The Minister in Austria ( Messersmith ) to the Secretary of State

No. 163

Sir: I have the honor to refer to the exchange of telegrams between the Department and this Legation with reference to the aid to be extended to the Vacuum Oil Company in its endeavor; to secure a [Page 63] larger quota for 1934 of artificial and natural crude oil to be imported for refining in its plant at Kagran in Austria, and to give a report on the action so far taken by the Legation. In view of certain circumstances in connection with the matter, and in order to be able to give the Department adequate background and comment, I have deemed it advisable to put the report in the form of this strictly confidential despatch.

In its telegram of April 20, 1934, 1 p.m., the Department authorized the then Chargé d’Affaires, Mr. Kliefoth, to call at the Foreign Office at the earliest possible date to express the hope that in the allocation of quotas for 1934 due regard would be paid to the investment of the Vacuum Oil Company in Austria and to the respective capacity of the company’s refinery. Mr. Kliefoth called at the Foreign Office on April 21, the day this telegram was received, and left the following Aide-Mémoire:

“Upon instructions of my Government, I desire to express the hope that in the allocation of import permits of artificial and natural crude oil for the year 1934, due regard may be had for the investment of the Vacuum Oil Company and its refinery’s output capacity.

“The Company is fearful that the allocation may be undertaken on the basis of allocations in former years without equitable reference to the Vacuum Company’s recent extensive investments in the refinery of its Austrian subsidiary and the resultant increase in the latter’s refining capacity, which it states now equals that of any other plant in Austria.

“In view of the urgency of the matter, I would be grateful if the intervention of the appropriate authorities might be invoked, to the end that a decision in the premises could be conveniently expedited.”

In his telegram of April 21, 1934, 1 p.m. the Chargé d’Affaires informed the Department that he had taken this action at the Foreign Office. A letter was later received from the Managing Director of the Vacuum Oil Company, dated April 27, 1934, (Enclosure No. 1)44 in which he called attention to promises said to have been given to representatives of the Vacuum Oil Company in the Ministry of Finance and Commerce to the effect that if the capacity of the Kagran refinery was increased requests for larger artificial crude permits would be readily granted. Upon the receipt of this letter the Chargé d’Affaires thought it advisable to transmit this information informally to the Foreign Office, which he did on April 27, 1934. (Enclosure No. 2).44

After I assumed charge of this Legation the Managing Director of the Vacuum Oil Company, Mr. R. H. Evans, called and gave me information as to the status of the case and requested the further [Page 64] assistance of the Legation. He informed me that I would undoubtedly hear from the Department, and immediately following this conversation there was received the Department’s telegram of September 15, 1934, 1 p.m., authorizing me, if I deemed it advisable, to support the Company’s request for a redistribution of the import permits. On the basis of the information which I had been furnished by the Company, and with the authorization in this telegram, I deemed it advisable that the Legation should take further action.

During the conversation with the General Manager, Mr. Evans, it was learned that the allocation of the quotas for the importation of this artificial oil is determined by the Ministry of Finance, acting in conjunction with the Ministry of Commerce. Mr. Evans was of the opinion that if the matter was taken up through the intermediary of the Foreign Office only, it would be handled in the Ministry of Finance, which has the last word, as well as in the Ministry of Commerce by high ranking subordinates who, he had reason to believe, had already assumed a definite attitude and that therefore their case would not be aided. It was his opinion that the only effective way to take up this matter was with the Minister of Finance, who, he said, had definitely given the Company’s representative the assurance that the quotas for 1934 would be based on refining capacity. I told Mr. Evans that the Legation could not communicate directly with the Ministry of Finance in this matter without the knowledge and approval of the Foreign Office, but that as I was calling at the Foreign Office on another matter, I would determine whether it had any objections to my taking it up directly.

During a conversation therefore with Dr. Peter, the Secretary General in the Foreign Office, on another matter, I brought up this question of the Vacuum Oil Company and said that if the Foreign Office had no objection I hoped to take the first opportunity I had to speak with the Minister of Finance directly about it. As he offered no objection, I called on the Minister of Finance on September 18, and he said in substance the following:

Whenever in the past the Vacuum Oil Company brought before the Ministry of Finance or the Ministry of Commerce the question of an increase in its quota of artificial oil imports, it was indicated to them that if the Company would increase its refining capacity it would be easier for the Government to consider favorably an increase in its quota of artificial oil imports. The Company, therefore, in 1933 began to take the necessary steps to increase the refining capacity of its refinery at Kagran. In January, 1934, the Company called to the attention of the Ministry of Finance what it was doing in the way of increasing its refining capacity. The Company states that at this time the Minister of Finance promised that the allotment for artificial oil quotas to the refineries for 1934 would be made in relation to their actual refining capacities of the various refineries. To this end the [Page 65] Ministry of Finance appointed a committee of three persons to make a report on the refining capacity of the Kagran plant. One of these persons was to be an expert, and the other two were respectively representatives of the Ministries of Finance and Commerce.

The committee investigated the refining capacity of the Vacuum Oil Company’s plant at Kagran, and made, after considerable delay, a report on the basis of which the 1934 quotas were to be fixed. The Shell Company was given a quota of 6300 cars of 10 tons, while the Vacuum was given a quota of 3600 cars, etc. Although there is not, or apparently should not be, anything confidential with respect to this report, the Vacuum in spite of its endeavors has not been able to see a copy thereof. It has learned, however, that the refining capacity of its Kagran plant is fixed as 118,000 tons a year in the report. As this figure, in the opinion of the Company, does in no sense represent the actual refining capacity of the plant, it employed independently the best expert known to it to make a separate report. This report was made by Professor Pilat, who is now a professor in the University of Lemberg and has a European reputation. His report fixed the refining capacity of the Kagran plant at 206,000 tons a year.

The Vacuum is of the opinion that this figure represents the actual refining capacity of the Kagran plant and that the report of the committee of experts appointed by the Ministry of Finance which fixed it at 118,000 tons, is not correct. The Vacuum therefore has asked the Ministry of Finance to reopen the question of the 1934 quotas under which it received 3600 cars and the Shell received 6300. The Vacuum contends that it is well known in the trade that the refining capacity of the Shell in Austria is only about equal to that of the Vacuum, and certainly not in excess of it by more than a few thousand tons.

The Vacuum therefore contends that it has been unfairly treated in the allocation of the permits for 1934, which allocation it was assured would be made on the basis of actual refining capacity. The information which the Legation has so far been able to secure would seem definitely to support the contention of the Company. In view of the Company’s statement that it received assurances that the allotment for 1934 would be based on actual refining capacity, the Legation was of the opinion that as a matter of equity and in order that this discrimination might be removed, the question of the 1934 quotas should be reopened by the Ministry of Finance, as the Company desires, and so that an equitable distribution of the quota might be arrived at.

Of all the companies refining in Austria, which number five, only one has any Austrian capital in it. This question, therefore, is one of equitable treatment of foreign interests.

The Minister of Finance listened carefully to the complete statement which I made in practically the exact form given above. He said that he was very familiar with the entire situation and, for the Department’s background, I believe it desirable that I give a resume of his statement.

From the point of view of the Ministry of Finance, it would prefer not to have this artificial oil imported into Austria as it would be more [Page 66] advantageous in the way of tax returns and revenue if the refineries did not operate in Austria. For this reason therefore the Austrian Government could not consider increasing the total of artificial oil allowed to come in, as this would involve a still greater loss to the Treasury. The importation of artificial oil was permitted so that the refineries which existed could continue to operate, as the Government did not wish to destroy the investment made therein which would necessarily result if no artificial imports were permitted. The Vacuum Oil Company formerly engaged only in distributing, but bought the Kagran refinery several years ago obviously because the refinery business is a very profitable one in Austria. They bought this refinery at a time when the Government’s policy of fixing a maximum of artificial oil to be imported in any one year was already known.

The Vacuum Oil Company increased its refining capacity without getting any assurances from the Government that it would get a larger quota for the importation of artificial oil. The Minister said that it seemed to him that the Company should have assured itself of a larger quota before making the additional capital investment in enlarging the refinery. He said that obviously the Vacuum Oil Company took the action it did as refining is a good business in Austria and they wished to force the Government to give the Company a higher quota. The Minister emphasized that discrimination was hardly in question because the original action in fixing the total of artificial oil permitted to come in was based on the existing refineries and their then capacity and the respective quotas were fixed at an amount enabling them to operate at a profit. The Minister pointed out that if the quota of the Vacuum Oil Company were increased to meet their alleged present capacity, there was no reason why the other refineries should not enlarge their capacity, or why an entirely new company should not come in, build a refinery, and demand a quota on the basis of its refining capacity.

The Minister emphasized that he had endeavored to meet the Vacuum Oil Company’s wishes and had increased its quota of artificial oil three fold for 1934. He said that the Government could not increase the total amount permitted to be brought in as this total already represented a great sacrifice of revenue to the Treasury. He said he thought he had treated the Vacuum Oil Company very well in tripling the 1933 quota of the Company as the one for 1934.

The Minister said that he would be very glad to go into this matter further and requested me to leave with him a copy of the memorandum covering what I had said to him, and which has already been recited in this despatch. He said that he would have a memorandum prepared for me which he would send me, in due course.

It will be noted that I presented the case of the Vacuum Oil Company on the basis of the information given me at considerable length and that in the reply which the Minister gave orally he made no reference to what I had said with respect to the statement of the Vacuum Oil Company that he himself had agreed that for 1934 the quota would be based on actual refining capacity. He also made no reference to the wide disparity between the reports of the committee and that [Page 67] of the expert appointed independently by the Company except to state he had to issue the permits on the basis of the report brought to him.

Pending the receipt of the memorandum which the Minister of Finance said he would supply to the Legation, I thought it advisable to inform the General Manager of the Vacuum Oil Company, Mr. Evans, of my conversation. He therefore called at the Legation and I recited to him what I said to the Minister and the substance of his reply. I pointed out that the Minister had ignored the reference to himself as the one who had specifically agreed that the increased refining capacity of the Vacuum should be recognized in allotting the 1934 quotas, and that these quotas would be made definitely on the basis of relative refining capacity. The Minister did not deny that he had made this statement, but ignored what had been said in this respect completely. On the other hand, the Minister had, I pointed out to Mr. Evans, made to me the specific statement that the Company had proceeded with its plans to increase its refining capacity without having any assurances that it would be able to get a larger quota and knowing that the Government did not wish to increase the total of artificial oil imported into Austria. To this Mr. Evans replied that these assurances had been given by the Minister and that he did not think that the Minister would deny this.

For the Department’s confidential information and background I may say that when we gave this case preliminary study in the Legation, and before my conversation with the Minister of Finance, I was of the opinion that the Vacuum Oil Company had a good case. Its case, however, was dependent, in my opinion, on the statement made by the Company that it had repeated assurances that if it increased its refining capacity its quota would be correspondingly augmented and on its statement that the Minister of Finance himself had assured the Company that the 1934 quotas would be made on the basis of actual refining capacity. The case of the Company seemed further strengthened by the assumption that the Minister might have been favorably inclined towards it because of its attitude on the question of mixing a certain percent of alcohol with the gasoline before distribution. In Austria, as in several other countries where there is a production of alcohol which it has not been possible to consume or export, the Government in its desire to help agriculture wishes to oblige the oil companies to mix a certain percentage of alcohol in the gasoline. According to the information given me by Mr. Evans, the oil companies in Austria took a very antagonistic attitude towards this proposal of the Government, but his company took a more favorable point of view and was willing to help the Government to put this into effect. This attitude, Mr. Evans says, was very helpful to the Minister of Finance who was [Page 68] faced by the necessity of taking certain measures to relieve the agricultural situation, and he was correspondingly grateful and well disposed towards his Company.

The Department will note, however, from what I said to the Minister of Finance and from his reply that he gives the impression that no promises were made to the Vacuum Oil Company and that on the other hand the Vacuum went ahead to increase its investment in the refinery without assurances of a larger quota. In my conversation with Mr. Evans, therefore, which took place after I had seen the Minister, I pointed out that if the Minister denied having given such assurances their case was considerably weakened. I asked Mr. Evans to whom these promises had been made. He replied that they had been made to an Austrian representative of the Company who acted as intermediary. I said that it was unfortunate that as the Manager of the Company he Had not carried on these conversations himself, as in that case it would be easier for the Department and for the Legation to take the attitude that such a promise had been made. I explained to him that in the past such paid intermediaries have been known to state to their principals that certain promises had been made and in a certain form, when in fact they had not actually been made by the Government official to whom they were attributed. I said that in this case the question might resolve itself into one of the veracity and dependability of their intermediary, and as he is an Austrian, it would be impossible for the Legation to take the view that this promise had been given, should the Ministry of Finance deny that it had been given. Mr. Evans said that he recognized this situation, but repeated that he did not think the Minister of Finance would deny that this promise had been given. I further learned from Mr. Evans that he has nothing in writing in any form from the Ministry with respect to this alleged promise.

I have just received from the Minister of Finance a memorandum of which I transmit herewith a copy (Enclosure 3) together with a translation (Enclosure 4).46

From this reply it is clear that the Minister has no intention of increasing the total of artificial oil imported in any year and feels that it has treated the Vacuum very favorably by giving it a quota for 1934 three times as large as that for 1933. I have furnished a copy of this memorandum to Mr. Evans who has informed me that he is leaving the city for three or four days and will get in touch with me on his return. When he comes back I shall be glad to go into the matter further and will then supplement this despatch.

After a very careful consideration of this entire problem I am doubtful whether there can be any real claim that the Vacuum Oil Company has been discriminated against. There is no information [Page 69] that the other four companies refining artificial oil in Austria have increased their refining capacity. There is very real basis for the contention of the Austrian Government that it would prefer not to have any refining done in the country and that it would prefer not to permit the importation of any artificial crude oil. There is further apparently real basis for the Government’s contention that it permitted the importation of artificial oil only so that the existing investments in refineries should not be destroyed and that the allotments were made on their then refining capacities. If the Government chooses to deny that assurances were given to the Vacuum Oil Company that its quota would be increased if its refining capacity were augmented, or if it did not make such promise, there can be no basis for representation on the grounds of discrimination. In fact, on the other hand, the Government can be open to criticism by the other companies for having increased the quota of the Vacuum simply because the Vacuum increased its refining capacity. If the Ministry of Finance, therefore, leaves the matter rest where its memorandum herewith transmitted leaves it, I am doubtful as to whether the Legation is in a position to further press the claim of the Vacuum. The only ground for representation would be that of discrimination. Discrimination does not exist unless it can be shown a definite promise was made by a responsible official of the Austrian Government. The information which I have so far is not sufficient to show that such a promise has been made. Mr. Evans, in a letter dated October 2, 1934, has transmitted to me two memoranda of conversations by his representative (Enclosures No. 5 and 6),47 but the accuracy of these may be disputed and in case such accuracy is disputed there is, I believe, not sufficient ground on which we can take further action.

I shall not fail to supplement this despatch after I have seen Mr. Evans on his return to Vienna. I shall, however, refrain from taking up the matter further with the Foreign Office or the Ministry of Finance before receiving the Department’s further instructions and comments.

For the Department’s further background I may say that Mr. Evans informed me that his Company is endeavoring to secure another settlement of this matter. It is endeavoring to take over one of the other four refineries operating in Austria besides theirs, and thus to acquire the quota of that refinery which would then place them on about a parity with the Shell which is what Mr. Evans is aiming for. I have told him that in my opinion he will have far more chance of success by following this line. He is not yet sure whether their negotiations to secure this refinery will meet with success.

Respectfully yours,

George S. Messersmith
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