The world was short of oil and prices were soaring when, in April, 1979, Saudi Arabian oil minister Ahmed Zaki Yamani announced a strategy to help protect the international economy: he directed four major U.S. companies to pass along to their customers Saudi Arabia's relatively low oil prices in world markets.
The companies that have access to most of Saudi Arabia's oil, Mobil Oil Corp., Exxon Corp., Texaco Inc. and Standard Oil Co. of California, all agreed to comply. Mobil--dependent on Saudi Arabia for half of its crude oil supply--established "a company-wide policy of not selling Saudi crude directly or indirectly for more than" the official price set by the Saudis, a company spokesman said last month.
Internal Mobil Oil Corp. records raise questions about Mobil's compliance with the Saudi directive and show the company made at least $75 million in profits from complex transactions involving Saudi crude oil during part of 1980 and 1981.
A Mobil spokesman, however, issued a categorical denial, saying that Mobil made "no additional money or profit" reselling Saudi crude oil during this period, and asserted that Mobil documents obtained by The Washington Post are being misinterpreted and reflect only routine crude oil transactions and bookkeeping practices.
Yamani and other Saudi officials declined to comment.
The records show that Mobil sold tanker loads of Saudi crude oil at the official Saudi price to five Japanese oil companies. The records also show companion transactions on identical volumes of non-Saudi oil aboard other ships. Mobil sold this oil at a higher price to the same Japanese customers and bought it back the same day or within days at prices $4 to $9 a barrel lower. The result was substantial profits from transactions in which Saudi crude was the only oil received by the Japanese customer.
In other words, according to the records, a number of Mobil's transactions with the Japanese oil companies were on two parallel tracks: on one track, Mobil provided Saudi oil at the official price, in line with Yamani's directive; on the second track, Mobil sold and bought back on paper identical volumes of non-Saudi oil, resulting in profits one step removed from the Saudi oil.
Mobil's records for 1980 show that the sales on both tracks were part of a single transaction and were assigned one contract number within Mobil.
There is no indication from the records that these transactions violated any law. Nonetheless, Mobil's dealings with its Japanese customers illustrate how Mobil, the second-largest company in the United States, reconciled its commercial interests with a foreign policy initiative of its major supplier. As the largest oil producer in the Middle East, Saudi Arabia was seeking to enforce its lower prices on a global scale while Mobil's special access to Saudi crude oil presented the company with large profit opportunities.
The price of Saudi crude more than doubled during the oil crisis, but the Saudis were more restrained than other oil-producing countries. Saudi Arabia was pumping about 9 million barrels of crude oil a day at a price $4 or more below average world prices. This relatively small margin of price differential carried an enormous profit potential.
Of the $75 million in profits documented for this article, $35.6 million was listed in Mobil records as net balances from nine transactions involving Saudi oil in 1980, and $39.1 million was recorded as "profit" from "sales of crudes acquired on exchange" during the first half of 1981.
All of these profits were taken from transactions in which Mobil was supplying more Saudi oil to Japan than was required by contract. How much total profit was made in this manner from Mobil's roughly $2 billion in annual crude oil sales to Japan could not be determined. Other Saudi oil under the contracts was sold at the official Saudi price in standard transactions, according to the records.
The Japanese, who lost 18 percent of their oil imports when Iran's oil fields were shut down by revolution in 1979, were willing to pay a premium for additional supplies of Saudi oil. Even with a premium, Saudi oil was a good buy for the Japanese and, compared with other crudes being offered to the Japanese by Mobil at the time, was lower in sulfur content and higher in its yield of gasoline and jet fuel.
Mobil spokesman Herbert Schmertz said that Mobil "did not sell Saudi crude, directly or indirectly, at prices in excess of official selling prices." On the contrary, he said, Mobil bent over backward to maintain a steady supply of oil to its Japanese customers and to be fair to them at a time of critical shortage.
In a series of interviews and in a letter to The Post, Schmertz gave a general explanation, but declined to address specific figures in Mobil's records that show a "net balance" or "profit" resulting from these transactions.
There is no question from the records of each Mobil transaction with the Japanese firms that Saudi crude oil was always sold at Saudi Arabia's official price. But, according to Mobil's records, such a sale at times represented one-half of the total transaction. In the second part, according to the records, an identical amount of non-Saudi oil was sold and bought back at different prices to create an immediate profit for Mobil.
The following example from Mobil's records shows how one complete transaction worked:
Under contract No. 81-80, dated July 10, 1980, and approved by Gerald T. Owens, then president of Mobil Sales & Supply Corp., Mobil agreed to provide additional Saudi crude oil to one of its Japanese customers, Fuji Kosan Co.
As a first step, on July 17, 1980, Mobil sold Fuji Kosan a tanker load of oil produced in the tiny sheikdom of Dubai. The selling price for the 675,482 barrels was $36.51 a barrel.
The next day, July 18, Mobil bought back the same load of oil for $27.46 a barrel, resulting in an overnight profit of $6.1 million.
The Dubai oil never changed hands and, at the time of the paper transactions, was on the high seas, destined for another Mobil customer in Japan.
With its profit in hand, Mobil shipped on another tanker an identical amount of Saudi crude oil to Fuji Kosan on July 27 and charged the official Saudi price of $27.46 a barrel.
The Saudi oil was aboard the supertanker Fujikawa Maru, and the Dubai oil was aboard the tanker Asia Maru-2. Mobil records pertaining to both shipments are part of contract No. 81-80.
Those records show that the only oil received by Fuji Kosan from Mobil was Saudi oil. The records also show a $6.1 million "net balance" due Mobil that was paid by the Japanese firm on July 25 as "final settlement" of the transaction.
This is the "net balance" that Mobil spokesman Schmertz declined to address specifically. Schmertz also said that Mobil would not entertain any additional questions about the transactions. He said he had no faith in The Post to interpret additional data fairly. He gave this general explanation, which he said was more than adequate:
Schmertz said that Mobil had access to only so much Saudi crude oil and, therefore, tried to distribute it fairly between Mobil refineries and outside customers, such as the Japanese oil companies. The Japanese customers had signed agreements with Mobil to accept a certain percentage of Saudi crude and a certain percentage of non-Saudi crude during the oil shortage, he said.
Subsequently, some of the Japanese firms requested extra supplies of Saudi crude, Schmertz said. In these instances, Mobil proceeded as if the Japanese customers already had purchased the higher priced non-Saudi oil. Then Mobil entered into a "barrel-for-barrel exchange" with the Japanese firm, in which Mobil received back the higher-priced oil and gave up an equal amount of Saudi oil, he said.
"Since Saudi crude was involved, it was decided, in view of the Saudi edict applicable to Mobil, that the price of the Saudi crude would be the Saudi OSP official selling price and, therefore, the price of the exchange crude non-Saudi oil would also be the Saudi OSP," Schmertz wrote.
Mobil received back the more-expensive non-Saudi oil at the low Saudi price through such an exchange. "The total cost to each party was the same and the average cost was the same," Schmertz said. He challenged any suggestion that "a company which receives, through exchange, more than its basic allocated quantity of Saudi crude, should have his average cost reduced."
Schmertz questioned the basis for "an article on this subject, related to events far removed from the United States and printed three years after the fact."
He said the Mobil transactions did not violate "any U.S. laws, regulations or policies . . . . The Japanese refiners and their government were all pleased with them. The only plausible purpose for an article we can perceive is an attempt to present a distorted interpretation of these transactions in the hope that it will cause difficulty for Mobil with the Saudi government. We find it more than a bit ironic that The Washington Post has suddenly become a 'guardian' of Saudi Arabian interests."
Former Mobil Sales & Supply Corp. president Owens, in a series of interviews during July, verified documents outlining some of the transactions, and defended Mobil's actions vigorously. Owens, 56, said during these interviews that it would be "an accurate accounting statement" that Mobil's Japanese customers at times ended up paying more for Saudi crude oil than the official Saudi price.
The former Mobil official, who remains a consultant to the corporation, said the transactions in question were the "exception, not the rule." He said the transactions were always initiated by the Japanese customers, who were desperate for additional supplies of high quality Saudi crude.
Owens also said the profits were justified because Mobil had arranged to acquire large quantities of non-Saudi crude to meet the terms of its supply contracts in Japan. If a customer did not want to accept his full share of non-Saudi oil and wanted to receive Saudi oil instead, he should have to pay for the disruption to Mobil's supply system, Owens said.
Also, "In order for that deal we made [in Japan] . . . to be fair to us, it was critical that some amount of profit be derived as if we were running it [the Saudi crude] in our own system," Owens said. "It would have to be [profitable] in order to be fair. That's part of Americana, that's Americana personified . . . with the Stars and Stripes forever."
Schmertz said in his letter, "The large basic allotments of Saudi crude made by Mobil to our Japanese customers actually enabled them to achieve lower average costs than the average of our own affiliates--hardly a policy with the objective of maximizing our profits."
Owens said he knew of Mobil's obligation to comply with the Saudi directive: "We were aware of the fact that Saudi crude oil had to be sold not only cosmetically, but also effectively at OSP." Asked how the Saudis would have reacted to these profits, Owens said he is sure they would have understood. "It wouldn't cost me a minute's loss of sleep . . . . That would cause me zero embarrassment vis-a-vis Zaki Yamani," he said.
After conferring with Schmertz, Owens wrote a letter to The Post on Aug. 3 criticizing two Post reporters for "confusion" and "lack of understanding." Owens wrote that his statements were being misquoted and taken out of context. What Owens had characterized as Mobil's "profit" from the transactions during several interviews in July, he said were "totally immaterial" matters in his Aug. 3 letter.
In a telephone interview this week, he confirmed the accuracy of his statements used in this article.
Owens, who speaks fluent Japanese and maintains an office at Mobil's headquarters in New York, retired from Mobil last February after a 20-year career in international crude oil sales.
When the late-1970s oil crisis struck, Japan was Owens' largest and most important international customer for crude oil not used in Mobil refineries.
"We, of course, were besieged with requests and impassioned pleas" from the Japanese for additional supplies of crude oil, especially Saudi crude, Owens said.
"It appeared to Mobil," he said, "that Saudi Arabia would continue to be the biggest dove among the producers and that they were operating their pricing levels in a manner that kept the economic stability of the world in view."
Yamani disclosed his price directive in an April, 1979, meeting with reporters in Geneva. It was reiterated in a letter to the chairman of the Arabian American Oil Co. (Aramco), the consortium that includes Mobil and the three other American oil companies.
"The companies shall pledge not to sell to any . . . party at prices in excess of those fixed by the government," Yamani's deputy wrote on April 1, adding, "Please notify the companies transporting Saudi oil of the necessity of submitting certificates from auditors confirming the adherence of the companies to the instructions of the State as of the beginning of this year."
Frank Jungers, former longtime chairman of Aramco, said the oil company partners in the consortium historically have taken such directives "very seriously . . . . My experience with Yamani on any directive, especially when he speaks out publicly, is that he means what he says."
William Smith, a spokesman for Exxon in Washington, said his company adhered strictly to the Saudi directive and never charged more than the official price, directly or indirectly, for Saudi oil. Spokesmen for Texaco and Standard Oil of California Chevron declined to comment.
During late 1979, according to Owens and Japanese oil executives, Mobil negotiated new supply contracts for the coming year with its major Japanese clients: Maruzen Oil Co., Daikyo Oil Co., Asia Oil Co. and Fuji Kosan Co. Under the new agreements, Mobil reduced the amount of Saudi crude it had been supplying from nearly 100 percent of the total volume to about 50 percent. Mobil agreed to fill out the rest of the contract with oil from other Mideast countries, such as Dubai, Kuwait and Egypt.
Soon after the contracts were signed, according to Owens, some of the Japanese customers, Fuji Kosan in particular, "pleaded" with Mobil to supply a greater proportion of Saudi crude. Officials at Fuji Kosan insisted that, for technical reasons, other types of crude oil offered by Mobil would not work in the Fuji Kosan lubricant refinery, Owens said.
Mobil's records show that, at least once a month between mid-1980 and mid-1981, Mobil supplied additional Saudi oil to one or more Japanese companies by substituting it for other crude types in the complicated transactions.
On May 14, 1980, records show, Owens approved transaction No. 61-80, in which Fuji Kosan would get an extra allocation of 626,000 barrels of Saudi crude oil during the following month.
By first selling an identical amount of Dubai crude oil to Fuji Kosan for $33 a barrel and buying it back two days later for $5.50 a barrel less, Mobil made a profit of $3.4 million, records show.
The sale and buy-back of Dubai oil occurred between May 26 and May 30 and involved two oil tankers, the Kollbris, carrying 426,000 barrels, and the Shinko Maru, carrying 200,000 barrels.
Then, on June 7, Mobil shipped Fuji Kosan the promised Saudi oil aboard the supertanker World Duke.
At the end of the transaction, the only oil Fuji Kosan had received was Saudi oil, but it had paid $3.4 million more than the Saudi government price to get it.
The Dubai oil used for the sale and buy-back was shipped as planned to other customers. Maruzen Oil received 426,000 barrels and Daikyo Oil, 200,000 barrels.
A Mobil cable dated May 19, 1980, shows that the Dubai oil sold to Fuji Kosan and bought back was destined for other customers.
In July 1980, Owens approved a series of transactions to provide Fuji Kosan with 1.4 million barrels of additional Saudi oil over three months in a manner "identical in concept" to the May transaction, according to a cable written by one of Owens' staffers.
The first such transaction was numbered 81-80, and is the same transaction referred to at the beginning of this article.
Owens said he sometimes planned the complicated transactions in advance. "It was done quarterly," he said, but "once you've done something special and unique and spontaneous, . . . it grows like topsy since they the Japanese love the quality of Saudi oil ; rather than fight about it each time, rather than having 400 cables going back and forth, you do it quarterly."
Records show that Fuji Kosan paid more than $25 million over the Saudi official price for Saudi crude provided in a half-dozen similiar transactions with Mobil during 1980.
On Oct. 29, 1980, Mobil sold 750,000 barrels of Dubai crude to Fuji Kosan and bought it back the same day at a lower price, resulting in a $6.3 million profit, according to the records. The oil was aboard the Japan Adonis and the paper sales occurred as the ship cleared the Indian Ocean on its way to the refinery of another Mobil customer. Having paid this premium, Fuji Kosan then received an identical amount of Saudi crude at the official price, the records show.
In November, 1980, Mobil twice sold and bought back Dubai crude on the supertanker Mobil Kestrel, resulting in more than $8 million in profits, while simultaneously shipping identical amounts of Saudi crude to Maruzen Oil Co. and Daikyo Oil Co.
In this instance, the invoices from the transaction were recorded out of sequence. In the first sale and buy-back with Maruzen, Mobil sold the Dubai crude to Maruzen on Nov. 21 and did not buy it back until Nov. 28, according to invoices. During the seven-day interim, however, Mobil's paperwork shows that on Nov. 25, Mobil sold the cargo of the Mobil Kestrel to Daikyo while, according to records, it still belonged to Maruzen.
Schmertz said in a telephone interview that at times invoices can get out of sequence without affecting the outcome or validity of the transaction.
Maruzen and Daikyo each received 482,000 barrels of Saudi crude at the official price under the arrangement. Through the sale and buy-back transactions, each firm paid Mobil an additional $4.1 million, a total of $8.2 million in profit. The destination of the Mobil Kestrel was a Mobil refinery in Singapore.
Owens repeatedly emphasized that Mobil had arranged to acquire certain volumes of Dubai, Kuwait and other crudes to meet the total needs of the Japanese customers and that, therefore, Mobil should be compensated for any disruption to its system.
"To me, it's very simple," Owens said. "The man bought Dubai and Saudi Arabian, and because of concerns over quality, he wanted to undo a portion of the deal, and nobody, not Zaki Yamani, not The Washington Post, not Norman Vincent Peale nor J. Edgar Hoover would want me to do anything else."
Records show that, in late 1980, Mobil twice gave up some Saudi crude to oil-trading firms in exchange for Dubai crude, which could be sold to the Japanese firms at higher prices. According to records, Mobil obtained the Dubai oil on the Mobil Kestrel by trading some of its Saudi crude to international crude oil trader Marc Rich & Co.
Moreover, one Japanese oil company that did not have a supply contract with Mobil, Mitsubishi Oil Co., negotiated with Mobil officials in October, 1980, to buy some Saudi crude on a one-time, or "spot," basis.
Owens approved the sale of 486,000 barrels of Saudi oil to Mitsubishi at the official Saudi price. But at the same time, Mobil used a tanker load of Dubai oil bound for a refinery in the Philippines to obtain an additional payment from Mitsubishi.
Dubai oil on the tanker Marilena, bound for Bataan Refining Corp., then partially owned by Mobil, was sold to Mitsubishi for $16.5 million and bought back within days for $14.5 million, resulting in a $2 million Mobil profit.
Owens said he did not recall the transaction and declined to check Mobil's records. Schmertz declined to comment.
A senior Mitsubishi executive in Tokyo who examined the records of the transaction said his company's apparent intent in the sale and buy-back of Dubai oil was to pay Mobil a premium on an identical amount of Saudi crude delivered in a separate shipment.
During the first six months of 1981, Mobil documents relating to its sales of crude oil to Japanese firms show eight transactions in which Mobil sold Dubai or other non-Saudi crude to three of the Japanese firms, Maruzen, Fuji Kosan and Asia Oil.
Immediately after these sales, Mobil received the same amount of non-Saudi oil back through "exchanges" for separate shipments of Saudi crude oil. A Mobil summary of the transactions shows that Mobil received the non-Saudi oil back at the lower Saudi price. After the non-Saudi oil was delivered to its ultimate customer, Mobil recorded a "profit" from "crudes acquired on exchange."
The total "profit" for these eight transactions in early 1981 was $39.1 million, according to the documents.
Owens attributes much of Mobil's commitment to Japan to his personal attachment to the executives of the Japanese oil firms Mobil has supplied over the years.
"I've done business for a long time with those people," said Owens. "I play golf with them four times a year, I know their children. To throw them out in the world and have them buy from Marc Rich, I think that would have been immoral. I couldn't live with myself . . . ."
Owens said Mobil did not profit unfairly from its sales of Saudi crude in Japan during the oil crisis. "We had a right," he said, to cancel the contracts in Japan, adding later, "I hate to defend altruism--it galls me."
"We were the fair-haired boys," he said. "They the Japanese gave us a medal and we were thanked by the business community."
Owens read the text of a June, 1980, cable to Mobil from an executive of Fuji Kosan, which said, "We always appreciate your utmost efforts to assist . . . us to grow under the difficult and unforeseeable circumstances prevailing in the petroleum industry. And I am very much pleased to have the opportunity to express my heartfelt gratitude to you . . . ."
In an interview this summer, one senior executive at Daikyo Oil offered this assessment of his company's relationship with Mobil during this period:
"Given circumstances prevailing at the time, it was unavoidable that we pay some kind of premiums for Saudi crude . . . . Our purpose was to get the necessary volume of crude at the lowest prices." As for the Saudi directive, the Daikyo official said that the method Mobil chose to structure transactions was a matter between Mobil and the Saudis.