Foreign Relations of the United States, 1946, The Near East and Africa, Volume VII

8901.6363/2–546

Memorandum by the Chief of the Petroleum Division (Loftus)²

[Washington,] February 5, 1946.

I am forwarding herewith a summation of the facts and issues involved in the current negotiations for pipeline and refinery concessions in the Near East being conducted by the Arabian American Oil Company.

At a meeting in your office on January 29 there was substantial agreement among those present on the following propositions.

1. It would not be in the long-run interest either of the stability of Aramco rights in the Near East or of the prestige and position of the United States Government in that area for Aramco to adhere rigidly to the pattern of provisions established by the earlier IPC concession contracts for transit rights through Trans-Jordan and for transit and refinery rights in Palestine.³

2. It would be equitable for any oil company operating a pipeline through a country (as for instance Trans-Jordan) to pay to the Government of that country some annual monetary compensation which, however small it might be, would be something over and above the direct costs incurred by the local government for policing of the line and other services.

3. A prima facie case could be made that the equitable form of such compensation should be some fee related to and based upon the tonnage of oil moved through the pipeline.

4. Over and above any such transit fees additional compensation ought equitably to be paid to the Government of a country (e.g., Palestine or Lebanon) in which a concession for refinery operations is obtained; and this compensation ought both equitably and economically to be related to and based upon the tonnage of throughput.

5. The company ought to assume a contractual obligation to provide those countries in which either transit or refinery rights are obtained with ample supplies of oil at reasonable prices. Definitive agreement was not, as I recall it, reached on the exact form of such a contractual undertaking; it was suggested, however, that one possibility might be to assume an obligation to sell up to some predetermined quantity annually at a price 25% (or such other percent as might be appropriate) below the lowest delivered price prevailing in Mediterranean terminal markets (with appropriate safeguards against re-exportation).

6. Whatever more advantageous terms might be offered to local governments by the Arabian American Oil Company should not be such as to prejudice the competitive position of Arabian oil vis-à-vis oil from Iraq or elsewhere.

On the basis of this area of agreement discussion was held on January 31 with Messrs. Duce, Lenahan, and Miller of the Arabian American Oil Company. It was made clear to these gentlemen that a general problem was being discussed and that while the Department was agreed upon certain principles and considerations, no formal opinion was being conveyed to the company at this time.

The representatives of the company were in complete agreement that some compensation should be accorded to the local government in the case of Trans-Jordan for transit rights. They did not feel, however, that it was desirable at this juncture to pre-judge the question of the contractual form which such compensation might take; and they wished to reserve for further consideration certain alternative possibilities, such as either a fixed or a variable annual contribution to the local government unrelated to tonnage moved through the line or a transit tax paid upon the length of the line rather than the tonnage moved through it. Representatives of the Department urged that while the absolute amount of the compensation might work out to the same figure under various alternatives, there was a prima facie and evident equity in payment based upon tonnage, making it clear however that the Department was not insisting upon any particular form of contract.

Due to the lack of time the question of guaranteeing cheap fuel supplies was not adequately explored with the company’s representatives. They indicated concurrence in the objective being sought but felt that cheap fuel would be a natural economic result of the initiation of refinery operations. It was pointed out to them that this “natural economic result” did not occur when the Consolidated Refinery went on stream at Haifa and in fact prices rose. Further discussion of this matter was deferred to some subsequent meeting.

The company officials made a considerable point of their anxiety not to be placed at a competitive disadvantage by virtue of any contractual provisions designed to assure economic benefits to countries of transit and/or terminus. It was pointed out to them that (a) there would not in fact be more than a short term competitive disadvantage vis-à-vis other Middle Eastern oil moving to the Eastern Mediterranean since the terms of the IPC concession contract would undoubtedly have to be revised upward to meet the Aramco levels, and (b) the monetary magnitudes that would probably be involved would be infinitesimal in relation to the f.o.b. refinery prices that could be expected for petroleum products, so that the competitive differential, even if there were one, would be of no real significance. They did not seriously dissent from this reasoning and presumably agreed to it.

The areas of disagreement or incomplete agreement that emerged from the discussion are as follows:

1. The company did not agree that the principle of compensation for transit rights was applicable to countries in which refinery and port rights were obtained as well as transit rights. It was argued specifically, for instance, that in the case of Palestine the economic benefits (in the form of employment, industrialization, etc.) resultant from refining and shipping operations would adequately compensate the government of Palestine for privileges granted, whereas in Trans-Jordan where only transit rights are obtained a special compensation ought to be accorded. It was argued by the Department that in such a country as Palestine three separate sets of privileges are obtained by the company—transit rights, refinery rights, and port rights; and that compensation for transit rights in such a case should be on the same basis as in the case of a country in which only transit rights are obtained. It did not appear that the company was willing to accept this reasoning.

2. While agreeing with the Department’s ultimate objectives in respect of compensation for transit rights the company wished, so far as immediate tactics are concerned, to pursue a course exactly opposite. Specifically in the case of Trans-Jordan they stated that the British Colonial Office was unalterably opposed to any provision in the pipeline concession that would establish a transit tax or transit fee;⁴ and that opposition to the Colonial Office in this matter would result in an extinction of the company’s present limited access to the Emir of Trans-Jordan for negotiating purposes. Accordingly the company wanted to defer to the wishes of the Colonial Office and therefore to negotiate with the Emir a contract substantially identical with the previous IPC contract, intending at some subsequent date and after Trans-Jordan has been granted its independence to modify the contract by granting more favorable terms. It was pointed out by the Department that the Embassy at London could approach the Colonial Office and state strongly that it was the view of the United States Government that the Arabian American Oil Company should have complete freedom to grant any terms it desired (provided they were not more favorable to the company than the provisions of the IPC contract) and that the terms which the company would discuss with the Emir might or might not include payment of a transit tax. If the Embassy took this position the outcome might be either (a) a modification of the attitude of the Colonial Office, or (b) a breakdown of the negotiations between the company and the Emir. The company felt that the risk of the latter outcome was sufficiently great to outweigh any possible advantages.

3. The company felt that it would be preferable for any revision of concession terms in the Near East to be made by both Aramco and IPC simultaneously and for IPC to appear to take the lead, since it was the established company. In this view Mr. Merriam concurred⁵ and earlier Mr. Pinkerton at Jerusalem⁶ had concurred. I argued and still believe that the benefits in goodwill and prestige of any concession arrangements designed to accord greater economic benefits to the countries of the Middle East should accrue primarily to the American company and the United States Government.

With respect to point 1 immediately preceding, this is a matter upon which the Department’s position is clear and what is needed is further discussion with the company and a more effective effort to alter the company’s view.

With respect to point 2, I do not share the company’s opinion that the Colonial Office would resist a perfectly reasonable request of the American Government to the point of precipitating a breakdown of the negotiations. I should appreciate your judgment, however, on whether we ought to proceed with instructions to the American Embassy against the expressed wishes of the company.

With respect to point 3 the decision will depend upon what course is pursued with respect to point 2. If we proceed with instructions to the Embassy at London I think it will follow naturally that the prestige benefits will accrue to Aramco and the United States Government. If, however, we defer to the company’s wishes and permit the improvement in concession terms to come at some later date the step will in practice probably be taken by both companies concurrently and the British will get the greater share of the credit.

Incidentally, with reference to the company’s program for modifying the concession terms at a later date I do not know of any oil concession anywhere in the world the terms of which have been voluntarily liberalized by an oil company.

In summary, the security of our oil investments in the Near East, the protection against hostile internal and external forces and the goodwill of our American companies will be much enhanced if the various countries in that area participate directly in the economic benefits resulting from the development of local oil resources. The granting of such terms would be an important step in establishing an independent and enlightened U.S. policy in that area. It is likely that British pressure on the local governments and on the Aramco will prevent us from following such a course if no action is taken by the Department to assure freedom of action for Aramco and the Near Eastern countries.⁸

2. Addressed to the Director of the Office of Near Eastern and African Affairs (Henderson) and the Chief of the Division of Near Eastern Affairs (Merriam).
3. A convention governing the construction and operation of pipelines and refineries in Palestine was signed by the High Commissioner for Palestine and William J. Lenahan of the Trans-Arabian Pipe Line Company, an Aramco subsidiary, on January 7, 1946. A copy of the convention was transmitted to the Department in despatch 2377. January 11, from Jerusalem (867N.6363/1–1146). In a memorandum of February 4 to Mr. Henderson, Mr. Loftus and Walter J. Levy of the Office of Research and Intelligence noted that the convention followed closely the pipeline agreements signed between Palestine and the IPC and between Palestine and the AIOC in the 1930’s in that it provided for security fees for the protection of company facilities rather than transit fees. The memorandum noted further that the Emir of Trans-Jordan had requested payment of transit fees for the right to build a pipeline through his country, a departure from previous concession practices in the Near East in that direct compensation would be paid for right of transit and not merely as compensation for special expenses. (890F.6363/2–446)
4. The memorandum of February 4, 1946, by Messrs. Loftus and Levy stated that the British authorities were perturbed about the repercussions that the granting of such fees might have on Anglo-Iranian and IPC pipeline and refining rights in the Near East.
5. Marginal notation by Mr. Merriam: “Yes. I feel we might be seriously criticized for urging or even permitting Aramco to accept a less favorable arrangement than IPC. Moreover, it does not necessarily follow that IPC would lift its terms to conform. IPC and the British might just sit back and laugh. GPM”
6. Lowell C. Pinkerton, Consul General at Jerusalem.

8. In a conversation on February 15, officers of the Division of Near Eastern Affairs informed Aramco officials in the following sense: “If Aramco is obliged to include a transit tax provision as a condition to obtaining the pipeline concession, a clear case would apparently arise under the 1924 treaty requiring IPC to sign a supplementary agreement including a similar provision. This would perhaps be the ideal way to handle the matter. On the other hand, if Aramco should on its own initiative, for reasons which it considered good, offer to include a transit tax provision, it seemed unlikely that our treaty rights would be affected, although we might wish to transmit an official notice to that effect to the British Government. It seemed to us that a treaty provision conferring the right of non-discriminatory treatment to American interests would not operate to prevent an American interest from voluntarily offering a non-generalized benefit to Trans-Jordan.” (Memorandum by Mr. Merriam, 867N.6363/2–1546). William W. Bishop, Jr., Assistant to the Legal Adviser, when consulted by Mr. Merriam on the legal question involved in these views, concurred in the position taken by officers of the Division of Near Eastern Affairs (penned comment, February 25).

   The 1924 treaty referred to is the convention between the United States and Great Britain relating to rights in Palestine, signed at London, December 3, 1924; for text, see Foreign Relations, 1924, vol. ii, p. 212.