164. Memorandum of Conversation1
SUBJECT
- Participation and Saudi–U.S. Oil Relations
PARTICIPANTS
- His Excellency Ahmad Zaki Yamani, Minister of Petroleum and Mineral Resources of Saudi Arabia
- His Excellency Ibrahim al-Sowayel, Saudi Arabian Ambassador to the U.S.
- Honorable John N. Irwin, Acting Secretary
- Honorable Rodger P. Davies, Acting Assistant Secretary for NEA
- Mr. James Akins, Director, Office of Fuels and Energy
- Mr. Nicholas Veliotes, Special Assistant, U
- Mr. Francois M. Dickman, Director, NEA/ARP
Summary: Yamani saw few obstacles remaining before reaching final agreement with the oil companies on participation. He did not believe other oil producing countries could disrupt this agreement if he could show that it is fair and advantageous. Once participation is achieved, Saudi Arabia wants to invest in downstream oil operations. Otherwise, it will soon no longer be in Saudi Arabia’s economic interest to increase oil exports and accumulate surplus cash reserves in depreciating currencies. He hoped the U.S. would give Saudi oil special treatment. If an early start is made, the end result would be to have a huge Saudi investment in downstream facilities in the U.S. with an obligation by the Saudis to move their oil to these facilities in future years. Not only would this assure future energy supplies to the U.S. but would also benefit the U.S. balance of payments. End Summary
Responding to Mr. Irwin’s question about the status of negotiations on participation with the oil companies, Minister Yamani said a few obstacles remain but he believed these could be resolved. What is important now is what will happen once the participation negotiations are concluded. This will be the starting point of a new relationship between the oil companies, the producer governments, and the consumers. Full cooperation among all three parties will be needed to achieve stability in the energy field.
Mr. Irwin hoped that the agreement the Minister was negotiating would assure future stability but what concerned the U.S. was the attitude [Page 524] of other OPEC members. Given OPEC’s support for the “law of changing circumstances,” Mr. Irwin hoped that other OPEC members would accept the results of these negotiations and not try to disrupt them.
Yamani recognized that this was an important consideration but noted that the bulk of the oil that is exported now comes from the Gulf. Moreover, Saudi Arabia will be producing in the near future almost as much oil as all the other Gulf countries combined. The Kingdom’s oil reserves also are almost as large as the other Gulf countries combined, and may be much larger if anticipated new reserves are added. Therefore, if these are serious negotiations and a satisfactory agreement is worked out, Saudi Arabia will take the lead and other countries will not be in a position to dictate a different settlement.
Minister Yamani admitted that he did not know if he could sell what he was negotiating to other oil producing countries. He had been working hard to convince the Kuwaitis. He did not expect support from Iraq, Libya, or Algeria, although the latter’s attitude had been more pragmatic than the others. Therefore, it was important for him to be able to show OPEC that the agreement for participation which he had negotiated was the best and most successful choice. If this could be done, Yamani believed that the attraction in producer countries to nationalize or take unilateral actions against the oil companies would diminish.
Proving that participation was different from and more beneficial than nationalization would not be possible, however, unless the national oil companies of producing governments invest in downstream operations. This Yamani said would establish an economic interest for the producer government and allow its national oil company to play an important role in the world energy field, just as the major oil companies have done up to now. Downstream investment would encourage stability of supply. Consumer nations which established a relationship with the national oil companies would guarantee for themselves a good amount of crude in the future when the world’s oil is in short supply.
The Minister observed that given the present growth in Saudi oil production, the Kingdom’s oil revenues will soon exceed its spending capacity. There will no longer be any need to accumulate any more surplus foreign exchange to deposit in foreign banks since the appreciation of oil left under ground will be greater than the return on foreign exchange assets. This problem could be avoided if national oil companies of producer nations can go downstream. Otherwise, if no outlets for this surplus cash are available, pressures to implement a production control program would be inevitable and this would have a serious and adverse effect on the consumer.
[Page 525]Yamani noted that Saudi Arabia was the only country opposing a production control program at the present time. In 1964, Venezuela had tried to get OPEC support for production controls but Saudi Arabia had vetoed this. At that time Saudi Arabia had Kuwait and Libya on its side but this has changed. Kuwait has now established production controls and is in fact thinking of decreasing production in the future. Libya has already decreased its production. While Abu Dhabi’s production is rising, it doesn’t really count as a replacement source.
Mr. Irwin agreed that close cooperation will be needed by all parties. If a satisfactory agreement is reached, the new investments which Minister Yamani had spoken of should strengthen the bonds of cooperation among all the parties—producers, consumers and oil companies.
Minister Yamani said he was glad to hear this but he thought it would require some action by the United States Government. Perhaps a treaty or bilateral agreement would be needed to give Saudi oil special treatment in the U.S. markets. He believed that one day a large percent of U.S. energy requirements would come from Saudi Arabia. As the United States’ energy requirements continue to grow and more of it comes from the outside, Saudi Arabia could become the number one foreign oil supplier to the United States. While no one could depend on a piece of paper to assure energy supply over the next 20 to 30 years, Yamani believed that Saudi policy toward world energy requirements was a friendly one. This had recently been reiterated in a Royal statement early in August that Saudi Arabia had a moral commitment to sell its oil to consumer countries and not to impose an embargo for political reasons. Nevertheless, it might be in Saudi Arabia’s economic interest to restrict production if adequate downstream investment outlets are not provided for PETROMIN (the national oil company). Such investment in the U.S. would effectively guarantee Saudi interest in the continued growth of production and would help the U.S. balance of payments.
Mr. Irwin remarked that mutual interests always provided the best guarantees and he hoped that something could be worked out. What the Minister had said raised a lot of questions. Mr. Akins interjected to say that he did not think a treaty would be needed to assure Saudi investments in the U.S. Moreover, he expected that the whole U.S. import program will be changed. The Acting Secretary noted that the U.S. would be looking especially hard at its whole energy policy in the next year. Mr. Irwin agreed that a piece of paper would not guide us over the next 20 to 30 years but as the Minister knew from his legal training in the U.S., U.S. (and Western) business was based on the sanctity of contract. That is why we were pleased that the Minister and the oil companies seemed to be moving toward an agreement that both sides could live with.
[Page 526]Mr. Irwin said he could appreciate the Saudis’ interest in investing funds in downstream operations but wondered whether investment might not profitably be made outside the oil industry. The American people have vast investments all over the world. European and Japanese investment in diverse sectors of the American economy is growing. While recognizing that there is a difference between private and government investments, there would be opportunities for Saudi investment in other fields as well.
Minister Yamani insisted that the most logical outlet for Saudi investment funds would be in downstream oil operations. He recognized that private investors looked for the highest return. In the case of government companies, however, national pride plays a role. While investment in such activities as steel might be more profitable, he believed that the Saudis would want to invest in a product with which they are identified. The extent of Saudi investment in downstream oil operations would of course depend on the attitude of the consumer countries. If Saudi investment is welcomed in downstream operations in a particular country, the Saudis will have an interest in supplying markets to that country for their share of oil obtained from participation. If a start could be made with the United States at an early stage, the end result would be to have a huge Saudi investment in the United States with an obligation on the part of the Saudi national oil company to move its oil to the United States in future years. This would assure the US a continued source of energy in the period 10 to 15 years from now when oil is expected to be in short supply in the world.
Turning to the negotiations now underway with the oil companies, Yamani said these are to be resumed on Sunday, September 30. He was optimistic that a settlement could be reached soon provided that the companies were willing to move on compensation which remained the principal stumbling block. Arrangements for marketing Saudi Arabia’s future crude oil share were virtually completed. Yamani was particularly pleased that the oil companies now seemed to acknowledge that participation was not partial nationalization but realized that it was the basis for a new and permanent partnership. He affirmed that the Saudis were serious about being partners and wanted strong links with the oil companies.
Mr. Irwin thanked the Minister for his presentation. He appreciated the responsible nature of the negotiations which Yamani had conducted and hoped that the investments that he had spoken of would assure stability of supply for all consumer countries. He was also encouraged to hear Yamani’s description of where negotiations stood. From the US point of view, the most difficult issue was compensation. As the Minister well knew, the American Congress had passed several laws calling for sanctions in the event of inadequate compensation. The [Page 527] USG did not wish to get involved in the details of compensation but only to be sure that compensation was recognized by both sides as fair and equitable.
Yamani reiterated that all he was looking for was “a fair deal.” It was important to work out something that was acceptable so that Saudi Arabia would not stand alone. He would hate to present an agreement to OPEC and have it turned down. This would be bad for everyone including the oil industry. Yamani added that he had agreed not to use net book value as basis for compensation even though he had received a strong letter to the contrary from the Secretary General of OPEC. He thought that OPEC’s position would have to be changed and he was endeavoring to do so. Yamani added that a move was afoot now to have a high level meeting in Tripoli to review what he had been negotiating. Hence there was all the more urgent reason to reach a fair settlement.
- Source: National Archives, RG 59, Central Files 1970–73, PET SAUD. Confidential. Drafted by Dickman and approved on October 3 by Nicholas Veliotes.↩