888.2553/3–2054: Telegram
No. 441
The Ambassador in Iran (Henderson) to the Department of State1
priority
1977. Limited distribution.
1. If it would dare do so Iran Government my opinion could as a strictly legal matter within framework nationalization law agree pay compensation AIOC for latter’s financial lapses between date nationalization and effective date oil settlement (London telegram 176, March 18 to Department 4024). Nationalization law authorizes Government set aside 25 percent net current oil revenues as security for “certain claims” which company may raise against Iran. I doubt, however, Government would dare agree pay compensation AIOC for such losses in connection any agreement which fails to give full satisfaction to Iran national aspirations re oil, that is, agreement which would not permit Iran have complete control over production and refining its oil and full freedom sell oil where it pleases on terms to be determined by it. … I believe Iranian public has been educated during last six months re realities situation to such extent it will accept—although with feelings deep humiliation—agreement which in effect leaves Iran oil industry in hands foreigners provided Iran will not also be called upon to pay any appreciable amount compensation and provided its position in future will be no less favorable than that other oil producing countries Middle East re amount oil sold abroad and revenues to be received per barrel from such sales. (See, however, paragraph 4.) In my opinion Iranian leaders have for most part become reconciled … so far as control industry concerned (provided formulas found permitting them argue that nationalization had actually been put into effect) because they have become convinced that it is only reasonable that consortium which undertakes market bulk Iranian oil must have sufficient control production facilities to assure itself steady flow oil.
Iranians leaders have been hoping, however, that in making acceptable to Iranian public agreement which again gives foreigners right produce and sell Iranian oil on approximately 50–50 basis over long period of time they can point out that (a) problem compensation being taken care of by internal arrangements among members consortium, and (b) Iran will be put in no less favorable position than other countries of the Middle East which have not [Page 961] nationalized their oil. Government would be placed in extremely vulnerable position, however, if in addition to giving foreigners right to control production and sale Iranian oil it should also agree pay compensation or to receive less per barrel for its oil than other Middle East countries. Iran Government leaders and Iran public would be sure to regard demand for compensation for damages suffered by AIOC during last three years as being advanced either (a) to enrich coffers AIOC at expense Iran, or (b) as punitive measure which would further humiliate Iran in eyes of world. Demand this kind which Iran would consider unnecessary, if not vindictive, certain to arouse deep resentment. It might lead to complete breakdown negotiations. It would give valuable ammunition to those forces determined keep West out of Iran. Even assuming full validity AIOC claims, I believe advantages to be gained by AIOC in putting forth demand this kind would be more than offset by disadvantages which would accrue both immediately and in future.
I earnestly recommend, therefore, every effort be made to prevail on AIOC to be satisfied with compensation received from American companies and not to seek additional compensation from Iran. It might be stressed in this connection Iranian expressed willingness in past to pay compensation has been based on assumption that it would in future retain control production and sale its own oil.
2. Iran public for three years has been assured Iran has valid counterclaims against AIOC amounting hundreds millions dollars. Impression prevails wide circles that any fair international arbitration board would find that aggregate value these counterclaims would exceed that of losses AIOC installations in Iran. Iranian public would, therefore, believe amount Iran’s counterclaims would more than offset financial losses AIOC during last three years plus value of internal distribution facilities of Kerman Shah refinery and of Naft-I–Shah oil field. It would regard $280 million as unreasonable and exorbitant.
3. I doubt Iran Government could survive which would present to Majlis agreement providing that Iran would receive less per barrel for oil than other Middle East countries. If, for example, it should be calculated Saudi Arabia receives 80 cents per barrel for oil and if Iran is to receive 80 cents minus 10 cents for compensation there would be tremendous uproar. I doubt government would dare sign such agreement; if it should do so I doubt Majlis would ratify it; if Majlis should do so I doubt agreement could long remain in force in face outraged public opinion. If AIOC insists on this additional compensation and if US Government and companies decide that regardless consequences in Iran they must associate themselves with AIOC in this matter it might be preferable request compensation in form of free oil so that Iran Government can tell its people Iran [Page 962] will receive as much per barrel as any other Middle East country. I hope, however, it will not be found necessary make decision this kind.
4. It conceivable that Iran Government could be persuaded give AIOC reasonable amount compensation for loss to AIOC of latter’s physical property in Iran other than that situated in oil fields of south. Iran Government might, for instance, be prevailed upon to agree to formula along following lines:
“(a) In consideration arrangements which have been entered into between Iran and consortium for production refining and distribution Iran oil over period X years, and (b) arrangements which have been entered into between AIOC and other members of consortium; Government of Iran and AIOC agree to waive all claims and counterclaims which each may have against other at time this agreement shall come into force except such damages as AIOC has against Government of Iran as result of loss to AIOC of internal oil distribution facilities in Iran, Kerman Shah refinery and physical installations of Naft-I–Shah oil fields. Both parties agree on X million dollars as value these damages and Government of Iran undertakes to settle these claims by paying to AIOC (note: or, if considered preferable, ‘to consortium’) X cents per barrel on all oil delivered by consortium for distribution in Iran until such time as these damages, including interest at X percent on unpaid balances, have been paid.”
5. If AIOC continues insist it be paid compensation for damages, distribution facilities in Iran, et cetera, it should be prepared to accept possible Iranian counter suggestion that these AIOC claims and Iranian counterclaims be submitted to International Arbitration Board.
6. I am sure in reading above you will not obtain impression that I do not believe AIOC has valid claims against Iran for damages, loss of distribution facilities, et cetera. I have merely tried point out practical considerations which, in my opinion, should influence AIOC not to present these claims.
7. I discussed this matter twice yesterday with British Ambassador who is communicating direct his government. Although he and I agree on some points I believe that I feel more strongly than he in advisability of submission of AIOC claims for $280 million.
- Transmitted in two sections; sent to London as telegram 604 for Hoover and repeated to the Department.↩