The 1928 Red Line Agreement

Introduction

The 1928 Group Agreement (better known as the “Red Line” Agreement) was a deal struck between several American, British, and French oil companies concerning the oil resources within territories that formerly comprised the Ottoman Empire within the Middle East. The origins of the Red Line Agreement can be traced back to the initial formation of the Turkish Petroleum Company (TPC) in 1912.

The TPC was formed as a joint venture between Royal Dutch/Shell, the Deutsche Bank, and the Turkish National Bank, in order to promote oil exploration and production within the Ottoman Empire. In March 1914, however, the British Government, which controlled the Turkish National Bank, managed to have its shares within the TPC transferred to the Anglo-Persian Oil Company. The following June, the Ottoman Grand Vizier promised an oil concession to the reconstituted TPC to develop oil fields within the Ottoman provinces of Baghdad and Mosul.

Seven Sisters

During World War I, the Allies expropriated Deutsche Bank's share in the TPC and transferred them to the French Government during the San Remo Conference of 1920. At the time, Royal Dutch/Shell hoped that it could purchase the French Government's shares so as to balance out Anglo-Persian's 50% stake within the TPC. Prime Minister Raymond Poincaré of France, however, brushed aside any such suggestions, since he was determined to create an independent French oil company that could compete with major British and American oil companies, which became known collectively as the seven sisters. The seven sisters were the Standard Oil Company of New Jersey (later Exxon), the Standard Oil Company of New York (Socony, later Mobil, which eventually merged with Exxon), the Standard Oil Company of California (Socal, later renamed Chevron), the Texas Oil Company (later renamed Texaco), Gulf Oil (which later merged with Chevron), Anglo-Persian (later British Petroleum), and Royal Dutch/Shell.

The San Remo Oil Agreement excluded American oil companies from participation in the TPC. This fact provoked strong protests from both American oil companies, who feared that the Europeans would deny them access to foreign oil sources and dump cheap Middle Eastern oil on the world market, and the U.S. Department of State, which opposed any attempts by foreign governments and businesses to discriminate against American firms in their search for new markets and business opportunities. In order to discourage the Europeans from treating American oil companies unfairly, the U.S. Congress passed the Mineral Leasing Act in February of 1920, which denied drilling rights on publicly-owned land in the United States to any foreign company whose parent government discriminated against American businesses. Neither the British nor the U.S. Government, however, wished to jeopardize relations over the issue. In 1928, the TPC was reorganized to include the Near East Development Corporation, an American oil syndicate that included Jersey Standard, Socony, Gulf Oil, the Pan-American Petroleum and Transport Company, and Atlantic Refining (later Arco). Jersey Standard and Socony later assumed total control over the NEDC after they bought out their partners during the 1930s.

Signing the Red Line Agreement

On July 31, 1928, following the discovery of an immense oil field in Iraq and TPC negotiating regarding the division of crude oil output between the partners, representatives from the Anglo-Persian, Royal Dutch/Shell, the Compagnie Française des Pétroles (CFP, later Total), and the Near East Development Corporation signed the Red Line Agreement in Ostend, Belgium. Under the terms of the agreement, each of the four parties received a 23.75% share of all the crude oil produced by TPC, which was allowed to operate anywhere in the Middle East between the Suez Canal and Iran, with the exception of Kuwait. The remaining 5% share went to Calouste Gulbenkian, an Armenian businessman who was a partial stakeholder within the TPC. The most important feature of the Red Line Agreement, however, was its ‘self-denying' clause. It stipulated that the participating companies would agree not to develop oilfields within the territory comprising the TPC unless they secured the support of the other members.

The deal became known as the Red Line agreement because, supposedly, during the negotiations between TPC members, none of the participants was exactly certain of the pre-war boundaries of the Ottoman Empire. Consequently, during one of the final meetings, Gulbenkian drew the boundaries from memory on a map of the Middle East with a red pencil. In fact, the question had been resolved well before, during negotiations between the British and French foreign ministries. Nevertheless, the name stuck.

The Red Line Agreement proved to be a difficult arrangement, since it could not keep non-member companies from seeking concessions within the area covered by the TPC (which was renamed the Iraqi Petroleum Company in 1929). In 1928, Socal secured a concession to search for oil in Bahrain and, in 1933, they managed to gain another concession from the Saudi Government that encompassed the province of al-Hasa. In 1936, the Texas Oil Company purchased a 50% share within the California Arabian Standard Oil Company (the Saudi subsidiary of Socal, which was renamed Aramco in 1944) in order to further develop Socal's concession within Saudi Arabia.

In 1946, Socal and Texaco invited Jersey Standard and Socony to join them as partners in Aramco, but the latter two were barred from doing so under the terms of the Red Line Agreement unless they invited the other members of the TPC to join them. Consequently, Jersey Standard and Socony joined the U.S. Government in pressuring the other members of the IPC to abrogate the terms of the Red Line Agreement. Although the French Government and Gulbenkian protested, both had withdrawn their objections by November 1948, in exchange for a greater share of the output of the IPC, whose boundaries were now redrawn to exclude Saudi Arabia, Yemen, Bahrain, Egypt, Israel, and the western-half of Jordan.