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The Mideast oil connection

First of three parts

Sunday, March 16, 2003

By Dan Fitzpatrick, Post-Gazette Staff Writer

Part One: How Mellon money and the Gulf Oil giant it spawned helped to create and shape the Middle East

At left, Andrew W. Mellon, right, the Gulf Oil building in Pittburgh.

Part Two
For one young Mellon banker a Middle East assignment opened up a world of oil, riches and Saudi finance.

Part Three
Even several Steelers got into the act when Pittsburgh companies followed the scent of Middle Eastern oil

How Pittsburgh business helped
shape the development of the Middle East

Gulf Oil Co. co-founder William Larimer Mellon once said the oil business stirred in him the "excitement of treasure hunting."

To unearth his most lucrative find, he looked to the vast deserts of the Middle East. Through a combination of timing, luck and intuition, Mellon and his colleagues at Pittsburgh-based Gulf then stumbled onto one of the great treasures of the 20th century -- oil from the Arabian peninsula and the Persian Gulf.

They stumbled onto it early, too, realizing the potential for Mideast crude years before it shot out of the ground in Saudi Arabia, Kuwait, Iraq or Bahrain. The fact that Gulf was willing to trust geological reports at a time when others scoffed at them contributed to the changing economic, political and social landscape of that region, setting the stage for a modern, wealthy and industrialized Middle East.

Since the events of Sept. 11, 2001, which thrust the geography of the Middle East into the front of the American consciousness, little has been said locally about the role Pittsburgh played in the early development of the world's major oil center -- how it helped usher in the spread of capitalism, the rush to riches and the conflicted U.S. dependence on Middle Eastern energy sources. Today, Tuesday and Wednesday, the Post-Gazette traces the many connections between Pittsburgh and the Middle East -- connections newly relevant with war looming in Iraq.

The story of Pittsburgh's involvement begins with William Larimer Mellon and his uncles, Andrew and Richard, all of whom had a history of making good bets on petroleum.

In the late 1800s, they started an oil company in Western Pennsylvania that they sold to John Rockefeller's Standard Oil, a giant of the business. After that, Andrew and Richard Mellon put up several million dollars to support a Texas enterprise that in 1901 struck oil atop a hill in Beaumont, Texas, called Spindletop. The oil from that well, and the Mellons' ability to form an integrated company from it, led to the creation and development of Gulf Oil, named for Spindletop's proximity to the Gulf of Mexico.

But the Middle East would be a tougher sell than Texas.

In fact, the Mellons had to be dragged into it. The person who persuaded them to take a look was a New Zealander named Frank Holmes, who as a British army quartermaster during World War I heard rumors about oil oozing from the coast of the Persian Gulf. Holmes was convinced, at a time when everyone else was not, that oil lay beneath the Arabian sands.

He formed a company, the Eastern and General Syndicate, to go after business in the Mideast. Traveling from country to country, he convinced revenue-starved Arabian rulers that money could be made by allowing companies a chance to dig. He signed 1920s oil options with the island of Bahrain, eastern Saudi Arabia and a "neutral zone" between Saudi Arabia and Kuwait.

Holmes could not find a U.S. or British oil company willing to buy the options, however. Running out of money and not able to raise more capital in London, where people avoided his advances, Holmes went to New York to work with oil expert Thomas Ward and lobby the "New York sheiks" -- a reference to Gulf Oil, which had offices in New York City and a headquarters in Pittsburgh.

In a diary on file at the Historical Society of Western Pennsylvania, Ward describes how he and Holmes approached Gulf officials in Pittsburgh and New York repeatedly in the mid-1920s, with little success. Gulf, in fact, turned down the Bahrain concession three times due to a "lack of sufficient geological information."

So Ward and Holmes returned in 1927 with an offer for Bahrain and a larger geographical area, including Kuwait. The total for all properties -- $250,000. Gulf said 'yes' in November 1927, and on Dec. 24, 1927, a slew of Gulf executives traveled to Bahrain through the cities of New York, Cherboug, Marseilles, Beirut, Baghdad and Makinah, using trains, trucks and steamers to get there.

Gulf Oil agreed to invest $250,000 in oil exploration in Bahrain in 1927. But because of its interest in Iraq, under the terms of an agreement it signed with other companies, it never got to put a rig in Bahrain or the sands of Saudi Arabia, shown above in 1956.

It took about a month.

Once there, Gulf's geologists became excited after their work showed possibility for oil covering Bahrain's 32-mile-long island. But Gulf never got to put a rig into the earth -- all because of its interest in neighboring Iraq and its signing of a "red line" agreement for the future development of Iraqi oil. Signed by nine companies, the 1928 "red line" agreement got its name from a red pencil used to draw a circle around the borders of the Saudi kingdom, Bahrain, Iraq, Yemen, and Oman. It was designed to prevent any single company from pursuing oil rights within that area, the perimeter of the old Turkish Empire. Any pursuit had to be made along with the other companies.

What the red circle meant for Gulf was that it could not dig for oil in Saudi Arabia or Bahrain -- despite its options for both regions.

Gulf officials "were deeply disturbed" about losing Bahrain and Saudi Arabia, Ward wrote in his dairy of the negotiations. While Gulf thought perhaps it was a "mistake," the top executives went along with it, relinquishing rights to an area that would eventually supply more than one-quarter of the world's oil reserves. Frank Leovy, a vice president with Gulf, told a colleague a few years later that the "loss of Bahrain by the Gulf Company was the greatest regret of his life."

But Gulf still had hope for oil in Kuwait -- a country that eventually would become the "crown jewel" of Gulf's oil holdings, according to former Gulf executive Tom Mullins, who is now executive director of Harvard University's Center for Middle Eastern Studies.

In the 1920s, Kuwait was a country suffering from financial distress, with its once-lucrative pearl diving industry now undercut by the development of artificial pearls in Japan. It was ruled by Sheikh Ahmad, who was anxious to strike a deal for oil envious of the 1932 discovery of petroleum in neighboring Bahrain. Holmes, who had locked up the rights to Kuwait, wanted to give them to Gulf.

But the British were not crazy about an American company drilling for oil on their turf. The British government handled all of Kuwait's foreign affairs at the time, and they also were vigilant about protecting the territorial interests of a British-owned oil company now called BP, which controlled the rights to oil in neighboring Iran. At first, BP chairman Sir John Cadman thought he had nothing to worry about when he learned of disappointing geological reports in Kuwait, prompting him to say "the Americans are welcome to what they can find there."

He changed his mind with the May 1932 discovery of oil in neighboring Bahrain, triggering a U.S.-British battle for Kuwait.

Gulf did everything in its power to get the contract. It paid for a $4,389 Sunbeam automobile as a gift to the Sheikh of Kuwait, according to Ward's diary. It also asked the U.S. government to intervene on its behalf. There is evidence Gulf appealed directly to Treasury Secretary Andrew Mellon, member of the family that controlled the company. A State Department memo of November 1931 cited in David Koskoff's book The Mellons shows that Mellon met with three executives of Gulf "in connection with the assistance which Mr. Mellon has asked us to render the representatives of the Gulf Oil Corp."

After Mellon became ambassador to Great Britain in 1932, he met three times with a high-ranking member of the British Foreign Office and each time Mellon brought up Gulf's interest in Kuwait, according to Koskoff. The British diplomat asked to meet with Mellon wrote on Nov. 3, 1932 that "it was quite plain Mellon considered that we were acting with deliberate dilatoriness, and indeed with duplicity, and that the infinite delays of this matter had resulted in his compatriots getting the reverse of a square deal."

It was obvious, noted Mullins, a former Gulf executive now at Harvard, that "our ambassador in London was not a totally disinterested party."

Two years later, the British and Americans agreed to a deal, giving Gulf and BP 50-50 ownership of what they could find in Kuwait. The two companies struck oil in 1938, beating their American competitors in Saudi Arabia by several months. That oil would soon become the largest single source for Gulf, which would become one of the world's largest companies before being purchased by Chevron in 1984. William Larimer Mellon, who eventually became Gulf's chairman, said close to his death that "the Gulf Corporation has grown so big I have lost track of it."

In 1938, though, all of that was in the future. Still, some had a sense of what was to come. Ward, the person who worked with Holmes on the oil concessions, wrote in his diary that now "the genie of the lamp who watched over the fantastic oil reserves" of the Middle East had "opened the door to desert oil for all the world."

He then quoted a Bible passage: "The desert shall rejoice and blossom as the rose."

Tuesday: How one Pittsburgher came to know the bin Laden family and the wealthiest banker in Saudi Arabia.

Dan Fitzpatrick can be reached at dfitzpatrick@post-gazette.com or 412-263-1752.

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