with a view to obtaining the maximum cooperation and the committee is authorised to set up such machinery as it deems advisable for the inter-change of such information and statistics as may be required, and in general do all things necessary toward the proper functioning of this arrangement..[32]

This article was titled ‘Committee’ in the standard version, but in the version approved by Socony-Vacuum all references to As Is were deleted, the article was renamed ‘Disputes’ and was shortened by the omission of parts dealing with the operation and machinery of the London Committee, though this did not imply that they were not applicable.[33] The London Committee As Is territories comprised Albania, Algeria, Angola, Austria, Azores Islands, Belgium, Bulgaria, Canary Islands, Congo, Cyprus, Czechoslovakia, Denmark, Egypt, Estonia, Finland, France (including Corsica), Germany, Gibralter, Greece (including Crete and Rhodes), Hedjaz, Holland, Hungary, Iceland, Italy, Sicily, Sardinia and Tripolitania, Jugoslavia, Latvia, Lithuania and Memel, Madeira, Malta, Morocco (French Western, French Eastern and Spanish and Tangiers), Norway, Palestine, Poland and Danzig, Portugal, Red Sea Area, Rio de Oro, Saar, Spain and Belearic Islands, Sudan (Anglo-Egyptian), Sweden, Switzerland, Syria, Tunisia, Turkey and Asiatic Turkey, United Kingdom and Irish Free State, and West Africa, from Senegal to Nigeria.[34]

The Draft was even more flexible for adaptation to local markets than Heads. For instance, the version agreed with Standard-Vacuum stated that it was not applicable in India.[35] It made it possible for local parties to unanimously override the Draft. It was also more flexible on the issue of the 1928 based quotas. Quotas could be altered in several situations including penalties for under-trading, new membership, or product replacement, e.g. diesel fuel oil for gasoline. At the same time it was more comprehensive, restricting marketing and advertising to budgets set by the London Committee. It provided for looser cooperation and severe reductions in competitive advertising campaigns, so that, inter alia, there was agreement on the number and type of signs in petrol stations. But the suggestion that outside auditors would check on quotas and supplies was resisted.[36] The quotas were revised from 1 January 1936 as over- and under-trading had rendered the 1928 benchmark inappropriate.[37] One market in which problems were persistent was the Far East market in which Caltex habitually over-traded. In 1937, Rieber, chairman of Texas, told Cadman that Caltex did not aim to destroy As Is but wanted to collaborate fully with Anglo-Iranian, and following the retirement of Deterding, also expected better relations with Shell.[38] Rivalry between the Caltex Group and its parents, Socal and Texas on the one hand, and the British companies on the other, will be a recurrent theme.

By the end of 1936, “the DMOP [Draft] has been cancelled.” Henceforth, disputes should be settled locally, but if it proved necessary to refer to “London Head Office officials” this should only be by a joint memorandum agreed by both parties.[39] The reason why there was little provision for referring matters to principals was that the parties to these agreements were the local companies rather than the parent companies. The quotas related to the total market and involved relative share between the parties. Where there was a loss of market share the over-trader must make adjustments to the under-trader, which was the same provision as under the Draft. However, this could be either through a physical transfer of goods or money, if there were mutual consent. In this case, the amount payable would be the gross proceeds less cost of goods and less agreed expenses, which were defined in the Proceeds Less Expense addendum, which was more explicit than Draft and could last for an indefinite period, but it was possible to give notice for any product, without leaving the agreement for the market as a whole.[40] The system thus retained the principle of cooperation, but provided more flexibility in application.

In fact, the system was called a “New ‘As Is’ Memorandum” by Standard- Vacuum. It was superseded by a revised draft of 4 March 1937 which had changes in phraseology for legal reasons.[41] The 1937 draft provided for a meeting held each month for exchange of figures regarding the trade and outsiders. There should be an independent auditor’s certificate at the end of each accounting period for each period. The auditor must be acceptable to the other firms, and where possible they could retain the same firm. Information on how the trade of outsiders was being calculated should be made available and at each monthly meeting definite proposals for adjusting trade should be discussed.[42]

It is impossible to know whether the companies developed any extra profits through this cooperation. What we do know is that there was a lot of cooperation and attempts at coordination. There really was “a room where it happened.”

[1]Hedley Bull, The Anarchical Society: A Study of Order in World Politics (New York: Columbia University Press, 1977), 9.

[2]Hedley Bull, The Anarchical Society, 15.

[3]Congress, Senate, Staff Report of the Federal Trade Commission on the International Petroleum Cartel, Subcommittee on Small Business of the United States Senate, 22 August 1952, 198. [Hereinafter FTC, Report]; Christopher Tugendhat and Adrian Hamilton, Oil: The Biggest Business (London: Eyre Methuen, 1968), 100. Deterding had expressed the idea to Walter Teagle, then a young Jersey executive based in London. Impressed he arranged a meeting with the president of Jersey, Archbold, who was not very interested. On page 99 they claim that “Deterding was the dominant figure at the meeting.”

[4]Daniel Yergin, The Prize, 260–265. Furthermore, it is possible to see the post-World War I Shell as a British company in spite of its share ownership and the misgivings of the British government at the time of its share purchase in Anglo-Persian. For instance, Deterding became a British citizen in 1915. See E.M. Earle, “The Turkish Petroleum Company,” Political Science Quarterly 39 (June 1925), 273.

[5]BP 68317, World Co-operation in Oil. Short Journal of Events.

[6]Daniel Yergin, The Prize, 263. This contradicts Louis Turner’s account of As Is which he regards as resulting from the absence of governmental intervention from Britain and the United States. Louis Turner, Oil Companies in the International System, 30.

[7]BP 68317, World Co-operation in Oil. Short Journal of Events.

[8]BP 68317, World Co-operation in Oil. Short Journal of Events.

[9]Daniel Yergin, The Prize, 263.

[10]BP 43855, Kuwait Oil Company. Note. Folder 10/3, “Kuwait”.

[11]BP 77958 contains a slightly earlier marketing agreement of 25 October 1927 which appears to contain the same terms as the As Is Agreement.

[12]Anthony Sampson, The Seven Sisters, 106–107.

[13]Christopher Tudendhat and Adrian Hamilton, Oil, 100–101 provides a complete text of the seven principles of As Is.

[14]FTC, Report, 205–210.

[15]FTC, Report, 23.

[16]Anthony Sampson, The Seven Sisters, 107.

[17]BP 37143, Memorandum on Italy, Morris to Fraser, 16 May 1945; Morris, 3 September 1943. J. H. Bamberg, The History of The British Petroleum Company, vol. 2, the Anglo-Iranian Years, 1928–1954 (Cambridge: Cambridge University Press, 1994), 115–6.

[18]BP 68878, Draft Agreement Anglo-Persian Oil Company and Texas, 18 July 1929. This is one of the many agreements which the researcher came across which have not been referred to elsewhere. The fact that so many unexamined agreements came to light demonstrates the richness and complexity of the web of agreements, a point of view shared with Jim Bamberg. Informal interview by author, March 1997.

[19]Daniel Yergin, The Prize, 265.

[20]P.H. Frankel, Essentials of Petroleum: A Key to Oil Economics New ed. (London: Frank Cass, 1969), 116–117.

[21]Petroleum Times, August 10, 1929, 239.

[22]BP 71383, B.R. Jackson New York Office. Jackson to Fraser 12 November 1929; Jackson to Fraser, 18 November 1929.

[23]BP 51727, D. Anderson to M.T. Lloyd, 11 October 1934, 2. The effect was to require the over-trader to pay for the oil and also the marketing profit received from the sale.

[24]BP 77958, As Is quotas, 12 March 1934. This pattern continued through all the revisions of As Is procedure and was introduced in Allied relations/resumed again during the war.

[25]Daniel Yergin, The Prize, 265–7. Also, FTC, Report, 230–231, 240–241, 247, 264.

[26]BP 91058, London Conference.

[27]BP 110644, Crude Oil Production — Standard Oil Company New Jersey

[28]BP 77958, Copy of Draft Memorandum of Principles.

[29]BP 77958, Draft Memorandum of Principles, Addendum V, Economy in Competitive Expenditure.

[30]BP 110644, Sharing of Joint Gains from Outsiders, 27 April 1936. Quotas remained at the heart of the system, so although a gain might be made by an individual firm it would be shared by the cartel in the ratio of the existing quota.

[31]BP 110644, Notes on discussion regarding the United Kingdom, 14 August 1935.

[32]BP 91058, Draft Memorandum of Principles.

[33]BP 91058, Draft Memorandum of Principles as agreed with Socony-Vacuum, enclosed with Guepin’s letter of 8 January 1935.

[34]BP 96603, London Committee “As Is” Territories, 1.

[35]BP 91058, Draft Memorandum of Principles as agreed with Standard-Vacuum, enclosed Frederick Godber’s letter to William Fraser, 29 June 1934.

[36]Daniel Yergin, The Prize, 266–8.

[37]BP 110644, As Is Implementation, Memorandum, Revision of ‘As Is’ Quotas, 23 September 1935, 1. The memorandum goes on to state that, “there should be no relaxing of the efforts of all parties against outside competition, so that we may be ready and able to take full and immediate advantage…to expand the joint share of the trade.” 2.

[38]BP 16608, Diary Sir John Cadman’s Visit to Trinidad and New York, February 18 — April 13, 1937.

[39]BP 96602, “Statement”, 17 December 1936, 2–4. This was agreed by directors of Shell and Standard-Vacuum following meetings held in London from November to December 1936.

[40]BP 96602, Snow to Norris, “Statement on The New Shell/Standard-Vacuum Agreement”, 17 December 1936, 1–2.

[41]BP 96602, “New ‘As Is’ Memorandum”, Standard-Vacuum, 18 December 1936; “Covering Note Re. ‘As Is’ Memorandum of 4 March 1937”, 4 March 1937.

[42]BP 96602, “Memorandum”, 4 March 1934.