890F.6363/8–1148

Memorandum by the Assistant Chief of the Petroleum Division (Moline)1

confidential

Saudi Arabia’s Offshore Oil

Problem. In the specific instance of Saudi Arabia’s proposed grant of an offshore oil concession, what is the desirable application of the Department’s general policy of encouraging a wider company participation in the development of Middle East oil reserves.

Background. The Department long has endeavored to maintain the open door and non-discrimination policy with respect to the opportunity of American nationals to obtain foreign oil concessions, the most notable example of Department intervention to achieve this being the Iraq Petroleum Company case following the first World War. Subsequently, both with and without Department help, other American companies other than those in the IPC have obtained important Middle East oil concessions, and by 1945 all but the apparently less promising areas had been brought under concession by a small group of British and American companies. Among them, through contracts and partnership arrangements, close relationships had come to exist in respect to Middle East oil. Confronted with this factual situation and with the holdings of some companies so large as to preclude any possibility of development within any reasonable period, the Department began to consider seriously the development of a Middle East oil policy. It was then suggested that it might take the form of encouraging new companies not now holding concessions in the area to bid for the remaining areas open and of discouraging existing companies with large undeveloped areas from seeking them. It was also suggested that companies holding large areas might be encouraged promptly to examine such areas and relinquish those they did not desire to keep and develop without inordinate delay. A wide measure of agreement on the soundness of these suggestions seemed to exist within the Department.

The Department discussed the foregoing policy with the American partners in the IPC at the time the latter company was considering acquiring a concession in Transjordan. None the less IPC added the [Page 30]concession to its widespread holdings in the Middle East. In the case of Kuwait, the Department made the ruler’s interest in granting a concession known to several independent American companies, and an independent company was successful in obtaining the concession.

For several months the Government of Saudi Arabia has been contending, contrary to the view of the Arabian American Oil Company, that Aramco’s 440,000 square mile concession in Saudi Arabia does not include offshore areas in the Persian Gulf beyond territorial waters. The Government has also been negotiating with Superior Oil Company and Central Mining Investment, Ltd., operating jointly for this purpose, with a view to granting a concession to some 10,000 square miles of these areas.

A memorandum left at the Department on July 21 by Superior officials2 states that the Government has informed Superior of its intention to give the company the concession on the basis of the company’s present offer. The Department has little specific information regarding details of the proposed concession. The memorandum also refers to a competitive offer by Aramco regarding the area in question which Superior contends is a tacit admission that the existing concession does not cover offshore areas beyond territorial waters.

Aramco has not conceded the latter point. One cable from Jidda, among those which confirm the fact of an offer by Aramco, refers to it as a consideration for “clarification” of the basic Aramco contract.

The position of the Department as it has been made known to the Government of Saudi Arabia, to Aramco, and to the Superior Oil Company has been that the question of whether or not the existing concession covered offshore areas was a matter to be settled between Aramco and the Government of Saudi Arabia and that if the offshore areas were not covered by the existing concession it would be preferable that no new concession be granted to any company until the areas of the Persian Gulf, over which riparian states had jurisdiction, had been determined on an equitable and scientific basis. It was made known that this Government, together with the British, was working to determine on such a basis, the limits of the areas over which the riparian states might wish to proclaim their jurisdiction. In addition, representatives of the Superior Oil Company were told in response to a direct inquiry on the point that the Department favored the entry of independent oil interests into the Middle East, but could not favor any one company over another.

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For implementing the policy of widening company participation in the development of Middle East oil, it would seem preferable that particular concession opportunities be made known to as large a number of interested independent companies as possible. It appears, however, that in the present case of Saudi Arabia’s offshore areas the complications in the form of potential disagreement between neighboring states as to respective areas of jurisdiction in the Gulf, together with the progress of current negotiations, may not permit this preferable procedure to be followed. It is a real possibility that Aramco will obtain the right to exploit the offshore area whether or not as a “clarification” of its basic contract and notwithstanding the Superior statement that the Government has agreed to give the latter the concession. Should this occur a major opportunity for the participation in Middle East oil development of a company independent of existing concessionaires in the area will have been lost.

Recommendation.

1.
That officials of Aramco be called to the Department for an exchange of views with respect to the company’s intention in regard to Saudi Arabia’s offshore areas and the Department’s policy as indicated in the background section above. In addition to outlining our general policy, an attempt should be made to persuade Aramco that it would be in the interest of all parties, including the company, that a new company take over development of the offshore area if Aramco has any material doubt that its concession covers the area or is unable to clarify its claim to the area without payment of a consideration equal to or greater than the best competitive offer.
2.
That the officials of Superior Oil Company be called to the Department to discuss specific terms of the company’s proposed concession with a view to determining whether any of them are at variance with our petroleum policy and, if so, to inform Superior concerning the Department’s views.
  1. Transmitted by Winthrop G. Brown, Director of the Office of International Trade Policy, to Raymond A. Hare, Acting Director of the Office of Near Eastern and African Affairs, in a memorandum of August 11. The transmitting memorandum noted that the position paper “has been discussed at length by PED, IR, NEA and NE officers and an effort has been made to reconcile in the present paper the views of the offices concerned.”
  2. Not printed.