McGhee Files: Lot 53 D 468: Petroleum

Memorandum of Conversation, by Mr. Richard Funkhouser of the Office of African and Near Eastern Affairs

confidential

Subject: IPC Developments

Participants: Mr. Charles Harding, Director of Socony Vacuum
NEA—Assistant Secretary McGhee
ANE—Mr. Berry
ANE—Mr. Clark
ANE—Mr. Funkhouser
PED—Mr. Moline

Problem: IPC is concerned with their relations with Iraq and plans to increase royalties by 50%. The AIOC partner wants to make any royalty increase contingent on Iraqi agreement to reopen the Haifa pipeline; the French partner desires to pay increased royalties only in paper currency or in kind. The company will press for unitization of the three separate Iraqi concessions. The company will postpone decision to transfer or divert Haifa pipe and/or equipment until the end of the year.

[Page 48]

Mr. Harding stated that the Iraq Petroleum Company had been asked by the Iraq Government to revise the royalty terms of the IPC concessions and asked that negotiators be sent to Baghdad immediately. At the IPC Board Meeting in London, from which Mr. Harding just returned, it was decided to comply with this request. Mr. Wheatley and Mr. Gibson were proceeding to Baghdad for this purpose. No American negotiator would participate in these discussions.

Mr. Harding stated that American partners were in favor of meeting Iraqi demands for an increase in royalties from four to six shillings gold per ton, approximately 34¢ per barrel, since this was the average level of royalties in the area. British and French partners similarly favored an increase in royalties but only under certain conditions. The Anglo-Iranian Oil Company was insisting that the increase be made contingent upon Iraqi agreement to reopen the Haifa pipeline. Other partners in IPC felt that this quid pro quo was unrealistic at this time. The French Company wished to make any increase in royalties payable in crude oil or in paper currency. They feared that the price of gold might appreciate considerably over the future to the detriment of oil companies paying royalties based on gold. The negotiators were instructed to seek agreement on these points but were given authority to use their own judgment in finding a compromise in Baghdad.

The company in these negotiations will endeavor to unite the three separate concessions. The company feels that in view of the 20% free crude provisions given the Iraq Government in the Mosul and Basra concessions these two concessions will only be developed to the minimum extent allowed under the contracts. They believe it is to the advantage of both company and Iraq Government to make the terms of all concessions similar so that the most economic development can be effected.

IPC tried during 1949 negotiations to get the Iraq Government to agree to the removal of the 20% free crude oil provisions in the Basra and Mosul concessions. This proved impossible and Mr. Harding stated that the company was now going to suggest that the 20% provision remain for the first million tons of oil produced from both concessions as written in the two contracts. However, IPC now will propose to pay the Iraq Government an increased royalty without the 20% crude oil for production above this minimum one million tons per year production on each concession. Mr. Harding stated that in this way the company would be able to increase production from Kirkuk and develop Basra rather than attempt to expand production from the meager discoveries of the Mosul concession,

All partners desire the earliest reopening of the two southern Haifa pipelines. However, they recognize the difficulties in trying to persuade [Page 49]the Iraqi to make any concessions on this subject at this time. In order to postpone action on this matter until the end of the year, they have decided on the following procedure. The company will proceed full speed with the 30-inch pipeline to Banias, Syria. By completing the 30-inch line through Syrian territory and by joining it to the northern end of the two inoperative pipelines to Haifa, the company will be able to increase production by 100,000 barrels a day by January 1, 1952. By putting the 30-inch pipeline on stream ahead of schedule, French needs for crude and Iraqi needs for increased revenue can be satisfied.

By the end of the year it may be that some solution will have been found to the Haifa pipeline problem. If not the company will make the decision as to whether to transfer pump station equipment from the southern Haifa lines to the new 30-inch line or whether to divert the southern lines to an Arab port. The company feels that to divert the Haifa lines at this time would require from 18 months to two years and would slow down progress on early completion of the new big inch line. Mr. Harding stated that both Mr. Gibson and Mr. Wheatley are of the opinion that it is impossible to discuss the reopening of the Haifa pipeline at this time. According to Mr. Harding, the company was concerned with the report that the proposed route for a diversionary pipeline, which would come within three miles of the northern tip of Israel, was within an area currently being bought up from Arab landowners by the Israelis. The Department had no knowledge of any such development.

Mr. Harding stated that the company had important problems outstanding in Syria. The Syrian Government was still actively trying to collect 15 years back payments for transit fees on IPC’s pipelines to Tripoli. IPC only began paying the Syrian Government for transit rights after Tapline offered such fees in 1948. The Syrian Government feels that they have been dealt with unfairly and are insisting on retroactive payments amounting to approximately $15,000,000.

The Syrian Government also is insisting upon a refinery at the Banias terminus of the IPC big inch line. The Syrian Government will receive enough crude for their domestic needs under the terms of the Tapline Convention. In addition Syria washes to minimize their dependence on the Lebanese. The company feels that to build a refinery in Syria would be to encourage Syria along the path of nationalization of the petroleum industry even though Syria would be satisfied with a small 5000 barrel per day topping plant. Mr. Harding stated that U.S. lawyers also had recommended that the American partners discourage the extension of IPC group activities into the refining field.

Mr. Harding stated that the American partners were actively seeking to decrease IPC holdings wherever possible. IPC efforts to give [Page 50]up their concessions in Transjordan, Lebanon and Dhofar have been temporarily blocked. Mr. Gulbenkian feels that individually or collectively the IPC partners might give up valuable concessions in order to obtain these same concessions without his participation. Efforts were being made to work out an agreement which would assure Gulbenkian that his interests would be protected.

Mr. Harding also stated that the American partners were urging the company to give up concessions in Israel and Syria. Although there were prospects for oil discovery in Northwest Syria, the American partners did not consider them sufficiently attractive to warrant further IPC expenditures.

Mr. Harding referred to a new Lebanese problem which Socony was now facing. The Lebanese Government owed Socony approximately a half million dollars for oil imports. Socony had asked for prompt payment of this sum and payment on a current basis for any future imports of oil products. The Lebanese Government, in view of the increased capacity of the Tripoli refinery which could provide Lebanon with products sufficient for local consumption payable in Lebanese pounds, was reluctant to make available the scarce dollar exchange to pay off this debt at this time. The Lebanese Government had gone to Tapline and threatened Tapline, in which Socony owns 10%, with non-cooperation if Socony pressed this claim.

Mr. McGhee thanked Mr. Harding for bringing the Department up to date on IPC developments. He further expressed the Department’s view that the history of IPC operations left much to be desired and that a situation had developed in Iraq which was of concern to the U.S. Government. Iraqi dissatisfaction with the terms and development of the IPC concessions was a source of serious instability in the area and a vulnerable target for Communist attack. Many of the company complaints the Department felt were to a considerable extent justified. Mr. McGhee mentioned specifically that production and development of Iraq concessions had proceeded much more slowly than in neighboring countries, that the Iraqi complained of few opportunities for holding important jobs with the company, that IPC progress in housing, labor relations, education, social amenities was considered the slowest in the Middle East in spite of the fact that interest in Iraq oil had been manifested earliest.

Mr. Harding agreed with most of the points raised, and expressed his interest in any further information the Department could give him on this subject. He confessed that the American partners had only become actively interested in IPC in the last two years. However, Mr. Harding added that it was difficult for the two American minority partners alone to bring about progress in these fields and he expressed the hope that the U.S. Government would endeavor to gain the support of the British and French Foreign Offices for action [Page 51]in this matter. According to Mr. Harding it was the Anglo-Iranian Oil Company and the CFP, in which the British and French Governments respectively had policy control, which were the most reactionary partners in IPC.

Mr. McGhee assured Mr. Harding that the Department had already discussed its views with the British and was prepared to take further action at the forthcoming Foreign Ministers Meeting.