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Enter British Petroleum - History of Lighting

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Enter British Petroleum

Winston Churchill, as first lord of the admiralty, agreed with Fisher on converting warships from coal to oil, with one major reservation. Churchill believed that the British Navy should not rely exclusively on contracts from suppliers, but that the government should have its own oil fields to guarantee a supply of fuel for the navy. Marcus attempted to convince Churchill that Royal Dutch-Shell, along with Standard Oil, could supply the British Navy in any location throughout the world. Marcus argued that the navy would be better served building storage facilities, not buying oil fields. Despite Marcus’ pleas, the British government went ahead with Churchill’s plan and purchased a 51 percent interest in Anglo-Persian Oil Company, an offshoot of Burmah Oil, in 1914, weeks before the start of the First World War.30

In 1901, private British investors funded the initial exploration of oil in Persia. In charge of exploration was George Reynolds, who had the drive of Colonel Drake to continue exploring after seven fruitless years that nearly bankrupted the original backers before turning the project over to Burmah Oil. George Reynolds’ incantations that success was just around the corner eventually exhausted the willingness of Burmah Oil and others to further support the project. An ultimatum was delivered to Reynolds to cease and desist upon completion of the last well to be drilled to 1,600 feet. Once he reached this depth, he was to abandon the project in its entirety. But Reynolds drilled on even more feverishly when the unmistakable smell of rotten eggs emanated from the well. On May 26, 1908 with the drill hole at 1,180 feet, a fountain of oil spewed forth much to the surprise of all. Reynolds was fully vindicated. Anglo Persian Oil Company, organized in 1909, owned and managed the oil find. Pandemonium broke out on the London trading floor when the company sold a portion of its stock to raise capital.31

The company laid a 130-mile pipeline, the first in the Middle East, between the oil field and a refinery built in Abadan. Having no tankers and no marketing department with only one outlet to reach the market, all of which provided by the Shell Group, Anglo-Persian Oil was in a weak bargaining position and financial condition despite its success. Vulnerable to a Shell Group takeover, the company wanted an investment by the British government for a half-interest in the company. In addition to gaining a major new client, the British Navy, funds from the British government would be invested in expanding its refinery to become the largest in the world, diversifying its markets with an aggressive marketing program, and serving those markets with its own tanker fleet. This plan of action would eliminate its dependence on the Shell Group for marketing and distribution. By owning an oil field, Churchill felt that he would not be at the mercy of oil companies with regard to price and supply. The British government did not interfere with the running of Anglo-Persian Oil. Its members on the board of directors monitored the company’s operations to ensure conformity with the government’s strategic goals; other than that, management was given a free rein.

World War One

At the start of the war, Shell Group chartered its entire fleet of over seventy tankers to the British Admiralty at prewar rates as a show of support for Britain. As a consequence, the company had to charter in other tankers up to four times these rates to meet its needs. The Dutch side of the company transferred as much of their operations to London as possible. Marcus converted his mansion into a military hospital and his two sons and two sons-in-law served in the military. Only one survived the war.

Shell Group became sole supplier of aviation fuel and principal source of motor vehicle fuel to the British Expeditionary Force. Toluene for the explosive TNT (trinitrotoluene) came from processing coal. Though crude oil normally contains only trace amounts of toluene, Shell’s Borneo crude was unusually rich in toluene (10 percent). To process Borneo crude for its toluene content, Shell Group’s refinery in Rotterdam was dismantled and “smuggled” to England. In addition to having Shell Group invest in National War Loans, Marcus spearheaded conversion of general cargo vessels into tankers and had others fitted with double bottoms for supplying fuel to the expeditionary forces in Europe. He was also active in introducing diesel propulsion to replace oil-fueled steam propulsion plants. In 1916, when it was clear that Romania would fall to German forces, Marcus and Deterding authorized company personnel to destroy Shell Group’s Romanian oil assets without any promise of restitution by the British government. Ironically Shell Group gasoline was distributed in Britain before the war under a contract with British Petroleum, at that time a German-owned marketing company. British Petroleum shares were seized by the British government and turned over to the Anglo-Persian Oil Company, marking the official birth of BP.

The British government was the first government to have majority ownership of an oil company, but chose not to run it. The first government that actually ran an oil company was the Soviet Union after it expropriated the oil-producing properties of Nobels, Shell Group, and Russian independents after the Russian civil war. But Nobels did not leave empty-handed because Standard Oil of New Jersey (Exxon) bought their oil rights in Russia in 1920 on the remote chance that the Whites would win the Russian civil war. Although Nobels received some restitution for their oil properties, they were out of the oil business. Rothschilds’ loss would have been disastrous, aside from their one-third ownership of Asiatic Petroleum, had they not exchanged their Russian oil-producing properties for shares in Royal Dutch-Shell. Russian independents were lucky to escape with their lives. Now the Soviet Union was in the oil business and depended on oil exports to build communism in much the same way that Russian oil rebuilt the Russian economy after the fall of communism in 1991.

In 1920, despite all that Marcus had done in support of the British war effort during the First World War, the public rose against him and accused him of greed in the face of rising petroleum prices. Only a decade earlier the darling of London society, Marcus was now a pariah, accused of siphoning money out of everyone’s pocket. It was his turn to endure the vituperation heaped on Rockefeller. Marcus’s appeal to the harsh law of supply and demand for establishing the price for oil to clear the market did not endear him with the public. This display of public ill-will might have played a role in his retiring as chairman and board member. In 1925 he became Lord Bearsted (Deterding was knighted in 1921 in recognition of his war services), and 2 years later both Marcus and his wife died within 24 hours of one another.

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