LOOKING BACK ON TOBACCO ROAD PART II

A meeting took place far from my Tobacco Road, when I was 8 years old. It impacted my life 28 years later.

THE PIPEFITTER AND THE SHEIK[i]

In 1947 an oil field pipefitter was in the lobby of the Shepheard Hotel in Cairo. He was waiting for a flight to the US, but his earliest booking was several days away. He was wearing cowboy boots. A man in Arab dress approached him and said, “Are you a Texas oilman?”  The pipefitter said, “Yes I am a Texas oil man.” (He was a Texan and he did work in the ‘oil patch.’)  The Arab represented the ruler of Kuwait, and the King (Sheik) was interested in granting a concession to explore and develop an oil field in his country. The King did not want to deal with major oil companies, but rather with an ‘independent American operation.’  “Would the Texas oil man consent to fly back to Kuwait and discuss the matter with the King?”

Since he couldn’t get to America, the pipefitter decided he would make the trip to Kuwait. At the royal palace, as he waited for an audience with the Sheik, he grew bored. He wandered around the palace for a couple of days and saw that most of the plumbing leaked. A pipefitter, he spent his time repairing the broken water pipes.

The Sheik learned what the plumber had done. When the plumber met with him, the King was grateful for the repairs that saved precious water. He gave the plumber a concession to develop a potential oil field along the Kuwait-Saudi border. And the plumber returned to America with the concession in his pocket.

Back home, nobody took the concession seriously. He took a job in Texas welding on a Philips Petroleum pipeline. He mentioned his concession to his boss who passed the information along to Phillips management in Bartlesville, OK. A crusty vice president thought the story crazy enough to be true, and he asked the pipefitter to come to Bartlesville.

The document was real, and Phillips set about forming a new oil company, a consortium of smaller companies like Philips - Hancock, Signal, and a few others. The Sheik’s request to do business with “an American independent oil company” was not lost on them, so they named their new enterprise – American Independent Oil, Aminoil for short. Aminoil developed the concession and produced oil in a Kuwait area called the “Neutral Zone,” a sort of no-man’s land between Saudi Arabia and Kuwait, with Getty Oil operating the Saudi side of the Neutral Zone.

In 1969, Malcolm McLean, founder of SeaLand, sold his container shipping company to Reynolds Tobacco. In 1970 as a board member, he suggested that Reynolds buy Aminoil. He thought it a useful source of fuel for the SeaLand ships. Reynolds paid $56 million for Aminoil, entering the oil business in a small way.

Aminoil was a marginal operation for three years. Then, Oct. 17, 1973, the world experienced its first "oil shock" as Arab exporters (OPEC) embargoed shipments to the West. The embargo was prompted by America's military support for Israel, at war with the Arab countries. Oil prices more than quadrupled. The US had long gas lines at service stations.

The economic upheaval did not totally end until 1981. But for Aminoil, the price increase was a windfall. Even after huge royalties to the Kuwaitis, the company had cash flow in the $10-20 million range, an enormous return on Reynolds’ $56 million investment.[ii]

At the same time, events elsewhere in the world drew RJR much further into the oil business. This would change my life forever. Part III will introduce a shipbuilder and a troubled company.

[i] Tompkins, Walter A., The Little Giant of Signal Hill, The Plumber and the Potentate.

[ii] This table shows the cash flow from the original investment in the Kuwaiti operation in 1970.

The returns were minimal for the first three years. After the embargo, revenues went up four or five-fold. However, the Kuwaiti government began to extract taxes and royalties that amounted to about 97% of earnings. In 1977, like other Middle Eastern countries, Kuwait nationalized Aminoil, ending RJRs participation. RJR asked for reparations, and a tribunal awarded RJR $83 million.

There was a question about whether this ruling could be enforced. Sometime afterward, Jack Sunderland, the former CEO of Aminoil, told me that he was sure the Kuwaitis would pay, and they did. I believe it was partly because of the respect they had for Jack and his straightforward dealing with them. In 1982, RJR received the award plus interest with an inflation adjustment, $179 million. The return on investment was over 18% annually for the 12-year project.