886A.2553/7–2550: Despatch

The Ambassador in Saudi Arabia (Childs) to the Secretary of State 1

No. 35

Subject: Discussion With Aramco and Saudi Arabian Government Officials Regarding Saudi Arabian Government Requests for Increased Participation in Revenues of the Arabian American Oil Co.

During the past several months relations between Aramco and the Saudi Arabian Government have been increasingly strained chiefly as a result of numerous demands which the Saudi Arabian Government has made for increased participation in the revenues of Aramco and Aramco’s unwillingness to make further concessions to the Government at this time. Aramco feels that the Saudi Arabian Government has been attempting during the last few months to force it to alter its position with regard to the Government’s demands by throwing numerous petty obstacles in its path, all of which have resulted in the needless expenditure of time and effort which could, they believe, be more profitably spent in increasing oil production and revenues to the advantage of both Aramco and the Saudi Arabian Government.

In view of the growing difficulties and increasing intransigence on the part of the Saudi Arabian Government, Aramco sought my help and asked if I would come to Dhahran to discuss these difficulties with the Aramco officials there and, if necessary, go to Riyadh to explain the difficulties to His Majesty the King.

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On July 15 I flew to Dhahran in a plane provided by Aramco and for two days discussed with Mr. Moore, President of the Company,. Mr. Ohliger, Mr. Davies, Mr. Eddy and Mr. Spurlock,2 the difficulties which are confronting Aramco in an attempt to come to some decision as to what might be the best way to solve these difficulties.

Just prior to my departure for Dhahran I called on Najib Bey Salha, Assistant Deputy Minister of Finance (see enclosure No. 1)3 and Shaikh Abdullah Sulaiman, the Saudi Arabian Minister of Finance (see enclosure No. 2)4 in order to obtain their views with regard to the difficulties between the Saudi Arabian Government and Aramco. Shaikh Abdullah was in a rather uncompromising mood and emphatically claimed that Aramco was proving uncooperative and that they had neither answered his recent communications relating to the Saudi Arabian Government’s requests nor had they appeared the slightest bit willing to discuss these matters with His Excellency.

During my discussions with the Aramco officials in Dhahran I mentioned Shaikh Abdullah’s grievances regarding the unanswered communications and the alleged failure of Aramco to agree to discuss with the Saudi Arabian Government’s representatives, and as will be seen from enclosure No. 5,5 I learned that Aramco has in fact replied to all of Shaikh Abdullah’s communications with the exception, of course, of those to which replies are still under consideration by the Company. I also found the Aramco officials very eager to discuss on friendly terms the differences between Aramco and the Saudi Government although, as was pointed out by the Aramco officials, Aramco does not feel that it can make any further concessions to the Saudi Arabian Government.

Aramco feels that the deferments of the payments by the Saudi Arabian Government on the $6,000,000 loan granted by Aramco and on the payments for construction of the Dammam pier and the Saudi Arabian Government railroad are as far as it is financially able to go at the present time and that further concessions on the part of the Company would not only invite additional demands by the Saudi Government but would be financially unwise.

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After discussing these various difficulties, Aramco prepared for me a memorandum covering the situation to use as a basis of any further discussions I might have with the Saudi Arabian Government officials on any of the subjects discussed. It was decided at that time that, since Shaikh Abdullah was necessarily the man with whom Aramco would constantly have to deal, it might be unwise for me to bring the present difficulties to the attention of the King as this might very well irritate Shaikh Abdullah and result in even more difficulties for the Company. I told Aramco, however, that since I had promised Shaikh Abdullah that upon my return I would present him with the views of Aramco it would of course be necessary for me to do so.

After completing our discussions at Dhahran I flew to Riyadh for the purpose of taking leave of His Majesty before departing on leave. Shaikh Yusuf Yassin, Deputy Foreign Minister, met me at the airfield and, though I wished him to be aware of our discussions in Dhahran, I did not feel it wise to become involved personally in any discussion with Shaikh Yusuf on the points of dispute. Consequently, I requested Mohammed Effendi, the Embassy’s Arab Secretary, to explain the situation to Shaikh Yusuf in order to acquaint him with the matter and obtain his views. This Mohammed did, and found Shaikh Yusuf quite unsympathetic with Aramco’s viewpoint and of the opinion that if Aramco continued to be uncooperative with reference to the Saudi Government’s demands, a revision of the Aramco concession might become necessary. A copy of the memorandum of Mohammed’s conversation with Shaikh Yusuf is attached as enclosure No. 3.6 As mentioned previously, I did not mention this subject to the King during our brief conversation.

Upon my return to Jidda on the 19th I called on Shaikh Abdullah and, finding him to be in a more reasonable mood than I had on our previous meeting on July 13, I informed him in general of my talks with the Aramco officials in Dhahran, pointing out that I had found these officials to be extremely anxious to maintain the most friendly relations with His Excellency and that they deeply regret that Shaikh Abdullah had felt that they were not prompt in replying to his various communications. (See enclosure No. 4).7 I mentioned at that time that Aramco had given me an inclusive memorandum on the entire subject under discussion and would shortly forward to him a memorandum which I had prepared, outlining the Company’s point of view as expressed in the memorandum. Shaikh Abdullah stated that the Government was also anxious to continue friendly discussions [Page 65] with Aramco and suggested that it would be best for the Company officials to come to Jidda for a preliminary exchange of views and later go to Riyadh to report their findings if such appeared necessary.

The memorandum (enclosure No. 6)8 has been prepared and forwarded to Shaikh Abdullah but as yet no answer has been received from him, and I have had no further discussions with him or any other members of the Ministry of Finance on this subject since that time.

J. Rives Childs
[Enclosure 6]

Memorandum by the Embassy in Saudi Arabia to the Saudi Arabian Minister of Finance (Sulaiman)

The American Ambassador wishes to acquaint His Excellency, as he promised, somewhat more in detail, with the result of the Ambassador’s recent discussions with Aramco officials in Dhahran concerning relations between the Saudi Arabian Government and the Company and, in particular, with the claimed failure of the Company to reply to His Excellency’s communications and a reported evasiveness on its part in responding to His Excellency’s desire to meet with representatives for an exchange of views.

In conveying the Government’s appeals for increased participation in revenues, the Minister of Finance recently pointed out what he described as huge profits of the Company. In answering the Minister’s assertions in this regard, Aramco points to the Company’s vast investment in Saudi Arabia (now totalling over $600,000,000) and abroad necessary for the success of the enterprise and the absolute necessity of maintaining costs on a competitive basis in order to obtain maximum benefits for both the Company and the Saudi Arabian Government. The Aramco officials also referred to the Tapline project and the large expenditures which it entails, all of which represents an addition to the total investment of Aramco in Saudi Arabia. It now appears that the total investment in Tapline alone will amount to approximately $225,000,000 or an increase of approximately $100,000,000 over the original estimate.

Aramco considers that it has examined sympathetically the Government’s requests for increased participation in Aramco’s operations and Aramco has within the past year made the following concessions in order to meet the Government’s requests:

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In January of this year Aramco advanced $6,000,000, interest-free, to the Government with repayment to begin in July, 1950. This advance was made on the assurance that it would tide the Government over its financial difficulties. Despite an unexpected increase in production and royalties this proved to be insufficient, and pressure for further assistance was renewed. In view of this, Mr. Davies, after consultation with the Company’s Board of Directors in the United States announced to the Minister of Finance that the Company had decided to defer for an additional 12 months the repayment of the $6,000,000 loan as well as of the funds advanced by Aramco to cover construction cost on the Dammam port and Saudi Arabian Government railway projects. These deferments, totalling between $10,000,000 and $12,000,000, are now in effect.

It is understood that His Excellency has expressed the view that this was not enough and that he has requested $10,000,000 annually from the Company for public works programs and a waiver by Aramco of repayments on the Company’s pier and railroad expenditures. To these requests Mr. Davies states that he replied verbally and by letter that the deferments already granted were as far as the Company could go.

With regard to curtailment of Aramco’s right under the Concession, the following demands are reported as having been made on the Company by the Government and the following is the status of these demands as reported to the Ambassador by the Company:

Customs duties must be paid on all imports other than equipment and machinery: Aramco’s reply to this demand should now be in the hands of the Finance Minister. The Company points to its immunity from such duties under Article 21 of the Concession but recognizes that this immunity does not extend to materials (such as food) subsequently sold within Saudi Arabia;
Demand for quarantine fees: Aramco in its reply, which has probably just been received by the Ministry, admits that reasonable charges may be made for appropriate quarantine services at ports of entry but protests that the current tariff is exorbitant and, as to any excess, claims immunity under its tax exemption from all travel on Company business;
Demands for tax on material sold: Aramco’s reply is still under consideration, though the Company maintains that its exemption is clear under Article 21 and its right under Article 22 to the natural products necessary for the enterprise. The amount involved, however, is, Aramco states, insignificant;
Demands for royalty on oil used in the operation of the refinery: Aramco maintains that this deduction is clearly provided for in the Concession and has been so recognized since the first operation of the original refining unit established in 1940 at the Ras Tanura terminal. Aramco has replied to the Ministry of Finance that Aramco stands on its right to deduct. The Government has indicated that it may take this issue to arbitration;
Demand for aircraft landing fees on all landings made anywhere in Saudi Arabia: Aramco received this letter only recently and is now preparing a reply. Early this year the Company offered to pay the established landing fees on airports of the Government and this arrangement is in effect. However, Aramco claims immunity from any fees on aircraft facilities established by the Company;
Demand for termination of Aramco’s Dhahran-Jidda radio services: This demand was received only recently and Aramco’s reply is under consideration. The Agreement with regard to this circuit which provides for termination only for non-performance by the Company or in the event of an adequate service being established by the Government was concluded after long negotiations within the past year and a half. Aramco believes that neither of these conditions prevail;
Demand that oil for the Trans-Arabian Pipeline be gauged for royalty purposes at Abqaiq: Aramco has only recently received this letter and is now preparing a reply. Following the suspension of construction during the Palestine trouble, Aramco substantially increased its delivery facilities at Ras Tanura and arranged to extend its pipeline gathering system to include the vicinity of Abu Hadriya. When Tapline resumed construction arrangements were made for that Company to take delivery of crude oil at Qaisumah. The royalty gauging tanks were therefore placed at Qaisumah. Aramco maintains that this arrangement is consistent with its Concession and with the long established gauging practice;
Tapline security fees: While Aramco acknowledges the necessity for reasonable requirements of a civil administration and the usual guards at camps, it does not feel it should be obliged to support a Saudi border force.

The Ambassador recalled that a particular grievance expressed to him by His Excellency was that Aramco had not only ignored the Minister’s request for additional assistance, but that Aramco officials had been evasive and appeared unwilling to discuss these matters with the Saudi Arabian Government. The Ambassador has learned that Aramco sincerely regrets that such was the impression gained by the Finance Minister, for Aramco feels that Mr. Davies made it quite clear in the course of his announcement of the deferments arranged last month that he brought the final word of the Company and that Mr. Moore’s visit to Saudi Arabia was in no way connected with the Minister’s request for additional assistance. As Mr. Davies pointed out in his last visit to Jidda he and the other Aramco officials are prepared at any time to meet with the representatives of the Government at any place such representatives might choose to discuss and explain the Company’s position. Although the Company stated it cannot change its position with regard to additional assistance it is nevertheless prepared, in fact, anxious, for continuing friendly discussion with the Government and is prepared to meet with His Excellency, as the Ambassador has confirmed orally, at any time or any [Page 68] place whether Jidda, Taif or Riyadh, as may be found agreeable and convenient.

The Ambassador hopes that this frank expression of Aramco’s point of view with regard to the misunderstandings will be of assistance to His Excellency and will help in restoring the atmosphere of frankness and friendly partnership which has for so long existed between the Saudi Arabian Government and Aramco.

  1. Copies sent to Cairo, Dhahran, and Aramco.
  2. Aramco Legal Counsel.
  3. Memorandum of conversation of July 13; not printed. Salha told the Ambassador he deplored the worsening relations between Aramco and the Saudi Arabian Government, and he arranged a meeting for that night with the Minister of Finance.
  4. Memorandum of conversation, dated July 14; not printed.
  5. Statement of Aramco’s position with regard to the Saudi Arabian Government’s demands for increased participation in Aramco’s earnings—prepared for Ambassador J. Rives Childs by Aramco, dated July 16; not printed. The statement contained a list of Saudi Arabian requests and the Aramco replies to each of them. The last paragraph read: “We are hopeful that the American Ambassador will take any opportunities available, to confirm the fairness of the Company’s position and to counter the charges of intransigeance being made by the Minister of Finance. We will welcome any meetings he may arrange for us, either in Riyadh or elsewhere.”
  6. Memorandum of conversation of July 17; not printed. When Effendi explained that Aramco considered it impossible to meet the Saudi Arabian Government’s financial demands if it was to remain competitive with other oil companies in the Middle East, Yassin replied that if Aramco was not prepared to help, the Government would probably find it necessary to revise Aramco’s concession.
  7. Memorandum of conversation of July 19; not printed.
  8. Printed below.