Yergin - The Prize - Chapter 6 PDF

C H A P T E R 6 The Oil Wars: The Rise of Royal Dutch, the Fall of Imperial Russia I N T H E A U T U M N of 1896, a youngish man, already tempered by life in the Far East and with a minor reputation in oil circles, passed through Singapore on his way from Britain to an isolated, virtually unknown...

C H A P T E R 6 The Oil Wars: The Rise of Royal Dutch, the Fall of Imperial Russia I N T H E A U T U M N of 1896, a youngish man, already tempered by life in the Far East and with a minor reputation in oil circles, passed through Singapore on his way from Britain to an isolated, virtually unknown stretch of jungle called Kutei, on the east coast of Borneo. His movements were quickly noted and as quickly reported to New York by a Standard Oil agent in Singapore: "A Mr. Abrahams, said to be a nephew of M. Samuel's, of the . . . Samuel's Syndicate, has arrived from London and immediately departed for Kutei where it is rumored that the Samuels people have large oil concessions. As Mr. Abrahams is the gentleman who started the Russian tank oil business at Singapore and Penang, erecting and building the plant at both places, his visit to Kutei might mean something." Indeed, it did. For Mark Abrahams had been dispatched by his uncles to develop the oil concession that Samuel's oil combine desperately needed to maintain its position—and perhaps even to assure its survival. In this undertaking Marcus Samuel was driven by an imperative of the oil business. Those in oil are always in quest for balance. An investment in one part of the business forces them to make new investments in another part, to protect the viability of the existing investment. Producers need markets if their oil is to have value. As Marcus Samuel once said, "The mere production of oil is almost its least value and its least interesting state. Markets have to be found." Refiners, meanwhile, need both supply and markets; a refinery that goes unused is little more than scrap metal and used pipe. And those who run a marketing system need oil to pass through it; otherwise they, too, have nothing but financial losses. The intensity of those needs varies at different times, but the underlying imperative is a constant of the industry. And, by the late 1890s, Marcus Samuel, with his huge investment in tankers and storage facilities, very definitely needed a secure supply of oil. As a trader, as a merchant, he was too vulnerable. The contract for the Rothschilds' Russian oil would run out in October 1900. Could he count on a renewal? At best, his relations with the Rothschilds were rocky, and the banking family could always turn around and make a deal with Standard Oil. Beyond that, it was dangerous to be dependent upon Russian oil alone. Arbitrary changes in transport rates within Russia kept the economics in continual confusion, complained Samuel, making the Russian oil trade a hand-to-mouth business, and "placing those engaged in the Russian trade at a great disadvantage with their powerful Amer­ ican competitors." There were other dangers, as well: The growing volumes of oil from the Dutch East Indies, with shorter routes and lower freight rates, threatened his ability to remain competitive in the Far East; and at any moment Standard Oil could marshal its resources to launch an all-out war, aimed at destroying Shell. Samuel knew, quite simply, that he needed his own production, his own crude, to protect his markets and his investments—indeed, in order to assure the survival of his enterprise. And, in the words of his biographer, "He went all but berserk in his search for oil." 1 The Jungle In 1895, through the efforts of an elderly, obsessed Dutch mining engineer, who had spent all his adult life in the jungles of the East Indies, Samuel was able to obtain rights to a concession in the region of Kutei in east Borneo. The concession stretched for more than fifty miles along the coast, and reached inland into the jungle. It was to this overgrown, desolate destination that Mark Abrahams was dispatched to be the man on the spot. Abrahams had no experience at all in drilling for and refining oil; rather, he had organized the construction of storage tanks in the Far East, but that hardly prepared him for the new and much more difficult enterprise on which he was now embarking. The irrelevance of Mark Abrahams's skills was mirrored on a larger scale in the case of Marcus Samuel himself. The very way he did business—the an­ tipathy to organization and to systematic analysis and planning, the lack of sound administration and competent functionaries—made the job in the Borneo jungle far more difficult. Ships were always arriving at the wrong time, bearing the wrong equipment, without even a manifest of the cargo. Loads were dumped on the beach, forcing the workers to stop everything else in order to try to gather and organize and make sense out of what had been dropped; all sorts of equipment ended up being left to rust in the tall grass. Even without the haphazard, disjointed management from London, the job would have been extremely difficult. Borneo was far more isolated from the outside world than even Sumatra; the nearest depot from which any supplies or equipment could be obtained was a thousand miles away, in Singapore. The only communication to Singapore was via the odd ships that might pass by every week or two. The workforces, isolated from one another in different parts of the concession, were in constant battle with the jungle. A four-mile path they arduously cut through the jungle to a place called Black Spot, where there were oil seepages, was overgrown again within a few weeks. The project had to depend on imported Chinese coolies for laborers; the local headhunters were not exactly 115 eager for steady work. Disease and fever constantly attacked everyone working on the sites. Frequently, when Abrahams was sitting up at night to write reports home, he himself was half-delirious with fever. The death rate among all the workers—the Chinese, the European managers, and the Canadian drillers— was high. Some died on shipboard, even before arrival. Every piece of wood with which they tried to build anything, be it a house or a bridge or a pier, soon rotted. Their constant companion was the "hot, steaming, rotting, destructive, tropical rain." Once again, the Samuels in London and Mark Abrahams in Borneo renewed the stormy, explosive, abusive correspondence that they had exchanged in the days of constructing the storage tanks in the Far East. Poor Mark Abrahams— whatever he did, no matter how hard and daunting his work, was not good enough for his uncles. His uncles could not begin to understand the reality of the jungle. When Marcus Samuel complained that the houses built for the Europeans were lavish "villa residences" that looked like "a couple of pleasure resorts," Abrahams replied angrily that "Your 'Villa Residences' " were so makeshift that "the least gale of wind, or heavy rain, takes away the whole of the roof. The houses in which we lived on first arrival were only fit to accom­ modate pigs." Yet, despite all, the first oil was struck in February 1897; the first gusher in April 1898. Much additional effort, however, would be required to go from discovery to commercial production. Moreover, the chemical characteristics of the Borneo crude were such as to yield little kerosene. It could, however, be used, unrefined, as a fuel oil. This quality of the heavier Borneo oil became the foundation for a vision to which Samuel thereafter zealously clung—what he called the "tremendous role which petroleum can play in its most rational form, that of fuel." Here, on the eve of the twentieth century, he looked ahead to prophesy, and rightly so, that oil's great future would be not as a source of illumination, but as a source of power. And Marcus Samuel was to become the most vociferous proponent of the conversion of shipping from coal to oil. That historic development had actually begun in a small way in the 1870s, when ostatki, as the waste residue from kerosene refining was called in Russia, was first successfully used to fuel ships on the Caspian Sea. Pure necessity drove this innovation: Russia had to import coal from England, a very expensive proposition, and wood was scarce in many areas of the empire. Subsequently, the new Trans-Siberian Railway began to use oil fuel, supplied by Samuel's syndicate through Vladivostok, rather than coal or wood. Moreover, the Russian government encouraged oil's use as a fuel in the 1890s to speed overall economic development. In Britain, railways did in some cases switch from coal to oil—to reduce smoke in urban areas or for special safety reasons, such as when carrying members of the Royal Family. But, for the most part, coal held on to its massive market share; indeed, it was the basis for the vast development of heavy industry in North America and Europe. It also fueled the world's commercial and naval fleets. And Samuel met the greatest resistance to his vision in the market about which he cared the most—the Royal Navy. He was to pound on its door for more than a decade, to little avail. 2 116 Shell Emerges Still, Marcus Samuel found consolations. While painful progress was being wrought in Borneo, he was making progress on his own road to acceptance and status. He became a justice of the peace in Kent, and in London, a master of the Spectacle Makers' Company, one of the most venerable of all the ancient guilds. He also received a knighthood after one of his tugs, said to be the most powerful such vessel in the world, dislodged a British warship that had gone aground at the entrance to the Suez Canal. In 1897, Samuel took a major step in the organization of his business. It was a defensive move. He wanted to ensure the loyalty of the various trading houses that formed the Tank Syndicate in the Far East. To that end, he made all of them shareholders of a new company that incorporated the whole of his oil interests and tanker fleets, as well as the storage installations belonging to the various trading houses. It was called the Shell Transport and Trading Company. Meanwhile, Samuel was ballyhooing the Borneo enterprise far beyond what was justified either by the immediate commercial prospects or by the reality of the painfully difficult and frustratingly slow work in the jungle. But in order to advance his contract renegotiations with the Rothschilds, he had to make it seem that he would soon have alternative supplies from his own fields in Kutei in Borneo. The stratagem worked. The Rothschilds were persuaded, and they renewed the contract to supply Shell with Russian oil—on terms, it should be added, more favorable to Shell than previously. Yet, while Shell's position now appeared stronger, its fortunes were, in fact, precariously balanced. For Marcus Samuel was boldly riding on the crest of a rising market, and like any wave, it would eventually break. The end of the nineteenth century was marked by a worldwide boom in oil. Demand was growing rapidly, supplies were tight, and prices were rising. The Boer War in South Africa, which started in 1899, pushed prices up further. But in the autumn of 1900, the price of oil began to crumble. A disastrous harvest led to famine and an economic depression in the Russian empire. Do­ mestic demand for oil fell away, and the Russian refiners now began producing as much kerosene as they could for export, which caused a glut on the world market. Prices collapsed. In China, one of Shell's most promising markets, the Boxer Rebellion erupted against foreigners, disrupting the country and the entire Chinese economy. Not only was there no longer an active market, but Shell facilities were pillaged. These and other adverse developments all converged on the vulnerable Samuel. When prices dropped, Shell's tanks were full of expensive oil. Shell had continued to expand its shipping fleet, and now freight rates also plummeted. To make matters worse, Borneo was falling far short of expectations. Production was developing slowly. The poorly designed refinery was proving a disaster. Fires, explosions, technical malfunctions, and accidents continually interrupted its operations and killed workers. Despite the bad news, Samuel maintained his dignity and composure and, as is required of the entrepreneur in times of trouble, his front. He was still to be found almost every morning on his favorite horse, 117 Duke, riding through Hyde Park. Another British oil man, who would from time to time encounter Samuel on horseback, observed with some acuity that Samuel rode his horse much as he rode his vast business, always looking as though he were about to fall off, but never quite doing so. 3 Royal Dutch in Trouble Meanwhile, in Sumatra, the competing Royal Dutch had continued its dramatic increases in production and further stepped up its investment in tankers and storage facilities. A celebration of its coming eminence was planned for New Year's Eve, December 3 1 , 1 8 9 7 , at the company's refinery site on Sumatra. The evening was highlighted by fireworks and a holiday reception for the new tanker, Sultan of Langkat, welcomed by the Sultan himself. But the festivities were marred by a rumor circulating through the night—that a considerable amount of water had been found in the oil tanks, indicating that there might be something wrong with the wells. The rumor could not be stamped out. The rumor was true—Royal Dutch's wells were beginning to produce not oil, but salt water. Its prolific field was in decline. By July 1898, the word was out, and panic gripped the oil section of the Amsterdam stock exchange. The value of Royal Dutch's shares plummeted. Standard Oil missed the chance to pick up Royal Dutch on the cheap. So did Marcus Samuel, much to his later regret. Royal Dutch desperately tried to find new production. No fewer than n o times did it drill for oil in Sumatra, and no fewer than n o times did it fail to find new oil. But the company would not give up. Eighty miles or so to the north of its existing concession in Sumatra, it sought a new drilling site at a seepage in the little principality of Perlak, a frontier territory still troubled by a native rebellion. The local ruler, who made his money in the pepper trade, was most eager to augment his revenues with oil money. An expedition to Perlak was led by Hugo Loudon, a young engineer who had already demon­ strated a depth of technical and administrative competence, backed up by experience that stretched from land reclamation in Hungary to railway con­ struction in the Transvaal. He also happened to be the son of a former gover­ nor general of the East Indies and had unusually effective diplomatic skills. Those talents were particularly requisite in Perlak, where Loudon successfully advanced Royal Dutch interests not only with the Rajah of Perlak, but also with the leaders of a local rebellion, who had declared a holy war against the Rajah. Loudon included several professional geologists in his group, and drilling started on December 22,1899. T h expertise of the geologists made a difference, for only six days later, the crew struck oil. Now, just in time for the new century, Royal Dutch was back in business, and once again in a very big way. It quickly called upon geological talent to find and develop oil elsewhere in the Indies. And with those substantial new supplies of high-quality oil, Royal Dutch was ready to invade the budding gasoline markets of Europe. e 4 118 "A Pushing Fellow" In November 1900, Jean Baptiste August Kessler, the man who, more than any other, was responsible for the survival of Royal Dutch, cabled to The Hague from the Far East that he was "in a very nervous condition." Worn out by the strains of the business, he set off for the Netherlands and home. He got only as far as Naples, where, in December 1900, he suffered a heart attack and died. The next day a driving young man named Henri Deterding, age thirty-four, was installed as "interim manager." The "interim" lasted a very long time; for the next three and a half decades Deterding would dominate the world of oil. Henri Wilhelm August Deterding was born in Amsterdam in 1866, the son of a sea captain who died when the boy was six. The family funds went to support the education of Henri's older brothers, while Henri was left to feel the full weight of ever-deepening genteel poverty. At school, he stood out for his special talent—like Rockefeller, he was very good at doing quick mathematical com­ putations in his head. On leaving school, instead of going to sea and becoming a captain like his father, as he had intended, Deterding went into the more prosaic world of banking in Amsterdam, where he soon mastered accounting and finance. For a hobby, he took up the study of balance sheets of companies, trying to figure out who was doing well and who was not, and why, and what kind of strategies the various companies might be pursuing. Thus began the development of what his business associates would later call his "lynx-eye for balance sheets and figures." Much later, his inspirational advice to young men starting out was, "You will go a long way in business if you train yourself to be able to appraise figures almost as rapidly and as shrewdly as a good judge of character can sum up his fellow-men." When Deterding's promotion in the bank did not proceed with the speed that he thought was his due, he did what many young Dutchmen of the time would do—he shipped out to the East Indies to seek opportunity. He went to work for the Nederlandsche Handel-Maatschappij, the Netherlands Trading Society, a famous old banking concern. Managing its office first at Medan and then at Penang on the west coast of Malaya, he learned how to make money. "By generally sniftering round wherever business could be done," he was later to say, "and without this flair for sniftering, no man starting from the bottom can make money on a large scale—I discovered fresh avenues whereby additional financial grist rolled into the bank's till." Deterding earned quite appreciable sums for the bank by exploiting the differences among various cities in the Far East in exchange and interest rates. "Sniftering around" also led to oil, where, on his first venture, he made more money for his bank. When Royal Dutch suffered its severe shortage of working capital in the early 1890s, it was to Deterding that Kessler, spurned everywhere else, had finally turned. The two men had known each other since their boyhoods in Amsterdam. Deterding figured out an ingenious solution: He agreed to lend the necessary working capital, using the kerosene stored in in­ ventory as collateral. Royal Dutch survived, and the Netherlands Trading Society found a new way to make money. Kessler was grateful and impressed. Not long after, when Kessler decided that he had to set up Royal Dutch's 119 own trading organization through the Far East, he wrote to Deterding to ask for suggestions as to who might run it. Kessler knew exactly the sort of person he must have—"a first-rate businessman, a pushing fellow, with seasoned ex­ perience and a good eye for business." Who fit that bill better than Kessler's correspondent, Henri Deterding himself? In 1895, Kessler offered the job to Deterding, who, frustrated with the life of a banker, accepted. He immediately began to aggressively build up its marketing system through the Far East. His aims were to bring Royal Dutch to parity with its competitors, and to insulate it from those competitors. His grand ambition was to become, as he was later to say, "an international oil man." Henri Deterding was short and dynamic, with very wide open eyes that had a startling effect on people. When he laughed, all his teeth showed. Hardy and vigorous, he believed fervently in exercise, both for its own sake and as the way to work out business problems. In Europe in later years, even when he was on the "shady side" of sixty, he would, every morning before going to work, in winter as well as summer, first go swimming, then spend forty-five minutes horseback riding. He made a powerful and compelling impression on everyone with whom he came in contact. He had what was described as an "irresistible magnetism" and an "almost aggressive charm," both of which he used to per­ suade others to join in his causes and campaigns. But unlike Marcus Samuel, he was not motivated by a quest for status, for position. The Dutch historian F. C. Gerretson, chronicler of Royal Dutch, and for many years private secretary to Deterding, summed up his real purpose: "Now Deterding was not aiming at something exalted and wonderful: to serve the public interest, to create a new economic order, to build up a mighty commercial concern. His purpose was that of any merchant, great or small, something extremely matter-of-fact: to make money." Whatever else Deterding became, he was always "a merchant in heart and soul." In time, Deterding would jokingly begin to call himself a "Higher Sim­ pleton." He certainly did not mean it as a term of self-derision, but as a guide to his working theory—to reduce each problem to its simplest terms, to its essential elements. "Simplicity rules everything worth while, and whenever I have been up against a business proposition which, after taking thought, I could not reduce to simplicity, I have realized that it was hopelessly wrong and I have let it alone." One "simple" idea dominated his mind during his early years with Royal Dutch—the need for amalgamation among the new oil companies. He saw it as the only way to protect Royal Dutch against Standard Oil. "Eendracht maakt macht"—unity gives power. So ran the old Dutch proverb that he took as a touchstone. He also sought cooperation as a way to bring stability to the industry. Like Rockefeller, he was repelled by the wild fluctuations in price. Unlike Rockefeller and Standard Oil, he did not want to use price cutting as a com­ petitive tool; rather, he wanted to work out price-setting arrangements and peace treaties among the warring companies. That was better even for the consumer in the long run, he would argue, because more stable and predictable returns would encourage more capital investment and greater efficiency. But, with this one simple idea of amalgamation went another, though hardly one he trum120 peted—that in any amalgamation Royal Dutch would eventually have to occupy first place. Still, Deterding's intentions were not regarded as altogether benign by others. To the Nobels, he later appeared not as a paragon of conciliation, but as nothing less than "a terrible sort of being whose mission was to slaughter everybody and pick up the carcass." 5 The First Step Toward Combination Together, Shell and Royal Dutch controlled over half of the Russian and Far Eastern oil exports. The "ruinous competition" between the two would provide the starting point from which Deterding was to embark on a momentous ne­ gotiation to achieve amalgamation with his great rival, Marcus Samuel. The character of this global enterprise would be determined by the long struggle between two men—each a businessman of great talent and daring, each of daunting ego, but one, Marcus Samuel, more subject to flattery and sentiment and more interested in position; the other, Henri Deterding, driven more than any­ thing else by his quest for raw power and for money itself. On the fundamental question—which of them would lead any new combination—the two men were wholly at odds. Marcus Samuel had no doubt who should be the leader—he himself, because of Shell's visible preeminence and its far-flung activities. But Deterding had absolutely no intention of being, as he said, anybody's second fiddle. These two were not going to get anywhere negotiating directly with each other. They badly needed a middleman, and who better than that middleman par excellence when it came to oil, the shipping broker Fred Lane? After all, "Shady" Lane was the London representative of the Rothschilds' oil interests; he was Samuel's friend, consultant, confidant—and trusted coconspirator in the great oil coup of a decade earlier. He had just met Deterding, but they had instantly hit it off, and they were bound to become very close friends as well. Lane began by negotiating a truce in a price war in the Far East between Royal Dutch and Shell and by putting an end to what he called the damaging "battle­ dore and shuttlecock game of accusation" between Samuel and Deterding. His efforts helped to create the right mood for discussions to begin. From the outset, however, there was a major difference of purpose. Samuel wanted a simple marketing arrangement between the two firms. Deterding wanted out-and-out "joint management." Lane had to advise Deterding that, while "in the long run joint management was inevitable," for the moment, Samuel's opposition was "insuperable." Matters became even more complicated when, in the middle of October IQOI, Marcus Samuel sailed to New York to visit none other than the gentlemen at 26 Broadway, for the apparent purpose of negotiating an alliance with Standard Oil. "There is here Sir Marcus Samuel," John Archbold wrote to Rockefeller. "This company represents by all means the most important distributing Agency for Refined Oil throughout the World, outside of our own interests. He is here undoubtedly to take up with us the question of some sort of an alliance, preferable on his part of the sale to us of a large interest in their Company." But, despite extensive talks, the two sides could not agree on how much Shell was worth; Standard was skeptical of the value that Samuel set on his operations. Yet Samuel was not an entrepreneur for nothing. When he 121 returned to London, he gave the impression of impending triumph, displaying great talent in stirring up enthusiasm about Shell, a company that was, in fact, in deep trouble. 6 The "British Dutch"—and Asiatic While Samuel was in New York, Lane had been diligently trying to sketch out the basis for a negotiation between Royal Dutch and Shell. But the major question remained unanswered: Was there simply to be a dividing up of the market, or was there to be an out-and-out combination? It was on November 4 , 1 9 0 1 , that Lane went to see Samuel for what was to prove a decisive discussion. Lane hammered at one point. A simple marketing arrangement would be mean­ ingless if more and more oil kept coming into the market, destroying prices. Production had to be controlled as well. That, in turn, made the conclusion clear: "There is no solution except the absolute amalgamation of the businesses." Once Samuel too had come to this conclusion, he became graciousness person­ ified and "cordially" declared himself won over. There would have to be a new organization, which would have the ability to limit production. From that fateful meeting dated the first steps that led eventually toward the establishment of the Royal Dutch/Shell Group. Deterding was in a rush to get the deal completed; he was afraid Standard Oil would beat him to Shell. His fears were justified. Two days before Christmas 1901, Standard Oil, despite its earlier reluctance, finally made an offer for Shell, and it was huge—$40 million was a great deal of money in 1901 (on the order of $500 million today). Samuel's family urged him to accept. Samuel himself went down for the holidays to the Mote, his estate in Kent, to struggle with the choices. He faced one of the most agonizing decisions of his life: to accept a fantastically large sum, acquire almost unimaginable wealth, and become one of the most important personages in the Standard Oil empire, or to take his chances with Deterding and Royal Dutch. There was enormous reason to pause and waver. But then, right after Christmas, Samuel's meditations were abruptly broken by an urgent telegram from Lane summoning him back to London. Deterding had given in on the key points, Lane told him. Samuel signed a hurriedly drafted agreement with Royal Dutch on the afternoon of December 27, 1901. It was hand-carried on the night boat to Deterding. That same evening, Samuel sent a telegram to New York rejecting Standard's offer and breaking off negotiations. What Samuel wanted was equality. Standard could be very generous in terms of money, but it was insisting, as it always insisted, upon control, which would thus pass from a British to an American entity, and that, no matter how much the money, Marcus Samuel could not countenance. He was too much of a patriot. Still, he and Deterding did not yet have a thorough agreement, only the barest outline. With his usual singleness of purpose, Deterding succeeded in getting the other major producers in the Netherlands East Indies to bind themselves together in a new combination, with Royal Dutch in the driver's seat. Deterding now had half of what he wanted—effective control and man­ agement of the oil output of the Dutch East Indies. But what kind of sales combination was it to be with Shell? Deterding had talked about the "joint 122 management" of Samuel and Deterding. But once Standard Oil was off the stage, Shell's position was weakened, and Deterding began to focus on another of his very simple ideas, one that was inordinately appealing to him. There should be only one man in charge, and that man should be Henri Deterding. Deterding delivered an ultimatum. Accept his scheme for the organization, which limited Shell's and Samuel's control over the management, he told Samuel, or he would not even bother to cross the Channel for any more negotiations. "Neither of us can afford to waste time," said the Dutchman. He got his way. Samuel would be the chairman of the new company, but Deterding would be its manager and chief executive, with responsibility for the day-to-day direction of affairs. Deterding could ask for no more. Soon after, the two key documents were signed. One set up the Committee of Netherlands Indian Producers and the other a new company called "The Shell Transport Royal Dutch Petroleum Company"—soon to be known as the "British Dutch." Thus was conceived the company that would emerge as a true global rival to Standard Oil. Then, a third party, the Rothschilds, decided that in spite of their distaste for Samuel and Shell, they could not afford to be left out. If the Rothschilds wanted in, Deterding argued to a dubious Samuel, bring them in at all costs. "Delay dangerous," he said. "If this chance has slipped this time, we shall never get it again. Once we are combined with the Rothschilds, everybody knows that we hold the future, but we cannot do without their name." Samuel was finally persuaded. In June 1902, a chastened Samuel signed a new overarching agreement with Deterding and the Rothschilds. "British Dutch" would disappear into a new, larger combination, the Asiatic Petroleum Company. The results of the business, Samuel now promised his stockholders, would be much improved because the "whole organization" would no longer be based exclusively upon marketing Russian oil, with all its insecurity and risks. "It is a matter of sincere congrat­ ulation to all concerned," he ringingly concluded, "that the war which we have been engaged in with our Dutch friends has now ended, not only in peace, but in an offensive and defensive alliance." 7 Deterding Triumphant The British Dutch and now Asiatic companies represented the first major steps to­ ward amalgamation. But this initial agreement still had to be turned into a work­ ing contract. Meanwhile, Shell's financial and market position was continuing to deteriorate to the point of peril, and Deterding threatened to withdraw from the entire arrangement. Samuel had to face the possibility that everything would fail. Such failure could not have been more ignominious, for on September 29, 1902, Samuel, senior alderman, was due to be elected Lord Mayor of London. At the end of August, he asked Deterding to come to the Mote. The Dutchman was very impressed by the English country house; he had never seen one before, and he determined that he would own one, too. Samuel was frank about his current troubles. Deterding understood Shell's weakness, but he also knew that the Dutch "flag" would not be sufficient for the global enterprise he had in mind; he needed a more powerful "flag"—the Union Jack. Thus he reassured 123 Samuel that he would seek to restore Shell's fortunes through the medium of the new Asiatic Petroleum Company. In order to manage the new company, Deterding took up residence in London (though since 1897 he had been using a London cable address—"Cel­ ibacy"). And from Asiatic's offices in London, Deterding controlled and bal­ anced the combined resources of Royal Dutch and Shell, a substantial part of the Rothschilds' Russian oil exports, and the output of the independent pro­ ducers in the Netherlands East Indies. He now began buying and selling oil on a vast scale, with great skill and success. Through his chairmanship of the Com­ mittee of Netherlands Indian Producers, he began to restrict production there and to work a quota system. While Deterding was furiously focusing his energies on the nascent Asiatic, Marcus Samuel was firmly fixed on something else that had nothing to do with the oil business—his official installation as Lord Mayor of London on November 10, 1902. It was surely to be the grandest day of his life, for he was to attain the highest honor to which a London merchant could aspire—and all the more important to Marcus Samuel, a Jew from the East End and the son of a seashell merchant. When the great day came, he had the procession of carriages, which bore him and his family and various dignitaries, include in its route the Jewish quarter, Portsoken Ward, his birthplace. The day culminated at the Guildhall in a grand banquet, filled with notables, honoring Marcus Samuel. Among the guests was Deterding, who distanced himself from the event, as though watching some quaint native ritual. "I certainly should not think it worth a white tie to attend a second time," he derisively wrote to one of his colleagues. "The Lord Mayor's show was very fine, according to the view here, but in Dutch eyes it was more like the ceremonial parade of [a] circus." Samuel was thereafter caught up in ceremonial duties, reception after re­ ception, speech after speech. Almost a month passed before he turned his attention back to the oil business. Even then he was to be continually involved with the business of being Lord Mayor, with its many duties and the official trips, and all the visiting dignitaries. One of his responsibilities was to interview personally every lunatic who was to be certified insane at the Mansion House, and some were to think he spent more time with the lunatics than he did with the oil men. Samuel enjoyed the ritual and position of Lord Mayor greatly, but the strain also took its toll on him. During his year as Lord Mayor, he had to cope with ill health and constant headaches, and in the midst of everything else, he had to have all his teeth removed. There were pains of another kind, too. On the last Saturday in December 1902, Samuel took the early morning train up from the Mote, in Kent, to attend the funeral for the Archbishop of Canterbury, lunch with the sheriffs of the City, and then attend a play. On Sunday, he viewed weapons presented by Lord Kitchener from the Boer War; on Monday morning, he presided in the City, and only then, at last, turned to pressing private business—a letter waiting for him from Fred Lane. It was nothing less than devastating. Samuel's old friend and partner was resigning from the board of Shell. It was not just the press of activities consequent on his having become deputy managing director of Asiatic. Lane launched into a bitter critique of the way Marcus Samuel ran his company. 124 "You are, and have always been, too much occupied to be at the head of such a business," he wrote. "There seems only one idea: sink capital, create a great bluster, and trust to providence. Such a happy-go-lucky frame of mind in business I have never seen before. . . . Business like this cannot be conducted by an occasional glance in one's spare time, or by some brilliant coup from time to time. It is steady, treadmill work." Unless "some very radical change is made," Lane prophesied, "the bubble will burst" and then nothing "will be sufficient to save the company." Samuel met with Lane; they talked; they corresponded further. Trading blame and accusations, they became angrier and angrier. The breach could not be healed. So Lane left the board; on each side there was to be a lasting and bitter sense of betrayal. Meanwhile, Asiatic was still being constructed; the final deal was not yet done, and that engendered continuing disputes over control and policy—and power. The historian of Royal Dutch wrote that Deterding only wanted every­ body to act "rightly and fairly." Samuel's biographer had a different view; Deterding was so intent to get his way that he was driven into "a state of un­ reasonable rage and unreasoning venom" that was "close to dementia." Sure that he held the winning hand, Deterding was unwilling to compromise. At one point, he declared, "I am feeling entirely fit and able to withstand ten Lord Mayors." Finally, by May of 1903, ten contracts had been agreed to that established Asiatic, which was a third owned by each of the parties. The new company would regulate production in the East Indies, carry out sales in the Far East, and also control the sale of East Indies gasoline and kerosene in Europe. The greatest achievement of all, Deterding triumphantly assured his own board, was that Royal Dutch emerged paramount in every part of the agreement. Perhaps most important, the managing director of Asiatic would also be the managing director of Royal Dutch—Henri Deterding. Samuel insisted that the term of the managing director be limited to three years. Deterding dug in his heels. "Twenty-one years and not a day less," he declared, which was another way of saying the appointment would be permanent. He won on that, too. The first meeting of the Asiatic board took place in July 1903, with Marcus Samuel in the chairman's seat. Deterding, speaking without notes, seemed to know where every ship was at that moment, its destination, its cargo—and the prices awaiting it in each port. Marcus Samuel was much impressed. 8 "The Group"—Samuel Surrenders Deterding threw himself with irrepressible energy into the new enterprise. When the chairman of the Royal Dutch board warned him that he was pushing himself too hard, Deterding replied, "It so happens that in the oil business one has to seize one's opportunities quickly; otherwise, they escape." He was not a gambler, but a calculated risk taker, and his method was working. In short order, Royal Dutch assimilated most of the independent producers in the East Indies, where the oil was particularly suited to the manufacture of gasoline. Automobiles were starting to become familiar sights on the roads of Britain and the Continent; and, under Deterding's bullwhip, Asiatic won an important share of the growing European gasoline market. 125 As things were going ever better for Royal Dutch, they were getting pro­ gressively worse for Shell. Not only had the Texas supplies from Spindletop given out, but the British Admiralty remained committed to coal and refused to take seriously Samuel's vision for fuel oil for the Royal Navy. Thus, the large market that Samuel fervently hoped for—the Navy—simply was not there. Then, too, Royal Dutch discovered Borneo crudes suitable for fuel oil, shattering Samuel's hope to have a monopoly on its production. Standard's price wars took a continuing toll. And there was also the animus of Fred Lane, who had turned bitterly on Shell and used his position as deputy managing director of Asiatic to settle his own scores. Deterding, wearing two hats, certainly did what he could to advance the position of Royal Dutch against that of the dilapidated Shell. Limping along, with collapse in the air, Shell was barely able to pay 5 percent dividends, while Royal Dutch's were at the rates of 65 percent, 50 percent, and then in 1905, an immensely satisfying 73 percent. What was left for Shell to do? The clock was running out for Marcus Samuel. In the winter of 1906, his most talented employee, a young man named Robert Waley Cohen, told him the bad news—a consolidated marketing company was insufficient. The only way that Shell could survive was to amalgamate completely with Royal Dutch on the best terms he could get. The idea devastated Samuel. After all, he had almost single-handedly created a great global oil company. But there seemed hardly any choice. Facing up to what had now become inevitable, he raised with Deterding the desirability of amalgamation. Deterding agreed. Yes, it was desirable. But on what basis? Fifty-fifty, replied Samuel, as in their original British Dutch agreement. Absolutely not, said Deterding. He was blunt. The days of the "British Dutch" were past; the relative position of the two companies had changed dramatically. The ratio would have to be sixty for Royal Dutch and forty for Shell. "The property and interests of Shell would henceforth be managed by a foreigner!" Samuel responded. He would never be able to justify it to his stockholders. There they left the matter for several months, but when the position of Shell showed no improvement, Samuel was forced to bring up the issue again with Deterding. "I should be prepared," said Samuel, "to leave the management to Royal Dutch, if you, Deterding, could give me some absolute guarantee that it would be in the interest of the Royal Dutch to manage the Shell properly." Deterding offered only one guarantee. Royal Dutch would buy a quarter of the shares of Shell, and thus would, as a shareholder, have Shell's best interests at heart. Samuel asked for time to think it over. Deterding refused. "I am at present in a generous mood. I have made you this offer, but if you leave this room without accepting it, the offer is off." Samuel saw no obvious alternative. He accepted. His struggle with Deterding had gone on for a half decade. But, finally, it was over. Deterding had won. The union was cemented in 1907, and out of it emerged the Royal Dutch/ Shell Group. The first joint marketing company, four years earlier, had been called the "British Dutch"—the order of names reflecting the seniority. But now "Royal Dutch" came first. The change in order was deliberate; Deterding was, after all, the victor. Over the years, the new combine was sometimes simply known as "the Group." All the oil production and refining assets were lodged 126 in a Dutch company, Bataafsche Petroleum Maatschappij; and all the transport and storage in an English company, Anglo-Saxon Petroleum Company. Both Royal Dutch and Shell became holding companies, with Royal Dutch holding 60 percent of the stock in the operating subsidiaries and Shell 40 percent. There was no Royal Dutch/Shell board and, indeed, no legal entity called Royal Dutch/ Shell. The "Committee of Managing Directors" had no specific legal status; rather, it was composed of active members of the boards of the two holding companies. Royal Dutch did buy a quarter of the shares of Shell, the bond of good faith that Samuel had demanded, but over the years it disposed of all save one last symbolic share. Deterding established his working office in London, which became the financial and commercial center of Royal Dutch/Shell; he also acquired a country estate in Norfolk, where he took up the life that he had envied, that of an English country squire. The technical side of the business, production and re­ fining, was based in The Hague. As events transpired, the former corporate distinctions faded; it did not matter in which part of the business profits were made, as they were all split on the same sixty-forty basis. Indeed, all parts of the business were run by the same people, of whom three were key. Deterding was the first, of course. The second was Hugo Loudon, the Dutch engineer who had rescued Royal Dutch with new discoveries in Sumatra when its initial wells gave out. The third was young Robert Waley Cohen. Of an old Anglo-Jewish family, Waley Cohen had graduated from Cam­ bridge University with a degree in chemistry, went to work for Marcus Samuel in 1901, and then moved as Shell's man into Asiatic. After the amalgamation, he played a major role in bonding the parts together. Deterding concentrated on the business side of the business, constantly traveling and negotiating; Loudon focused on the technical. Waley Cohen was Deterding's de facto commercial deputy, making decisions in Deterding's absences, picking up and concluding one set of negotiations when Deterding moved on to the next, and bucking Deterding up at those times that the Dutchman began to have misgivings and second thoughts. Defeated by Deterding and forced by necessity to give up his control, Samuel initially regarded himself as a failure. There was no glory for him in the amalgamation. "I am a disappointed man," he told the newspaper reporters. Immediately after the merger, Samuel treated himself to a 650-ton yacht to assuage his hurt and took himself to sea. But the humiliation quickly healed. The two tycoons made an effort to get along with each other. Deterding consulted Samuel, made him much richer, and after his death was to speak of him as "our chairman." In turn, it did not take Samuel long to see what Deterding could accomplish; already, by 1908, he was telling Shell stockholders that Henri De­ terding was "nothing less than a genius." Even if he did not rule, Samuel presided for over a decade as chairman of Shell Transport and Trading and was actively involved in a wide range of the Group's business. He grew even more wealthy, became an engaged philanthropist, continued to be celebrated or caricatured in the newspapers as events warranted, and went on promoting the use of his beloved fuel oil for shipping. During his years as chairman, he maintained an amicable relationship with Deterding. But there was never any question about the nature of that relationship. Deterding was the boss. 9 127 "To America!" The completion of the amalgamation in 1907 meant that the world oil market was now dominated by the original giant, Standard Oil, and a growing giant, the Royal Dutch/Shell Group. "If the Standard had tried three years ago to wipe us out, they'd have succeeded," Deterding said in 1910, but proudly added, "Now things are different." The competition between the two, however, re­ mained fierce and bitter, and that same year he made a pilgrimage to 26 Broad­ way, seeking conciliation. What he encountered instead was an offer to buy Royal Dutch/Shell for $100 million. "I am sorry to have to place on record that my visit to this city . . . has been so useless," was his acid response. He felt humiliated for, he said, the issues of cooperation "are at present not considered as being worthy of discussion with the manager and chairman of the various Companies who, next to your Company, are doing the largest oil trade in the world." Standard Oil replied to Deterding's rejection with a new price-cutting cam­ paign, opening another phase in the oil wars. As if that was not enough, it also established a Dutch subsidiary to seek oil concessions in southern Sumatra. The Group no longer had any choice; it had to counterattack, and that meant one thing: "To America!" It became the slogan for the policy of Royal Dutch/Shell between 1910 and 1914. If the Group was not active in America, it would always be vulnerable to Standard's price cutting, for Standard could sell surplus gasoline at cut-rate prices in Europe, as it had sold surplus kerosene, while maintaining higher domestic American prices and thus also its profits. That position gave Standard a staying power that the Group did not have; it could use its American profits to subsidize losses resulting from marketing wars in Europe and Asia. Deterding moved in two directions. The first was on the West Coast, where in 1912 he set up a marketing operation for Sumatra gasoline and then the following year went directly into oil production in California. The second di­ rection took the Group toward the mid-continent. Keen to get in on the Okla­ homa boom, Deterding dispatched a new special agent to the United States to organize the whole thing quickly. The agent was the man who had organized Shell's original network of storage tanks in the Far East in the early 1890s, and its Borneo foray in the late 1890s—none other than Mark Abrahams, Marcus Samuel's nephew, now fresh from launching an oil exploration company for the Group in Egypt. Heading for Oklahoma was hardly like going to Borneo, but still Abrahams did not quite know what to expect when he set out from New York for Tulsa in July 1912. So he had his little party carry its own typewriter, in case there were no typewriters in Tulsa, and he stashed $2,500 in a money belt, in case there were no reputable banks in the little boom town that was already pro­ claiming itself "the Oil Capital of the World." Once ensconced in Tulsa, he proceeded to acquire a number of small oil companies and incorporated them into a new company, Roxana Petroleum. Deterding had now achieved his larger goal, which might have been called defensive expansion. He was on Standard's home ground. When Mark Abrahams, his task completed, returned to London, Deterding sent a jubilant letter to Hugo Loudon: "At last we are in America!" 10 128 Russia in Turmoil Galling as it was for Samuel to have lost control to Deterding in the amalgamation of Shell and Royal Dutch, events soon proved the move a wise one, given Shell's dependence on Russian oil. Russia's industrial economy had gone through stu­ pendous growth under the favorable policies of Count Sergei Witte, the powerful finance minister from 1892 to 1903. Trained as a mathematician, Witte had risen from a position as a lowly railroad administrator to become the master of the Russian economy by sheer ability—a most unusual means of ascent in the Czarist empire. As Finance Minister, Witte oversaw the rapid, large-scale industriali­ zation of Russia and of the oil industry in particular, fueled by a vast infusion of foreign capital. Conservative critics attacked his program; the Minister of War complained of "too hurried development" in the oil region, especially by "foreign capitalists, foreign capital, and Jews." But Witte stuck to his devel­ opment strategy. Witte was truly an exception, a man of great talents in a government pop­ ulated by people of little ability. The entire system was rotten with corruption, prejudice, and incompetence. The font of ineptitude was the Czar himself. Nicholas II was highly vulnerable to flattery, a dangerous characteristic in an autocrat, and he and his court descended into mysticism and unreality, immersing themselves in cults and surrounding themselves, as Witte said, with "imported mediums and home-bred 'idiots' passing as saints." The Czar could "not relin­ quish his 'Byzantine' habits," said Witte prophetically. "But inasmuch as he does not possess the talents of either Metternich or Talleyrand, he usually lands in a mud puddle—or in a pool of blood." Witte could only pray that God should deliver "us from the tangle of cowardice, blindness, craftiness, and stupidity." Nicholas II was contemptuous of all the non-Russian minorities in his mul­ tinational empire and sanctioned the repression that, in turn, made them into rebels. By the early 1900s, the whole empire was in turmoil. In 1903, the Minister of Interior was forced to admit to Witte that the reign of Nicholas II was already a colossal failure. With a few inconsequential exceptions, the minister declared, the empire's entire population was alienated and dissatisfied. The Caucasushome of the Russian oil industry—was one of the worst-run parts of the ill-run empire. Living and working conditions in the area were deplorable. Most work­ ers were in Baku without their families, and in Batum, the working day was often fourteen hours, with two hours of compulsory overtime. Baku became the "revolutionary hotbed on the Caspian." Hidden away deep in the heart of its Tatar quarter was a large cellar that stretched under several buildings. Here was the home of "Nina"—the name given to the secret, large printing operation into which the mats of Vladimir Ilyich Lenin's revo­ lutionary paper, Iskra, were smuggled, from Europe via Persia, to be printed for circulation within the country. To the continued befuddlement of the Czarist police, "Nina" became the source of a massive flow of revolutionary materials. The oil industry was the unknowing accomplice; its national distribution system provided a perfect vehicle for clandestinely distributing propaganda throughout the country. Baku and the oil industry also provided the training ground for a 129 host of eventual Bolshevik leaders, including a future Soviet President, Mikhail Kalinin, and a future marshal of the Soviet Union, Klementi Voroshilov. The alumni included a still more important figure, a young Georgian, a former seminarian and son of a shoemaker. His name was Joseph Djugashvili, though he operated in the underground under the name "Koba"—Turkish for "Indom­ itable." Only later did he begin to call himself Joseph Stalin. In IQOI and 1902, Stalin became the chief socialist organizer in Batum, masterminding strikes and demonstrations against the local oil industry, includ­ ing a prolonged strike against the Rothschilds' interests. Stalin was among the many arrested after the strikes, the first of his eight arrests. He repeatedly escaped from exile, only to find himself landed again and again back in a Czarist prison. In 1903, the oil workers of Baku went out on strike, setting off a wave of labor strife across Russia, culminating in the first general strike in the empire. The country was in disarray, and the government in crisis. No wonder Marcus Samuel, the Rothschilds, and others worried about their dependence on Russia as their source of oil supply. The Czarist regime needed a diversion, and, as so many others have done before and since, it sought its diversion in a foreign adventure, hoping to unite the nation and restore the prestige of its rulers. And, like many others, it chose the wrong opponent—in this case, Japan. Competition for control over Man­ churia and Korea, particularly the Yalu Valley, had made war with Japan a distinct possibility ever since 1901. The Czar, who had been wounded in an assassination attempt on a trip to Japan a decade earlier, had no respect for the Japanese; even in official documents he called them "monkeys." St. Petersburg turned aside every effort by the Japanese to work out some sort of accommo­ dation. Count Witte had sought to head off conflict; his removal from the Finance Ministry in 1903 convinced the Japanese that war was inevitable. That suited the Czar and his circle. "Russia's internal situation" required something drastic, said the Minister of Interior. "We need a little victorious war to stem the tide of revolution." It was obvious that war was only a matter of time. The Russo-Japanese War began in January 1904 with Japan's successful surprise attack against the Russian fleet at Port Arthur. Thereafter, the Russian forces lurched from one military disaster to the next, culminating in the burial at sea of the entire Russian fleet at the Battle of Tsushima. The war did not stem the tide of revolution, but rather hastened it. In December 1904, the Baku oil workers went out on strike again, and won their first collective labor agree­ ment. A few days after the strike ended, revolutionaries put out a proclamation, "Workers of the Caucasus, the hour of revenge has struck." Its author was Stalin. The next day, in St. Petersburg, police fired on a group of workers marching on the Winter Palace to submit a petition to their Czar. This was Bloody Sunday, the beginning of the Revolution of 1905—what Lenin called the Great Rehearsal. When the news reached Baku, the oil workers again went out on strike. Government officials, fearful of revolution, provided arms to the Moslem Tatars, who rose up to massacre and mutilate Christian Armenians, including the leaders of the oil industry. A legend arose afterward about one of the wealthiest Ar11 130 menian oil men, one Adamoff. A crack shot, he stationed himself on the balcony of his house, and with the aid of his son, held off a siege for three days, until finally he was killed, the house set fire, and his forty dependents either burned to death or dismembered. Strikes and open rebellion spread again throughout the empire in September and October of 1905. In the Caucasus, it was race and ethnic conflict, and not socialism, that drove events. Tatars rose up once more in an attack on the oil industry throughout Baku and its environs, intent on killing every Armenian they could find, setting fire to buildings where Armenians had taken refuge, pillaging every piece of property on which they could lay their hands. "The flames from the burning derricks and oil wells leaped up into the awful pall of smoke which hung over the inferno," one survivor was to write. "I realized for the first time in my life all that can possibly be meant by the words 'Hell let loose.' Men crawled or dashed out of the flames only to be shot down by the T a t a r s . . . I thought the scene might well be compared with the last days of Pompeii. It was made worse than anything that could have taken place at Pompeii by the ping of rifle and revolver bullets, the terrific thunder of exploding oil tanks, the fierce yells of the murderers, and the dying screams of their victims." The smoke was so thick that at two in the afternoon, the sun could not be seen. Then, as if to provide proof that the last days were truly at hand, a terrifying earthquake shook the entire region. The news from Baku had a profound effect on the outside world. Here, for the first time, a violent upheaval had interrupted the flow of oil, threatening to make a vast investment worthless. Standard Oil wasted no time in taking advantage of the disarray in Russia; it moved quickly and successfully to regain the markets for American kerosene in the Far East that had formerly been lost to Russian oil. As for the Russian industry itself, the tally was dis­ maying: Two-thirds of all the oil wells had been destroyed and exports had collapsed. By the end of 1905, the revolution was spent. The Russo-Japanese War was also over, its conclusion mediated at the behest of the belligerents by President Theodore Roosevelt at Portsmouth, Rhode Island. In October 1905, the Czar granted, albeit completely against his will and grain, a constitutional government, which included a Parliament, the Duma. Though the revolution was over, the oil region remained in turmoil. The oil workers of Baku elected Bolshevik deputies to the Duma; Nobel's chief in Batum was murdered in the street. In 1907, strikes swept through Baku, again threatening to become a general strike, while the Czar stupidly undermined the constitution that might ultimately have preserved him and his dynasty. Also in 1907, the Bolsheviks sent Stalin back to Baku, where he directed, organized, and as he said, fomented "unlimited distrust of the oil industrialists" among the workers. Those years in Baku were one of the few times that Stalin actually involved himself in the day-to-day struggles of the working class. In 1910, he was arrested in the midst of preparations for another general strike, imprisoned, and exiled to the desolate north of Russia. It was in Baku that he had honed the revolutionary and conspiratorial skills— and the ambition and cynicism—that would help make his future. 12 131 Return to Russia It was not only the political upheavals and racial and labor tensions that were undermining the Russian pet