Foreign Relations of the United States, 1948, The Near East, South Asia, and Africa, Volume V, Part 1

890G.6363/12–2248

Memorandum of Conversation, by the Assistant Chief of the Petroleum Division (Moline)

confidential

[Washington,] December 22, 1948.

Participants:	Mr. Charles L. Harding—Socony-Vacuum Oil Company.
	Mr. Orville Harden—Standard Oil Company of New Jersey.
	E—Mr. Nitze
	NEA—Mr. Satterthwaite
	—Mr. Deimel
	NE—Mr. Colquitt
	Mr. Sanger
	Mr. Clark
	PED—Mr. Eakens
	Mr. Moline
	IR—Mr. Vernon

Messrs. Harding and Harden called to give interested officials of the Department an account of the final negotiations on the recently concluded IPC agreements¹ and to answer any questions regarding the provisions of the agreements.

Mr. Harding began by referring to the cooperation on the part of the various members of IPC. In his view the cooperation was at the highest level it has ever attained and is particularly striking in the case of the French who have in the past been very critical of the IPC operations. It was noted that the major parties to the old Red Line Agreement had reached an accord on a new agreement some months ago and the main difficulty since then had been with Mr. Gulbenkian who holds the minority interest in IPC.

In the renegotiation differences of opinion concerned two points in particular, 1) the elimination of the restrictive clauses of the Red Line Agreement, and 2) addition of a provision under which parties to the agreement could, if they so desired, acquire greater than proportionate shares of oil produced by IPC and its subsidiaries.

The first point was the most difficult from Gulbenkian’s viewpoint. Since he is not directly engaged in oil production or marketing, he views his IPC interest as an investment, a principal source of revenue. He was fearful that the removal of the restrictive clauses would lead to his being manoeuvred out of his 5 per cent interest in IPC. However, negotiations were finally successful and the only restrictive covenant left concerns concessions terminated against the wishes of the company. In this case parties to the agreement are obligated for five years from the date of termination of a concession to seek its recovery for the interests of all parties. Other than this there is complete freedom regarding the right of the parties to acquire new concessions in the area or to acquire new interests in existing concessions as in the case of Socony and Jersey participation in Aramco.

The French were particularly concerned with the second point mentioned above. Under the new agreement the old arrangement of sharing oil on a proportionate basis will apply until 1952, a date selected because of the anticipated completion of IPC’s thirty-inch pipe line in that year. Beginning in 1952 requests can be made for whatever quantity of oil a group company wants. This policy will lead to uneven takings since some companies will require more and others less than their proportionate share. Requirements are to be tabled five years ahead of time. However, requirements through 1957 are shown in a schedule attached to the agreement.

Under the foregoing procedure, under taking companies are required to sell to over takers at a so-called half way price, i.e., half way between IPC cost (taxable cost plus one shilling a ton) and market price. This procedure was adopted in recognition of the right of the under taking companies to compensation for capital invested and risk taken but at less than full returns since they were not faced with the costs and difficulties of marketing for which the over taker should be compensated.

If the tabled requirements are greater than total production the Managing Director will cut the requirements back proportionately.

Gulbenkian, not being in a position to take over “flexibility oil” (i.e., overtakings beyond basic proportions) since he was not in the oil marketing business, was given special treatment. In lieu of flexibility oil he will get for fifteen years 250,000 tons per year above his basic share. Thereafter he gets his basic share. His oil will be sold to the major groups at market price. His basic share will be obtained at IPC cost and his special flexibility oil will be acquired at the half way price. His 250,000 tons extra is supposed to become available beginning in 1952 but there is provision for postponement provided Gulbenkian still gets fifteen times 250,000 tons of oil prior to 1966.

Another feature of interest to Gulbenkian involved the question of payment for his oil. Under the old agreement Gulbenkian was paid for his oil in pounds or in a currency of his choice. He sold to the major groups and when he requested dollars they were usually able to obtain them from their governments.

Under the new agreement Gulbenkian can sell other than to the majors if he so desires in the event they are unable to provide the currency of his choice. For 1949 he has been guaranteed dollars for all of his oil for which he may pay IPC in sterling. Thereafter Hear East Development will pay him dollars for any purchases by NEDC. In addition, STDC [NEDC] has guaranteed his profits in dollars on the special flexibility oil for fifteen years.

Gulbenkian wanted the majors to buy his oil in perpetuity but he compromised on the fifteen year basis. After fifteen years there is no obligation on majors to take his oil and Gulbenkian will be obliged to market as best he can.

In the matter of requirements no group can table requirements in excess of five-sevenths of the two lower requirements or in excess of 25 per cent above its takings in the previous five years. Only when the total requirements are in excess of capacity will a company be unable to get what it wants, but there are provisions for expanding production provided the additional quantities needed can be economically produced and brought to market.

The agreement did not settle the question of French losses due to the war, which is still to be arbitrated or settled in court.

The agreement is exceedingly complex and in its final form an attempt will be made to simplify it. However, the agreement as it stands is a complete and binding contract which does not require the additional action contemplated.

Messrs. Harding and Harden offered to answer any inquiries which subsequent study of the agreement might suggest.

1. The IPC partners signed these agreements on November 3. The agreements terminated the litigation and continued the relationship between the partners established by the Group Agreement of 1928, with modifications, including new sale-of-oil agreements. The partners agreed that the acquisition by Jersey Standard and Socony-Vacuum of Aramco stock was not a breach of any past or present agreements; nor would any of the European partners have any claim to damages as a result. The European partners also abandoned any right to participate in the American partners’ purchases of “Red Line” crude oil and products or to any damages as a result of these purchases.

   The documents giving the texts of the November 3 agreements were sent to the Department by Socony-Vacuum on December 16, 1948. They are not found attached to the transmitting letter. The letter stated, however, that the documents were being prepared in printed form in London. It is from the printed form, now filed with the letter of December 16, that the summary in this footnote has been prepared (800.6363/12–1648).