x Abu Dhabi, UAETuesday 25 July 2017

Birth of oil bloc that shook the world

From humble beginnings the forum grew to become a power able to influence the world.

Fifty years ago, a telegram arrived at the desk of Juan Pablo Perez Alfonso, then the Venezuelan minister of mines and hydrocarbons. The simple message invited him to a meeting of Middle East oil exporters in Baghdad to discuss the conditions of the world oil market.

But Mr Perez Alfonso, who had for years championed efforts by oil producers to gain greater control of their resources from foreign oil companies, knew exactly what the 1960 message really meant: a new international organisation, known today as OPEC, was about to be born out of the frustrations of oil exporters across the developing world. "The telegram was put in front of Perez Alfonso - I couldn't see what he was reading - but all of a sudden a smile spread across his face and he looks up at me and says, 'We've done it, we've done it at last'," recalls Alirio Parra, who was at the time an aide to Mr Perez Alfonso and 30 years later was to hold the same ministerial post in Venezuela.

By September 10, 1960, Mr Perez Alfonso had joined ministers from Saudi Arabia, Iraq, Iran and Kuwait in the Iraqi capital. Over the next four days, the five countries crafted the principles and founding charter of OPEC, an international organisation that was to have profound impacts on their countries' histories and on the global oil market. The Baghdad conference caught the world by surprise but it had its roots in a secret agreement signed 18 months earlier in Cairo by the same group of countries at the urging of Mr Perez Alfonso, and Abdullah Tariki, who was to become Saudi Arabia's first oil minister.

"It reads like a novel because, out of the blue, Perez Alfonso is invited to go to this petroleum conference in April 1959," Mr Parra says. "They started meeting in the lobby of the Cairo Hilton, in the halls, around little tables. I don't think he went to any of the formal meetings of the first Arab Petroleum Congress at all." On the final day, the ministers slipped off one by one to meet secretly at the Cairo Yacht Club in Maadi, out of view of the press.

The "gentlemen's agreement" they signed there stressed the need for sustained oil prices to support their governments' revenues and underscored the need for foreign oil partners to consult them before changing the official export prices. For more than a year nothing happened. The big oil companies, which then included Standard Oil of New Jersey and Royal Dutch Shell, had heard rumours of the agreement, Mr Parra says, but "they thought it was just the idea of some crazy politicians".

The companies unilaterally cut the official selling prices of oil from Venezuela and Middle East exporters, in a stroke reducing those governments' revenues substantially. The price cut was justified by a glut of oil on the market but the "seven sisters", as the oil majors became known, did not bother to explain their move to the host governments. The companies had developed the oilfields and legally owned the products. Under existing concession agreements they marketed nearly all of the oil and set the official price.

But the oil-producing countries, newly emboldened by the Cairo gentlemen's agreement, no longer saw it that way. They convened in Baghdad, determined to send the oil companies a message that they wanted significantly more say in the use of their own resources. "The affront was so clear that producers had no other recourse but to form an organisation," Mr Parra says. "Times were starting to change. The producers were starting to wake up and the international oil monopoly was starting to crack."

The process that the five founders of OPEC set in motion in 1960 would take more than 10 years to begin to bear fruit, as oil exporters gradually assumed greater control of their oilfields and at times asserted their right to push oil prices higher than market rates. Qatar, Libya and Indonesia joined OPEC in 1961 and 1962, followed by Abu Dhabi in 1967. The Emirate's membership was transferred to the whole of the UAE in 1974.

OPEC did not achieve significant power until the early 1970s, as oil producers successfully renegotiated concession terms with foreign oil companies and moved to greater direct control of the oilfields. In a 1968 declaration, the group invoked an "inalienable right" for member states to directly undertake the "exploitation of their own, indigenous exhaustible resources". By late 1970 and early 1971, Libya, Iran, Iraq and the Gulf states were putting significant pressure on foreign partner companies to increase export prices and share a greater proportion of the profits with host governments. The "50-50 arrangement", which treated foreign oil companies and host governments as equal partners evenly sharing oil profits and had been in place across the Middle East for decades, quickly began to crumble.

Mehdi Varzi, an oil industry consultant who served in several posts in the Iranian government in the 1970s, recalls one of the first major victories of the oil exporters: signing the 1971 Tehran agreement that gave Gulf producers a larger proportion of the profits from their oil. "I remember they were really heady days," says Mr Varzi, who was then a senior analyst at the National Iranian Oil Company. "OPEC came out and faced down the majors and essentially said 'we are in control, not you guys'.

"I remember the euphoria among the senior bosses at the time, as if the sky was the limit, that this was our golden era. We could do anything we wanted to." cstanton@thenational.ae