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

96. Memorandum of Conversation¹

Washington, March 29, 1976, 12:50 p.m.

SUBJECT

• U.S.-Iran Oil Agreement (II)

PARTICIPANTS

• Henry A. Kissinger
• Secretary of State
• Hushang Ansary
• Iranian Minister of Finance and Economy
• Frank G. Zarb
• Administrator Federal Energy Administration
• Charles W. Robinson
• Under Secretary of State for Economic Affairs
• Ardeshir Zahedi
• Iranian Ambassador
• Brent Scowcroft
• Assistant to the President for National Security Affairs
• Rutherford M. Poats, E
• Notetaker

Kissinger: We have been thinking about this project of a bilateral oil agreement for a year and a half. I have continued to think that it would be in our interests from the points of view of both immediate and long term strategy. What we have not been able to do is to come up with a workable scheme because to do so we must satisfy everyone here that putting the government into the buying of oil will achieve an advantage for the United States. On your part, you have difficulties as an OPEC member in giving us a financial advantage. I believe we can find a way and that we ought to be able to put together an agreement now.

The question is whether we can find a formula that will have full support within the Administration and can be presented with enthusiasm on the Hill.

At one time we were thinking of working it through Defense purchases. We have had to exclude that. If we could do it all with FEA, it would avoid a lot of bureaucratic problems. Frank has an idea. Let him present it now and then you can make your counter-proposal—or you can always just accept his proposition.

Ansary: I’m always easy.

Kissinger: Let me just make this clear: I am for an arrangement.

Zarb: In looking at this question, we have to deal with two problems: The U.S. Government is not in the oil business, and to change this would take a strong showing that it was very advantageous to do so.

There is one vehicle now to get around these problems. It is our legislation to establish a Strategic Oil Reserve of one billion barrels with an initial target of 500 million barrels by 1980.² FEA is authorized to purchase and store. We can make direct deals with domestic or foreign suppliers of oil. In doing so, we would not change our basic oil distribution system; the oil would not go on the market except in an emergency.

We would need to show that we could get very favorable terms in order to buy offshore—a significant discount below world market prices.

Kissinger: Before we get into prices, let me touch on one issue that I know is on the Shah’s mind: Iran wants to increase its sales revenues now, but the Strategic Reserve can’t buy much Iranian oil until 1978.

Ansary: Yes, we started these discussions because we wanted to continue to purchase U.S. military and industrial equipment, and by increasing our sales to you we could increase your sales to us—the best form of recycling. How can this be accommodated if you can’t start buying oil for the Reserve for a year and a half?

Zarb: If we could come to terms on a long-term supply to the Reserve, we could work out a solution to your cash-flow problem.

Ansary: When we talk about financial benefits to the U.S., we must look at just what this means. If you follow the precedents of other government agency purchases of oil, it would run through the majors, and they take a profit. We need to find an arrangement that deals with the gap between our sales to the oil companies and our capacity to produce, and to do so in a way that gives the financial benefit to the U.S. Government, rather than the companies.

Zarb: We assume that the Consortium companies will gradually increase their take-down from Iran. The Reserve program would be in excess of this.

Ansary: How would you assure that there would be no erosion of normal Consortium sales growth in the U.S. market? The Strategic Reserve does fit this concept, but the other sales?

Zarb: The Reserve purchases could over the next two years reach a rate of 300,000 barrels a day using tank farms and other interim storage. We could start the stream of payments to you earlier than the oil deliveries.

Ansary: On the basis of a schedule you would set.

Zarb: That’s one possibility.

Ansary: I see. Then we need to turn to prices and other details.

Robinson: Correct me if I am wrong, Frank, but there would be another way for FEA to take Iranian oil without storing it, right?

Zarb: Yes, Title III of the overall agreement could provide for near-term acquisition by a U.S. Government agency to take it down through the major oil companies.

Ansary: That’s what I don’t like.

Robinson: On the basis that it would be incremental sales.

Ansary: This would put someone in between us, taking a profit.

Kissinger: If we buy it for storage, how will we get it?

Ansary: Load it on your tankers. The question is the price.

Kissinger: You would give us more or less the same profit margin as the Consortium companies get?

Ansary: Our idea was to make it more advantageous to you but in a manner that would not put us in an embarrassing situation within OPEC. We could do this by linking prices to changes in your consumer price index.

Zarb: If we can agree to a long-term Strategic Reserve scheme, we can then solve the interim problem.

Ansary: What are the criteria for purchases for your Reserve?

Zarb: We have authority to buy domestic oil or foreign oil. The types must match our refinery requirements and locations.

Ansary: Will you have problems if you exclude domestic suppliers?

Zarb: Yes. But the primary problem is the argument by some that we should use our government-owned oil. We have a present capacity to provide 160,000 barrels per day from government-owned sources, and this can rise to over 300,000 barrels per day in a year or so. My view is that we would achieve maximum benefits for the U.S. if we bought foreign oil, provided we could get the right prices.

Ansary: What quality requirements?

Zarb: We are developing a schedule of purchases by amounts and types and locations.

Ansary: What proportion of light to heavy?

Zarb: We are close to a final decision on this.

Ansary: When will you be ready to ask for an appropriation?

Zarb: Friday.³

Robinson: It will not be tied to Iran. If Congress comes through with the money, we will be ready to make a deal.

Zahedi: I understand you have discussed with the Venezuelans and the Saudis buying their oil for the Reserve.

Kissinger: That’s why we know the price can be $3 below the market.

Ansary: If the Saudis sell it, the money goes into their reserves. If Iran sells it, the money goes back to you for your production and exports of manufactured and agricultural goods.

Zarb: That’s why we are trying to put our ideas together on a plan to use Iranian oil.

(To Zahedi) Yes, the Venezuelans raised this subject when I was there,⁴ and we discussed it in general terms.

Ansary: Can you go into details today on what you need to make a decision? I want to be clear that the United States Government will be able to move on this and what steps must be taken. If later we find that it backfires, it would not be good for anyone. Frankly, one reason I have been dragging my feet on stating the terms and conditions Iran would accept is that over and over we have talked and nothing materialized. I don’t want to put our cards on the table and then get no deal.

Kissinger: Frank, how soon could we act? I’d rather not complete any arrangement until the Congress has appropriated the money.

Zarb: I agree.

Ansary: We will abide by your suggestions as to the best route.

Kissinger: I am impressed by the possibilities of Frank’s route. He has the legal authority and a program, with appropriations virtually assured. As soon as you and Frank and Chuck can work out an agreement, assuming the President’s approval, we could implement it immediately. We’ve got in this room now, except for the President, all the people needed to put this together.

Ansary: Unless I am wrong, the last time I was here the President approved the idea of a government purchase agreement in principle.⁵

Kissinger: The President could order the departments to proceed. But this would lead to a situation in which objections emerged from within the Executive Branch during the Congressional hearings. The result would be to no one’s benefit. My bureaucratic instinct is that the most promising approach is Frank’s. The meeting I had with him a few weeks ago⁶ broke the back of the problem. My recommendation is that you put everything on the table, get the main elements agreed, then—about a month before the final appropriation—you and Chuck and Frank get together and work out the final deal. In this way we could in good conscience testify that we did not have a deal with Iran before submitting the appropriation to Congress.

Zahedi: How long do you expect the appropriation process to take?

Zarb: Probably about 60 days.

Kissinger: Is there any serious opposition?

Zarb: None that we can see now, but you never can be sure.

Zahedi: Perhaps this could be tied in with your visit, Henry. You could see His Imperial Majesty in Tehran and then we could have a meeting of the Joint Commission in Isfahan.⁷

Kissinger: Isfahan belongs among the ranks of the most exquisite sights in the world.

You will be seeing the President this afternoon and then Frank. I’ll see you again tonight.

1. Source: National Archives, RG 59, Records of Henry Kissinger, Lot 91D414, Box 16, Classified External Memoranda of Conversations, March, 1976. Confidential; Nodis. Drafted by Poats. This lunchtime meeting continued a discussion that had begun at noon without Zarb and Scowcroft. The group met again for dinner at 8:30 p.m. with the addition of Atherton and Ellsworth. Between his lunch and dinner meetings, from 4:34 to 5:18 p.m., Ansary met with President Ford in the Oval Office, during which Kissinger briefed the President on their progress regarding a bilateral oil deal. Ford assured Ansary that his “interest” was “for something being done.” The memoranda of conversation of all three of these March 29 meetings are printed in Foreign Relations, 1969–1976, volume XXVII, Iran; Iraq, 1973–1976, Documents 168–170.
2. See footnote 4, Document 95.
3. April 2.
4. Zarb was part of a U.S. delegation led by Kissinger that visited Venezuela in mid-February. (Telegram 2056 from Caracas, February 20; National Archives, RG 59, Central Foreign Policy Files, D760066–0257)
5. Ansary was in Washington for the March 3–4, 1975, meeting of the U.S.–Iran Joint Commission. He met with President Ford and Kissinger on March 14. The memorandum of conversation is printed in Foreign Relations, 1969–1976, vol. XXII, Iran; Iraq, 1973–1976, Document 109.
6. No record of this meeting has been found.
7. Kissinger visited Tehran August 6–7 and attended a meeting of the U.S.-Iran Joint Commission.