Modern history


Opening the Door on the Middle East: The Turkish Petroleum Company

SOME TEN DAYS after Curzon and Bérenger had raised their glasses in toast to the “blood of victory,” French Premier Georges Clemenceau came to London to pay a visit to British Prime Minister David Lloyd George. The guns had already been silent for three weeks, and the issues of the postwar world could not be postponed. The questions were momentous and inescapable—how to make the peace and how to reorganize a world in shambles. Oil was now inextricably linked to postwar politics. And this topic was very much on the minds of Clemenceau and Lloyd George as they drove through the cheering crowds in the streets of London. Britain wanted to assert its influence over what was loosely known as Mesopotamia, the provinces of the now defunct Turkish Ottoman Empire that would later be known as Iraq. The area was thought to be highly prospective of oil. But France had a claim to one part of the region—Mosul, northwest of Baghdad.

What specifically did Britain want? That was the question Clemenceau asked when the two men finally reached the French embassy.

Would France give up its claim to Mosul, Lloyd George responded, in exchange for British recognition of French control over neighboring Syria?

France would, Clemenceau replied—so long as it received a share of the oil production from Mosul.

To this Lloyd George assented.

Neither Prime Minister bothered to inform his respective foreign minister. Indeed, their casual verbal agreement was not a settlement at all; rather, it was the beginning of the great postwar struggle for new oil sources in the Middle East and throughout the world. It would pit the French against the English, but it would also draw in the Americans. No longer would the competition for new oil lands be primarily restricted to a battle among risk-taking entrepreneurs and aggressive businessmen. The Great War had made abundantly clear that petroleum had become an essential element in the strategy of nations; and the politicians and bureaucrats, though they had hardly been absent before, would now rush headlong into the center of the struggle, drawn into the competition by a common perception—that the postwar world would require ever-greater quantities of oil for economic prosperity and national power.1

The struggle would focus on that one particular region—Mesopotamia. In the decade before the war, Mesopotamia had already been the object of intricate diplomatic and commercial competition for oil concessions, stimulated by favorable reports of its petroleum potential. The wrangling had been encouraged by a dilapidated Turkish empire that was chronically in financial arrears and eager to find new ways to generate revenues. One player in the prewar years was a German group, led by the Deutsche Bank, which aimed to project German influence and ambitions into the Middle East. Arrayed against it was a rival group, sponsored by William Knox D’Arcy and eventually merged into the Anglo-Persian Oil Company. It was championed by the British government as a counterweight to Germany.

Then, in 1912, the British government was alarmed to discover a new player on the scene. It was called the Turkish Petroleum Company, and it turned out that the Deutsche Bank had transferred its claims for a concession to this entity. The Deutsche Bank and Royal Dutch/Shell each held a quarter of the new company. The largest share, half of the total equity, was held by the Turkish National Bank, which, ironically, happened to be a British-controlled bank set up in Turkey to advance British economic and political interests. But there was one additional player, a man who would be admired by some as the “Talleyrand of oil diplomacy” and scorned by others—an Armenian millionaire named Calouste Gulbenkian. It was Gulbenkian who had put the entire Turkish Petroleum Company deal together. Upon closer examination, it turned out that he was the silent owner of 30 percent of the Turkish National Bank, which made him a 15 percent owner of the Turkish Petroleum Company.2

Mr. Five Percent

Calouste Gulbenkian was the second generation of his family in the oil business. He was the son of a wealthy Armenian oil man and banker, who had built his fortune as an importer of Russian kerosene into the Ottoman Empire, and who had been rewarded by the Sultan with the governorship of a Black Sea port. The family actually lived in Constantinople, and there occurred Calouste’s first recorded financial transaction. Given, at age seven, a Turkish silver piece, the boy took it off to the bazaar, not to buy a sticky candy as might have been expected, but to exchange it for an antique coin. (Later in life he would create one of the world’s great collections of gold coins, and he took special pleasure in acquiring J. P. Morgan’s superb collection of Greek gold coins.) Unpopular as a schoolboy—throughout his life there was never to be any great love lost between him and the rest of humanity—the young Calouste often spent his after-school hours in the bazaar, listening to deals being made, sometimes making small ones himself, imbibing the arts of Oriental negotiation.

He was sent off to secondary school in Marseilles, to perfect his French, and then to King’s College, London, where he studied mining engineering and wrote a thesis on the technology of the new petroleum industry. He graduated in 1887, at the age of nineteen, with a first-class degree in engineering. A professor at King’s suggested that the obviously talented young Armenian student go off to France for graduate studies in physics, but his father overruled the idea. Such a notion, he said, was “academic nonsense.” Instead, his father sent Calouste to Baku, from which the family’s fortunes had, in large part, derived. The young man was fascinated by the oil industry that he was seeing for the first time. He was also drenched by a gusher, but the oil being “fine and consistent,” he did not find the experience unpleasant. Though pledging to return, he never bothered to visit oil country again.

Gulbenkian wrote a series of highly regarded articles on Russian oil, which appeared in a leading French magazine in 1889, and he turned the articles into a prestigiously published book in 1891—making himself a world oil expert by the time he was twenty-one. Almost immediately after, two officials of the Turkish Sultan asked him to investigate oil possibilities in Mesopotamia. He did not visit that area—he never did—but he put together a competent report based on the writings of others, as well as on talks with German railway engineers. The region, he said, had very great petroleum potential. The Turkish officials were persuaded. So was he. Thus began Calouste Gulbenkian’s lifelong devotion to Mesopotamian oil, to which he would apply himself with extraordinary dedication and tenacity over six decades.

In Constantinople, Gulbenkian tried several commercial ventures, including selling carpets, none of them particularly successful. But he did master the arts of the bazaar—trading and dealing, intrigue, baksheesh, and the acquisition of information that could be put to advantageous use. He also developed his lifelong passion for hard work, his capacity for vision, and his great skills as a negotiator. Whenever he could, he would control a situation. But when he could not, he would follow an old Arab proverb that he liked to quote, “The hand you dare not bite, kiss it.” In those early business years in Constantinople, he also cultivated his patience and perseverance, which some said were his greatest assets. He was not prone to budge. “It would have been easier,” someone later said, “to squeeze granite than Mr. Gulbenkian.”

Gulbenkian possessed one other quality. He was totally and completely un-trusting. “I have never known anybody so suspicious,” said Sir Kenneth Clark, the art critic and director of the National Gallery in London who helped Gulbenkian in later years on his art collection. “I’ve never met anybody who went to such extremes. He always had people spying for him.” He would have two or three different experts appraise a piece of art before he bought it. Indeed, as he got older, Gulbenkian became obsessed with bettering a grandfather who had lived to the age of 106 and, to that end, employed two different sets of doctors so he could check one against the other.

Perhaps such suspiciousness was a necessary survival mechanism for an Armenian living precariously between opportunity and persecution in the last years of the Ottoman Empire. It was in 1896, during one of the periodic government-sanctioned Turkish massacres of Armenians, that Gulbenkian fled by ship to Egypt. He made himself invaluable to two powerful Armenians—an oil millionaire from Baku and Nubar Pasha, who helped rule Egypt. Those connections opened the doors of both oil and international finance to him, and he was able to set himself up in London as a sales representative for Baku oil.

Once in London, Gulbenkian met and allied himself with the Samuel brothers and with Henri Deterding. His son Nubar later wrote that Gulbenkian “and Deterding were very close for over twenty years. One never knows … whether in the end it was Deterding who used my father or my father who used Deterding. Whichever way round it was, their association was very fruitful to them both as individuals and to the Royal Dutch/Shell Group as a whole.” To Shell, Gulbenkian brought deals, especially acquisitions, and arranged financing.

One of the very earliest transactions he offered was the Persian concession that eventually went to D’Arcy. He and Deterding had looked at the original prospectus for the concession, promoted in Paris by the Armenian Kitabgi, but rejected it because, Gulbenkian later said, it was “a very wild cat, and it looked so speculative that we thought it was a business for a gambler.” Thereafter ruefully watching the growth of Anglo-Persian, he framed a motto—“Never give up an oil concession”—that would be a guiding principle for the rest of his life. He would apply it, first and foremost, and with relentless tenacity through many tribulations, next door to Persia, in Mesopotamia. In 1907, he persuaded the Samuels to open a Constantinople office under his charge. Anti-Armenian sentiment had waned for the time being, and he was altogether busy. In addition to pursuing many other business interests, he was financial adviser to the Turkish government itself, and to its Paris and London embassies, and was a major stockholder in the Turkish National Bank. It was from this base that he brought the rival British and German interests, and then Royal Dutch/Shell as well, into the entity called the Turkish Petroleum Company—a task, he said, requiring great delicacy, and “not, in any way, a pleasant one.”3

From 1912 onward, once the Turkish Petroleum Company had come into existence, the British government directed its efforts toward trying to force the company to amalgamate with D’Arcy’s Anglo-Persian syndicate and jointly pursue a concession. Finally, the British and German governments were able to agree on a unification strategy, and to force its execution. According to the “Foreign Office Agreement” of March 19, 1914, British interests were to predominate in the combined group. The Anglo-Persian Group held 50 percent interest in the new consortium, while the Deutsche Bank and Shell each had their 25 percent. There was still Gulbenkian to contend with. Under the agreement, the Anglo-Persian Group and Shell each gave up the “beneficiary interests” of 2.5 percent of the total shares to the Armenian. That meant that he could not vote the shares, but he would enjoy all the financial benefits of such a shareholding. And so Mr. Five Percent was born, and that was how he was known ever after.

Thus, a decade of rivalry and squabbling was brought to an end. But the signatories had taken upon themselves a very significant obligation, one that would haunt many people down through the decades. They had all agreed to the “self-denying clause”: None would be involved in oil production anywhere in the Ottoman Empire—save jointly “through the Turkish Petroleum Company.” The only areas to which the self-denying clause did not apply were Egypt, Kuwait, and “transferred territories” on the Turco-Persian border. That clause would establish the foundation for oil development in the Middle East—and for titanic struggles—for many years thereafter.4

“A First-Class War Aim”

In a diplomatic note on June 28, 1914, the Grand Vizier promised that the Mesopotamian concession would be formally granted to the now-reconstituted Turkish Petroleum Company. Unfortunately, that was the very day that the Austrian Archduke Franz Ferdinand was assassinated in Sarajevo, triggering the First World War. The timing would leave a major question unanswered: Had the concession actually been granted, or had only a nonbinding promise of a concession been made? On the answer would hang much argument. But for the time being, the war put an abrupt end to Anglo-German cooperation in Mesopotamia and, apparently, interred the Turkish Petroleum Company as well.

But the oil potential of Mesopotamia was not forgotten. In late 1915 and early 1916, a British official and a Frenchman hammered out an understanding for the postwar order in Mesopotamia. Known by their names as the Sykes-Picot Agreement, it rather casually assigned Mosul in northeastern Mesopotamia, one of the most promising potential oil regions, to a future French sphere of influence. This “surrender” of Mosul immediately outraged many officials in the British government, and strenuous effort was thereafter directed toward undermining it. The issue became more urgent in 1917 when British forces captured Baghdad. For four centuries, Mesopotamia had been part of the Ottoman Empire. That empire, which had once stretched from the Balkans to the Persian Gulf, was now over, a casualty of war. A host of independent and semi-independent nations, many of them rather arbitrarily drawn on the map, would eventually take its place in the Middle East. But, at the moment, in Mesopotamia, Britain had the controlling hand.

It was the wartime petroleum shortage of 1917 and 1918 that really drove home the necessity of oil to British interests and pushed Mesopotamia back to center stage. Prospects for oil development within the empire were bleak, which made supplies from the Middle East of paramount importance. Sir Maurice Hankey, the extremely powerful secretary of the War Cabinet, wrote to Foreign Secretary Arthur Balfour that, “oil in the next war will occupy the place of coal in the present war, or at least a parallel place to coal. The only big potential supply that we can get under British control is the Persian and Mesopotamian supply.” Therefore, Hankey said, “control over these oil supplies becomes a first-class British war aim.”

But the newly born “public diplomacy” had to be considered. In early 1918, to counter the powerful appeal of Bolshevism, Woodrow Wilson had come out with his idealistic Fourteen Points and a resounding call for the self-determination of nations and peoples after the war. His own Secretary of State, Robert Lansing, was appalled by the President’s broadside. The call for self-determination, Lansing was sure, would result in many deaths around the world. “A man, who is a leader of public thought, should beware of intemperate or undigested declarations,” he said. “He is responsible for the consequences.”

But the British government, though no less appalled by what it considered Wilson’s high-minded vagueness, had to take the President’s popular appeal into account in formulating its postwar objectives. Foreign Secretary Balfour worried that explicitly pronouncing Mesopotamia a war aim would seem too old-fashionably imperialistic. Instead, in August 1918, he told the Prime Ministers of the Dominions that Britain must be the “guiding spirit” in Mesopotamia, as it would provide the one natural resource the British empire lacked. “I do not care under what system we keep the oil,” he said, “but I am quite clear it is all-important for us that this oil should be available.” To help make sure this would happen, British forces, already elsewhere in Mesopotamia, captured Mosul after the armistice was signed with Turkey.5

Clemenceau and His Grocer

The entire experience of wartime, beginning with the armada of taxis that saved Paris in the first weeks of the war, had convinced the French no less than the British that access to oil was now a matter of great strategic concern. Before World War I, Georges Clemenceau was supposed to have said, “When I want some oil, I’ll find it at my grocer’s.” During the war he changed his mind, and at war’s end, he sought to obtain oil for France, not from his grocer’s, but—like the British—from the Middle East. On December 1, 1918, Clemenceau, following his drive with Lloyd George through the cheering throngs of London, apparently surrendered France’s claim to Mosul. But in turn, Clemenceau won not only British support for a French mandate over Syria, but also a guarantee that France would receive a share of any oil found in British-controlled Mosul.

The exchange in London between the two Prime Ministers, in fact, settled nothing. Rather, it initiated a protracted series of stormy negotiations, filled with acrimony and mutual recriminations, between their respective governments. Indeed, in the spring of 1919, during the Paris Peace Conference, at a meeting of the Big Three dealing with Syria and oil, Clemenceau and Lloyd George rancorously disagreed as to what they had “agreed” on in London and repeatedly accused each other of bad faith. The discussion turned into a “first-class dogfight,” which, save for the on-site peacemaking of Woodrow Wilson, might have become an actual fistfight.

The matter remained unresolved and a major bone of contention until, finally, the Allied Supreme Council met—though with the United States no longer participating—in April 1920, to settle their many outstanding differences, including oil and the Middle East. Lloyd George and France’s new premier, Alexandre Millerand, hammered out the compromise San Remo Agreement: France would get 25 percent of the oil from Mesopotamia, which itself would become a British mandate under the League of Nations. The vehicle for oil development remained the Turkish Petroleum Company; and the French acquired what had been the German share in it, which had been seized by the British during the war. In turn, the French gave up their territorial claim to Mosul. Britain, for its part, made absolutely clear that any private company developing the Mesopotamian oil fields would very definitely be under its control. There was only one remaining question: Was there, in fact, any oil in Mesopotamia? No one knew.6

The French were looking at another way to enhance their oil position—by creating a state company, their own national champion. Rejecting a proposal for partnership with Royal Dutch/Shell from Henri Deterding, Raymond Poincaré, who became premier in 1922, insisted that this new company be “entirely French” in terms of control. To that end, he turned in 1923 to an industrial magnate, Colonel Ernest Mercier. Mercier was well-qualified for the task. A Polytechnicien and a war hero who had been wounded trying to help protect the Rumanian oil fields from the advancing Germans, he was also a technocrat devoted to modernizing the French economy. He had already put together a modern electric industry in France. Now he would try to do the same for oil. The new company was to be called the Compagnie Française des Pétroles, CFP, for short, and it was to be the “instrument” of “liberation” for France. While the French government appointed two directors and approved all others, the company was to be private.

Mercier’s assignment was made more difficult by the reluctance of French companies and banks to invest in the new firm. They had none of the speculative, even feverish enthusiasm for new oil ventures that gripped British and American investors, even though this one would be underwritten by the state. Mesopotamia looked like very high risk—“so full of international difficulties,” Mercier was later to say. “None of the initial investors begged for the favor of being admitted into the CFP.” Nevertheless, Mercier did eventually succeed in finding sufficient investors—ninety banks and companies—so that the Compagnie Française des Pétroles could be launched by 1924. This new firm took up the French shares of the Turkish Petroleum Company.

But the French government remained unsatisfied that its objectives and interests were sufficiently safeguarded. In 1928, a special Parliamentary commission reported on the future organization of the domestic oil market, the largest in Europe after Britain’s. It opposed both a “free market” and state monopoly. Instead, it called for a hybrid—a quota system, under which the state allocated market shares to various private refining companies in order to assure diversity of supply and guarantee the viability of French refining companies. In addition, tariffs and various other legal protections would be established to protect the French refiners against foreign competition. Legislation of March 1928 outlined the main objectives of a new “constitution” for French oil: to curtail the “Anglo-Saxon oil trusts,” to build a domestic refining industry, to bring order to the market, and to develop the French share of Mesopotamian oil. To ensure that CFP would actively embody French interests under the new system, the state acquired a direct 25 percent ownership and increased the number of government directors, while the share of foreign ownership fell sharply. CFP was ready, in the words of a French deputy, to become “the industrial arm of government action.” And the French government had now positioned itself as a major contender in the struggle to obtain the oil riches of the Middle East.7


For the British government, the sailing was not so smooth. It continued its efforts, started during the war, to upset the sixty-forty Dutch-British split and bring Royal Dutch/Shell under British control, by having British rather than Dutch shareholders predominate. To Marcus Samuel, such a result would be of great sentimental importance, and thus very appealing. But Henri Deterding was not much interested in sentiment; his interest was only business. British protection and sponsorship could count for much more than Dutch in a postwar world convulsed by revolution, diplomatic competition, and nationalist movements. But there was a further prize, or bait, for Shell to agree to surrender its Dutch predominance: Mesopotamian oil and the Turkish Petroleum Company. By passing under British control, Shell could guarantee its title to Mesopotamian oil.

From the viewpoint of the British government, bringing Shell under British control would greatly enhance Britain’s worldwide oil position. But the British government wanted to name at least one director and approve others on the board of the restructured Shell, much as in its arrangement with Anglo-Persian. Deterding simply would not countenance that. British predominance was one thing; British government interference in the business was another. Deterding would not risk giving up any commercial control. He also began to see disadvantages in too close an association with the British government, particularly in terms of obtaining acreage in North and South America. Royal Dutch/Shell was the target of persistent attacks in America, where it was mistakenly thought that the Group was an arm of the British government. The criticism was vigorous enough to make Deterding very reluctant to pass under explicit British control.

Yet, despite all the delays, disappointments, and loss of patience, Deterding and Shell continued to be mightily interested in amalgamating with Anglo-Persian. They saw great merit in gaining control of Anglo-Persian before it could become a fearsome direct competitor. Amalgamation would strengthen Shell in its worldwide competition with Standard of New Jersey and the other American companies. It would end the preferential relationship of Anglo-Persian as fuel oil vendor to the key British market, the Royal Navy. Deterding was also repelled by what he saw as waste and duplication in the way the industry was functioning. “The world,” he would soon write to the president of Standard Oil, was “suffering from over-production, over-refining, over-transporting, and—last but not least—over-retailing.”

Anglo-Persian had already had to face difficulties because of government ownership. Many countries, said a Foreign Office official, assumed that “every action of the company” resulted from “direct Government inspiration,” hampering both company and government. Latin American countries, in response to American prodding, banned concessions to government-controlled oil companies, which meant, specifically, Anglo-Persian. Its link to the British government could prove especially dangerous on Anglo-Persian’s home soil, Persia. The company was already seen as standing much too close to the British government in the eyes of Reza Shah, the one-time military commander who had made himself ruler of the country. How secure would the company—and Britain’sposition—be with the new Shah? Anglo-Persian’s entire position in the country was highly vulnerable; as one British official observed, the “whole revenue is at present derived from an area of a few square miles in Persia. Any interruption, either from natural causes or through hostile action, of the output of this small field would be disastrous.”

A merger with Shell, some British government officials were convinced, would diversify Anglo-Persian’s interests and thus reduce the risk. And, in the process, the government would obtain its long-desired control over Shell. And Shell was still willing—at least up to a point. “The whole question of control,” said Robert Waley Cohen of Shell in 1923, was “very largely nonsense. It is a matter of sentiment, but if by transferring control to the Hottentots we could increase our security and our dividends, I don’t believe any of us would hesitate for long.”

To be sure, there was no shortage of opposition to amalgamation, beginning on political grounds. Public hostility to “oil trusts” was not much less in Britain than in the United States. But the strongest opposition came from the Admiralty, which continued to be antagonistic to Shell. The Navy’s original rationale still remained; the government, as one official commented, “did not go into the Anglo-Persian Company to make money but to form an independent Company for national reasons.” The Admiralty had also become deeply attached to its right to obtain fuel oil from Anglo-Persian at a substantial discount from the going market price, especially as the Navy’s budgets were under constant threat of cutback. And, of course, Anglo-Persian itself vehemently opposed the amalgamation. Charles Greenway had not fought so hard to turn the enterprise into an integrated oil company in order for it to become merely an addendum to the hated Shell.8

Reenter Churchill

How, against such entrenched opposition, was Shell to effect its takeover of Anglo-Persian? Robert Waley Cohen had a brain wave. In the course of a carefully orchestrated dinner, he approached Winston Churchill with a most interesting proposition. Would the former M.P. and distinguished former Cabinet member consider taking up a project on Shell’s behalf? The assignment? To lobby for an amalgamation of both Anglo-Persian and Burmah Oil with Shell, whereby Shell might end up purchasing the government’s shares in Anglo-Persian. Burmah was also supportive of such a combination. Churchill would really be working for Britain, Cohen stressed, for if his effort was successful, it would secure British control over a worldwide oil system.

The offer could not have been better timed. For in the summer of 1923, Churchill, the “champion of oil,” was out of a job. He had been defeated in his Parliamentary constituency at Dundee East, had just purchased a new country estate, Chartwell, and was writing at a furious pace in order to make ends meet. “We shall not starve,” he promised his wife. After his discussions with Churchill, Cohen said, “Winston at once saw the picture complete.” Still, Churchill said he had to think about it. He did not want to damage the political career to which he was totally devoted. Moreover, he needed to earn a living, and he would have to put aside the fourth volume of his work on the Great War—The World Crisis. So, of course, there would have to be a fee.

Yes, of course.

After brief consideration, Churchill accepted the offer. But about the fee? Churchill wanted ten thousand pounds if the deal did not go through, and fifty thousand pounds if it did.

Cohen was taken aback by the magnitude of Churchill’s terms, but it was decided that the sum could be split between Shell and Burmah. As the chairman of Burmah remarked, “We couldn’t very well haggle or bargain” with Churchill. Burmah’s officers worried about how to pay the money, since if the recipient of such a large fee was not disclosed on the books, the auditors would not approve. Finally it was decided to set up a secret account.

Thus, Churchill went to work for Burmah and, more so, for Shell, the very same company that—while First Lord of the Admiralty, a decade earlier, engaged in his battle to bring the Navy into the oil age—he had so roundly castigated. Shell’s voraciousness, he had then insisted to the House of Commons, was the central reason for the government to buy shares in Anglo-Persian and guarantee its independence. Now he was prepared to undo all that, to persuade the government to sell those same shares in the cause of what he now saw as larger political and strategic interests. Shell would pick up those shares, thus shifting the balance within the Royal Dutch/Shell Group from Dutch to British predominance.

Churchill wasted no time. In August 1923, he called on the Prime Minister, Stanley Baldwin, who, Churchill wrote to his wife, was “thoroughly in favor of the Oil settlement on the lines proposed. Indeed he might have been Waley Cohen from the way he talked. I am sure it will come off. The only thing I am puzzled about is my own affair. … It is a question of how to arrange it so as to leave no ground of criticism.” Prime Minister Baldwin was certainly persuaded that the British government should quit the oil business. He even had a definite figure in mind for the purchase of the government’s shares. “Twenty million pounds would be a very good price,” he told Churchill. It was almost ten times what the government had paid less than ten years earlier, an excellent return on a speculative investment.

But before anything further could be done, there was an outside intervention. Baldwin called a snap general election at the end of 1923, and Churchill, the job not yet done, resigned his commission, returned the initial fee, and charged back into his natural and beloved fray, politics. A minority Conservative government came back into power, but quickly fell, and was replaced by Britain’s first Labour government, which resolutely rejected both the amalgamation and the selling off of the government stake. In the autumn of 1924, the Conservatives came back into power, but they, too, were now opposed to selling the government stake. “His Majesty’s Government,” the Undersecretary of the Treasury wrote to Charles Greenway, chairman of Anglo-Persian, “have no intention of departing from the policy of retaining these shares.” The minister responsible for the Treasury was the new Chancellor of the Exchequer, none other than the newest convert to Conservatism, Winston Churchill.9

Oil Shortage and the Open Door

The Middle East was not to be the preserve of European oil interests alone. The American companies were embarking on a campaign to develop new oil supplies worldwide, which would inevitably thrust them into the Middle East. A fear of imminent depletion of oil resources—indeed, a virtual obsession—gripped the American oil industry and many in government at the end of World War I and well into the early 1920s. The wartime experience—“Gasolineless Sundays” and the part played by oil in battle—gave a tangibility to the fear. When, in 1919, a retiring official wrote him that lack of foreign oil supplies constituted the most serious international problem facing the United States, President Wilson sadly agreed: “There seemed to be no method by which we could assure ourselves of the necessary supply at home and abroad.” The anticipated rapid depletion of American oil resources was gauged against the rise in demand: American consumption had increased 90 percent between 1911 and 1918 and was expected to grow even faster after the war. America’s love affair with the automobile was becoming ever more intense. The increase in the number of registered motor vehicles in the United States between 1914 and 1920 was astonishing—a jump from 1.8 to 9.2 million. The fear of shortage was such that one Senator called on the U.S. Navy to reconvert from oil back to coal.

The leaders of engineering and scientific geology shared the fear. The director of the United States Bureau of Mines predicted in 1919 that “within the next two to five years the oil fields of this country will reach their maximum production, and from that time on we will face an ever-increasing decline.” George Otis Smith, the director of the United States Geological Survey, warned of a possible “gasoline famine.” What to do? The answer, he said, was to go overseas; the government should “give moral support to every effort of American business to expand its circle of activity in oil production throughout the world.” He warned that the known American oil reserves would be exhausted in exactly nine years and three months.

At the same time, there was much discussion about the potential of the shale oil locked up in the mountains of Colorado, Utah, and Nevada. It was predicted in 1919 that “within a year petroleum will probably be distilled from these shales in competition with that obtained from wells.”National Geographic excitedly declared that “no man who owns a motor-car will fail to rejoice” because shale oil would provide the “supplies of gasoline which can meet any demand that even his children’s children for generations to come may make of them. The horseless vehicle’s threatened dethronement has been definitely averted.” Alas for the proponents of shale oil, the costs of development were woefully underestimated. In Britain, where similar shortfalls were anticipated, Anglo-Persian was doing research on extracting liquid fuels from coal, and the British government had given over two acres in Dorset to the cultivation of Jerusalem artichokes in the hope that this plant could produce alcohol in commercial quantities to be used as automobile fuel.

Large price increases gave powerful support to the expectation of shortage. Between 1918 and 1920, the price of crude in the United States jumped 50 percent, from two to three dollars a barrel. Moreover, the winter of 1919–20 saw an actual shortfall in fuel oil supplies. The United States, it was generally thought, would soon have to become a significant importer of oil. And that raised the specter of international competition and a clash with Britain. Both the United States oil industry and the American government firmly believed that Britain was pressing its own aggressive policy to preempt the rest of the world’s oil resources before the Americans could move. Thus, Washington rallied quickly to support the oil companies in their quest for foreign supplies. The principle invoked was that of the “Open Door”—equal access for American capital and business.

The British reacted to this campaign with varying mixtures of skepticism, injury, outrage, and implacability. They noted that the United States produced two-thirds of the world’s crude oil. “I don’t expect that you or any other oil man in America really believes that your supplies are going to be exhausted in the next 20 or 30 years,” John Cadman, director of the Petroleum Executive, wrote incredulously to an American friend. But the fears of both shortage and competition pushed American companies to seek out new supplies on a worldwide basis, either by exploration or by purchase of existing production. And the shift in strategy would be supported by technological improvement—in tankers, pipelines, and drilling—that helped to overcome the physical difficulties and distances that before the war would have been forbidding obstacles to global exploration or production.10

American eyes fastened on the Middle East, particularly Mesopotamia, under British mandate. But the door was manifestly not open there. When two Standard Oil of New York geologists slipped into the territory, the British civil commissioner handed them over to the chief of police of Baghdad.

The news of the San Remo Agreement of 1920, the understanding between the British and French over the division of any possible Mesopotamian oil, stunned Washington and the oil industry. The accord was thunderously denounced in the American press as old-fashioned imperialism; it was regarded as all the more obnoxious because it seemed to violate the principle of equal rights among the victorious Allies. Jersey was deeply worried. It feared a double alliance—one between the British and the French, and one between Shell and Anglo-Persian—that would shut it out of production and markets around the globe. The company protested vigorously to the State Department, which no less vigorously denounced the agreement as a violation of the cherished principles of the Open Door. Congress passed the Mineral Leasing Act of 1920, which denied access to drilling rights on public lands to foreign interests whose governments denied similar access to Americans. It was aimed, specifically, at the Dutch in the East Indies and the British in Mesopotamia.

Cynical observers were struck by the degree to which the Wilson Administration, the embodiment of progressivism, now gave support in its final phase to the oil companies—particularly to Jersey, the most prominent heir to the dragon that had been slain by the Supreme Court just a decade earlier. The British ambassador to Washington marveled at how the rapprochement between the Wilson Administration and the Standard Oil interest “completely reversed the prewar relationships under which it was nothing less than courting disaster for any member of the administration to incur the suspicion of an affiliation with the oil interests.” The specter of oil shortage and the suspicion of British treachery did much to firm this new alliance. So did the wartime experience of business-government collaboration; Standard Oil of New Jersey, alone, had supplied a quarter of all the oil used by the Allies. There were other reasons as well for the turnabout. Progressivism and reform had spent their force. And the American businessman was again to be seen, as in the 1880s and 1890s, as a hero, and government would be his supporter, not his adversary.

The new Republican Administration of Warren Harding, which came into office in 1921, was an outright champion of business, and it proved even stronger than its predecessor in defending American oil interests, from Mexico to the Dutch East Indies—and including Mesopotamia. Tension between the United States and Britain mounted. But then something strange happened. The British became conciliatory and signaled a new openness to American participation in Mesopotamia. Why? For one thing, they recognized that there was ambiguity about the legal status of the Turkish Petroleum Company. Had it won a concession in 1914—or only the promise of a concession? In addition, the British had many other economic and strategic considerations on the agenda with the United States, and it wanted American cooperation. London was also concerned about anti-British sentiment in the United States, which was at a high point. There was even talk in Congress of retaliating with an embargo on the shipment of American oil to Britain. Moreover, failure to allow American participation in the Mesopotamian development would only be a permanent irritant—or worse—in Anglo-American relations. By contrast, direct American involvement could be a real plus: the British were anxious to see the region’s petroleum resources developed as rapidly as possible in order to provide revenues to the new British-backed government that was emerging in Mesopotamia, thus reducing pressure on the British Treasury. American capital and technology would certainly speed the process. Finally, Shell at least believed that American participation would strengthen the hand of the companies in any political difficulties that might arise in that unstable part of the world. Calouste Gulbenkian added his voice, advising the Permanent Undersecretary of the Foreign Office that it would be better to have the Americans “inside” than to have them “outside,” competing—and challenging the concession. The Permanent Undersecretary was persuaded, and he very firmly instructed Anglo-Persian and Royal Dutch/Shell that it was in the British national interest to include the Americans—and as soon as possible. Afterward, he wrote Gulbenkian to say that the Armenian had been “instrumental in bringing in American participation.”11

“The Boss”: Walter Teagle

But which American companies was the United States government to support? Would it not appear more than a little unseemly to exert so much diplomatic energy solely on behalf of a single company, Jersey Standard? Various influential people, including Commerce Secretary Herbert Hoover, suggested that a syndicate of American companies be formed to operate in Mesopotamia. Hoover, in particular, knew the oil business and its risks well; he had been active in it before the war, and in fact had sold some Peruvian oil properties to Walter Teagle of Jersey, who had described the future President in his notes at the time as “a queer looking fellow—seersucker suit & white tennis shoes.” Now, at a meeting in Washington in May of 1921, Hoover, as Commerce Secretary, and Secretary of State Charles Evans Hughes explained frankly to a group of oil men that the United States could not swing the door open on behalf of one company alone, but could do so for a representative group. For its part, Jersey recognized that it could never count on sustained government support if it went the course alone, and so Teagle put together a consortium of several leading companies. Only recently this new group would have been attacked by the government on grounds of restraint of trade; now it was supported as a national champion in promoting the Open Door and access to foreign oil.

Following the establishment of this American group, the State Department backed away from the inevitable clash with European oil interests. While monitoring developments closely, it would stand apart from the actual negotiations. Walter Teagle, a businessman and not a politician or diplomat, would speak for the American syndicate, and in July 1922, he sailed for London to begin negotiations on American participation in developing whatever petroleum resources were to be found in Mesopotamia. He could have had no idea how lengthy and difficult the course would be.12

On one side stood Teagle, representing not only Standard Oil, but also the entire consortium of American companies. Arrayed against him were Henri Deterding, Charles Greenway, and for the French, Colonel Ernest Mercier of CFP. But hovering close to the table was Calouste Gulbenkian. All of Teagle’s opponents were partners in the Turkish Petroleum Company, which controlled the Mesopotamian concession—or at least presumed it did.

Gulbenkian, more than anybody else, would prove to be Teagle’s chief antagonist in the unfolding drama. The contrast between the two men seemed enormous in almost every respect. Short and unprepossessing, Gulbenkian was suspicious and uncommunicative. Teagle loomed over almost everybody; he was six foot three, and a man of considerable girth—sometimes getting up as high as three hundred pounds when he was losing one of his battles with his almost unquenchable passion for chocolate. He appeared direct and forthright, the very embodiment of the friendly American. Whereas Gulbenkian was a lone operator, Teagle was the head of the world’s largest oil company, by far the largest of the successor companies to the Standard Oil Trust. Known as “the Boss,” he singularly dominated Standard Oil of New Jersey, and was one of the most prominent and familiar figures throughout the oil business. Gulbenkian preferred anonymity.

Yet there were strange similarities between the two men. Teagle, too, was born to oil. As Gulbenkian was second-generation oil business, so was Teagle, on his father’s side. On his mother’s side, he was actually third generation; his maternal grandfather was Maurice Clark, the partner whom John D. Rockefeller had bought out at the critical “auction” held in Cleveland in 1865. Teagle’s father, originally from Wiltshire in England, was one of the most successful independent refiners in Cleveland, and for years he had resisted the onslaughts of the Standard Oil Trust. He hated Standard Oil, and had been one of the heroic battlers against it depicted in the pages of Ida Tarbell’s history of the trust.

Both Gulbenkian and Teagle had been outstanding students of petroleum technology. At Cornell University, Teagle seemed to be manager or organizer of almost every student activity. He wrote his undergraduate thesis on the desulfurization of crude oil and scored an unheard-of perfect one hundred in industrial chemistry. Like Gulbenkian, he was encouraged by his professor to study for an advanced degree, and his father responded as sharply as Gulbenkian’s had—in Teagle’s case, with a terse telegram, “Come home at once.” Back in Cleveland, Teagle went to work firing a still in the family refinery, at nineteen cents an hour. Then his father sent him out on the road. Teagle proved himself to be a formidable, aggressive, and persuasive salesman. But he was again summoned home to help sell out the family business to the enemy his father had so long resisted—Standard Oil. His father could not carry the strain any longer. Better to be bought out than to struggle on. Moreover, Standard Oil had spotted the talented young Teagle, and it wanted not only the owner’s business, but also the owner’s son.

The family business was now reconstituted as Republic Oil, and the young Teagle was made its boss. His skills soon became apparent—a mastery of the whole range of the oil business; a prodigious memory for technical, commercial, and administrative details; unflagging energy; a capacity to reason through a problem and find a solution; and beneath the outward charm, a relentlessly demanding and dominating personality. The years on the road had taught him what Gulbenkian had learned in the bazaar—always go for the best deal possible. “He haggled over everything,” a colleague from the Republic Oil days remembered. “He’d trade and trade and trade. If it was company money, he’d think he was paying too much for a five cent cigar and try to get it for four.”

Teagle rose rapidly and by 1908, he was head of Standard Oil’s Foreign Export Committee. He had a keener understanding than Standard’s other senior executives of the new dynamics of the international marketplace. He also developed a better understanding of Henri Deterding and promoted conciliation with Royal Dutch/Shell. Once, in order to settle a particularly acrimonious competitive situation in the Far East, Teagle spent two days shooting grouse with Deterding in Scotland—they were both excellent wing shots—two days playing poker, and then worked out the matter. Yet their mutual respect, even what could be described as friendship, could not overcome the fundamental suspicion that governed their relationship. Far too much was at stake. Bluntly stated, each man totally distrusted the other. Deterding, Teagle once said, “frequently changes his mind and usually forgets to tell you that such is the case.” Teagle never ceased to see Royal Dutch/Shell as the most dangerous and deadliest of competitors.

In 1909, Teagle became a director of Standard Oil, taking the chair of the powerful H. H. Rogers, who had, among other things, been Ida Tarbell’s inside source. Teagle was only thirty-one. One newspaper predicted that he had been picked to fill the “John D. shoes” and reported that—in contrast to Rogers, who had been Mark Twain’s admirer and patron—Teagle’s favorite authors were Dun and Bradstreet. Teagle believed that a kind of managerial paralysis had set in at Standard Oil, primarily as a result of the antitrust suit and other legal assaults. One of the costs, Teagle thought, was the failure by the company to adjust to the new global competition and to develop its own crude production from foreign sources.

In 1917, at the age of thirty-nine, Teagle became president of Standard Oil of New Jersey. He was a new style leader. He was not a substantial stockholder, in contrast to the previous generation; he was a professional manager, and his arrival reflected a change in American business and the nature of the corporation. He would later completely restructure Standard’s operations. Yet he also represented a continuity with the company’s past—after all, he was the grandson of Rockefeller’s original partner—and he made sure that the continuity was clear to others. On becoming president, he installed Rockefeller’s old rolltop desk—number 44—in his own office and set about reinvigorating the moribund company. He had observed firsthand the cost of excessive secrecy as measured in the public antipathy to the old Standard Oil, and put much effort into better public relations. He created a new in-house magazine, The Lamp, and made himself its de facto editor. He instituted an “open door” for the press. He was available, yes, friendly and hearty with reporters, and apparently candid and forthright. But what he said was also carefully controlled and calibrated. Still, it was a striking difference from the old regime.

With the end of World War I, Teagle saw that the company faced a major problem—crude supply. His efforts to push the company into crude production had continually been blocked by the traditional opposition to such a “risky” activity, as reflected in the comment of one veteran director, who said, “We’re not going to drill dry holes all over the world. We’re a marketing company.” Now, Teagle feared that oil shortages would become chronic in the postwar world. He believed that Standard Oil was at a great disadvantage, as its crude production was only equivalent to 16 percent of its refinery output. Meanwhile, his old rival Deterding was pursuing a global strategy of building up diversified sources of crude around the world. Teagle knew of the efforts of the British government to merge Shell and Anglo-Persian. He fully expected an ever-harsher global competitive environment, and he feared that Standard Oil of New Jersey was not ready for it. To meet the challenge, Teagle overrode his opponents and pushed the company into domestic acquisitions, as well as into a new commitment to foreign oil production. In 1920, at the fiftieth-anniversary celebration for Standard Oil, he bluntly enunciated his strategy: “The present policy of the Standard Oil Company is to be interested in every producing area no matter in what country it is situated.” And wherever in the world there looked to be the possibility of oil, Standard Oil of New Jersey intended to be there.13

That was why, in the summer of 1922, Teagle was in London, facing the partners in the Turkish Petroleum Company. The discussions were fruitless and, after a month, Teagle returned home. The negotiations were continued by correspondence. By December 1922, the frustrated Americans were seriously thinking of walking away completely. It was no easy matter to divide up Mesopotamia, or Iraq, as the British mandate was now called, at such a crowded table.

The participants argued over who would get what share of Iraqi oil. They debated whether they would maintain the self-denying exclusion from the earlier agreement and thus not participate in oil production in most of the rest of the former Ottoman Empire except through the Turkish Petroleum Company. Then there was the acrimonious matter of revenues, which proved to be the most contentious issue of all. Teagle and Greenway of Anglo-Persian wanted the oil sold to the participating stockholders at cost, without any profits on it. That way, they would preclude a battle with Iraq over definition of profits and just pay it a royalty, and the American companies would avoid additional British taxes. But this proposal did not please Iraq, which wanted a direct share of earnings. Nor did it sit at all well with Calouste Gulbenkian, who was most interested in receiving his dividends in money—not oil.

To make matters more problematic, the new, much-shrunken nation-state of Turkey was challenging the border with Iraq and was trying to undermine the legal basis of the Turkish Petroleum Company—all of which highlighted the risk that the oil companies would be running in that part of the world. To blunt these risks, the British government, taking advantage of its League of Nations mandate over the region, put pressure on Iraq to grant a new concession, but without swift result. For the British government had a most uneasy relationship with the regime it had recently established in Iraq. The two parties could not even agree on what the word “mandate” meant.14

Faisal of Iraq

During the war, London had encouraged Hussein, the Sharif of Mecca, to take the lead in raising an Arab revolt against Turkey. This he did, beginning in 1916, aided by a few Englishmen, of whom the most famous was T. E. Lawrence—Lawrence of Arabia. In exchange, Hussein and his sons were to be installed as the rulers of the various, predominantly Arab, constituents of the Turkish empire. Faisal, the third son of Hussein, was generally considered the most able. Lawrence, enchanted at meeting Faisal during the war, described him as “an absolute ripper” and the perfect person to command the revolt in the field. After the war, Faisal cut a romantic figure at the Versailles Conference, even capturing the imagination of the dry American Secretary of State, Robert Lansing, who wrote that Faisal’s “voice seemed to breathe the perfume of frankincense and to suggest the presence of richly colored divans, green turbans, and the glitter of gold and jewels.”

The British put Faisal on the throne of the newly created nation of Syria, one of the independent states carved out of the extinct Turkish empire. But a few months later, when control of Syria passed to France under the postwar understandings, Faisal was abruptly deposed and turned out of Damascus. He showed up at a railway station in Palestine, where, after a ceremonial welcome by the British, he sat on his luggage, waiting for his connection.

But his career as a king was not yet over. The British needed a monarch for Iraq, another new state, this one to be formed out of three former provinces of the Turkish empire. Political stability in the area was required not only by the prospect for oil, but also for the defense of the Persian Gulf and for the new imperial air route from Britain to India, Singapore, and Australia. The British did not want to rule the region directly; that would cost too much. Rather what Churchill, then the head of the Colonial Office, wanted was an Arab government, with a constitutional monarch, that would be “supported” by Britain under League of Nations mandate. It would be cheaper. So Churchill chose the out-of-work Faisal as his candidate. Summoned from exile, he was crowned King of Iraq in Baghdad in August 1921. Faisal’s brother Abdullah—originally destined for the Iraqi throne—was instead installed as king “of the vacant lot which the British christened the Amirate of Transjordan.”

Faisal’s task was enormous; he had not inherited a well-defined nation, but rather a collection of diverse groups—Shia Arabs and Sunni Arabs, Jews and Kurds and Yazidis—a territory with a few important cities, most of the countryside under the control of local sheikhs, and with little common political or cultural history, but with a rising Arab nationalism. The minority Sunni Arabs held political power, while the Shia Arabs were by far the most numerous. To complicate things further, the Jews were the largest single group among inhabitants of Baghdad, followed by Arabs and Turks. To this religious and ethnic mosaic, Britain sought to import constitutionalism and a responsible parliament. Faisal depended upon Britain to support his new kingdom, but his position would be gravely impaired if he were seen as being too beholden to London. The British government had to cope not only with Arab nationalism in Iraq but also with the oil men, who were clamoring for some word on the status of the Iraqi concession. Britain was all for oil development, hoping that the potential oil revenues would help finance the new Iraqi government and further reduce its own financial burdens.

But oil exploration and development in Iraq could not begin without a new, sounder concession granted by the government. For one thing, Washington consistently refused to recognize the validity of the 1914 grant to the Turkish Petroleum Company. Allen Dulles, the chief of the Division of Near Eastern Affairs in the State Department, carefully monitored the long negotiations for the U.S. government. In 1924, he told Teagle that the United States government believed that the Turkish Petroleum Company’s claim to a concession was “invalid.” As Dulles had explained on another occasion, “The information we have is sufficient to knock the case of the Turkish Petroleum Company into a cocked hat.” Yet the various Iraqi cabinets, fearful of nationalistic sentiments and domestic criticism—which sometimes expressed itself in the form of assassination—were most reluctant to take responsibility for signing over a revised concession to the foreigners. Negotiations between the Turkish Petroleum Company and the Iraqi government were, thus, slow, difficult, and invariably bitter. But at last, on March 14, 1925, a new concession agreement was signed. It satisfied the American government; it gave the illusion of holding open the Open Door. But that last, Gulbenkian later noted, was mere “eyewash.”15

The Architect

Everything seemed settled at last, even the boundary with Turkey, except for one stumbling block—Calouste Gulbenkian and his 5 percent. Throughout the negotiations, Gulbenkian had remained a strange, solitary figure. He went to great lengths to avoid meetings, but scrutinized every word of memoranda, and replied with a torrent of telegrams. Isolation also marked his personal connections. “Oil friendships are very slippery,” he once said. That certainly proved true of his formerly close business relationship with Deterding, which ruptured in the middle 1920s. “We worked most harmoniously for over twenty years,” Gulbenkian later explained, “but, as it has very often been the case in the oil business, personal jealousies, divergencies of opinions separated us.” Others said that their quarrel was the result of a struggle for the affections of a White Russian lady, Lydia Pavlova, former wife of a Czarist general. For a time the two men collaborated on that lady, as on oil. Once, when Deterding found that he could not come up with the three hundred thousand dollars he owed Cartier’s for the emeralds he had impulsively bought for her, Gulbenkian arranged a bridging credit until Deterding’s next draw from Royal Dutch/Shell. But, in due course, Lydia Pavlova became the second Mrs. Deterding, and the outcome led to bad blood between the two men. Deterding and Gulbenkian also had a nasty dispute over the profits from a Venezuelan oil company that Gulbenkian had brought to the Royal Dutch/Shell Group. Deeper questions of ego were at stake, as well. At least, that was the view of Nubar Gulbenkian, who had the unique vantage point of having been personal assistant both to his father and to Deterding—leaving the latter position only when the two men angrily severed their relationship. As Nubar explained, Deterding came to resent the “persnickety interference” of Gulbenkian, while Gulbenkian could not stand the “overbearing grandeur of Deterding.”

With or without Deterding, Gulbenkian continued to be involved in manifold business activities, including an effort to secure an exclusive concession for the marketing of Soviet caviar. He had left his wife installed among his art treasures—his “children,” as he called them—in the mansion he had built on avenue d’Iena in Paris. He himself alternated between suites at the Ritz in Paris or, in London, at the Ritz or the Carlton Hotel, attended by a succession of mistresses, at least one of whom at all times, on the basis of “medical advice,” had to be eighteen years or younger in order to rejuvenate his sexual vigor. He could be seen once or twice a day, taking his constitutional in the Bois de Boulogne or in Hyde Park, his limousine trailing behind him. The rest of the time he sought to keep out of sight, devoting himself to his worldwide business interests, keeping in constant contact by a stream of telephone calls and telegrams.

The companies in the American consortium, particularly Standard, remained committed to developing new oil sources around the world. Iraq loomed very large in their plans. But Gulbenkian stood in the way, and he would not budge. Of overwhelming importance to him was his 5 percent of the Turkish Petroleum Company—to be paid in cash, which the Americans opposed. His break with Deterding only strengthened his obstinacy, taxing ever more Deterding’s and Teagle’s—and everybody else’s—patience. Teagle was once driven to say that Gulbenkian was “most difficult in a difficult situation.” Gulbenkian was convinced, in his own words, that “the oil groups headed by the American had only one aim, that is, by hook or by crook to wipe out” his rights. But he was absolutely confident in his position. The Armenian wanted money, not crude oil. “How would you like it,” he asked a newspaper reporter, “if you had a small interest in an oil company and it was proposed that your dividends be paid in a few gallons of oil?”

Teagle finally decided that he would have to see Gulbenkian in person. He arranged that they should lunch together at the Carlton Hotel in London. After working his way through many courses, Teagle got to the point. He adopted what he thought would be an appealing line in discussing the royalty that Gulbenkian demanded. “Surely, Mr. Gulbenkian, you’re too good an oil merchant not to know that the property won’t stand any such rate as that.”

Gulbenkian’s face went red, and he furiously banged the table. “Young man! Young man!” he shouted. “Don’t you ever call me an oil merchant! I’m not an oil merchant and I’ll have you distinctly understand that!”

Teagle was taken aback. “Well, Mr. Gulbenkian,” he began again, “I apologize if I have offended you. I don’t know what to call you or how to classify you if you aren’t an oil merchant.”

“I’ll tell you how I classify myself,” the Armenian replied hotly. “I classify myself as a business architect. I design this company and that company. I designed this Turkish Petroleum Company and I made a room for Deterding and I made a room for the French and I made a room for you.” His fury was unabated. “Now, the three of you are trying to throw me out on my ass.”16

Toward the Red Line

Meanwhile, it was yet to be determined if oil was going to be found in commercial quantities in Iraq. Only in 1925 did a joint geological expedition—representing Anglo-Persian, Royal Dutch, and the American companies—arrive in Iraq. Even as the stalemate with Gulbenkian continued, the geologists carried out their exploration with rising excitement. One of the Americans reported back to New York that he knew of no other region in the world where the promise of drilling was greater.

Gulbenkian still refused to give any ground. But then why should he? It had been almost thirty-five years since he had written his original report on Mesopotamia and its oil for the Sultan. Almost fifteen years had passed since he had put together the Turkish Petroleum Company. He had paid the expenses out of his own pocket to keep that ramshackle scheme going during the First World War. He had waited patiently for so long; what did a little more delay matter? He was already a fabulously rich man. And he knew that any geological success in Iraq would only strengthen his position by putting pressure on Teagle and the other Americans to come quickly to some agreement.

The response to the flow of news from the geologists proved Gulbenkian right. A settlement, Teagle recognized, was now imperative. Drilling began in April 1927, which meant that delay was no longer possible on the business front. The stalled negotiations started to move again at the same time, as Teagle reluctantly began to give ground to Gulbenkian. Finally, an agreement was in sight.

It was none too soon. One of the drilling sites was at Baba Gurgur, about six miles northwest of Kirkuk, in what was primarily the Kurdish region. There, for thousands of years, two dozen holes in the ground had been venting natural gas, which was always alight. They were thought to be the “burning fiery furnace” into which Nebuchadnezzar, King of Babylon, had cast the Jews. It was there, too, that the local inhabitants—so Plutarch had written—had set afire a street sprinkled with oil seepages to impress Alexander the Great. And it was there, at 3:00 A.M. on October 15, 1927, from a well known as Baba Gurgur Number 1—in which the drill bit had barely passed fifteen hundred feet—that a great roar was heard, reverberating across the desert. It was followed by a powerful gusher that reached fifty feet above the derrick, carrying in it rocks from the bottom of the hole. The countryside was drenched with oil, the hollows filled with poisonous gas. Whole villages in the area were threatened, and the town of Kirkuk itself was in danger. Some seven hundred tribesmen were quickly recruited to build dikes and walls to try to contain the flood of oil. Finally, after eight and a half days, the well was brought under control. It had flowed, until capped, at ninety-five thousand barrels per day.17

The leading question had been answered. There were petroleum resources in Iraq—potentially so bountiful that they were, after all, well worth all the wrangling. Now a final settlement became urgent. The negotiations had to be completed. At last on July 31, 1928, nine months after the initial discovery—almost six years to the day since Teagle had first sailed to London to nail down an agreement—the full contract was signed. Royal Dutch/Shell, Anglo-Persian, and the French would each receive 23.75 percent of the oil, as would the Near East Development Company, which was created at this time to hold the interests of the American companies. As to the main sticking point, Gulbenkian would receive his 5 percent interest in oil, but he could immediately sell the petroleum to the French at market prices, thus automatically transmuting crude oil into his desired and beloved cash.

There remained the question of the critical “self-denying” clause, by which all the participants agreed to work jointly together—and only jointly—in the region. As Gulbenkian later told it, at one of the final meetings he called for a large map of the Middle East, then took a thick red pencil and drew a line along the boundaries of the now-defunct Turkish empire. “That was the old Ottoman Empire which I knew in 1914,” he said. “And I ought to know. I was born in it, lived in it, and served in it.” Gulbenkian may have, however, been adding his own personal embellishment to what had already been decided. For, several months earlier, the British, using Foreign Office maps, and the French, with maps from the Quai d’Orsay, had already fixed the same boundaries. Whoever the author of the boundaries, this far-reaching oil settlement was thereafter called “The Red Line Agreement.”

Within the red line were eventually to be found all the major oil-producing fields of the Middle East, save for those of Persia and Kuwait. The partners bound themselves not to engage in any oil operations within that vast territory except in cooperation with the other members of the Turkish Petroleum Company. So the self-denying clause of the 1914 Foreign Office Agreement was reborn fourteen years later as the Red Line Agreement. It set the framework for future Middle Eastern oil development. It also became the focus for decades of bitter conflict.

Many years later, when it was said that Gulbenkian had defeated him on the deal with the Turkish Petroleum Company, Walter Teagle looked back. Remembering those arduous and time-consuming negotiations, he said, “It was a damn bad move! Should have gone in by ourselves three years earlier.”


It was certainly a great victory for Gulbenkian—the culmination of thirty-seven years of concentration, and a testament to his perseverance and tenacity. It was the deal for which he had waited his entire adult life. It would be worth tens of millions of dollars to him. To mark the grand event, he chartered a boat that summer and set off on a Mediterranean cruise with his daughter Rita. Off the coast of Morocco, he caught sight of a type of ship he had never seen before. It looked very strange to him, with its funnel jutting up at the extreme stern of the long hull. He asked what it was.

An oil tanker, Rita told him.

He was fifty-nine years old, he had just made one of the greatest oil deals of the century, he was the Talleyrand of oil, and he had never before seen an oil tanker.18

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