800.6363/3–447

Memorandum by the Assistant Chief of the Petroleum Division ( Eakens ) to Mr. George C. McGhee, Special Assistant to the Under Secretary of State for Economic Affairs ( Clayton )

confidential

This memorandum develops further the subject of the memorandum dated February 21, 1947, from Mr. Nitze to Mr. Clayton on “Proposed Alternative Solution to Difficulties with French Arising from Jersey–Socony Middle East Deals”, a copy of which is attached.

Prior to negotiation of the three large Middle East oil deals, the oil resources and productive capacity of the Middle East were to a major degree held by three companies—Gulf, Anglo-Iranian, and [Page 648] Arabian-American. The existing productive capacity of these companies, but primarily that of the latter two, largely had been developed during the war period to supply military requirements. Consequently, it is likely that with the dropping off of military demand there was no close relationship between the war-developed productive capacity of these companies and their peace-time market outlets. There can be no question but that this was true if the comparison were between their relatively small peace-time market position and their existing and potential production based upon a reasonable program of development. Thus, with these companies holding vast reserves pressing for market outlets, the prospects were favorable not only for increased competition for markets between them and the principal established marketers—Shell, Jersey, and Socony—but also for the development of a competitive market for crude oil in the Middle East upon which other companies might rely for supplies in entering the international oil trade.

Under the three large Middle East oil deals, a major change in the conditions favorable to competition would seem to be in prospect. Instead of undertaking to develop their own market outlets for their present and prospective production, Gulf, Anglo-Iranian, and Arabian-American have aligned themselves through long-term crude oil contracts and partnership arrangements with the three large marketing companies, thereby at least contributing toward if not in fact precluding, the development of any bona fide competition for markets between the two groups of companies. The deals are of course equally attractive to the two groups of companies, one acquiring already proven reserves and oil supplies from the lowest cost production area in the world in sufficient quantities to maintain their market position, the other obtaining an immediate outlet for oil of such magnitude as otherwise could only be acquired, if then, by tremendous investments in refineries and expansion of markets and over a period of many years.

Considering the various repercussions of the deals, as well as a frank recognition of the possible consequences of the existing narrow and interlocking ownership base, the question naturally arises as to whether some other feasible pattern of ownership of Middle East oil resources would not be in the public interest and more consistent with present United States foreign economic policy. It is believed that from these standpoints, the case is strong for doing what may be feasible toward making ownership of Middle East oil possible for a larger number of companies. It is believed that from the same standpoints the case is strong for discouraging, wherever possible, the further development of joint operations and joint interests between and among the large international oil companies.

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Assuming the desirability of widening the ownership of Middle East oil resources and of arresting the trend toward consolidation of interests of existing international companies, there would seem to be three possible measures that could be initiated at this time.

One of these concerns the present unsolved difficulties with the French. This aspect of the problem was discussed in the attached memorandum, but certain other points in regard to it will be made here. Since announcement of the Jersey–Socony deals, these companies and the other IPC partners have been negotiating with Compagnie Française in London with a view to reaching an agreement with Compagnie Franchise in regard to what the latter hopes to achieve from the lawsuit and from the protests of the French Government. It seems from these negotiations that what Compagnie Française desires is an assured supply of oil on favorable terms, and the negotiations in London have been concerned primarily with efforts to work out a mutually satisfactory basis upon which Compagnie Française would draw from IPC a share greater than its porportionate part of the oil produced. Thus far, the negotiations have not met with success.

But in any case it would seem open to serious question whether any temporary solution on the presently projected basis, even if satisfactory to the French, would correct the underlying problem and make for amicable relations among the partners of IPC in the future. In fact, with the present American Group and Anglo-Iranian in IPC, and both with their major production interests outside IPC, as compared with Shell and Compagnie Française, whose main production interests presumably are within IPC, all the elements underlying the present disagreements would remain, together with the delicate question of the breach of the Red Line Agreement.

From the standpoint of the Governments whose nationals are involved, as well as from the self-interest of the parties, a preferable solution would seem to be one directed at the root of the difficulties. The purchase by Socony of the Jersey interest in IPC and the withdrawal of Socony from the Arabian-American deal would seem to offer such a solution. In addition to providing an immediate solution to the French lawsuit and protests through removing any question of violating the Red Line Agreement, it would leave within IPC three companies, Shell, Socony, and Compagnie Française, who presumably are short of oil and who should find it easier to agree upon future development of IPC concessions. Also, from a long range standpoint, it would have the additional advantages alluded to in the February 21, 1947 memorandum attached.

A second measure would be directed at dissuading companies who already hold greater areas under concession than they can possibly [Page 650] develop within any reasonable future period, such as IPC, Arabian-American, Anglo-Iranian, and possibly Gulf, from bidding for concessions on new areas. Despite the company’s aleady vast holdings of undeveloped areas in the Middle East, IPC is one of the two bidders for the undivided one-half interest of the Sheikh of Kuwait in the neutral zone between Kuwait and Saudi Arabia and presently is the sole bidder for a concession on the whole of Trans Jordan.

The third measure would be to persuade companies with holdings too great for them to develop in a reasonable future period to relinquish blocks either through giving up their concessions on the areas relinquished or through outright sale of their concession rights on these areas to other companies. The principle of relinquishment of acreage, after a reasonable period for exploration, is one which has been widely accepted in Latin America and other areas, and therefore represents acceptance of, rather than a departure from, general practice. There is reason to believe that some thought has been given this subject by Arabian-American with respect to its vast Saudi Arabian concession, and that this company’s reaction to relinquishment of acreage will not be altogether unfavorable. Where concession areas are smaller, or held in a large number of small units, such as many of those belonging to IPC, the problem of relinquishment may be somewhat different, although not necessarily more difficult or more complex.

The foregoing is conceived as a statement of desirable long range objectives, as a program toward which petroleum policy with respect to the Middle East would be oriented in the long run when, as, and to the extent feasible. It is not envisaged as a goal to be attained within a specified time period of one or two years, nor as a policy of which the petroleum companies necessarily would be informed.

As a first step, Jersey and Socony officials might be invited to Washington to discuss the progress being made in the negotiations with Compagnie Française in London. At the same time inquiries might be made concerning alternatives that were considered before the companies decided to go ahead with their deals in reliance upon the Red Line Agreement being invalid, why if they considered the purchase by Socony of the Jersey interest in IPC, as above suggested, this was abandoned. Similar questions might be asked concerning other ramifications of the Middle East problems of these companies, including their ideas with respect to the timing IPC has in mind for developing its various concessions, and whether IPC does not have as many concessions as it can expect to develop within a reasonable future period. The same procedure might also be followed with Gulf and Arabian-American, and at some stage discussions with the British along the same lines probably would be necessary. From these exploratory discussions, [Page 651] the Department should obtain some indication whether the broad program suggested in this memorandum is in whole or in part desirable and feasible.