The Genesis of Shell

Lloyds 1A.100 was its gold standard rating and critical to achieving clearance for the Suez Canal. The stories relating to the award of the rating are myriad however it did not pass notice William Gray, the owner of William Gray & Co of West Hartlepool, the shipbuilder appointed to build the Murex was on the Lloyds of London executive management committee. But it was not all plain sailing. The oil business feeds on rumors and loves spreading them and before long Standard Oil had guessed there was a plan to ship oil through the Suez Canal. They engaged prominent solicitors to mount a counter attack by scaremongering in the press and lobbying the Salisbury Government claiming the plan would endanger the canal ergo British business interests.

In September 1891 as William Gray & Co laid the keel for the Murex the Standard Oil campaign was gaining momentum. It became nasty and anti-Semitic. It was time for the Rothschilds to join the battle but first a potted history of the Suez Canal. In December 1858 Ferdinand de Lesseps raised £8M to build it via a public share offer. Palmerston’s British Government was cool on the project. Perhaps because it was a French idea but more likely because it would compromise British trading interests along the West African coast. Private shareholders, mainly French with encouragement from Alphonse and Edmond Rothschild, took up 56% of the IPO with the remainder unsubscribed. Realising its importance to Egypt and to ensure the project went ahead, the Egyptian Viceroy, Mohammed Said Pasha took up the remaining 44%. The Canal was opened in November 1869 but not before the cost had doubled. This posed a financial strain on Egypt and in 1875 the Viceroy’s successor, Ismail, was forced to put the Egyptian stake on the market.

Even though the Canal’s initial receipts had not been as robust as predicted its economic and strategic value, particularly to Britain with its Empire, was now beyond question. Disraeli, Prime Minister of the day, was desperate to buy the stake but didn’t have the readies. Realising he had to act quickly he approached his old mate, Lionel Rothschild for a loan. It was done overnight on a handshake. Disraeli snatched a 44% stake in the Canal for £4M. Lionel was Alphonse and Edmond’s English cousin. So, the Rothschilds had influence where the Suez Canal was involved. By the time Marcus Samuel’s wife Fanny launched the Murex in May 1892 the Suez Canal Authority had cleared tanker ships rated Lloyds 1A.100 to navigate the Canal. There was only one and on August 23, 1892 loaded with 4,000 tonnes of Rothschild’s kerosene the Murex did it. Samuel had conceived and executed his incredibly audacious coup in 21 months.

Three weeks later as the Murex cruised down the Malacca Strait toward Singapore its crew might have seen a flare on the Sumatran coast. Twelve years earlier a Dutch tobacco farmer wandering around the area looking for suitable farmland stumbled across oil seeps. Aeilko Jans Zijlker had nothing but determination. It took him four years to secure a concession from the Sultan of Langkat and another year to raise sufficient money to drill a primitive well which produced crude oil in commercial quantities. Five years later the field at Pangkalan Brandan was turning a nice profit so in September 1889 he boarded a steamer for Amsterdam with a view to securing funding for expansion.

Just as a sea voyage had transformed Robert Nobel’s fortunes seventeen years earlier so too did Zijlker’s. A fellow passenger, Dr Norbertus van den Berg, was homeward bound to take up the post of Governor of the Netherlands Bank. By the time they reached Amsterdam van den Berg was a believer. Not only did he help Zijlker assemble a prospectus, he secured King William III’s royal warrant and accepted the role of chairman of the board. So when the “Royal Dutch Petroleum Company” was launched on the Amsterdam Stock Exchange in June 1890 it was oversubscribed fourfold. Zijlker’s return voyage was not so fortunate, he died in Singapore. His replacement, Jean Baptiste August Kessler, did not arrive in Pangkalan Brandan for another year. By then, two years after Zijlker’s departure, the site was a shambles.

Annual rainfall in Pangkalan Brandan is over 2m and there is no such thing as a dry season. A railway built to transport crude oil from the well site to a new refinery was sinking in mud. Kessler was not an engineer but knew the solution was a pipeline. As a retired pipeline engineer and having spent some time in that area I can only imagine how difficult it must have been stringing 10km of threaded joint pipe piece by piece through that jungle. But a gang of Dutchmen, Americans and Chinese coolies who could barely understand each other did it and in February 1892 the refinery was commissioned. The kerosene fraction was 35%. It would be another two years before Karl Benz started mass producing cars with internal combustion engines so the rest including the gasoline was waste. It was dumped in an adjacent disused quarry and flared. This was the flare the Murex might have seen as it sailed past 6 months later.

Meanwhile in Singapore, Samuel’s agents, Syme & Co, had established a 35,000 barrel capacity tank farm on Pulau Bukom, a 360 acre island 11km SW of Boat Quay. The plan had been so thorough Samuel had even sent a cargo of tinplate to the Far East so small factories at each of his destinations could commence the fabrication of kerosene cans. These were painted in the red we associate with Shell to this day. Having discharged half its cargo at Pulau Bukom on September 16^th 1892, the Murex continued on to Bangkok. The assault on Standard Oil’s monopoly in Asia had begun. Within 18 months Samuel & Co had launched ten more ships, all named after seashells, Conch, Clam, Elax, Bullmouth, Cowrie etc. Their grip on the trade was such that ten years later of all the oil to pass though Suez, 90 percent belonged to Samuel and his Tanker Syndicate.

Royal Dutch did not launch as robustly as the Tanker Syndicate but was given a leg up when the Dutch Colonial Government excluded foreign competition from its ports in the East Indies. By 1895 transportation costs had prevailed. Batumi to Singapore via Suez 6,500 miles. Philadelphia to Singapore via the

Cape 12,600 miles. Shell’s red cans and Royal Dutch’s yellow cans replaced Standard’s blue cans in the Orient. Standard even feared Russian kerosene might compete in America so reduced local prices in a preemptive move. A worldwide crude oil market had been established.

By 1897 Kessler was producing over 1,000 barrels of kerosene a day, Royal Dutch was paying a 50% dividend and trading at 9 times the issue price. Rockefeller was not happy and takeover attempts were made but patriotic fervor and the share price kept the predator at bay. But near death was just around the corner. The Pangkalan Brandan wells began producing water. Although Kessler didn’t know it at the time it was the beginning of the end of the reservoir. It was a phenomenon the Americans had come to understand well and as the rumours spread the shares were dumped. To prevent a takeover Royal Dutch issued special preference shares. But there was no point saving an oil company without oil.

A frantic drilling programme close to the existing wells at Pangkalan Brandan produced nothing. The rationale for this effort was convention. Hitherto oil had been discovered in the vicinity of oil seeps however an emerging theory suggested crude oil was the product of the organic decay that remained trapped in domes formed at the high points of folded rock layers deformed by movement of the earth’s crust. Geologists referred to these folds as anticlines and the “Anticline” theory was first suggested in 1855 by an English geologist working in Burma. More recently geologists Dr C Porro, Italian, and Dr C Schmidt, Swiss, had been successful in applying this theory mapping crude oil prospects in Alsace and Romania. In a last throw of the dice Kessler employed them to produce a geological map of North Sumatra and to identify likely drilling prospects.

Despite the best efforts of tigers, mosquitos and rain, as much as 4.5 m a year in parts, their first report appeared in April 89. It was a masterpiece and for years provided a basis for scientific exploration. It confirmed the reservoir at Pangkalan Brandan was in an anticline but it had been depleted and 100 dry wells drilled in the vicinity had made that abundantly clear. Drs Porro and Schmidt had mapped another promising structure and identified a drilling target at Peureulak 100km to the north. It took 8 months of patient diplomacy with the feisty Achinese however two weeks after securing a concession the drilling crew was struggling to control a gusher. Two months later barges were ferrying 4,000 barrels of crude a day to the refinery at Pangkalan Brandan. Crude oil exploration had become a science and Royal Dutch was back in business. Kessler had saved the company but the effort killed him. He died in December 1900, just days short of his 47^th birthday but not before recommending his 34 year old marketing manager, Henri Deterding, be appointed in his place.

The years following the Murex’s maiden voyage had been altogether different for Marcus Samuel. By 1897 he had more than 15 tankers and carried 70% of the world’s seaborne petroleum trade. He was a trader rather than an oilman but knew that without reliable access to crude his ships would be worthless. His contract with the Rothschilds would expire in October 1900 and their relationship was strained. So he badly needed alternative resources.

To that end he teamed up with a manic Dutch expatriate who claimed to have found oil seeps in the jungle near Balikpapan. I have travelled the road north from there on many occasions and although I haven’t seen oil seeps I have seen the exposed coal seams that burn on for weeks after bushfires have ignited them. I also know that even in the 1970s working in that jungle 1000 miles east of Singapore was a logistical nightmare. Nevertheless against all the odds Samuel’s exploration team lead by his long suffering nephew, Mark Abrahams, struck crude oil in February 1897. It didn’t have a high kerosene fraction but towards the end of the century as demand for automobile gasoline took off so did the importance of this discovery.

Later in 1897 Marcus and his brother merged the Tanker Syndicate and its associated assets into the Shell Transport and Trading Company. This included the Balikpapan refinery now producing copious amounts of fuel oil. Within three years this fuel had replaced coal in the Shell fleet thereby expanding the market for petroleum products even further. M Samuel & Co continued to prosper too. The brothers were winning both ways; eastbound kerosene shipments and the westbound commodity trade. Life couldn’t have been better for our portly champion. Well, yes it could.

It wasn’t an oil tanker that first threatened to block the Suez Canal, it was a Royal Navy battleship taking a short cut to Shanghai. Strong winds blew it onto a sand bank off Port Said and it stuck. Inevitably there was a Shell tanker nearby. Pectan was new and powerful and its patriotic owner was only too happy for it to go to the aid of an embarrassed Royal Navy. The 9,000 tonne tanker strained all ahead full for 24 hours before freeing the 15,000 tonne Victorious. Six months later our 45 year old hero from Houndsditch was knighted by a grateful Queen at Osborne House.

Sir Marcus was on a roll but trouble was around the corner. Henri Deterding was a man on a mission. He now had a reliable source of crude in the Far East and was not about to leave that market to Sir Marcus. He also knew Shell’s Batumi deal was about to expire. He bought tankers, established rival depots in Shell strongholds and cut prices. This upset the Rothschilds who had a stake in Sir Marcus’s fortunes. They asked Shady Lane to broker a peace accord but the giant egos were irreconcilable.  

The legendry gusher at Spindletop on January 10, 1901 tipped the balance in Sir Marcus’s favour. The well erupted at an estimated 75,000 barrels a day, doubling the entire American output. Guffey Petroleum, the successful wildcatter, knew better than to deal with Standard Oil but needed a buyer capable of moving large quantities. Shell was the obvious answer and Sir Marcus’s brother in law was sent to negotiate a deal. It was the “deal of the century” and consummated in June. Shell agreed to take a minimum of 15 million barrels over 21 years at 25 cents a barrel.

Shell’s future seemed secure and in October as Sir Marcus was losing patience with Deterding’s antics in the Far East he boarded a steamer for New York for talks with Standard Oil. His goal was an alliance of equals but Standard didn’t form alliances and they couldn’t agree Shell’s value. He returned empty handed, or so he thought. But just before Christmas Standard offered Sir Marcus $40M ($600M today) for Shell lock stock and barrel. It had been 11 years since he and Shady Lane had taken the Orient Express to Batumi.

But Sir Marcus was a proud Englishman and not about to become a Standard Oil stooge. And why should he, he had the deal of the century in his back pocket. But it wasn’t the deal of the century. Six months later, just as they had at Pangkalan Brandan, the wells at Spindletop ran to water. Overproduction had killed the golden goose. Sir Marcus now had more ships than he needed for the kerosene he was lifting from Batumi and Balikpapan. Following further pressure from Deterding and the Rothschilds he agreed to the formation of the Asiatic Petroleum Company for the transportation and marketing of petroleum products east of Suez. The company was formed in June 1902 with Shell, Royal Dutch and the Rothschilds as shareholders, Sir Marcus as Chairman and Deterding Managing Director.

Three months later Sir Marcus was elected Lord Mayor of London. It was a fitting accolade for a man recognized as one of the city’s most successful entrepreneurs. He reveled in the trappings of office however the day to day functioning of Shell, so dependent on his presence, suffered. He had too many ships and not enough oil. Royal Dutch was paying a 60% dividend, Shell Transport and Trading 5%.

The mutiny on the Potemkin in June 1905 signaled the end of Sir Marcus’s independence. The unrest spread to Baku where the oil fields were torched in the ethnic violence that followed. A young Joe Stalin, an Azerbaijani was one of the ring leaders. Sir Marcus’s luck had run out, Balikpapan was not enough. He had no option but to agree to the formation of the Royal Dutch Shell Group, 60% Royal Dutch 40% Shell Transport and Trading.

Our story ends when the union was finalized in 2008. It was a great blow to Sir Marcus’s ego but Deterding was an astute and energetic administrator without peer. In the years following the union, Shell would have been vulnerable to a concentrated Standard Oil attack but John Rockefeller had another problem. Teddy Roosevelt’s anti-trust campaign was gathering pace and indeed in May 2011 Standard’s appeal against dissolution failed. By then Henri Deterding had gathered the reins and was taking the battle to Standard in California.

This was also the year Churchill was appointed First Sea Lord. His first meeting with Sir Marcus arranged by Admiral Jackie Fisher didn’t go well but eventually he saw the sense in Sir Marcus’s argument for converting the Royal Navy from coal to fuel oil. Indeed, in August 1916, Murex refueled Ark Royal off Gallipoli. Unfortunately three months later the brave pioneer was torpedoed off Alexandria with the loss of one seaman.

Sir Marcus remained as chairman of the combined companies and became an even wealthier man. In June 1922 he was elevated to First Viscount Bearsted. Five years later he and his beloved Fanny died at home on the same day.