Foreign Relations of the United States, 1969–1976, Volume XXXVII, Energy Crisis, 1974–1980

77. Memorandum From the President’s Assistant for National Security Affairs (Kissinger) to President Ford¹

Washington, August 15, 1975.

SUBJECT

• Iran Bilateral Oil Deal

We have now reached agreement with Iran on the essential elements of the bilateral oil deal² (except for the interest moratorium period as discussed below), but subject to USG acceptance for which we will have to determine whether there is some existing authority.

The Shah has now indicated that if we are to proceed this must be finalized by August 23 (8 days from now), to which is one month ahead of the OPEC meeting of September 24 to consider the October 1 oil price increase. The current status of our negotiations with further action required is discussed below:

1. The only major issue still unresolved is the question of the moratorium period; however, I believe that this can be compromised with some flexibility on our part regarding the higher level of oil deliveries which Iran desires during an initial period of the contract. We have agreed to an additional 250,000 b/d (or a total of 750,000 b/d) during an initial period from September 1, 1975 to February 29, 1976. This would produce a cumulative average of 500,000 b/d (the contract level) from an assumed starting date of June 1 which the Shah had requested. Ansary advised me confidentially that the Shah would like to extend this initial period of higher deliveries to December 31, 1976. Accordingly, I suggest that we propose an interest moratorium of 120 days if the initial period of increased deliveries terminates on February 29, 1976, or alternatively 150 days with the extension of this period to December 31, 1976.

2. With Congress out of session it is clear that our only hope is to find some existing authority for this deal as we cannot obtain new authority or an appropriation by August 23. From a limited and confidential review we had concluded that our only hope was through Treasury’s right to issue notes combined with use of its Foreign Exchange Stabilization Fund to cover any financial risk exposure and the Defense Production Act to cover purchase and sale of oil. Accordingly, on August 12 we developed with Iran’s Minister Ansary a set of procedures which might be implemented on this basis as reflected in the memorandum—Elements of Agreement—at Tab A.³

This document does not alter the basic terms which were concluded with the Shah and Ansary in Tehran on June 30; however, it does reflect a new implementing procedure which would be as follows:

a. The U.S. Treasury issues a note on the first of each month for the value of the contracted oil deliveries for that month on receipt of bearer contracts from the Government of Iran for immediate oil delivery.

b. The Treasury sells the bearer contracts to U.S. private companies at auction prices or at cost to a U.S. stockpile or other USG programs.

c. Profits from (1) the difference between the contract price and the auction price and (2) the interest moratorium, are credited to the Foreign Exchange Stabilization Fund.

d. The Exchange Stabilization Fund covers any theoretical financial exposure, thereby avoiding congressional appropriation.

3. This is a highly technical matter which we have not yet discussed with Treasury lawyers; thus, we have no assurance that it will prove to be a viable plan. There is a risk that further study will prove our hopes to be unfounded; however, I believe that we should move forward promptly with the following steps:

a. Confirm with Ansary that we will make every effort to conclude this arrangement by the August 23 deadline but point out the possibility that we may not be able to obtain required authority by that date. At the same time we would propose the compromise on the interest moratorium period as discussed above.

b. I will talk to Bill Simon and set the stage for an immediate investigation of the Treasury’s legal authority to make a commitment of this type. It is critical that Treasury and State lawyers cooperate and try to make the deal work, which is essential for success.

c. Assuming we are sufficiently encouraged regarding the possibility of concluding this arrangement by the August 23 deadline, we will send to Tehran by next Tuesday (August 19) State and Treasury legal representatives for final drafting of the agreement.

d. Even if we determine that the USG has existing authority, we should consult with certain key Members of Congress prior to committing to this Agreement.

e. If it appears likely that we will conclude this Agreement, we must consult with key members of IEA to minimize the possibility of an adverse reaction which might weaken the solidarity of this organization.

Only by moving forward aggressively and in accordance with the plan outlined above can we hold open the possibility of concluding this arrangement.

4. Attached at Tab B⁴ are the points which I would make in discussing the matter with Bill Simon.⁵ Undoubtedly he will raise the following issues:

a. This deal appears to “bless” the current OPEC price level.

On the contrary:

—it represents a major crack in the solid OPEC front which could lead to a break in OPEC prices reflecting market forces (in which case we would cancel this Agreement).

—it partially protects us from the OPEC price increase on October 1.

b. It includes an element of “indexation” which might be viewed as acceptance of this principle. Our argument is that we are obtaining oil in exchange for “Purchase Certificates” for U.S. products. To induce Iran to make this kind of commitment we must provide them with assurance of at least partial protection against declining value of the oil in terms of U.S. product prices. The important point is that this only holds so long as the formula price is less than the OPEC market price.

c. It could be viewed as a violation of the basic IEA understanding on bilateral oil deals. If properly explained I believe that IEA members would see this as a move which could accelerate the return to a pricing system based on market forces.

In summary, this program would represent:

—a first major break in OPEC solidarity,

—a lower price on a portion of our oil imports,

—an effective response to the likely OPEC price increase on October 1,

—embargo insurance,

—a commitment assuring supply of oil to Israel as a replacement for Abu Rudeis,

—assured petrodollar recycling, supporting Treasury’s interest in foreign exchange stabilization and the public’s interest in the sale of U.S. goods and services.

On balance, it clearly serves U.S. interests and we should attempt to conclude the necessary arrangements recognizing that we may be frustrated in the end by lack of existing authority and the impossibility of obtaining new authority by the August 23 deadline.

Recommendation:

That you approve proceeding along the above lines to finalize a bilateral oil arrangement with Iran.⁶

1. Source: Ford Library, National Security Adviser, Kissinger–Scowcroft West Wing Office Files, Box 15, Iran (4). Secret; Nodis; Cherokee. Ford initialed at the top of the page.
2. For an earlier discussion of this issue, see Document 67. A copy of the draft oil agreed to by Robinson and Ansary on June 30 was transmitted in telegram 6280 from Tehran, July 1. (National Archives, RG 59, Central Foreign Policy Files, P840178–2008) As U.S.-Iranian talks continued, Robinson sent further refinements of the agreement to the Secretary in telegrams Tosec 80325/183102, August 3, and 20866 from Paris, August 13. (Both ibid.)
3. Dated August 12; attached but not printed.
4. Not found.
5. At an August 16 meeting in Vail, Colorado, Kissinger told Ford: “On the Iranian oil, Simon is violently opposed to it. He still expects a price break. No one else in the world expects the price to drop. Jamieson [of Exxon] thinks the sellers’ market is returning.” (Brackets in the original) Ford stated: “We are going to do it. Simon can like it or not.” Kissinger replied: “We do need his cooperation.” (Memorandum of conversation; Ford Library, National Security Adviser, Memoranda of Conversations, Box 14)
6. Ford approved the recommendation and wrote: “Would want Chuck Robinson to work with Frank Zarb & Alan Greenspan as he has in past.” Zarb and Greenspan had sent Ford a memorandum on August 7 in which they asserted: “We both believe that in the light of an almost certain OPEC increase in October that this transaction can be constructive as embargo protection, as well as bringing pressures on the cartel.” (Ibid., Kissinger–Scowcroft West Wing Office Files, Box 15, Iran (4))