Lecture 1.4

1
CRICOS Provider No. 00126G copyright © The University of Western Australia
BL Oil & Gas History, Economics and Geopolitics OENA8433

Topic 1, Lecture 4: The rise of the Multinationals
Dr Karin Oerlemans
1
Unit Overview
Topic 1: Introduction – The Founders
Lecture 1: Introduction to course: Oil beginnings
Lecture 2: The establishment of oil capitalism in the USA
Lecture 3: The irresistible rise of John D Rockefeller
Lecture 4: The rise of the multinationals
Topic 2: The Global Struggle
Topic 3: War and Strategy
Topic 4: Oil and Gas Economics
Topic 5: Oil and Gas Technology in context
Topic 6: The Energy Industry Today
3
Recommended Reading
Yergin, D. (1991). The prize: The epic quest for oil, money and
power. New York: Free Press.
Economides, M. & Oligney, R. (2000). The colour of oil. Katy:
Round Oak.
Other References:
http://www.azer.com/aiweb/categories/magazine/ai102_folder/102_
articles/102_oil_chronology.html
www.shell.com
4
2
Lecture Outcomes
Upon successful completion of this lecture you should be able to:
Retell the rise of some of the major competitors for Standard

Compare their development in the light of the growing demand
for oil
Understand the impact of their growth on Standard
Comprehend the significance of this growth in the light of
emergent international trade markets
5
Russia
Russia was the most promising new market for Standard Oil
Baku
Zoroastrians worshipped the Baku ‘eternal pillars of fire’
C14 – Marco Polo treated camels for mange with oil seepage from
a spring in Baku
1813 – Baku annexed to Russia
1829 – Russian state monopoly oil company tiny production – oil
produced from 82 hand dug pits
1871 – Entrepreneurial oil companies – wells drilled and 20
refineries built
6
3
Robert Nobel
Chemist
His younger brother sent him, with

money, to purchase walnut wood
for making rifle stocks
“The Walnut Money”: 1873 – He

passed through Baku to buy walnut
wood, saw the potential of the
booming oil industry and bought a
refinery with the money instead!
Modernized the refinery to improve

efficiency
Oct 1876, 1st shipment of Branobel

illuminating oil arrived in St
Petersburg
7
The Rise of Russian Oil
Ludwig Nobel was a great

industrial leader, equal to
Rockefeller, became the ‘Oil
King of Baku’
Harnessed science, innovation
and business planning for
maximum efficiency and
profitability
Employed a full time Petroleum
Geologist
Russian oil surpassed
American
8
4
Transportation:
Wooden barrels (costly – US
wood!)
Baku to Astrakan – 600 miles

by ship
Transferred to barge at the

Volga river
Transferred to train for St

Petersburg
9

1878 – Bulk shipping – Ludvig Nobel design – compartmentalised
tanker the ‘Zoroaster’
Ludwig Nobel developed the most technologically advanced refinery

in the world
The Nobel Brothers' oil wells in Balakhani, a suburb of Baku.

The derricks were so close to each other, making the risk of fire eminent, and the noise level horrendous.
Photo: Asbrink Collection
Source: http://www.azer.com/aiweb/categories/magazine/ai102_folder/102_articles/102_oil_chronology.html
10
5
‘Nobel Brothers’
Petroleum Producing
Company:
Wells 10
Pipelines 8
Refineries 6
Tankers
4
Barges
2
Storage depots
Railroad 0
1874 1876 1878 1880 1882 1884
Retail distribution
network
Multinational workforce
11

1880 – Baku 200 refineries
‘Nobel Brothers Petroleum Producing Company’ produced half

of Russian kerosene
American kerosene completely forced out of the market
But:
No export out of Russia – 2000 miles of boats, barges and trains
Severe winter weather shut down shipping between October and

March
Russian demand was not strong – ‘vast peasantry’
12
6
‘Bunge’ and
‘Palashkovsky’
convinced the
Government to let
them build a
railway from Baku
to Batumi, in
Turkey
13

But:
The oil price fell and they ran out of money
They were rescued by Rothschilds who (1886) formed ‘The

Caspian and Black Sea Shipping Company’ (BNITO)
The railway was completed in 1883
Overnight Batum became the World’s most important oil port
The door was open to the West for Russian Oil…..
14
7
The Challenge of Standard Oil
The Nobels suddenly faced a major competitor BNITO, as they
competed in European markets with American Kerosene
Standard Oil tried to purchase Nobel stock – Ludwig was not

interested
Russian oil production increased 10 fold (to 23MMbbl) between

1879 and 1888
Equivalent to 80% American production
15

In response Standard Oil:
Slashed prices in Europe
Started rumours about the quality and safety of Russian
kerosene
Resorted to sabotage and bribery
Rothschilds set up importing and distribution companies in

Britain
Nobels copied
24 days later – Standard Oil set up ‘Anglo-American Oil

Company’ – a truly multinational enterprise.
16
8
The railway from Baku to Batum was bottlenecked (3000ft peak
over 78 miles with 6 carriages)
1889 – Nobel brothers completed a 42 mile pipeline, through

the mountain (using 400 tons of their brother’s product –
dynamite)
Year 1888 1891

America 78% 71%
Russia 22% 29%
17
The Son of the Shell Merchant

Rothschild's needed to
dispose of kerosene and set
its sights on Asia, a market
they knew nothing about
Introduced to Marcus
Samuel
Had a business he called
‘The Shell Shop’
Sold exotic sea shells
imported from the orient
©1991 D Yergin
18
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The Son of the Shell Merchant
In 1878, Marcus Samuel Junior began handling consignments
of cased kerosene
In 1890, noticed the harbour at Constantinople was jammed

with tanker ships loading oil
Realized there was more money in oil than in sea shells –

ordered construction of eight tankers
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Suez Canal
Source: http://people.hofstra.edu/geotrans/eng/ch1en/conc1en/suez.html
20
10
Suez Canal
The Suez Canal,

An artificial waterway
running from north to south,
across the isthmus of Suez
in north-eastern Egypt
Connects Port Said on the
Mediterranean Sea with the
Gulf of Suez, an arm of the
Red Sea
The Suez Canal from Space

http://www.navis.gr/canals/su_space.htm
21
Suez Canal
Planned by the French, constructed by the British, opened in
1869
It brought a new era of European influence in Pacific Asia, by

reducing the journey:
London to Bombay by 41%
London to Shanghai by 32% (about 6,000 km)
It also avoided ‘Rounding the Cape of Good Hope’
22
11
Suez Canal
Source: http://www.wwnorton.com/college/history/ralph/resource/39suez.htm
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The Telegraph Cable

1870 direct cable from London to Bombay completed
Shortly after Japan, China, Singapore and Australia also connected
Global communications and deals could be made in advance of ships

arriving in port
Telegraph chart, America and Europe, by Charles Magnus, 1858, from LC

Source: history.sandiego.edu/ gen/media/newjournalism.html
24
12
The Coup of 1892
On January 5, 1892, the Suez Canal gave its official approval to
passage of tankers, built according to M. Samuel's new design:
Hull subdivided into various compartments which allowed for expansion and
contraction of the kerosene
Engine and boiler rooms positioned aft, protected by a fireproof bulkhead
Lloyd’s registered
Steam cleaned for the return trip with other goods
Murex, 1892
Source: www.shell.com
25
The Coup of 1892

Samuel made the first shipment of BNITO oil, to Singapore and
Bangkok in August 1892
Standard Oil were caught by surprise, they could no longer cut

prices in one market and subsidize by raising prices elsewhere
By the end of 1893, Samuel had 10 more boats transporting

90% of the oil through the Suez Canal
26
13
‘The Struggle to the Death’
Oil Wars (undercutting,
apportioning world markets,
mergers and acquisitions):
Standard
Rothschilds
Nobel brothers
Other Russian Producers
http://www.jonchristianryter.com/IMAGE/Oil%20giants.jpg
27
‘The Struggle to the Death’

In 1892, they all came close to becoming one company. It only
failed when Standard Oil could not bring the American
independents into the deal, despite having 85% control of
American oil
Standard tried to make a deal – with Samuel, but he wanted to

retain his independence
Standard then went to Russia, to form the grand alliance, where

Standard would receive 75% profits and Russians 25% – the
Russian Government opposed this
28
14
‘Royal Dutch’
Standard looked towards moving production closer to
Singapore, to compete with Russia – it found ‘Royal Dutch’ in
Sumatra (Dutch East Indies)
http://www.dornier24.com/images/pictures/Indonesia.jpg
29
‘Royal Dutch’
In 1880, Aeilko Jans Zijlker, a manager of the East Sumatra
Tobacco Company, noticed the natives using torches
The pond where they fueled the torches, smelled of kerosene.

He sent a sample to Batavia (Jakarta) for analysis – 60%
Kerosene
Zijlker raised funds through the former head of the central bank
of the East Indies. Based on this support, the Dutch King,
William III granted the use of the title ‘Royal’
The Royal Dutch company floated in 1890, and was

oversubscribed 4 times
30
15
‘Royal Dutch’
Kessler took over after the death of Zijlker
1892, Marcus Samuel sent his 1st cargo through the Suez, and
Kessler was selling 20,000 cases of ‘Crown Oil’ kerosene per
month
The Dutch Government excluded the ‘Tank Syndicate’ from the

East Indies ports
Royal Dutch Petroleum Company Share certificate

Source: http://www.clintonhollins.com/img/x7920.jpg
31
‘Royal Dutch’
‘Dutch Obstacles’:
Standard Oil was distressed by the new Crown Oil and Russian
Oil in Asia. They were impressed with Kessler and the Royal
Dutch Company
Samuel and Royal Dutch negotiated, but could not come to
terms, although they saw that ‘ruinous competition’ would take
place if they did not collaborate
Standard Oil offered Royal Dutch a formal proposal, which
would see stock quadruple in value – the board rejected
To prevent Standard Oil acquiring stock, Royal Dutch created a
preference stock (for invitation only) which paid 15% of
company profits
32
16
‘Royal Dutch’ – Emerging Problems
Sumatran Wells watering out
Share price plummeted
Drilled 110 new dud wells in Sumatra
Perlak
Modern Aceh province
Hugo Loudon and group of geologists
Discover oil, Dec, 1899
http://plasma.nationalgeographic.com/mapmachine/
33
‘Royal Dutch’
1900 Henri Deterding appointed

‘interim’ manager on death of
Kessler
Sought cooperation for

strength
Stability
Price setting arrangements
“Unity gives power”

Sir Henri Wilhelm Deterding (1866-1939)
Managing Director of Royal Dutch Petroleum Company
http://grancorona.blogspot.com/2004_08_15_grancorona_archive.html
34
17
Shell
1891 Trademark symbol for

Marcus Samuel & Co kerosene
1897 Samuel forms Shell

Transport & Trading Company
Mussel shell logo, c1900
www.shell.com
1897:
Shell discovers oil in Kutei,
East Borneo
Pecten shell logo, 2000

www.shell.com
35
Shell
Borneo Oil:
First gusher – April, 1898
This oil
Heavier
Kerosene? X
Fuel √
Significance? Challenge coal
for train and naval fuel (driver
of Industrial Revolution)
www.santos.com
36
18
Shell – Emerging Problems
Russia
Famine & economic
depression→
Domestic kero consumption ↓
Russian kero exports↑ → glut
World Price ↓
China – Boxer rebellion
Loss of potential market
Shell facilities pillaged
Glut – Freight Rates dropped
Borneo
Production slow
Accidents etc ↑
Sumatran Oil Rig, 1900
37
Shell and Royal Dutch

Weakness of Royal Dutch?
Start-up company:
Small capital
No infrastructure
No contracts
Market organization
Weaknesses of Samuel's position

Dependent on Russian Oil
Didn’t have refineries – no ownership of production
Distance to markets (but shorter than Standard)
Dependence on Rothschilds’
38
19
Strength of Royal Dutch?
Closeness to Asian Market
Govt backing (Monopoly)
Own source of oil
Strength of Samuel’s position?

Marketing/distribution system in place + transport
Access to Suez canal
Company was well established
Innovation
39

If you were Samuel, what would you do
Go into production elsewhere (where?)
Go into refineries
Grow (need capital from where)
Protect your markets (make life difficult for competitors
especially Standard Oil)
If you were Royal Dutch what would you do?

Need to break into a market – compete on prices? Quality?
New market? Where is not obvious
Maintain monopoly in Sumatra (Dutch East Indies) & in Holland
Find more oil
40
20
Solutions
Compete against one another ‘ruinous competition’!!
Form a partnership
1901 the British Dutch agreement
Shell Transport Royal Dutch Petroleum Company
50/50 share holding
1902 Asiatic Petroleum Company

Include the Rothschilds
1/3rd owned by each party
Henri Deterding as managing director – 21 years
41
Royal Dutch Shell Group

1907 ROYAL DUTCH SHELL Group of companies
60% owned by Royal Dutch
40% by Shell
Oil production and refining assets lodged in Batavia Petroleum
Company (Dutch)
Transport and storage in Anglo-Saxon Petroleum Company (English)
www.shell.com
42
21
To America!
Competition between Standard
Oil and Royal Dutch/Shell
Group
Standard
Price cutting campaign in
Europe
Dutch subsidiary in Sumatra
Royal Dutch/Shell Group

1912 West Coast sell gasoline
Original Roxana Petroleum sign Oklahoma – established
http://www.wrrhm.org/pages/tour.htm
Roxana Petroleum
1913 California oil production
43
More to come …
Ongoing acquisitions in Africa,
Asia and America
1919 flight across Atlantic on
Shell Fuel
Shell Aviation Services
established
1929 move into chemicals
1950s & 60s supplier of 1/7th of
world oil products
1970s North Sea oil & gas
discoveries
1980s introduction of unleaded
petrol
2005 unification of Royal Dutch
and Shell Transport to form Shell shaped petrol station, 1930
Royal Dutch Shell Company http://www.oldgas.com/info/ws_shell.htm
44
22
A Global Company
Blue areas signify where Shell has a presence

Upstream – Exploration/production of oil and/or natural gas – LNG
production and supply, gas to liquids production, and power and gas
marketing
Downstream Manufacturing – Refineries – Petrochemical facilities
Downstream – Sales of oil and/or petrochemicals – Retail stations
45
Oil Breakouts
1895 Pure Oil company – Pennsylvania trust to be “champions of
independence”
Oil discovered in
Texas
Oklahoma
Colorado
Kansas
California
Early 1890s LA field
San Joaquin Valley
1893 470,000 barrels
1903 24 million barrels
1910 73 million barrels
22% of world production
Unocal (Union Oil of California)
46
23
Dissolution of Standard Oil
1906 President Roosevelt's attacks on Rockefeller and
Standard Oil escalate
Rockefeller singled out as one of the "malefactors of great wealth"
Anti-Rockefeller sentiment is at all-time high
1908 U.S. government launches its largest antitrust suit to date,

targeting Standard Oil
1911 May 15: U.S. Supreme Court announces decision to

dismantle Standard Oil. The company is ordered to divest itself
of its subsidiaries within six months
47
Dismantling Standard Oil

Half total net value Standard Oil of New Jersey – Esso (now
Exxon)
9% Standard Oil of New York – Mobil
Standard Oil California – Chevron
Standard Oil of Ohio – Sohio then BP
Standard Oil of Indiana – Amoco
Continental Oil – Conoco
Atlantic – ARCO then Sun
48
24
The New Century
1879 Edison invented the light bulb
1882 threw a switch in office of banker near Wall Street starting
an electric generator plant
1885 250,000 light bulbs in use
1902 18 million!
Electricity took over from kerosene and gas for lighting
But …
49
The Automobile
1885 – Gottlieb Daimler invented what is

often recognized as the prototype of the
modern gas engine - with a vertical cylinder,
and with gasoline injected through a
carburettor (patented in 1887). Daimler first
built a two-wheeled vehicle the ‘Reitwagen’
(Riding Carriage) with this engine and a
year later built the world's first four-wheeled
motor vehicle
1886 – On January 29, Karl Benz received the first patent (DRP No.
37435) for a gas-fuelled car
1889 – Daimler built an improved four-stroke engine with mushroom-
shaped valves and two V-slant cylinders
1890 – Wilhelm Maybach built the first four-cylinder, four-stroke
engine
Daimler four wheeler
http://inventors.about.com/library/weekly/aacarsgasa.htm
50
25
In Summary
Growth of the modern oil industry
Establishment of oil capitalism in USA
Rise of Russian oil
Nobel Brothers
Marcus Samuel
Shell
51
Lecture Conclusion
This is the end of Topic 1, Lecture 4
You may now wish to review the lecture before attempting the one of
the following online discussion questions, and progressing to Topic 2
Outline and explain clearly the strategies used by Rockefeller to
achieve domination by Standard Oil of the oil industry. You should
explain why each strategy used by Standard oil was effective in the
various scenarios that Rockefeller employed. How effective would
these strategies have been in the modern industry?
Discuss the strategy of vertical integration and explain some of the
economic benefits of such a strategy in general and for the companies
in oil industry in particular. Use illustrative examples where possible
and debate whether such a strategy is still relevant in the changing
scenarios of the 21st century?
Explain the conditions under which the dissolution of Standard Oil
took place. Explain the significance of this dissolution to the modern
oil industry.
The maximum length should be between 300 and 500 words
52
26

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CRICOS Provider No. 00126G copyright © The University of Western Australia

BL Oil & Gas History, Economics and Geopolitics OENA8433

CRICOS Provider No. 00126G copyright © The University of Western Australia

 Retell the rise of some of the major competitors for Standard

 His younger brother sent him, with

 “The Walnut Money”: 1873 – He

 Modernized the refinery to improve

 Oct 1876, 1st shipment of Branobel

The Rise of Russian Oil

 Ludwig Nobel was a great

 Baku to Astrakan – 600 miles

 Transferred to barge at the

 Transferred to train for St

The Rise of Russian Oil

 Ludwig Nobel developed the most technologically advanced refinery

The Nobel Brothers' oil wells in Balakhani, a suburb of Baku.

The Rise of Russian Oil

 ‘Nobel Brothers Petroleum Producing Company’ produced half

 American kerosene completely forced out of the market

 Severe winter weather shut down shipping between October and

 Russian demand was not strong – ‘vast peasantry’

The Rise of Russian Oil

 They were rescued by Rothschilds who (1886) formed ‘The

 The railway was completed in 1883

 Overnight Batum became the World’s most important oil port

 The door was open to the West for Russian Oil…..

 Standard Oil tried to purchase Nobel stock – Ludwig was not

 Russian oil production increased 10 fold (to 23MMbbl) between

 Equivalent to 80% American production

The Challenge of Standard Oil

 Rothschilds set up importing and distribution companies in

 24 days later – Standard Oil set up ‘Anglo-American Oil

 1889 – Nobel brothers completed a 42 mile pipeline, through

Year 1888 1891

The Son of the Shell Merchant

 In 1890, noticed the harbour at Constantinople was jammed

 Realized there was more money in oil than in sea shells –

The Suez Canal,

The Suez Canal from Space

 It brought a new era of European influence in Pacific Asia, by

 London to Bombay by 41%

 London to Shanghai by 32% (about 6,000 km)

 It also avoided ‘Rounding the Cape of Good Hope’

The Telegraph Cable

 Shortly after Japan, China, Singapore and Australia also connected

 Global communications and deals could be made in advance of ships

Telegraph chart, America and Europe, by Charles Magnus, 1858, from LC

 Engine and boiler rooms positioned aft, protected by a fireproof bulkhead

 Steam cleaned for the return trip with other goods

The Coup of 1892

 Standard Oil were caught by surprise, they could no longer cut

 By the end of 1893, Samuel had 10 more boats transporting

 Other Russian Producers

‘The Struggle to the Death’

 Standard tried to make a deal – with Samuel, but he wanted to

 Standard then went to Russia, to form the grand alliance, where

 The pond where they fueled the torches, smelled of kerosene.

 The Royal Dutch company floated in 1890, and was

 The Dutch Government excluded the ‘Tank Syndicate’ from the

Royal Dutch Petroleum Company Share certificate

 1900 Henri Deterding appointed

 Sought cooperation for

Retell the rise of some of the major competitors for Standard

His younger brother sent him, with

“The Walnut Money”: 1873 – He

Modernized the refinery to improve

Oct 1876, 1st shipment of Branobel

Ludwig Nobel was a great

Baku to Astrakan – 600 miles

Transferred to barge at the

Transferred to train for St

Ludwig Nobel developed the most technologically advanced refinery

‘Nobel Brothers Petroleum Producing Company’ produced half

American kerosene completely forced out of the market

Severe winter weather shut down shipping between October and

Russian demand was not strong – ‘vast peasantry’

They were rescued by Rothschilds who (1886) formed ‘The

The railway was completed in 1883

Overnight Batum became the World’s most important oil port

The door was open to the West for Russian Oil…..

Standard Oil tried to purchase Nobel stock – Ludwig was not

Russian oil production increased 10 fold (to 23MMbbl) between

Equivalent to 80% American production

Rothschilds set up importing and distribution companies in

24 days later – Standard Oil set up ‘Anglo-American Oil

1889 – Nobel brothers completed a 42 mile pipeline, through

In 1890, noticed the harbour at Constantinople was jammed

Realized there was more money in oil than in sea shells –

It brought a new era of European influence in Pacific Asia, by

London to Bombay by 41%

London to Shanghai by 32% (about 6,000 km)

It also avoided ‘Rounding the Cape of Good Hope’

Shortly after Japan, China, Singapore and Australia also connected

Global communications and deals could be made in advance of ships

Engine and boiler rooms positioned aft, protected by a fireproof bulkhead

Steam cleaned for the return trip with other goods

Standard Oil were caught by surprise, they could no longer cut

By the end of 1893, Samuel had 10 more boats transporting

Other Russian Producers

Standard tried to make a deal – with Samuel, but he wanted to

Standard then went to Russia, to form the grand alliance, where

The pond where they fueled the torches, smelled of kerosene.

The Royal Dutch company floated in 1890, and was

The Dutch Government excluded the ‘Tank Syndicate’ from the

1900 Henri Deterding appointed

Sought cooperation for

Price setting arrangements

“Unity gives power”

1891 Trademark symbol for

1897 Samuel forms Shell

First gusher – April, 1898

Weaknesses of Samuel's position

Strength of Samuel’s position?

If you were Royal Dutch what would you do?

1902 Asiatic Petroleum Company

Royal Dutch/Shell Group

Blue areas signify where Shell has a presence

1908 U.S. government launches its largest antitrust suit to date,

1911 May 15: U.S. Supreme Court announces decision to

Establishment of oil capitalism in USA

Rise of Russian oil