SHELL EARLEY CONNECTION WITH THE SAUDI ARABIA / AL YAMAMAH BAE ARMS SCANDAL

Witness Statement of Mr Gerald James 1 June 2007 (24 page pdf document, so please be patience, it will take a while to download)

Gerald James book: IN THE PUBLIC INTEREST

Comment in House of Commons by Vince Camble MP, former Chief Economist of Shell (Debate on the Al-Yamamah BAE Fraud/Corruption controversy and associated money laundering)

7 Feb 2007: Dr. Vincent Cable (Twickenham) (LD):

"Let me turn to the history of this issue. The al-Yamamah contract originated in the mid-1980s, and the context is often forgotten. It was not achieved primarily as a result of competition and British technological excellence; the context at that time was the very close relationship between Saudi Arabia and the United States, which both sides wished to perpetuate. However, the problem was that, as President Reagan provided Saudi Arabia with more and more sophisticated equipment, there were objections from Israel. Perfectly understandably, the Israelis were concerned about one of their potential adversaries acquiring sophisticated technology. The situation was not helped, of course, by the tirade of anti-Semitic abuse that often comes from the Saudi authorities. Israel protested, and friends of Israel in the United States Congress blocked the F-15 deal, which was in turn passed on to Britain and Mrs. Thatcher. The Reagan Administration were very anxious to bless this arrangement. They owed the Saudis various favours. They were supporting the Nicaraguan Contras and helping gallant freedom fighters in Afghanistan—such as Osama bin Laden. Reagan was perfectly happy to support this British arrangement, which proved to be one of the largest arms deals in history. It has been worth about £40 billion to date, and could be worth something of the same magnitude again in the future. It is not merely an arms deal, but one of extraordinary complexity that involves two major subsidiary features. One is an offset agreement, which, essentially, is a joint venture set of arrangements under which British companies put in capital and expertise, and their Saudi partners take their cut. There is also an oil element. There was an oil barter arrangement whereby oil was marketed, initially by Shell and BP, and the proceeds were routed through the MOD to BAE Systems."

Al Yamamah 2 Offset Agreement THE AL YAMAMAH ECONOMIC OFFSET PROGRAMME

This Saudi British Bank document contains a reference to the original "Al Yamamah" agreement involving Saudi Arabia, BAE Systems, the UK Ministry of Defence (the MOD), with Shell and BP fulfilling what has been described as a money laundering role in the "oil-for-arms" deal:

"The Al Yamamah Project was initiated in September 1985. It involves the supply and support of Tornado, Hawk and PC-9 aircraft and specialised naval vessels to Saudi Arabia. The UK Government's prime contractor for the project is BAE Systems pIc. The related Al Yamamah Economic Offset Programme was launched in 1989."

The main parties are once again Saudi Arabia, BAE Systems and the MoD. The main "Key" address for "The British Offset Office" stated in the document is the Ministry of Defence in London. Shell is also involved, this time via a subsidiary:

"The foreign partner is Basell, who is the world's largest PP manufacturer and is itself a 50/50 joint venture between Royal Dutch/Shell Group and BASF. Basell will hold 25% of the equity in the Saudi Arabian venture."

Related MOD documents

House of Comons Select Committee on International Development: September 2000

21. The allegations continued. In December 1996, Sunday Business suggested that one of the reasons behind the Saudi company Aramco's replacement of BP and Shell as oil exporters in Al Yamamah was an attempt by the Saudi government to save money on commission payments to the companies, which were estimated at $30 million/£18 million a year. (Sunday Business, 1.12.96)

Declassified UK Government documents relating to Shell role in Al-Yamamah "oil-for-arms" project (all confidential/secret/restricted documents):

26 September 1985

UK Ministry of Defence (MoD) document "SALE OF AIRCRAFT TO SAUDI ARABIA). Includes written confirmation from Minister of Defence Michael Heseltine to "His Royal Highness Prince Sultan Bin Abdul Aziz" of terms for the BAe military planes-for-oil deal:

EXTRACT

"Following acceptance by the British Government of payment by means of an oil trading scheme, preliminary discussions have been held with the British Oil Companies, BP and Shell. These two companies are prepared in principle to handle the oil trading scheme subject to the agreement of satisfactory terms and conditions. They will form a Consortium, to be led by BP. "

2 October 1985

UK Department of Trade & Industry Minute headed BRITISH AEROSPACE: SAUDI ARABIAN DEAL

EXTRACT

"All that had so far been agreed was that the aircraft ordered by Saudi Arabia might be paid for entirely in oil, up to an amount of $4 billion. The details now had to be worked out. Mr Knapp's simplistic view was that if the oil price went down, the Saudi Arabians would have to pump up more to pay for the aircraft. British Aerospace would have to play a role with BP as an agent having an interest in the deal. BAe had already been involved by the Ministry of Defence in the discussions on the oil deal."

MoD Letter 21 October 1985

Letter to UK HM Treasury headed "SALE OF TORNADO, HAWK AND PC-9 TO SAUDI ARABIA".

EXTRACT

"Nor have the Saudis told us yet exactly how the deal is to be financed; the only word on that so far is that the Saudi authorities have told us that it will be paid for entirely in oil. We hope in concert with BP, Shell, BAe and the Department of Energy to thrash this out with the Saudi Petroleum Ministry, Petromin, very shortly. We await a summons to Riyadh."

22 November 1985

From 10 Downing Street (From Charles Powell on behalf of Prime Minister Margaret Thatcher) to MoD plus MoD Response.

EXTRACT FROM MoD RESPONSE 4 DECEMBER 1985

"Our oil negotiators (from Shell and BP) are ready to resume discussions with the Saudi Ministry of Petroleum as soon as the Saudi Government (which effectively means the King and Prince Sultan) have decided on the way ahead. Prince Sultan told Mr Chandler that he hoped to be able to make an initial cash payment in addition to arrangements for a long-term oil lifting arrangement in our favour."

 

8 January 1986

Letter from Export Credits Guarantee Department to R E Adams, HM Treasury headed: "SAUDI ARABIA - MILITARY AIRCRAFT FOR OIL ARRANGEMENTS"

(SHELL AND BP ARE NAMED IN THIS LETTER AND ASSOCIATED DOCUMENTS)

27 January 1986

MoD letter to Export Credits Guarantee Department (ECGD) headed "SAUDI ARABIA - MILITARY AIRCRAFT FOR OIL"

CONTENT OF LETTER FROM C H HENN, UK MoD Assistant Under Secretary of State Defence Export Services Administration.

"On returning from Saudi Arabia this morning I have seen a copy of your letter of 24 January to Adams.

I ought to put it on record that an agreement was signed yesterday in Riyadh by Yamani and by Shell and BP representatives providing for the lifting of 300,000 barrels//day for an initial period of 3 years. It will then continue year by year unless either party terminates. The 300,000 includes lifting East of Suez. The funds generated will be dedicated to the military aircraft project and Shell/BP stated their intention to carry on lifting so long as the aircraft project requires. There are of necessity review and escape clauses but all concerned are well aware of the need for stable funding and Shell/BP would in practice only terminate in extremis.

I should stress that the existence as well as the terms of this agreement is a matter of some political as well as commercial sensitivity.

I should be glad to expand on the above."

30 January 1986

Related confidential letter reporting that as a meeting of the Export Guarantees Committee noted in January 1986 “the reluctance of HMT and other departments to endorse the overdraft guarantee as presently proposed was tempered by a recognition of the political commitment already made to the project.”

10 February 1986

In a further related confidential letter, the MoD conceded in February 1986 “work has started well in advance of formal contract approval and revenues either in oil, or in cash, have been lower, over the period from September 1985, than originally envisaged”

11 February 1986

Department of Trade & Industry Minute

EXTRACTS

"The essence of the agreement is that Shell/BP will lift 300,000 bpd (+ or -10%) over three years, recoverable if payment for Tornado not by then completed (calculations were made on a price of $20pb which seems optimistic)."

"The Saudis have emphasised that they wish these arrangement to remain confidential; in particular there should be no mention of barter. Neither HMG nor BAe would take title to the oil."

ECGD 10 March 1986

Export Credits Guarantee Department letter from P Henley to R E Adams at HM Treasury

EXTRACTS

"Subsequently Shell and BP entered into 3 year contracts to lift 300,000 barrels per day on a net-back pricing basis and there are provisions for extending the period as necessary."

"However, towards the end, the Saudis made it clear that they expected all payments to be made from oil lift arrangements and for this purpose Shell and BP entered into contracts with the Saudis to lift 300,000 barrels per day on a net-back pricing basis."

13 February 1986

Bank of England letter to HM Treasury

The Bank of England complained “there is all too much evidence of Saudi reluctance to be bound by the letter of contractural commitments, as is evident from ECGD’s claims record.”

18 March 1986

Export Credits Guarantee Department Minute by P Henley headed "£5BN DEFENCE DEAL WITH SAUDI ARABIA"

EXTRACT

"Subsequently Shell and BP entered into 3 year contracts to lift 300,000 barrels per day on a net-back pricing basis and there are provisions for extending the period as necessary."

25 March 1986

Department of Trade and Industry letter from Minister Paul Channon to Rt Hon Nigel Lawson MP, Chancellor of the Exchequer (copied to the Prime Minister)

EXTRACT

"However, towards the end, the Saudis made it clear that they expected all payments to be made from oil lift arrangements and for this purpose Shell and BP entered into contracts with the Saudis to lift 300,000 barrels per day on a net-back pricing basis."

2 May 1986

Letter from Peter Walker MP, Secretary of State for Energy, to Rt Hon George Younger MP, Secretary of State, Ministry of Defence

EXTRACT

You will remember that, at the time the MOU was signed last September, I expressed great concern about the impact of the deal on the oil market.

I am still concerned to avoid adding to disruption and instability in the oil market. Given the importance that Saudi production levels have assumed, I have doubts about the wisdom of agreeing to any increase in liftings under the oil side of the aircraft deal. Nor would I want pressure to be put on Shell and BP to accept such an increase against their better judgement.

30 July 1986

Letter from MoD Head of Defence Export Services, Colin M Chandler, to HRH Prince Sultan bin Adul Aziz Al Saud, under the heading "PROJECT Al YAMAMAH"

EXTRACTS

"Currently we have approached the British oil companies who have indicated their agreement to increase liftings, subject to terms from 300,000 to approximately barrels a day until the end of March 1987, and as we have agreed today, it is our mutual aim to maintain this level throughout the life of the project. They have also indicated that they will endeavour, given market conditions prevailing, to take larger quantities."

"(b) Implementation of Increased Oil Liftings

As we agreed today it is necessary for Your Royal Highness to notify the Ministry of Petroleum so that the necessary negotiations can be commenced with the British oil companies Shell and BP as soon as possible."

29 August 1986

Letter from P Henley of ECGD to HM Treasury under the heading "SAUDI ARABIA: DEFENCE DEAL (Tornados) (now called the YAMAMAH PROJECT)

EXTRACT

"ECGD will also have no liability for any default by Shell/BP under the oil net-back arrangements or for the collapse of such arrangements."

11 September 1986

Department of Trade and Industry letter from Minister Paul Channon to Rt Hon Nigel Lawson MP, Chancellor of the Exchequer (copied to the Prime Minister)

EXTRACT

"In the event of a collapse of the oil arrangements between Shell/BP and Aramco ECGD would only assume liability if within a reasonable period thereafter (say 3 months) the Saudi have failed to institute another method of payment."

23 October 1986

Letter from P Henley of ECGD to HM Treasury under the heading "SAUDI ARABIA - YAMAMAH PROJECT")

EXTRACT

4. We have already told BIS that we are not prepared to entertain cover against any autonomous default by Shell/BP (or by any subsequent oil-lifters) in honouring the oil-lift agreements or in remitting the proceeds as instructed by the Saudis. In so far as Shell/BP entered into the Oil Agreement at the request of MODUK and BAe, Shell/BP can be said to be acting for the benefit of the latter and, in our view, any cover requirement by BIS in this particular respect should be addressed to them.

25 November 1986

Letter from Department of Energy Permanent Under-Secretary of State, Peter Gregson, to Sir Clive Whitmore, MoD.

EXTRACT

3. It is of course not at all clear how the Saudi intend to achieve a price of $18 pb without cutting production. But if they are to make any progress towards a fixed price, they will have to dismantle all their current netback contracts, including those with Shell and BP. The current oil agreement gives Shell and BP some protection against this because it entitles them to a netback deal so long as any other company has one.

4 December 1986

Ministry of Defence letter to Department of Energy.

2. You should be aware that on 10 November Colin Chandler , the Head of Defence Export Services, drew the attention of the Saudi Defence Minister, Prince Sultan, once again to the financing needs of the aircraft project. As a result, Prince Sultan said that he would write to the Saudi Oil Minister recommending a continuation of the level of lifting at 400,000 barrels per day, and an extension of the oil agreement for another two years (ie to February 1991). This has yet to lead to an invitation to Shell and BP to visit Saudi Arabia for negotiations, and there is indeed no sign of this yet or of any Saudi pressure on the two companies. But the ball is in the Saudi court.

9 December 1986

Letter from G T W Jones of HM Treasury to Peter Henley of ECGD under the heading "SAUDI ARABIA: YAMAMAH PROJECT"

EXTRACT

"4. You attached to your letter a copy of a Department of Energy letter of 25 November, which we had not previously seen. The Department of Energy is concerned that the Saudis might seek to renegotiate the netback contracts with Shell and BP in the context of the Yamamah project. As you know, the Saudis are reported to be in support of reducing output in order to increase the price of oil. This issue is included on the agenda for this week's OPEC conference."

18 December 1986

Letter from Peter Henley ECGD to T J D Downing at Bank of England under the heading "SAUDI ARABIA; YAMAMAH PROJECT"

         EXTRACT

"First concerning delivery of oil. The Oil Agreement provides for oil to be delivered to Shell/BP fob at an Arabian Gulf VLCC port or fob YANBU, making use of the oil pipe-line, or by means of a Saudi vessel to a Shell/BP facility outside Saudi Arabia."

"If Shell/BP cannot send its ships into the Gulf because of war or a blockade and if oil cannot be delivered at any other port because of pipeline capacity constraints and if KSA were not able to ship the oil to a Shell/BP facility and then failed to pay by other means, ECGD would be liable.

You also raised the question of the difference in meaning between "delivery" and "offer for delivery". Whilst it is our intention to cover failure by the Saudis to offer oil for delivery and not failure by Shell/BP to take delivery (other than by reason of the force majeure events described above), we have a practical and legal problem in defining "offer for delivery". We are overcoming this difficulty by talking only about "delivery" (as defined above) but specifically excluding events that we are not prepared to cover (eg default by Shell/BP)."

6 January 1986

EXTRACT

"E.

SULTAN ACCEPTED THE NEED FOR A LETTER LINKING THE OIL DEAL TO THE AIRCRAFT PROJECT. WE WILL TABLE A DRAFT ON 6 JANUARY SUBSTANTIALLY IN THE FORM AGREED WITH SHELL AND BP AND WHICH HAS BEEN SEEN BY THE SAUDI MINISTRY OF PETROLEUM.'

Press articles covering Shell involvement in Al-Yamamah corruption scandal

Extract from MEED Middle East Economic Digest article published 17 May 2002 under the headline: Al-Yamamah weathers the changes. (BAE). (Al-Yamamah project remains at the heart of the UK trade drive in Saudi Arabia)

The largest contract ever awarded to a British company, the Al-Yamamah project remains at the heart of the UK trade drive in Saudi Arabia, generating a substantial portion of Britain's export earnings from the largest economy in the Arab world. Although past its peak, Al-Yamamah still generates at least [pounds sterling] 100 million of sales a year. Contract payments are made through an oil barter arrangement involving BP and the Royal Dutch/Shell Group.

http://www.accessmylibrary.com/coms2/summary_0286-25436298_ITM

Extract from The Daily Telegraph published 19 August 2006 under the headline: “BAE lands arms deal for a new generation”

The oil-for-arms basis of the first deals only served to add to the mysterious workings of Al-Yamamah. BAE was "paid" in oil produced by Saudi outside its Opec quota and sold in the market by BP and Shell. The switch from oil to cash as the basis for the third deal has been influenced by a Saudi anti-corruption drive and a recognition that the slush funds associated with other Saudi arms contracts have helped finance terrorism. There is also a recognition that Al-Yamamah - which means The Dove - is hardly appropriate for defence contracts. There is nothing "dovish" about destructive weapons.

http://www.telegraph.co.uk/finance/2945759/BAE-lands-arms-deal-for-a-new-generation.html

Extract from The Times article published on 21 February 2007 under the headline: “Al-Yamamah an echo of 1980s sleaze”

“The first two al-Yamamah deals were complicated oil-for-arms arrangements that cost Saudi Arabia a certain number of barrels of oil a day. This oil was transferred to BP and Shell, which in turn paid the value of the oil into an escrow account from which BAE received its money.”

http://business.timesonline.co.uk/tol/business/article1415469.ece

Extract from The Guardian article published on 7 June 2007 under the headline: The al-Yamamah deal “Al-Yamamah is Britain's biggest ever arms deal.

The agreement - its name means "the dove" in Arabic - has kept BAE afloat for the last 20 years, bringing around £40bn of revenue.” “Al-Yamamah has been controversial for many reasons. Within weeks of the deal being signed in 1985, allegations of corruption surfaced. Those allegations have never gone away; in December 2006 the government terminated the Serious Fraud Office investigation into claims that BAE had paid massive bribes to Saudi royals.”

http://www.guardian.co.uk/world/2007/jun/07/bae15

Extract from Financial Times article published 8 June 2007 under the headline: “Barter fund used to pay commissions to middlemen”

Al-Yamamah is covered by government-to-government contracts between Saudi Arabia and Britain, which the British government and BAE insist are confidential. At its heart was a barter arrangement under which the Saudis delivered oil to BP and Royal Dutch Shell, which sold it and deposited the proceeds in an escrow account at the Bank of England. Payments from this account required signatures from officials of both Saudi and British governments. From this account, BAE was paid in stages as it completed project milestones. It used some proceeds to pay commissions to middlemen who had helped facilitate the transaction.

http://www.ft.com/cms/s/0/579364ac-155c-11dc-b48a-000b5df10621.html

Extract from Financial Times article published 2 July 2007 under the headline: Al-Yamamah deal: the Saudi foreign policy connection

The arrangement, at least initially, involved a special account controlled by the Saudis, at the Bank of England. This would receive funds from the sale of Saudi oil lifted and sold by BP and Royal Dutch Shell, which took a commission. Press reports in 1996 suggested this exact arrangement changed - but over nearly two decades, tens of billions of dollars were directed through it.

http://www.ft.com/cms/s/0/c8286b10-2833-11dc-80da-000b5df10621.html

Extracts from The Times article published 11 April 2008 headlined: Margaret Thatcher ‘ordered bugging of prince’

Al-Yamamah was initially an oil-for-arms trade. BAE supplied Tornados to the Saudis and they transferred oil to Shell and BP. These companies would pay for the oil by moving money into an account held by the Bank of England. The Ministry of Defence then paid BAE from there.

http://www.timesonline.co.uk/tol/news/politics/article3724416.ece