(THE CONTEXT: Foreign investment in the United States is burgeoning, while public consciousness of this perennial phenomenon has been raised by the prospect of Middle Eastern oil money buying large pieces of American corporations and real estate. The traditional investors in the U.S. have been the Europeans, but in recent years, nouveau investors … the Japanese, the Arabs, the Iranians … have appeared on the American horizon. An understanding of the impact of foreign money and foreign ownership is obscured by a lack of knowledge. The following is an autopsy of a single investment from a European nation.)
Without exaggeration, the most important foreign investment in the United States is the British Petroleum Company Ltd.’s Alaskan holdings involving the ownership of almost half of the Trans Alaska Pipeline and more than half of the oil in the rich Prudhoe Bay field containing upwards of 40 percent of the entire nation’s proven oil reserves. And, the British government owns roughly 70 percent of British Petroleum.
Philosophically, the presence of a foreign government in the role of the controlling stockholder of a global industrial corporation operating in the United States is an insidious threat to this nation’s generally-accepted doctrine of the separation of corporation and state. The establishment of this precedent opens the way for the logical argument: If the British government can own a controlling interest in an oil company operating in the U.S., the United States government should too.
Last winter, the only misgivings that the Ford Administration’s economic policy thinkers could conjure up about the expected tidal wave of foreign investment from the dollar-glutted Middle Eastern oil countries was the prospect of foreign-government stockholder-control of American corporations. In background briefings, these economic policy shapers said that corporate control by foreign governments was a phenomenon that the U.S. had never previously experienced. The problem was solved subsequently by arranging to have the Middle Eastern nations give advance notice of significant investments here.
The Lion Roars
Unlike the Iranian/Arab government investors who are expected to come humbly to Washington to seek an implied permission to spend their oil money, the British demanded a piece of corporate America in 1969 — and got it. That was the year that BP, a gigantic integrated multi-national oil company, began the process of swallowing the Standard Oil Company of Ohio (Sohio). The Justice Department in a half-hearted gesture that marked the anti-trust actions of the Nixon Years had stepped in to block the acquisition. In reaction, British Foreign Minister Michael Stewart complained personally to Secretary of State William P. Rogers. The State Department subsequently relayed the Crown’s concern to the Justice Department, which was a factor considered in permitting BP to proceed with the deal to buy into Sohio. Rogers, who left the Nixon cabinet in 1973, was elected a director of Sohio on April 24, 1975.
The chain of control can be summed up quickly: Her Majesty’s Government owns 69.7 percent of British Petroleum, which in turn now owns 25 percent of Sohio. BP’s grip on Sohio under the terms of the takeover agreement will expand to 54 percent as soon as the British oil in Prudhoe Bay begins flowing at the rate of 600,000 barrels a day through the Trans Alaska Pipeline. The Prudhoe Bay field section in which BP struck oil is now in Sohio’s name.
Beginning with Winston
To start at the beginning, the British government bought control of BP back in 1914 when Winston Churchill, as First Lord of the Admiralty decided that the Royal Navy needed an assured supply of oil. Some parallel thinking had already occurred in America. In 1912, the first of the U.S. Naval Petroleum Reserves had been established at Elk Hills, Calif.
BP waited until the 1950’s to enter the American marketplace. As a first move, the company began supplying its inexpensive Mideastern oil to the independent Sinclair Oil Company for sale in the U.S. That happy arrangement was short-lived because President Eisenhower — naturally in the name of national security —imposed in 1959 the oil import quota system which effectively walled out low-cost Arabian and Iranian oil. Domestic oil sold from two to five times the price of the Middle Eastern product — with the American consumer paying the difference.
The ambitious and imaginative managers at BP were undaunted by this American challenge. Realizing that the only way into the lucrative U.S. market was by producing domestic American oil, BP began searching for it in Alaska around 1959.
Navy Strikes Oil
The potential of Alaska as a source of oil had been recognized for years. Back in 1923, President Harding signed the Executive Order setting aside 23-million acres on the North Slope of Alaska, west of Prudhoe Bay, as Naval Petroleum Reserve Number Four. During World War II, the Seabees began exploratory drilling in this reserve to provide distant Alaska with an independent supply of oil. The Navy drilling uncovered supplies of both gas and oil, but little was done to develop the fields. The U.S. government has never displayed any interest in competing with the country’s private oil companies.
This early Navy effort obviously helped point the oil companies to Alaska. Thomas F. Field, executive director of Taxation With Representation, made this point in testifying in 1972 before Sen. William Proxmire’s Subcommittee on Priorities & Economy in Government. Field said: “Exploratory drilling on that U.S. Naval Reserve provided geological data, which when made public led experienced geologists in oil companies to suspect that there might be substantial oil reserves elsewhere on the North Slope.”
While BP was the first major oil company to follow the Navy onto the North Slope in the search for oil, the first big strike at Prudhoe Bay came in January, 1968 on a 90,000-acre lease owned by a combination of Exxon and Atlantic Richfield Company. Since BP was busy drilling on a nearby 96,000-acre lease, it seemed it would be just a matter of time before the British firm announced its own good news.
Before that was to happen, BP agreed in November, 1968 to acquire the Sinclair Oil Company’s East Coast marketing apparatus — including 9700 gas stations, pipeline interests and refineries — for $400-million. Sinclair was being forced by the Justice Department to unload the properties in order to get clearance to merge into Atlantic Richfield.
In February, 1969, Exxon, Atlantic Richfield and BP announced plans to build the Trans Alaska Pipeline to carry their oil from Prudhoe Bay south to the ice-free port of Valdez for trans-shipment to the U.S. mainland. Two months later, BP officially announced its Alaskan oil strike.
As things now stood, BP the only one of the Seven Sisters of global oil excluded from the U.S. market had finally pierced the Eisenhower Wall. The huge British firm was in a position to glut the domestic oil market with its share of the Prudhoe Bay oil since the Sinclair properties couldn’t possibly absorb all of the crude that BP would now have to offer. But Big Oil doesn’t work that way. Instead, BP soon found Sohio, a medium-sized oil company in search of a supply of oil, even at the expense of losing its independence.
Sohio had been THE original Rockefeller oil company, but after the Standard Oil empire was shattered into smaller pieces in 1911-12, the company evolved into a refiner-distributor-marketer without any significant oil fields. Sohio had to buy most of the oil that it processed in its refineries and sold through its gas stations which dominated parts of the Midwest. The combination of BP with its huge Alaskan oil reserves and Sohio with its entrenched, successful marketing outlets was good business. But from the consumer point of view, BP had been transformed from a new, major competitive force in the U.S. marketplace to just another of the global oil giants getting bigger by swallowing an independent American firm.
The deal worked out between BP and Sohio was simply a trade of Sohio’s stock for BP’s Alaskan oil. For openers, BP gave Sohio its Sinclair properties and the responsibility of paying for the development of the Prudhoe Bay field, which will cost Sohio about $1-billion plus interest. Sohio is to get all of the production from the field up to 600,000 barrels a day plus 25 percent of any of the oil produced thereafter. BP initially was given a 25 percent interest in Sohio, which will be expanded to 54 percent of the company when production in Alaska reaches the 600,000-barrel-a-day level.
At the time of the proposed merger’s announcement in June, 1969, British Petroleum owned the rights to one-fifth of the world’s proven oil reserves and was operating in more than 70 countries. Sohio was the 139th largest company in the U.S. Since Attorney General John Mitchell had set a policy of opposing any merger among the top 200 companies as an unfavorable concentration of economic power — it appeared inevitable that the BP-Sohio venture would be opposed under anti-trust statutes. Congressman Emanuel Cellar (D-Brooklyn), chairman of the House Judiciary Committee and its Anti-Trust Subcommittee at that point in history, described BP as an instrumentality of the British government and said that it would be “difficult not to see” that the BP-Sohio merger would lessen competition in this country.
The Justice Department’s anti-trust division moved against the merger that fall evoking howls from European journalists and industrialists that the U.S. was preaching the gospel of the free flow of investment between nations while closing itself off to foreigners. The New York Time’s John Lee reporting from London said: “The announcement (of Justice’s anti-trust) suit caused considerable concern in government and in industrial circles because it appeared to many to be a crude attempt to block the expansion of a British company in the United States.”
The Personal Touch
The British applied the pointed personal touch to the matter by having Foreign Minister Stewart inform Secretary of State Rogers that the British government would appreciate a “helpful” attitude. Newsweek, at the time, said that the State Department “tried to calm the uproar with an unusual public statement indicating there was still room for negotiating over the BP-Sohio merger.” BP’s chairman Eric Drake and Sohio’s president Charles E. Spahr also sat down with Mitchell for direct talks to iron out the problem.
The merger eventually was permitted to go through with the proviso that Sohio shed some of its gas stations to keep its domination of the Ohio gasoline market below the 25 percent level. The more complicated and probably more telling issue of allowing a potentially major crude oil producer (BP) to merge with one of the largest independent refiners in the U.S. (Sohio) was never pursued. In anti-trust lingo, this approach to the case would have evolved around a vertical foreclosure of market. A former anti-trust division lawyer said the vertical foreclosure angle wasn’t pursued “largely because to make (that) argument could have made it complicated, and because of the State Department’s interest, and because the Department of Justice wasn’t interested in making oil cases.”
In 1971, the BP-Sohio combine along with Atlantic Richfield and Exxon, the other major partners in the Trans Alaska Pipeline System got some additional help from Mitchell when he rejected a request by lawyers in Justice’s anti-trust division to begin a formal investigation of the proposed pipeline. Mitchell killed the proposal with a terse memo in which he wrote: “In view of what is going on, this is not the time.” He didn’t explain what he meant by “what is going on.” Between them, the Alaskan trio of BP-Sohio, Atlantic Richfield and Exxon own 95 percent of 9.6-billion to 20-billion barrels of oil in the Prudhoe Bay field and control slightly over 90 percent of the capacity of the pipeline. In an article in the Nation in 1973, William J. Lamont, a former lawyer in the Justice Anti-Trust Division and now an attorney with a public interest law firm in Washington, commented: “Control over the pipeline and the related production agreement will give to three companies operating virtually as one, monopoly control over the marketing of oil on the West Coast and a greater share of total domestic oil production than would be permissible under any view of the antitrust laws.”
The BP-Sohio combine alone owns 54 percent of the Prudhoe Bay field and 49.18 percent of the pipeline, which is being built at a cost of about $6-billion. This same Alaskan pipeline bas been considered as a possible means of transporting the oil from the Navy Petroleum Reserve Four when that field is developed at some uncertain point in the future. The Geological Survey has estimated that Pet Four, as the Navy refers to it, could contain between 10-billion and 33-billion barrels of oil. Back in 1973, Deputy Secretary of Defense William P. Clements Jr. recommended in an internal Pentagon document that the Reserve should be explored and developed, suggesting the use of private oil companies to do the job if government funds weren’t available. Since government funds usually aren’t available for that type of project, the proposal was tantamount to suggesting the Reserve be developed by private industry.
Prior to becoming the Number 2 man in the Pentagon in 1973, Clements had been chairman of SEDCO, a major oil drilling and pipeline contracting company which he founded and controlled. SEDCO’s 1974 proxy statement, the latest available, showed that Clements and his wife owned 1,611,275 shares of SEDCO, or 15.8 percent of the company’s stock, worth approximately $39-million at recent market prices.
A recently published financial analysis shows that SEDCO’s pipeline construction division has a two-year, $20-million contract with BP for work on the North Slope. BP also has been leasing two of SEDCO’s offshore drilling rigs, built at a cost of $49-million, to search for oil in the North Sea, and the company also is building a drilling ship at a cost of $46-minion for BP.
The British government directly owns 48.2 percent of British Petroleum, while the Bank of England, the country’s central bank, holds the other 21.5 percent. This adds up to a total of 69.7 percent. The Bank of England acquired its BP stock from the Burmah Oil Company Ltd. this past January in the process of helping to bail Burmah out of its financial straits.
Two of BP’s directors are appointed by the government, which emphasizes that it has a policy of not interfering with the company’s commercial activities. The interference represented by Stewart meeting with Rogers about the Sohio merger certainly countervails that claim. Among BP’s directors are four English lords and Sir Val Duncan, a director of the Bank of England and chairman of Rio Tinto Zinc Corp. Ltd., a British-based multi-national mining and metals conglomerate, which acquired about one percent of BP’s common stock back in 1961. Nicholas Faith in his book “The Infiltrator’s” notes that Rio Tinto’s subsidiary, United States Borax & Chemical Corp., mans a mine in California which supplies almost all of the world’s boron.
Sir Val is also a director of Societe Imetal, the French holding company controlled by the Rothschild interests, which is in the process of trying to acquire the Copperweld Corporation of Pittsburgh despite the opposition of the American firm’s management and unions.
BP and its corporate American child have a number of incestuous financial relationships — a common happening in corporate families. Sohio’s 1975 proxy outlines some of these transactions, but omits the telling detail of how much money is involved. Among them:
- In 1974, Sohio imported 159,000 barrels of crude a day from foreign sources including BP. This adds up to a daily bill of roughly $2-million. BP’s share is not delineated.
- In 1974, Sohio signed a five-year agreement under which BP was to provide 1.5-million tons of marine tanker transportation. This tanker agreement was reached in a period when tankers are a glut on the market.
- BP is reimbursed by Sohio for the development of the North Slope Alaskan leases. “Reasonable overhead and administrative charges” are added onto the bill according to the documents on file at the SEC.
The profits to BP are not spelled out, but all of the above transactions are covered by the catch-all phrase: “These transactions were in the ordinary course of business and were at no more than prevailing company prices.”
Three BP executives, including two of the British firm’s managing directors, sit on Sohio’s board. The records on file at the SEC note that only citizens of the United Kingdom may sit on the board of directors of British Petroleum Company Ltd.
Investments by foreign governments or corporations controlled by foreign governments should be unwelcome on the American corporate scene as contrary to our way of life. Conversely, for those who hunger for the U.S. government to become an owner of the industrial companies, the precedent of government ownership — as in BP’s case — has been established. The concept of government ownership of industry in the U.S. will be reinforced each time such an investment flows into this country from any government treasury, whether European, Japanese, or from an OPEC nation.
Received in New York on September 30, 1975
©1975 Kenneth C. Crowe
Kenneth C. Crowe is an Alicia Patterson Foundation award winner on leave from Newsday. His fellowship subject is the investment and movement of foreign funds into the U.S., especially OPEC nations’ oil monies. This article may be published with credit to Mr. Crowe, Newsday, and the Alicia Patterson Foundation.