The Saudi-Aramco "50/50" Agreement, December 30, 1950
About the Document
In 1933, a consortium of American oil companies, led by Standard Oil of California, signed a concession with the Saudi Arabian government of King Abd al-Aziz ibn Saud (r. 1902-1953) to explore for petroleum in the eastern provinces of the kingdom. In 1938, the company discovered oil, and began exporting small quantities. Following World War II, global demand for oil increased dramatically, and with the demand, the Saudi government's royalties rose from less than $5 million to more than $50 million in four years. After learning that the company, renamed Aramco (Arab-American Oil Company), in 1944 paid more in U.S. taxes than in royalties, and following a trend developing in Venezuela and Iran, the Saudi government requested, then demanded, re-negotiation of the division of royalties. The resulting agreement between Aramco and the Saudi government, also known as the "50/50" Agreement, set the precedent of equal sharing of income from petroleum in the Middle East, and paved the way to nationalization of petroleum reserves. Following the 1973 Arab-Israeli war, the Arab members of OPEC (the Organization of Petroleum Exporting Countries) imposed an embargo against Western supporters of Israel, resulting in the first of a series of price increases that transformed the world oil market. In 1938, Saudi Arabia produced 1,400 barrels of oil daily. By 1999, the amount was close to 8,000,000 barrels per day, about 12% of the world's total production, with an annual value of $46.5 billion. Saudi Arabia is estimated to have about 262.8 billion barrels of crude oil reserves, about 25% of the world's total.
Agreement concluded on 30 December 1950 between the government of the Sa'udi Arab Kingdom, hereinafter called "the Government," represented by His ExceIlency al-Shaykh 'AbdaIlah al-Sulayman al-Hamdan, Minister of Finance, and The Arabian American Oil Company, hereinafter caIled "Aramco," represented by F. A. Davies, its Executive Vice-President and Senior Resident Officer in the Sa'udi Arab Kingdom.
Whereas, the Government for a period of many months has been seeking additional revenue from Aramco, has held views different from those of Aramco on many long-standing interpretations of Aramco's concession and other agreements, and has made many claims and exactions which Aramco has contested as contrary to Aramco's concessionary rights and immunities; and
Whereas, the Government by letter of 20 August 1950 demanded amendment of certain conditions of Aramco's concession and other outstanding agreements and on 5 September 1950 submitted some thirteen points for discussion; and
Whereas, the Government on 4 November 1950 and on 27 December 1950 promulgated income tax decrees providing, among other things, for the taxation of business profits within the Sa'udi Arab Kingdom; and
Whereas, both the Government and Aramco recognize the necessity for resolving all matters in dispute so that Aramco may proceed with the development of oil resources in areas of Aramco's concession in full agreement with and having full cooperation from the Government;
Now, therefore, it is hereby agreed as follows:
1. Anything in article 21 in Aramco's concessionary agreement [of 29 May 1933] notwithstanding, Aramco submits to the income taxes provided in royal decrees, . . . it being understood that:
a. In no case shall the total of taxes, royalties, rentals and exactions of the Government for any year exceed fifty per cent (50%) of the gross income of Aramco, after such gross income has been reduced by Aramco's cost of operation, including losses and depreciation, and by income taxes, if any, payable to any foreign country but not reduced by any taxes, royalties, rentals, or other exactions of the Government for such year; and
b. In all other respects Aramco's exemptions and immunities set forth in article 21 of the concession agreement shall continue in full force and effect.
2. It is further understood that:
a. Aramco shall have the option to pay the taxes . . . in the currencies of the Sa'udi Arab Kingdom or in other currencies in the proportions in which Aramco receives such currencies from its sales.
b. The term "exactions of the Government" as herein used shall include, among other things, the amount of all fees and charges for services rendered to Aramco in excess of the cost of such services and all duties on imports by Aramco for Aramco, for its service organizations and for the use and benefit of Aramco employees and of such organizations, except duties on food and items imported by Aramco for sale in its canteens.
3. The Government recognizes the continuing nature of the provisions of articles 1 and 2 of this agreement, and agrees that the new arrangement described therein constitutes a complete satisfaction of all outstanding claims and demands of the Government with respect both to the past and to the future; the Government agrees that Aramco may continue to conduct its operations in accordance with the Aramco concessionary agreements in the same manner as in the past.
4. The following are examples of the effect of article 3:
a. The demands of the Government's letter of 20 August 1950, and the Government's points for discussion of 5 September 1950, are fully satisfied.
b. Aramco's practices of using the English ton of 2,240 pounds in computation of royalties, selecting the locations for royalty gauging, taking natural salt for use in Aramco's operations, and using crude oil, gas, and petroleum products free of royalty in Aramco's operations and facilities in Sa'udi Arabia, are in accordance with the terms of the concessionary agreement.
c. The Government agrees that Aramco may gauge and deliver oil to the Trans-Arabian Pipe Line Company at al-Qaysumah.
d. The Jiddah radio agreement of 6 March 1949 is in full force and effect.
These articles in no way limit the all-inclusive generality of article 3.
6. The free gasoline and kerosene that shall be offered the Government pursuant to article 8 of the Supplemental Agreement dated 31 May 1939 is hereby increased commencing 1 January 1951 to two million six hundred and fifty thousand (2,650,000) American gallons of gasoline per annum and to two hundred thousand (200,000) American gallons of kerosene per annum, all in bulk at Ras-al-Tannurah. Aramco agrees further to offer the Government commencing 1 January 1951 seven thousand five hundred (7,500) tons per annum of road asphalt at Ras-al-Tannurah, the said asphalt to be supplied in drums, provided that drums are available at reasonable cost. No royalty shall be payable on crude oil required for the manufacture of gasoline, kerosene and asphalt offered free by Aramco and taken by the Government. The costs of producing the said crude oil and of manufacturing the said free gasoline, kerosene, and asphalt shall be regarded as an expense of operations and not as an exaction within the meaning of article 2 (b) of this agreement. It is understood that all the said free gasoline, kerosene and asphalt is for the ordinary requirements of the Government and not for sale outside or inside of Sa'udi Arabia.
7. Aramco agrees, commencing 1 January 1951, to pay the Government seven hundred thousand dollars ($700,000.00) per annum toward the expenses, support and maintenance of representatives of the Government concerned with the administration of Aramco operations. The said amount of seven hundred thousand dollars ($700,000.00) shall be paid in equal installments in January, April, July and October of each year and shall be viewed as an expense of operations and not as an exaction within the meaning of article 2 (b) of this agreement. The Government accepts Aramco's undertaking to pay the said amount of seven hundred thousand dollars ($700,000.00) per annum as full satisfaction of all claims and demands for expenses, support and maintenance of representatives of the Government concerned with the administration of Aramco's operations, including all such representatives of the national, provincial and municipal governments, police, guards, guides, soldiers and officials of the customs, immigration and quarantine services. It is understood that the said payment without limiting the generality of the foregoing shall be in lieu of all claims for salaries, wages, expense, transport, free services, residence and construction of every description, and all payments and services otherwise accruing after I January 1951 pursuant to article 20 of Aramco's concessionary agreement.
8. Aramco confirms its policy of conducting its operations in accordance with first-class oil field practice and its accounting in accordance with generally recognized standards. The Government for its part confirms the Government's confidence in the management of Aramco in conducting Aramco's operations.
9. This agreement shall become effective on the date hereof and shall remain in full force and effect for the duration of the concessionary agreement.
Source: J.C. Hurewitz, ed., Diplomacy in the Near and Middle East: A Documentary Record, vol. 2: 1914-1956 (Princeton: D. Van Nostrand, 1956), pp. 314-21.
King Abd al-Aziz ibn Saud (ruled 1902-1953)
Founder of the modern state of Saudi Arabia, ibn Saud built his kingdom following World War I on the pillars of family alliances and Wahabbism, a puritanical form of Islam that emerged in eastern Arabia in the eighteenth century. After capturing Riyadh and overcoming the al-Rashid family, ibn Saud turned his efforts to conquest of the Hejaz, the territory in western Arabia containing the holy cities of Mecca and Medina. By 1929, ibn Saud was using the title King. Since the early 1930s, the cornerstone of Saudi foreign policy has been close relations with the United States--in part as a way to balance American and British interests in the region's oil. In 1945, on his way back from Yalta, Franklin Roosevelt met with ibn Saud, setting the groundwork for a military and economic alliance that has survived ever since.
Organization of Petroleum Exporting Countries (OPEC)
As late as the 1950s, world oil production and pricing was dominated by the major international oil companies, which set prices unilaterally. In September 1960, in an effort to take control of pricing and production, the governments of Venezuela, Saudi Arabia, Iran, Iraq, and Kuwait agreed to create OPEC. Since then, OPEC has grown to 11 countries: the original five, plus Algeria, Indonesia, Libya, Nigeria, Qatar, and the United Arab Emirates. Following the October 1973 Arab-Israeli war, the Arab members of OPEC imposed an embargo against countries that had supported Israel. As a result, gasoline shortages hit Europe and the United States, and the global price of oil quadrupled. After another price increase following the Iranian Revolution of 1979, oil prices stabilized, and OPEC producers split over strategy, with one group favoring cuts in production to keep prices high, and the other favoring higher production in order to keep prices lower to stimulate steady demand. Today, OPEC countries account for about 78% of the world's known crude oil reserves, and about 41% of the world's crude oil production. Saudi Arabia is the largest producer, itself accounting for roughly 25% of the world's total reserves, and 12% of production.
- According to the agreement, what does the company accept in the way of taxes, and what does the Saudi government accept in terms of limits on its own power over the company? What protection does the agreement give against nationalization of oil?
- According to the agreement, why does Aramco agree to pay $700,000 per year to the Saudi government? What does the government agree to in return?
- Compare this agreement to the D'Arcy Concession of 1901 (doc. 27.3). In what ways are the two agreements similar and different? How do you account for the similarities and differences?
- Does this agreement favor either the company or the Saudi government? Why would the company agree to pay higher royalties, and how could the Saudi government have responded had the company refused to pay?
- What are the major reasons for this agreement between Aramco and the Saudi Arabian government? Why was the old agreement no longer considered suitable?
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