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Business: Aramco’s Stormy Petrol

5 minute read

Gushing profits, big tax breaks and divided loyalties

Nobody will be following OPEC’S maneuverings in Caracas this week more closely than the executives of a highly secretive oil Goliath that many people have never heard of. The Arabian American Oil Co., or Aramco, is the Delaware-based firm that is jointly owned by Exxon, Mobil, Texaco and Standard Oil Co. of California. Under a geographic concession nearly as large as the state of Oklahoma, Aramco pumps almost all the oil that flows from the Croesus-rich fields of Saudi Arabia. But in Riyadh and Washington alike, Aramco is now feeling heat.

As producer and distributor of some 9.5 million bbl. of crude per day, Aramco is by far the world’s largest oil-producing corporation. It is not required to publish financial records because its stock is not publicly traded. But by expert estimates, during the past two years Aramco has paid between $800 million and $900 million annually to its four shareholders, as well as providing them with lucrative tax benefits.

Aramco got a bonanza from the gap between the $18-per-bbl. price that Saudi Arabia had been charging, vs. the official cartel ceiling of $23.50. In unregulated markets outside the U.S., Aramco’s proud parents have been able to sell their gasoline, heating oil and other products for high prices even though these fuels were made from the lowest-cost cartel crude. Largely as a result, third-quarter profits of Exxon, Mobil, Texaco and Socal jumped by anywhere from 73% to 211%. The revenue surge enraged the Saudis; Oil Minister Ahmed Zaki Yamani argues that Aramco’s parents have been grossly profiteering from Saudi “generosity,” suggesting that last week’s Saudi price rise of $6 per bbl. was in part at least to punish them. In fact, Aramco’s shareholders have been selling their oil products in the U.S. for prices just a bit below their competitors’. If the discounts had been any bigger, long lines would have formed at Exxon, Mobil and Texaco gasoline stations, as well as at those of Chevron, the retailing outlet for Socal.

In the U.S., Aramco is under attack because of a highly complex tax break. The company pays Saudi Arabia the fixed price for the oil that it extracts and then collects a production fee of 25¢ per bbl. But 85% of its payments are considered Saudi income taxes, which Aramco’s four parents ultimately can use to reduce their U.S. income taxes. Every time Saudi Arabia increases its oil prices, Aramco’s local tax payments rise, and so do its benefits under the U.S.’s so-called foreign tax credit. President Carter has vowed to tighten up on the credits, but he has not made much progress partly because Aramco’s owners argue that they need the benefits to stay competitive in world markets.

Aramco’s many critics also complain that the company is altogether too cozy with the Saudi government. Why, they ask, have the Saudis failed to complete their plan to buy out 100% of the company’s production facilities? The government announced the nationalization plan five years ago. So far, it has acquired only 60% of Aramco’s $2 billion in refineries, pipelines and ports. Has Aramco persuaded the Saudis to go slow, since a full buyout would burden the four corporate shareholders with enormous U.S. capital gains taxes? Nonsense, say Saudi officials. They insist that the final take-over is imminent and would have no effect on the company’s operations beause Aramco would continue to run them for a fee. But skeptics suggest that the takeover might already have been consummated. They contend that the Saudi government’s action in providing Aramco since last July with oil at much less than its real market value was in part to compensate the company, free of capital gains taxes, for the takeover of its assets.

In their middleman role, Aramco’s American chiefs plainly have divided loyalties. From Chairman John J. Kelberer, a career-long Aramco engineering manager, on down, executives remain determined to do nothing that would anger their Saudi hosts or jeopardize the company’s concession. During the 1973-74 Arab oil embargo, Aramco’s executives not only did as they were told by the Saudi government, but cut back production by more than requested just to show that they were good Saudi corporate citizens.

Company officers are extremely wary of divulging details of their business, and slips can prove costly. Example: much of Saudi Arabia’s ability to restrain OPEC from driving up prices has depended on whether the Saudis can convincingly threaten to boost production enough to create periodic petroleum gluts. Yet high Aramco officers are among the few people who know the real size of Saudi Arabia’s production capacity. Last spring Exxon and Socal divulged to the Justice Department, in its ongoing anti-trust investigation of the oil industry, that Aramco had little spare capacity. That statement helped to undercut Saudi influence over cartel price policy. On the eve of the Caracas gathering last week, Saudi officials proclaimed that the country could boost output almost immediately, perhaps to a hefty 11 million bbl. Meanwhile, the Saudi government is punishing Socal and Exxon for their indiscretion; Aramco is under orders to cut back deliveries to those two parent companies by 20,000 bbl. per day.

The controversy surrounding Aramco underscores the internal tensions within the U.S. over the nation’s alarming dependence on foreign crude. The oil industry must have billions of dollars to expand U.S. drilling, exploration and other energy-producing investments that are needed to escape OPEC’s hold, and Aramco’s megaprofits are a big help. But to ensure those profits and continued access to foreign crude, the company has to walk a finer and finer line between the steadily diverging interests of producing and consuming states.

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