Foreign Relations of the United States, 1949, The Far East: China, Volume IX

893.6363/10–1449

Memorandum of Conversation, by Mr. Robert N. Magill of the Office of Chinese Affairs

[Washington,] October 14, 1949.

Participants:	Colonel E. P. Kavanaugh—California-Texas Oil Company
	Mr. Sprouse—CA
	Mr. Magill—CA

Colonel Kavanaugh called today at our request to discuss the recently concluded contract between the Mid-Bast Crude Sales Company, Ltd., and the Chinese Petroleum Corporation about which the Department was informed in a letter of September 27, 1949 from Mr. Denham, President of the former.⁵⁸ Mr. Sprouse indicated that we were somewhat surprised at Mr. Denham’s letter since it implied that the Department had been kept fully informed of the details of the contract and bad given its approval to the contract as such. He added that this, of course, was not the case, and that in his last conversation with Colonel Kavanaugh on the subject in August, Colonel Kavanaugh had indicated that the contract might cover a period from six to nine months, and that he (Mr. Sprouse) had suggested that the period be kept as short as possible, preferably to three months. Mr. Sprouse continued that, while the sale of petroleum to Chinese Communist areas in accordance with normal civilian requirements was not in conflict with existing United States policy, the Department was concerned, and had indicated to the petroleum companies, that such sales should be on the most flexible basis possible in order that petroleum companies might adjust to a change in policy if one should occur.

Colonel Kavanaugh reviewed the course of developments leading up to finalization of the contract, indicating inter alia that he had not been aware of any understanding having been readied with the British. He stated that a one-year term was the shortest that CPC was willing to consider and that Caltex has been confronted with the alternatives of concluding such a contract or turning the business over to Anglo-Iranian which had offered CPC a one-year contract. He assured us that the Force Majeure clause of the contract covered a wide range of contingencies which might be used if Caltex wished to stop delivery. Colonel Kavanaugh added that, while CPC desired that the bulk of crude oil be delivered at Shanghai for storage, Caltex did not intend to use its tankers for deliveries to any port in the face of a threat of Nationalist interference or damage. He indicated that Caltex intended to keep deliveries to the minimum amount which would probably require one tanker shipment every two months.

In response to an inquiry by Mr. Sprouse, Colonel Kavanaugh stated that he would be glad to supply the Department with a copy of the contract and added that he would keep the Department fully informed of intended land actual shipments under the contract.

58. Not printed.