Foreign Relations of the United States: Diplomatic Papers, 1943, The Near East and Africa, Volume IV

800.6363/1223

Letter to President Roosevelt ²¹

Washington , June 26, 1943.

My Dear Mr. President: As an outcome of discussion held in the Office of Justice Byrnes, representatives of State, Navy, War and Interior Departments met to consider the situation presented by our prospective shortage of domestic petroleum reserves and the consequent imperative need to assure adequate foreign reserves, and the best means of proceeding to that end. They in addition gave particular attention to the situation in Saudi Arabia. They have agreed upon a signed report which we are transmitting to you. We concur and support this report. You will note that if one of its main recommendations is to be put into effect, that is, the creation of the Petroleum Reserve Corporation, it would be most desirable that this action be taken before July 1.²²

Faithfully yours,

Cordell Hull

Secretary of State

Henry L. Stimson

Secretary of War

James V. Forrestal

Acting Secretary of the Navy

Harold L. Ickes

Secretary of the Interior

[Enclosure]

Recommendations as to Petroleum Reserves ²³

[ Washington ,] 25 June, 1943.

Meetings of representatives of the State, War, Navy and Interior Departments took place on June 17, 19, 21 and 24, 1943, in the office of the Under Secretary of War in an effort to reconcile the views of the several Departments on the subject of the acquisition of petroleum reserves outside of the continental limits of the United States for both war time and post war needs. Besides Judge Patterson, there were present at some or all of these conferences Dr. Feis of the State Department, General Wright and Colonel Covell of the War Department, Mr. Bullitt and Captain Carter of the Navy Department and Mr. Fortas of the Interior Department.

Introductory

The factual background, and the military, economic and diplomatic considerations which render the problem both important and urgent, are adequately set forth in the memorandum from the Joint Chiefs of Staff to the President dated June 8, 1943, and in the memorandum to the President from the Secretary of State dated June 14, 1943, and accordingly will not be repeated here.

At the meeting presided over by Mr. Justice Byrnes in the East Offices of the White House on June 12, 1943, at which Mr. Stimson, Mr. Knox, Mr. Ickes, Mr. Feis and General Wright were present, the gravest concern was expressed over the rapidly dwindling domestic reserves of petroleum and recognition was given to the urgent necessity of the acquisition of foreign petroleum reserves by this government at the earliest practicable time. Specifically, all concurred that it was necessary (a) prior to July 1, 1943, to form a corporation for the general purpose of acquiring foreign oil reserves, and (b) immediately to initiate steps looking to the acquisition of an interest in the highly important Saudi Arabian Fields. There were left for further study by the interested Departments and later recommendation to Mr. Justice Byrnes, questions having to do with the directorate and the control of the proposed corporation as well as questions relating to the type of interest or ownership to be acquired in the Saudi Arabian reserves and the method of paying for such acquisition.

Recommendations

The undersigned representatives of the State, War, Navy and Interior Departments agree that the following proposals shall be submitted to the four Secretaries and, if approved by them, shall be presented to Mr. Justice Byrnes as the unanimous recommendations of the four interested Departments:

1. The Reconstruction Finance Corporation will be requested to organize a corporation to be known as the Petroleum Reserves Corporation, or by some similar name, which will be authorized to acquire interests or ownership in petroleum reserves outside the continental limits of the United States, and to finance, retain, develop, exploit or lease such reserves.

2. The Board of Directors of the Petroleum Reserves Corporation will consist of the Secretary of State, the Secretary of War, the Secretary of Navy and the Secretary of Interior.

3. In order that the activities of the Corporation in acquiring foreign oil reserves shall be in accord with American foreign policy, the following principles shall be observed in conduct of the Corporation’s affairs:

(a) The Corporation shall not embark on any major projects or undertakings without receiving the prior approval of the Secretary of State;

(b) all major negotiations with foreign governments shall be conducted through the appropriate missions of the State Department or else under its supervision.

4. The interest to be acquired by our government in the Saudi Arabian oil reserves shall be the ownership of 100% of the stock of the corporation now owning the oil concessions. The corporation which now owns the oil concessions is the California Arabian Standard Oil Company, a Delaware Corporation, and its stock is understood to be owned 50% by the Standard Oil Company of California and 50% by the Texas Corporation.

In view of the inherent uncertainty as to the quantity of oil which can be obtained from these or any similar oil fields, it is proposed that payment for the stock of the California Arabian Standard Oil Company shall be made by providing that (a) the present owners shall receive a proportion or percentage of the oil to be produced to be paid in kind or at the option of our government in United States currency, and (b) that such owners shall receive a payment, either in money or in oil, computed upon the basis of reimbursing them for the net expenditures made by them to date in connection with the concession. The percentage or proportion of oil to be received by the present owners should be the minimum amount which under the circumstances it is fair to accord them.

In the event the Petroleum Reserves Corporation shall determine that it is advisable to enter into an operating and management contract covering all or part of the Saudi Arabian oil fields, the two American corporations now owning the concessions may be afforded an opportunity to operate and manage the oil fields in question pursuant to a contract containing such terms and conditions as shall be stipulated by the Petroleum Reserves Corporation (or by its subsidiary, the California Arabian Standard Oil Company) including appropriate provisions placing in the Petroleum Reserves Corporation, or the California Arabian Standard Oil Company, the right to exercise control over the rate of production, the development of oil structures and the sale or other disposition of all oil produced from such fields.

5. Matters connected with the construction of an oil refinery for the Saudi Arabian fields are primarily questions of military policy and as such should be determined by the Army and Navy Petroleum Board. In no event should the consideration of problems as to the acquisition of these oil reserves or the formation of the proposed corporation be permitted to cause delay in carrying out any program for oil refinery construction in Saudi Arabia and elsewhere determined to be advisable by the military services. Instead it is suggested that such programs of refinery construction go forward without delay and that questions as to ultimate financing and ownership be reserved for future determination.

6. After definite determination has been made as to the program to be pursued, it is suggested that Mr. Byrnes, on a confidential basis, should inform certain members of the Congress of this program and should endeavor to obtain their informal approval in advance of the initiation of negotiations with the two American companies now owning the concession.

7. Thereafter, at the earliest practicable time, negotiations are to be commenced with the President of the Standard Oil Company of California and the President of the Texas Corporation in an effort to arrive at tentative agreements along with lines herein set out. The representative of the United States Government in these negotiations will be selected by the four Secretaries and the undersigned will submit recommendations for that purpose.

8. Promptly after exploring the matter with the two American Companies, an official of the United States Government shall be despatched to Saudi Arabia to confer with Mr. Kirk²⁴ and the United States Minister-Resident in Saudi Arabia²⁵ as to the arrangements herein proposed and to obtain their views as to what, if any, conferences or discussions with Ibn Saud are required in connection therewith.

9. While the undersigned concur in recommending that the interest to be acquired in the Saudi Arabian Fields should be represented by the ownership of stock as outlined above in paragraph 4, they desire to present for the consideration of the Secretaries the following alternative method of obtaining an interest in these oil fields:

In lieu of any stock acquisition a contract would be entered into by the Petroleum Reserves Corporation and the California Arabian Company (without altering or affecting the existing concessions) which, among other things, would provide:

(a) that a substantial gum of money should be advanced by the Petroleum Reserves Corporation upon the signing of the contract and further sums should be advanced thereafter in agreed installments. Such payments would insure that advance royalties and other obligations due Ibn Saud or the Saudi Arabian Government would be duly met and that exploration and development of the fields would proceed in the manner to be specified in the agreement. The California Arabian Corporation would be obligated to repay all amounts so advanced and the time schedule for making such repayments would bear a relation to the amount of oil produced upon each specific producing structure, over and above an agreed minimum;

(b) that in order to maintain a reserve of oil in the ground in the amount to be specified in the agreement, the California Arabian Company would agree that it would not withdraw for its own purposes more than a specified percentage of the total estimated reserves in the entire group of fields or more than a specified percentage of the estimated amount of oil in each individual structure brought into production. The estimates as to such reserves would be fixed as promptly as may be by agreement between representatives of the California Arabian Company and of the Petroleum Reserves Corporation and provision would be made for revisions from time to time of such estimates as development by drilling proceeded;

(c) that the Petroleum Reserves Corporation would be entitled to call for the production and delivery of the reserved oil at such rates and at such times as it deemed advisable. Payment for the oil so produced and delivered would be made on a cost basis formula to be set forth in the contract.

10. The undersigned desire also to direct attention, in the briefest manner possible, to the various considerations which in their conferences have been advanced as possible advantages and disadvantages of each of these alternatives.

The Stock Acquisition Method:

Suggested Advantages:

(a) that this is a simple, straightforward and readily understandable method and for that reason is easier to defend from domestic attack;

(b) that to the fullest extent practicable this method separates the interests of the government from those of the private companies and thus makes it difficult to criticize the arrangement on the ground that it is the utilization of government funds for private benefit;

(c) that the war need is urgent and immediate and in addition a critical peace-time shortage impends; that this method places complete control over these reserves in the hands of the Petroleum Reserves Corporation for both war and peace-time needs and thus attains fully the desired objectives;

(d) that the only cash payment would be the reimbursement of amounts actually expended and substantial revenues would presumably flow into the United States Treasury from the outset;

(e) that the oil produced could be offered on equal terms to all companies and in addition, if deemed advisable, the right to manage and operate the several structures could be granted to the oil companies making the best competitive bids.

Suggested Disadvantages:

(a) that the stock acquisition method may have undesirable international repercussions, and specifically may cause concern on the part of the U.K. and the U.S.S.R. and may strengthen the tendency of certain Latin American countries to proceed further along the road of oil nationalization;

(b) that it may be contended that this method will put the government in the oil business on a huge scale and by reason thereof a bitter domestic attack may result;

(c) that the desired ends can be attained, at least in large part, without embarking on such an uncharted course;

The Contract Method;

Suggested Advantages:

(a) that from the standpoint of international relations the contract method would not be so apt to create concern or serve as an incentive to the nationalization of oil resources;

(b) that from the domestic standpoint there would be less force to the contention that the government was entering the oil business;

Suggested Disadvantages:

(a) that there would be the danger that such an arrangement, no matter how scrupulously and fully it sought to protect the interests of the government, would be misconstrued and would be unfairly criticized as the use of the resources and prestige, and perhaps even of the armed forces, of our government to provide profit for private capital;

(b) that since it is impossible to determine with accuracy the amount of oil in the ground it would be difficult to make certain that the reserves would not be exhausted and the government left with little oil despite large profits to the companies;

(c) that if the government is to enter the picture at all, the government, and not the private companies, should have control over the development and production of oil and over its sale and distribution in the international market;

(d) that the government would be in the vulnerable position of a co-adventurer or junior business partner with large oil companies which have international tie-ups and which, in their activities outside the United States, operate under quota and cartel systems.

The foregoing is respectfully submitted by the undersigned:

Department of State	{	signed—	Dr. Herbert Feis
War Department	{	signed—	Robert P. Patterson
			Boykin C. Wright
			Colonel W. E. R. Covell
Navy Department	{	signed—	William Bullitt
			Captain Carter
Department of Interior	{	signed—	Mr. Abe Fortas

21. Sent by the Secretary of State, the Secretary of War, the Acting Secretary of the Navy, and the Secretary of the Interior.
22. This was done on June 30.
23. Memorandum drafted by representatives of the Department of State, the War Department, the Navy Department, and the Department of the Interior.
24. Alexander Kirk, the Minister in Egypt, concurrently serving as Minister to Saudi Arabia.
25. James S. Moose, Jr.