Foreign Relations of the United States, 1952–1954, Iran, 1951–1954, Volume X

888.2553/5–854: Telegram

No. 458
The Ambassador in Iran (Henderson) to the Department of State¹

secret
priority

Tehran, May 8, 1954—2 p.m.

2287. Noforn. Limited distribution.

1. It seems to me it might be useful for Department to have prior my departure Istanbul my views as of this morning re status and outlook oil negotiations.² These views based on conversations with Hoover, members Embassy Staff, representatives consortium, members British Embassy, and Iran leaders, as well as on such experiences as I have had in Iran and on my evaluation current political situation. Conditions here so fluid and fraught with so many uncertain factors it impossible forecast future developments with assurance.

2. Management. Shortly after negotiations opened consortium representatives took position consortium must control management of extraction and refining operations as principals (not as agents) whereas Iranians took position management must be under control National Iran Oil Company (NIOC); each side refused budge. Representatives consortium emphasized their terms reference did not permit them give ground and Iranians maintained Majlis and public opinion would not accept agreement giving control to other than Iranians. For time deadlock seemed almost inevitable. Tension lessened when both sides agreed to explore, without abandoning their original positions, kind of agreement that might be worked out on basis of concept of consortium being given effective control of extraction and refining industries as agent for NIOC or Iran Government. On this basis attempt is being made to bridge difference re management and to see what can be done to dispose of other issues.

3. Operating companies. Consortium representatives had proposed that consortium exercise its management through two subsidiary companies of British nationality—one primarily for extracting, other for refining operations. American oil companies had promised British Government to support British demand that these operating companies have British nationality in return for British Treasury agreement to convert sterling profits derived by American companies from their Iran operations into dollars. Dutch Shell also has promised British its support. Iranians have taken position it absolutely impossible accept British nationality and difficult accept other than Iran nationality. Privately and confidentially, however, Iran negotiators have hinted they might be able obtain acceptance nationality some small country such as Netherlands. British Ambassador and representatives AIOC indicate that because of British public opinion and for certain other somewhat vague reasons connected with currency control and purchase equipment and supplies which will be needed in Iran by consortium British Government must continue insist companies be British nationality. When Iran Ministers Foreign Affairs and Finance during private conversation told British Ambassador May 6 British nationality entirely unacceptable latter suggested discussions re this point be deferred until all other points settled. Members British Embassy have hinted to us that question nationality might at end of negotiations become “matter of bargaining”. We inclined believe British realize it would be unwise from point of view acceptability and durability oil agreement that companies be British nationality and that they hope that by insisting on this point they will be able at last moment obtain compromise providing that managing director operations in Iran be British and that headquarters operating companies be in London. I think this kind compromise would be almost as unwise and unnecessary as agreement providing for British nationality of operating companies.

4. Payment for crude. Representatives consortium have proposed that consortium be given lease rights to extract oil; that title for oil pass to consortium as it leaves ground; that cost of production plus certain discounts be subtracted from posted price of Persian Gulf crude and that consortium pay Iran in form income taxes fifty percent of difference. Representatives consortium have indicated consortium desires this arrangement in order relieve its members of certain taxes in countries in which they are domiciled and also in order not set precedent which might be embarrassing to operations its members in other oil producing countries. Iranians object:

(a) To certain discounts which consortium has suggested be taken from posted price before profit sharing begins. Consortium argues that large discounts are being subtracted in other countries Middle East. Iranians aware that Aramco and Saudi Arabia are negotiating for reduction such discounts now paid to SAG to approximately two percent and may therefore take position it willing compromise this point on most favored nation basis.

(b) To such undisguised arrangements for “profit sharing” as substitute for sale of oil. Irans say they realize they will probably be compelled let consortium have fifty percent profits by taxes or otherwise but they hope this can be arranged in such way that Iran opponents to agreement will not be in such good position to make capital of fact that Iran has capitulated re matter which has been subject much heated discussion for last three years. I believe with certain amount conciliatory resourcefulness on both sides this issue can be resolved.

(c) To passing of title to consortium as oil leaves ground since Iranians consider this would mean that consortium really had oil concession in Iran. Consortium has continued insist that for taxation and other reasons it must have “property right” to extract oil and that oil becomes its property as it comes out. Iranians say it would be difficult for them convince Majlis such arrangement in conformity nationalization law. This difference could probably be bridged if both sides can agree to some kind agency arrangement. If agency arrangement found impossible general negotiations will probably collapse and it will therefore be unnecessary argue re this particular point.

5. Payment for products. Consortium has proposed that all oil be purchased in crude form, but that members consortium pay to refining operating company cost of refining plus fee three shillings six pence per ton. This fee would be subject to fifty percent income tax. Iran would therefore receive additional one shilling nine pence for each ton oil refined. Iran objects. It desires that it share profits on fifty-fifty basis on all sales Iran refined oil products. Members consortium maintain that quite impossible as bookkeeping matter and furthermore arrangement kind proposed is in effect in other oil producing countries in area and therefore no exception can be made re Iran. Furthermore oil companies cannot afford pay more for oil refined in Middle East. Iranians will probably continue press for some disguised form fifty-fifty arrangement in matter of refined oil. I do not believe, however, they will let differences this respect result in breakdown.

6. Volume of sales. Consortium has proposed it would try produce during first year of agreement ten million tons crude, second year twenty million tons, and third year twenty-five million tons, with rate production thirty million tons at end third year. It also prepared try first year refine 6.5 million tons, second year ten million tons, and third year 12.5 million tons. Iranians insist on greater guaranteed production and refining during first three years and considerably more during subsequent years. I believe compromise agreement can be made in this respect which would mean consortium agreeing try to produce somewhat more crude than originally proposed during first three years and promise try thereafter assist Iran obtain position no less favorable than other countries Middle East.

7. Compensation. Consortium has proposed that in case general agreement reached along lines proposed, Iran will not be called upon pay compensation for nationalized assets in former concession area or for losses AIOC of future profits. It did propose, however, that Iran negotiate with UK for purpose ascertaining net amount it should pay, due consideration being given Iran’s counterclaims, for losses incurred by AIOC as result it being deprived Iranian oil during period between date nationalization and that on which general agreement becomes effective. Negotiations between UK and Iran re compensation proceeding slowly. Thus far each side has been talking in generalities and avoiding mention of sums involved. Iranians have taken position (a) AIOC has only itself to blame for losses derived from failure receive Iranian oil since in 1951 it had refused Iran’s offer to continue deliver to it Iranian oil against receipt pending working out new arrangements, and (b) Iranian counterclaims are as great as, if not greater than, losses suffered by AIOC because of failure receive Iranian oil. Iranians apparently are not sure soundness of position (a) and are therefore likely to rest their case for most part on position (b). In my opinion UK will not be able persuade Iran agree to pay as net compensation sum anywhere near as large as 100 million pounds sterling which it has in mind. Unless UK willing settle for much less than this amount all negotiations likely fail since it understood agreement between UK and Iran re compensation is to be integral part of settlement. Iranians aware that members consortium have agreed among themselves re value of nationalized assets in former concession area and that consortium intends include annually in cost of production percentage of amount at which these assets assessed. Since this would mean that during term of contract total revenue accruing to Iran would be reduced by 50 percent of value agreed upon, Iranians are now insisting they be informed re amount at which assets assessed. I understand representatives consortium have recently given this information to Iranians. It seems likely that this amount will be found to be so low that Iranians will have no reasonable grounds to object to deduction of half of it from their revenues over term of years. Amount of above deduction calculated to be exactly same as normal charges for depreciation on similar type operation if assets were owned by consortium.

8. Currency of payment. Consortium proposed that payments made for oil regardless whether direct, in form of taxes, or in form refining fees, should be in pounds sterling. Iranians at first objected but have since shown themselves willing consider matter favorably provided arrangements re convertibility into other foreign currencies to meet Iran’s need in various countries can be met. Negotiations are being carried on between UK and Iranian Governments with purpose of reaching convertibility agreement. Although British negotiators have been unwilling keep Embassy and non-British representatives consortium informed re course these negotiations they assure us such negotiations proceeding satisfactorily and that Iranians seem pleased with amount dollars which UK willing to place annually at their disposal (apparently UK willing convert freely into EPU currencies so no problem in this respect at present).

We hopeful agreement reached will not make it impossible for Iran during future years to pay from oil revenues such loans as it may receive from US Government, from Export-Import Bank, from International Bank, et cetera; to pay what it might owe American firms for goods received on credit; and at same time to pay for such goods and services as it may currently require from US. We willingly concede that since most Iranian oil will be sold in sterling areas or in areas where currency is freely convertible in sterling it only logical that Iran should try supply its needs from abroad primarily from these areas, other factors being fairly equal. We believe, however, durability of concession will be weakened and American business may feel we have been remiss if at later date British Government in framework convertibility agreement now being concluded with Iran should be able to exert pressures which prevent or hinder Iran from buying in US goods or services which in Iran’s opinion could be purchased most advantageously in US or should be able obtain commercial intelligence re US firms activities in Iran which would place those firms in disadvantageous position vis-à-vis British competition.

9. As can be inferred from foregoing I am not without hope that oil settlement can be effected provided agency/management arrangement can be worked out which would enable Iranian Government convince Majlis and public it living up to nationalization law and which would give consortium effective control operations in Iran on terms which would not seriously impair position its members in other oil-producing countries. Problems other than that of agency/management are nevertheless individually difficult and in aggregate rather appalling. If agreement to be achieved both sides must move rapidly and in conciliatory spirit since they are working against time. Extreme nationalist element spurred on by Communists, fellow-travelers and anti-western elements, are busy building up opposition to a reasonable settlement and will probably gain influence as negotiations lag. My belief is that target date for presentation of agreement to Majlis should not be later than end June. (Iranian negotiators are suggesting that in order expedite presentation, it might be wise present to Majlis not complete detailed agreement, but rather abbreviate “heads of agreement”.) They indicate document this kind could be drawn up relatively quickly and might be put through Senate and Majlis more easily than one full of details. Their idea seems to be that upon ratification such document, oil could begin flowing while details of agreement were being ironed out. I inclined believe consortium should insist that document to be submitted for ratification must contain every point which consortium might consider important and which in its opinion should be adhered to during life of agreement. Points to which Iranian Government not formally committed through ratification could be too easily changed by administrative action or by subsequent legislative action. On other hand, details which are of administrative or transient character need not, in my opinion, necessarily be included in document submitted to Majlis and Senate. I have strong doubts regarding advisability of permitting oil to begin to flow until detailed agreement has been reached regarding all matters of importance.

10. During last four days Iranian negotiators have been engaged in preparing document of provisional character outlining their suggestions, in light of conversations that have taken place, re kind of agreement that might be mutually acceptable. They plan submit this document to representatives consortium this afternoon. Much can depend character this document. If it indicates Iranians giving sympathetic consideration to problems faced by members consortium and prepared take position which will help consortium overcome its problems, outlook will of course be encouraging. If, on other hand, it shows that Iranians while taking advantage of conciliatory spirit shown by representatives consortium are not themselves prepared to make substantial concessions, representatives consortium likely become discouraged and in turn less conciliatory. British Ambassador, Hoover, and I have endeavored impress upon Foreign Minister and Finance Minister how important it is that this document reflect that both sides have made advances in direction of agreement.

11. It seems clear now that in any event it will not be possible for representatives consortium conclude agreement in framework their present terms reference. If it will be found possible within next two weeks for two sides make tangible progress towards an agreement on agency basis, representatives consortium may consider it worthwhile go to Rome or Paris discuss situation with their principals and ascertain whether latter willing give them more latitude. I inclined believe if general settlement to be reached representatives of consortium should have power enter into arrangements on agency basis (with as full safeguards as possible) which would guarantee it effective control operations they should request release from their promise to insist on British nationality of operating companies; they should be authorized to agree that general manager, at least for present, be not British and that headquarters these companies be located in Iran; they should be allowed work out some formula to make 50–50 profit-sharing concept more palatable, and they should be authorized promise try to increase to certain extent volume of production and refining. It possible that at such meeting question of amount compensation to be paid AIOC by Iran should be reviewed with view making recommendation to British Government. Otherwise, this problem might develop into serious stumbling block. Other differences which just now seem minor may increase in importance to such extent as to warrant their discussion also at this meeting.

12. Loudon, President Dutch Shell, compelled return Netherlands on business May 16; it might be that weekend beginning May 22 would be most convenient time for representatives consortium meet their principals and it to be hoped such meeting could be arranged on continent since psychological effect in Iran of another meeting in London would be bad. Ministers Finance and Foreign Affairs have expressed to Hoover and me their hope that only top representatives leave Iran to attend this meeting and that conversations can continue uninterrupted at technical level.

13. I have gone over this with Hoover and Rountree who are in agreement.

Henderson

1. Transmitted in five sections; repeated to London.
2. See supra.