Foreign Relations of the United States, 1950, The Near East, South Asia, and Africa, Volume V

McGhee Files: Lot 53 D 468: Special Briefing Memoranda Prepared by Mr. Funkhouser

Paper Prepared in the Department of State¹

secret

[Washington, September, 1950.]

Middle East Oil

(Background Paper for September 11 Meeting)

i. problem

The threat of Communist aggression is increasing. The Middle East is highly attractive and highly vulnerable to this threat. Rupture of the flow of Middle East oil to normal markets or seizure of these resources from without or within would seriously affect U.S. and allied economic, political and strategic interests. The problem is to develop lines of action to protect and maintain allied oil interests in the area and lines of action by which allied oil interests can help protect and preserve overall U.S. interests in the area, e.g. removal of the sources of Communism and attainment of overall U.S. policy objectives such as economic and political stability, increased standards of living, and the development of Western orientation and democratic processes.

ii. background

A. Description—Middle East Oil

Important Middle East oil resources are confined to the area technically known as the Persian Gulf geosyncline, roughly a long, narrow oval encompassing the Persian Gulf, most of Iraq, S.W. Iran and N.E. Arabia. This area is a uniquely rich section of the earth’s crust. Except for certain submerged areas under the Persian Gulf, it is completely covered by concessions belonging to U.S. and foreign oil companies. Proven oil reserves, approximately 40 billion barrels, equal those of all the rest of the world combined and are almost double U.S. proven reserves. Only some 500 wells have been drilled in the Persian Gulf as against over one million in the U.S. U.S. wells average 12 barrels per day, Middle East wells 5000 barrels per day. It is further estimated that the Persian Gulf area has an even greater proportion of the “probable” or “possible” oil reserves in the world, i.e., some 150 billion barrels. Reserves of undeveloped natural gas are also immense; natural gas burned in daily operations amounts to approximately 1 billion cubic feet per day.

Currently, oil production is approximately 1,800,000 b.p.d., or 90 million tons per year and comes from:

Iran–	700,000 b.p.d.	Iraq–	125,000 b.p.d.
Saudi Arabia–	555,000 b.p.d.	Qatar–	40,000 b.p.d.
Kuwait–	350,000 b.p.d.	Bahrein Island–	30,000 b.p.d.

United Kingdom (and Dutch) companies produce and sell 50% of this production, United States companies 45%, French and other companies 5%.

The breakdown of this production by oil companies is as follows:

Anglo–Iranian (British)	915,000 b.p.d.
Cal–Tex (U.S.)	360,000 b.p.d.
Standard Oil of New Jersey (U.S.)	175,000 b.p.d.
Gulf (U.S.)	175,000 b.p.d.
Socony (U.S.)	90,000 b.p.d.
Shell (British–Dutch)	40,000 b.p.d.
C.F.R. (French)	40,000 b.p.d.
Gulbenkian	5,000 b.p.d.

The world’s largest oil refinery is located at Abadan. Other important area refineries built for Middle East crude are located at Bahrein Island, Ras Tanura (S.A.), Haifa, Ahmedi (Kuwait) and Tripoli (Lebanon). Thousands of miles of pipelines and extensive port facilities have been constructed to bring this oil to Mediterranean and Persian Gulf tankers. Approximately 1,000,000 b.p.d. of Persian Gulf oil transits the Suez Canal daily and account for ⅔’s of total Suez traffic.

Middle East oil currently supplies 75% of European demand, the major part of African and South Asian consumption and virtually all Near and Middle East demand. By 1953, Middle East production is expected to equal total Eastern Hemisphere requirements. Costs are generally considered the lowest in the world and allow Persian Gulf oil to compete in the USA with indigenous supplies, notwithstanding the 9,000 nautical miles distance, U.S. import duties and Suez Canal tolls.

The approximate value of crude oil produced in the Middle East is $1 billion per year. The value of crude and products produced is approximately $2 billion per year. The total gross retail value of the oil to the companies, and to the consumers involved, currently amounts to 3–4 billion dollars per year. Both crude and products are controlled by 7 major international companies and the commodity is generally retained within the group through production, refining, transportation and marketing stages.

Oil companies have invested over 1 billion dollars in pipeline, refinery, port, communication, transportation, housing, etc., facilities in the Near East. Oil producing states currently earn 100–200 million dollars per year in direct royalties, the greater part of which is hard or convertible currency. Non-oil producing states make indirect financial gains through receipt of transit fees, security fees, refinery taxes, canal dues, port dues, etc. Approximately 100,000 employees are locally engaged by oil companies in the Middle East area.

B. The Importance of Middle East Oil

(1) To the Middle East:

The important resources of this barren, desert area, half the size of the United States, are human resources and oil. Development of the human resources depends to a large extent on the development of the oil resources. The introduction of the Bedouin to the 20th century western civilization is promoted by foreign oil companies. Without oil the incentive of the Western World to develop this desert area, as well as the ability of the peoples in the region to develop the resources of their own states, would be almost totally absent.

Among the specific advantages gained by the Middle East from the progressive development of oil resources are (1) for oil company employees: food, pay, housing, sanitation, health facilities, social welfare, occupational training and education and (2) for the area at large: the development of roads, airports, seaports, communications, water supplies, new methods and equipment, new skills and new enterprise. These activities primarily affect the lives of those directly associated with oil activities but an indirect impact of the Western World reaches peoples and areas far removed from the locus of oil development through such oil operations as involved in the big inch pipeline projects from the Persian Gulf to the Mediterranean.

Most obvious and tangible contribution to Middle East states is money. Oil companies virtually support the economies of the riparian states of the Persian Gulf. 75% of Saudi Arabian income is directly derived from oil royalties; with this money Saudi Arabia has launched an ambitious development program. Oil royalties play an even more important part of Kuwait’s income. In Iran the Seven Year Plan for economic development uses AIOC royalties exclusively; due to the importance of AIOC oil the U.K. converts into hard currency approximately $100 million per year of company sterling payments in Iran. In Iraq the recent IBRD loan for improvement of irrigation facilities is guaranteed by oil royalties. Even in Egypt, Persian Gulf oil is responsible for two-thirds of all Suez Canal revenue. These various payments for the most part represent hard currency earnings and place Middle East oil states in a uniquely advantageous position in international trade.

There are many miscellaneous benefits derived from oil company operations. For example, oil companies contribute, help to foreign governments in establishing procedures and giving advice on such diversified and technical subjects as mapping, boundary disputes, town planning, airline operations, etc. Foreign governments, generally rely too heavily on oil companies for miscellaneous advice and assistance outside the normal scope of oil activities. Although this informal assistance is often of an importance which is only recognizable locally, the summation of these personal considerations contributes to closer ties of understanding between Orient and Occident.

Since the economies of the Persian Gulf states are based on oil and since economic progress is derived from oil operations and oil royalties, so too is political stability in these countries a direct function of oil operations. When oil production is threatened as in the case of the recent sterling difficulties of American companies in the area, the continuing political stability of governments which have come to depend on oil company revenues to run their governments is likewise jeopardized.

(2) To the rest of the World (ex. U.S.):

Middle East oil currently supplies approximately 75% of all European requirements, a major part of the petroleum requirements of Africa, South Asia, and almost all the requirements of the Near and Middle East. By 1953 Middle East production should be sufficient to satisfy the total demand of the Eastern Hemisphere. Due to U.K. control of approximately 50% of Middle East oil resources, Middle East oil represents a vital contribution to the viability of the U.K. The U.K. uses Middle East oil to balance trade with many different countries of the world. The operations of AIOC in Iran are considered to be the most important commercial U.K. holding abroad. The French and Dutch also profit heavily from Middle East oil operations. Middle East oil assures Eastern Hemisphere markets of adequate supplies of fuel at lower cost than would be possible if the Western Hemisphere were forced to supply these needs and is a strong force contributing to lower world prices.

(3) To the USSR:

If the USSR could break the flow of Middle East oil to its normal markets, international trade would suffer a severe dislocation affecting, probably by shortages and rising prices, the economies of all states using oil. In the case of the U.K. and other western European countries highly geared to the use of oil this rupture could in turn affect not only economic viability but also political stability and the defensive position of Western Europe. Such rupture would place strains on the U.S. domestic economy and would greatly increase the drain oil the strategic reserves of the Western Hemisphere.

If the USSR could obtain control and use of these resources, it would not only provide the USSR and Satellite countries with adequate supplies of fuel in peace and war but it would provide Communism with an easily developed weapon with which to gain political ends in other states of the Eastern Hemisphere. At present the USSR and Satellite countries are reportedly hampered both in peace and in war by a shortage of petroleum products.

(4) To the U.S.:

Middle East oil is chiefly important to the U.S. for reasons given in (1), (2), (3). In addition, Middle East oil is used in U.S. to supplement domestic supplies. It further exerts deflationary pressure on oil prices to U.S. consumers. Use of Middle East oil conserves Western Hemisphere resources which are vital to the Allied Nations in an emergency. The military draws heavily on Middle East oil for its world-wide requirements. Middle East oil provides commercial American firms and American investors with profitable enterprise, U.S. companies owning approximately 45% of Middle East production. Control of this source of energy, important in peace and war, is a desirable goal in itself. Oil operations of U.S. companies in the area familiarizes large numbers of U.S. technicians with strategic materials in a strategic area; area intelligence is consequently excellent. Oil company activities provide the West’s broadest contact with the lower levels of Middle East peoples; oil companies are instrumental and can be more instrumental in contributing to the attainment of overall U.S. policy objectives for the area, e.g. economic and political stability, increased standard of living, Western orientation, development of democratic processes, expansion international trade, etc.

(5) It is obvious that the underground oil resources of the Middle East do not constitute an unmixed blessing. The fallowing general propositions have been used in support of this point: (a) Oil has been instrumental in making the Middle East a battleground of world powers and has interfered with the independence of Middle East states. (b) Many Arabs do not desire 20th Century Western civilization and culture and ill will may also be engendered by foreign enterprise. (c) Foreign states and foreign interests may have profited more than the states and people of the producing areas. (d) Development follows the convenience of oil companies and immediately affects a relatively small proportion of nationals. (e) Oil wealth of ten breeds corrupt and inefficient oligarchy. (f) Oil exploitation may not be translated fully into capital formation. (g) Development of Middle East oil may adversely affect the economies of certain Latin American states of strategic interest. (h) Middle East oil may adversely affect the development of strategic Western Hemisphere reserves. These general propositions have a validity of little relation to the strength of the preceding affirmative points.

C. Conflicts over Middle East Oil—Background

The history of Middle East oil has been chiefly characterized by (a) extraordinary technical development making vast supplies of oil available to world markets, (b) conflict between foreign companies and between foreign governments for control of these resources, (c) increasing conflict between nationals and foreign interests over increasing the national share of benefits from oil development and national control of these resources. The outstanding importance of oil to nations in peace and war is responsible for these developments and, since this importance is increasing, so these conflicts can be expected to continue until the oil is either exhausted or supplanted by a new source of energy.

To review briefly the background of these conflicts:

Control of the first Middle East oil production, developed in Iran by private British interests, was effected by the British Admiralty in order to secure a strategically located source of Empire oil supplies. At about the same time Germany and Great Britain carried their commercial struggle to control potential Mesopotamian oil into Near Eastern battle fields. Following World War I the U.K. and France divided former German claims to Mesopotamian oil; the U.S. Government contested this division, and by diplomatic means won the participation of private American interests in Iraq oil. These U.S., British, and French companies then drew a “red line” around the rest of the Middle East, promising to work together in this area.

Intercompany disputes between these established companies and non-established interests typified the first mid-war period with new U.S. interests securing important concessions. The Axis powers, Germany, Italy and Japan, as well as the USSR all sought to break this Anglo-American monopoly, both before and during World War II. During hostilities wells were destroyed or plugged in all Mid-East areas but Iran and Saudi Arabia where production greatly expanded.

Since the World War II production has quadrupled; the USSR has been the only foreign power outside the area to attempt challenging US–UK control of Middle East oil. Minor conflicts continue between US and UK established companies as well as between established US–UK companies and new US–UK competition, but chief conflict has developed between established foreign companies and nationals desiring increased control of and/or increased benefits from these natural resources.

D. Conflicts over Middle East Oil—Current Problems

(1) Iran:

The long unresolved problem of the AIOC Supplemental Agreement menaces economic progress and political stability in Iran. Following Iran’s demands for the Venezuela type sharing of profits arrangements, AIOC and Iranian officials reached a compromise agreement in 1948 calling for an increase in royalty from approximately 22¢ a barrel (1933 Agreement) to 33¢ a barrel plus miscellaneous additional financial benefits. This would mean a lump sum payment by AIOC of approximately $60 million and future payments of approximately $100 million at present production rates. The Iranian Majlis, however, refused the agreement in a 1949 session marked by emotional excesses and has since shown no disposition to sign. AIOC and the British are genuinely hated in Iran; approval of AIOC is treated as political suicide. Iranians have since made miscellaneous requests for additional benefits including: Increased employment of Iranians, government right to audit books, 5–10 year renegotiation, increased role of Iranians in AIOC management.

The Prime Minister has asked AIOC to begin payments at the new rate and make installment payments of back sums due under the unratified Supplemental Agreement. Since the Majlis is not in session, the agreement cannot be submitted for ratification for months; meanwhile, Iran urgently needs this money for its 7-Year Plan. Both US and UK Governments believe it important that AIOC comply with this request because of the economic, political and strategic considerations involved. AIOC, however, refuses to pay until the agreement is ratified; progress is nil, the Prime Minister has threatened concession cancellation.

(2) Iraq:

IPC similarly has agreed to increase royalty rates in its one producing concession in Iraq from 22¢ a barrel (1931 agreement) to approximately 33¢ a barrel. As in the case of the favorable AIOC terms, the company has received little credit from the public for this increased payment. Iraq still demands payments on Baghdad gold rates and production of all concessions far in excess of company schedules. IPC maintains production cannot be maximized until the two Haifa pipelines are operating, the three concessions unified, and 20% free crude provisions changed. There appears little chance of resolving these differences, most important of which is the Haifa pipeline issue, in the near future.

(3) Saudi Arabia:

The Saudi Arabian Government is now demanding complete revision of the 1933 concession contract, claiming conditions have changed since 1933, the company has been far more successful than anticipated in 1933, other companies pay more both in Saudi Arabia and in other areas of the world, AIOC and IPC have renegotiated in their respective areas.

Aramco meanwhile has been reporting an increasingly anti-American undertone in their relations with Saudi Arabia and report ceaseless Saudi Arabian nibbling at company operations wherever money is involved. The Saudi Arabian Government has received large advances and loans, and now demands the company postpone invoices, pay “protection fees” adequate to support a Saudi Arabian army, shut down company communications centers, pay sterling royalties at discount rates, pay other fees, duties, etc. Unfortunately whereas Iraqi and Iranian royalties are put to relatively worthwhile purposes, Saudi Arabia remains in financial anarchy. The company would be better prepared to make a new agreement with the Saudis if there were any assurance that a new document would settle outstanding issues.

The Aramco Board has, however, authorized President Moore to discuss renegotiation with Saudi authorities. Revision as contemplated by the Saudi Arabian Government could be expected to have obvious repercussions on other contracts in the area, particularly since the key issue appears to be Saudi Arab demands for an income tax. No Mid East concessionaire now pays local income taxes.

(4) Kuwait and Other Arab Sheikhdoms:

Oil problems in Persian Gulf Sheikhdoms principally involve land and sea boundary disputes. Settlement of the counter claims of the Kuwait Oil Company and the American Independents Oil Company over the three Persian Gulf Islands of Karu, Maradim and Kubbar awaits selection of the third arbitrator. Oil company operations and Saudi Arab–UK relations continue to be adversely affected by the unresolved dispute over land and sea boundaries between Saudi Arabia and Arab Sheikhdoms of the Peninsula, particularly Qatar, Bahrein, Trucial Oman and Muscat. The Saudi Arabian Government has asked that a commission examine counter claims in the field and desires to deal with the Sheikhs directly. The U.S. Government supports this position. The U.K. agrees in principle to such a field commission but desires prior submission of Saudi Arab claims, acceptance of the U.K. right to negotiate for all Sheikhs involved and has also demanded that the SAG remove certain Saudi Arab markers from certain Persian Gulf islands and shoal lights. The policy of mutual restraint from oil activities in disputed areas is meanwhile being generally followed.

(5) Other Near East States (Egypt, Israel, Jordan, Lebanon, Syria, Turkey):

Chief problem of oil companies throughput this area is the increasing encroachment of government in business. In Turkey the government controls all oil exploration, and now desires a government refinery and a pipeline to the Mediterranean from their one producing field. The government already directly handles through the Petrol Office 30% of the Turkish market. Syria too wants a local refinery and has started increasing government storage facilities to handle the 200,000 tons per year of oil provided the government under the Trans Arabian pipeline contract. Lebanon is seeking the same crude oil provisions won by Syria from Tapline and is demanding a direct share of the output of the IPC Tripoli refinery. Jordan wants its own refinery and enough crude oil from Tapline to supply their total petroleum requirements. In Iraq the government continues to press foreign loans to start work on their Kellogg-designed refinery. Israel has threatened nationalization of the Haifa refinery. The government is also considering forming a new marketing company which would have government participation and would take over a share of markets now held by established private interests. The Egyptian Government is increasing the government refinery capacity to 26,000 barrels a day. The government not only expects to acquire ownership of the Cairo-Suez pipeline but has requested bids on a second pipeline from Suez to Cairo.

Legislative control of all phases of the oil industry from exploration to marketing continues to increase in Egypt and has already resulted in Standard Oil of New Jersey abandonment of its Egyptian exploration operations. Oil companies in Egypt demand (1) exception of oil companies from Egyptian Company Law requiring 51% Egyptian capital, (2) modification and clarification of mining regulations which overcontrol the industry, (3) repatriation of profits, depreciation, expenses, (4) modification of government right to obtain crude and products at special prices, (5) payment for oil at world market prices (Piatt’s low).

Latest crisis in Egypt resulted from oil company advisement that 987 oil workers would be released this year and that Sinai reserves would be depleted in 1952 if present conditions persisted. The Egyptian Government reacted first with threats of taking over the industry, then agreed once more to work out differences with the companies. Meanwhile, Socony and Shell continue prepared to pull out of Egyptian exploration and the Egyptian Government continues to woo other petroleum interests without noticeable success.

It should be mentioned that this friction in Egypt over oil prices extends throughout the Near East area. Price troubles have caused three industry ultimatums to the Syrian Government in the past two years. Dollar-short Near East states still find it difficult to pay their oil bills and to appreciate company explanations of Piatt’s oil prices. Since oil companies cannot indefinitely supply products without payment, crises inevitably result.

(6) All Areas:

Possibly the outstanding problem throughout the whole area is the problem of public relations. It is believed that few Middle Easterners would lament expropriation or nationalization of the oil companies in any part of the Middle East. Few are aware of the benefits received from oil operations. Oil companies’ efforts at public relations are usually devoted to political leaders; little is done to win over the people in the areas of operations on whom the long-run stability of the concession essentially depends. In Iran AIOC has been wrongly predicting the passage of their generous Supplemental Agreement for one year while the government on the other hand is speaking of cancelling the concession. In Iraq IPC granted generous terms and expected automatic approval by Iraqis without press buildup; large segments of the press immediately criticized the terms. Although oil companies may not expect to become popular, techniques used profitably in the Western Hemisphere to improve public relations would be useful in the Middle East.

iii. discussion

With the threat of Communist aggression increasing throughout the world, the Middle East is attracting the close attention of world powers. The incentive for Communist attention to be directed to the Middle East is evident. The area is highly attractive to the USSR because of oil, its strategic location at the air, land and sea crossroads of Eurasia and its vulnerability to attack from without and within. Apart from the outer shell of resistance exhibited by Turkey and Iran, states historically familiar with the USSR, the ability of Middle East armed forces and the desire of local populations to resist Communist military forces appears almost non-existent. It is believed that Soviet striking forces could not be prevented by the West from fast overrunning Persian Gulf oil fields.

The vulnerability of the area and the oil to internal attack also appears high. Communism’s alleged support for the underdog, in an area of underdogs, and its promise of quick relief have opportunity for expansion in the Middle East where masses of people live in circumstances of exceptional poverty and ignorance, where governments are often corrupt, inefficient and of, by and for the upper class and where increasing numbers of partially educated but frustrated younger generations are becoming available for explosive action. Communist propaganda tries to exploit this internal situation and to place responsibility on the West.

Unfortunately, Western powers are already unpopular, the European nations chiefly because of their lingering reputation for colonialism and imperialism, the U.S. chiefly because of its support for the Jewish state of Israel. There unfortunately also exists a history of friction and dissatisfaction over the oil operations of foreign interests in the area. “Anglo–American oil imperialists” receive their full share of attention not only from those preaching Communism but from the increasing numbers of xenophobes in the area who believe that both the West and the Soviets are interested in only the exploitation of the Middle East and that both should be rejected.

It has therefore seemed evident that to maintain and protect the West’s oil position in the Middle East and to attain overall U.S. Middle East policy objectives, including economic progress, political stability and the development of Western orientation and democratic processes, increased efforts must be made on every available front to prove that the American way of life and the American meaning of democracy can be made to have meaning for people living in the Middle East and can be shown to offer more rewards during their generation than those offered by others. In these efforts oil companies are playing an essential role. Oil companies occupy, as described above, not only an integral part of Middle East affairs but present the West with its broadest contact with local peoples at the lowest level. Thus, to a large extent the maintenance and protection of Western oil interests in the Middle East depends on the attainment of overall U.S. policy objectives for the area and similarly to a large extent the attainment of these objectives depends on the manner in which oil operations are carried out. As local dissatisfactions with oil operations are removed the strength of the Middle East to resist the appeal of Communism and anti-West nationalism is proportionately increased. Near East people must be more clearly shown that oil operations work to their direct benefit. In bringing this situation about oil companies must improve their salesmanship of their considerable accomplishments and they must through imaginative leadership show themselves capable of making continuous and difficult internal and external adaptations to their fast changing Middle East environment.

Discussion of specific issues and suggested recommendations follow:

1. Public Relations

Attention of Mid East oil companies to their public relations is immediately needed. Means of reaching the illiterate elements must particularly be found. Top government officials are usually well-briefed by companies, but critical movements for expropriation, nationalization, etc. usually come from below. Even Parliament deputies seldom seem to be aware of basic information, such as annual royalty payments of oil companies. The Iranian Majlis, appears to have had little idea of what they voted on when rejecting the large AIOC offer contained in the Supplemental Agreement. Without such knowledge translated to the lowest levels it is difficult to see how local satisfaction with oil operations can be approached. Oil companies which have been so effective in selling their products should devote more energy selling themselves to the Middle East. As long as US–UK oil companies are condemned, so too will the U.S. and U.K. and their principles.

Specifically, recommendations in the field of press and public relations include:

(a) The U.S. Government should warn oil companies against concentrating public relations efforts on high government officials rather than directing such approaches to the public. (b) The U.S. Government should encourage fullest company use of press and public relations staffs in the field to assure fullest local understanding of benefits received from company operations. (c) The U.S. Government through its own media should itself support such efforts to publicize foreign and domestic accomplishments of oil companies. (d) The U.S. Government should endeavor to minimize publicity of Anglo-American “collusion” on oil in the Middle East while at the same time avoiding Anglo-American conflicts over oil, i.e. no oil publicity mentioning the US–UK together. (e) Oil companies should be cautioned not to overplay publicity on benefits received from pipeline operations. (f) The U.S. Government should encourage publicity involving abandonment of exploration activities by oil companies in the area. (g) The U.S. Government should encourage publicity of new companies interested but not well-known in the Middle East. (h) The U.S. Government should encourage oil publications to distribute free copies to foreign petroleum officials and to solicit substantive views on substantive issues from them for publication.

2. Intelligence

Sound public relations are impossible without thorough knowledge and understanding of public opinion. There is little evidence to indicate that oil companies in the Middle East have carried out or are carrying out organized examinations of public opinion in the area of their operations. The illiteracy rate makes this task more difficult but more urgent since imprinted opinions may be no less important and more dangerous. There is little evidence to indicate that oil companies particularly in Iraq and Iran either know how they are regarded or the reasons for local resentment until perhaps their concessions come up for debate. In order to improve the powers of examination and diagnosis, the following recommendations for improved general intelligence are suggested:

(a) The U.S. Government should help Posts maintain and increase contact with overt and covert public opinion affecting oil companies and should encourage oil companies to do likewise. (b) The U.S. Government should encourage the companies to institute intensive studies (opinion surveys, sociological or cultural anthropological studies, etc.) re the impact and impression of oil company operations on local populations, removal of basic tensions established therein, methods of making adjustments as painless as possible. (c) The U.S. Government should exchange information with U.K. officials on all phases of NE oil operations, except commercial secrets, on all levels at home and particularly in the field. (d) The U.S. Government should complement its company sources of information by increasing efforts to make direct contact with oil, press, labor, etc. officials of foreign governments. (e) The U.S. Government should maintain closest liaison at home and abroad with all oil companies operating in the area. It should specifically facilitate cooperation between Labor Attachés and important company labor officials and facilitate the exchange of labor reports. (f) The U.S. Government should seek to increase Financial and Treasury Attaché positions as well as Labor Attaché positions in the area. (g) Consulates should be established at Kirkuk, Kuwait, and S. Iran. (h) The U.S. Government should facilitate direct contact between U.S. Consul Representatives and Sheikhdoms of the Arabian Peninsula. (i) The U.S. Government should take advantage of schools run by oil companies for the training of field personnel.

3. Concession Contracts

The outstanding problem affecting the stability of oil concessions in the area involves the financial provisions of concession contracts. As described earlier, Middle East states are demanding a greater financial return from their concessions. This pressure on the part of sovereign states is difficult to resist. Experience in other oil producing states of the world indicates that this movement towards increased national benefits and increased national control of oil operations is ubiquitous. If progress towards these national goals is obstructed by foreign companies, the process appears to become more accelerated or explosive.

Like the history of labor agreements in the U.S., contracts however valid do not stand up or satisfy oil producing states indefinitely. Until it is possible to provide effective, objective and acceptable arbitration (probably international arbitration) on these issues which affect commercial, economic, political and strategic interests of nations, it appears these contracts will continue to be unilaterally modified in favor of producing states until oil companies lose business, withdraw or the relationship [is] broken abruptly. The latter development is actively encouraged by Communism.

No absolute values are available in determining how the benefits from oil development should be divided. The problem is a philosophical one to determine in what proportion benefits should be divided between oil companies producing oil, people living over oil reservoirs, consumers using the products and governments of the three elements involved. Middle East states it appears are now aiming at the Venezuelan sharing of profits arrangement which results in Venezuela earning three times as much as all Middle East states combined. Oil companies argue with logic that the increased political risks in the Middle East are greater and that lower per barrel royalties encourage increased production and increased revenues. These arguments are probably effective only in delaying the date of paying at least the 50–50 Venezuelan arrangement. Since there is no guarantee that producing states would remain satisfied with the Venezuela type contract, if won, oil companies can be expected to oppose liberalization of concession contracts until pressures by foreign governments threaten the life of the concession.

The key to successful oil operations abroad would seem to be the ability to recognize and evaluate these pressures. If calculations of critical pressures are in error, mistakes like the Mexican expropriation result, U.S. Government representatives at home and abroad provide an essential function in analyzing these pressures. Since the achievement of U.S. policy objectives are tied into the stability of oil concessions, U.S. officials have a positive responsibility to increase their attention to these pressures and to pass on their evaluations to companies concerned. Any efforts to encourage oil companies to mend fences in concessions should continue to be complemented by efforts to direct national requests into useful directions.

Although the U.S. Government cannot insist that Mid East states refrain from new demands, it is believed that efforts to dissuade Middle East Governments from new rounds of royalty increases might be maximized at this time. This approach seems needed in view of the current international situation and the need for a period of relative stability in the Mid East. The timing seems propitious because of the alignment of basic royalties in the major producing areas of the Middle East. Furthermore, the ability of companies to increase payments has been adversely affected by recent ECA moves reducing prices of Middle East oil. If the choice is available, it would seem in general in the greater interest of the U.S. to see the benefits of Middle East oil spread to world consumers than to have benefits to single states increased.

The U.S. Government might consider encouraging companies to counter requests for increased royalties by offering increased production and/or relinquishment of concession areas in which no development is contemplated in the near future. Such relinquishment should help minimize or delay pressures on contracts. It would indicate to producing states that the company cannot be accused of hindering development of the concession, that the company is not monopolistic, and that the company is not in a position to increase payments. These charges are familiar to oil companies operating in the Middle East. Such relinquishment would allow producing states to take advantage of the increased royalty market by offering these areas to new competition. If new competition is unwilling to pay increased royalties, it is indicative that present concessionaires are paying fair royalty rates. In turn, failure of concessionaires to reduce holdings is a strong indication to producing states that the value of the concession is greater to the companies than the royalties paid.

Since Middle East states appear to be moving in the direction of Venezuela arrangement, pressures may be expected on Middle East concessions for income, corporation and other taxes from which oil companies are currently exempt. Possible tax credit by the U.S. Treasury would make it desirable from the oil company point of view to retreat in the face of demands for increased income in this direction. With the U.S. Government and public the loser in such action, however, this process might not be as favored as the lines mentioned above. Failure of oil companies to pay U.S. taxes while benefiting from U.S. protection and support has already been subject to Senate investigation which damaged the reputation of the oil industry. Reducing the size of concessions on the other hand might not only help stabilize concessions but would fulfill another policy objective of the U.S. Government, i.e. the promotion of competition. Since many new American companies are interested in the area and financially strong enough to enter the field, continuation of oil properties in U.S. hands would be almost assured. Middle East states prefer American companies to those of other nationalities.

Such tactical efforts to “hold the line” at this critical moment of international affairs could not succeed over the long run. The Venezuelan situation and presence of 55¢ per barrel Pacific Western royalties and other special Pacific Western financial benefits would probably cause any “hold the line” efforts to fail, particularly if Pacific Western finds production in the Neutral Zone. However, if a short period of relative stability can be obtained and if major oil producing companies can be persuaded to give up parts of their concessions to new competition, major policy objectives will have been obtained. Since company retreat is inevitable, it would seem useful to make the retreat as beneficial and orderly as possible to all concerned.

Benefits other than outlays of money should be maximized as another method of decreasing pressures on concession contracts. Nonfinancial benefits such as roads, railroads and housing decrease the opportunities for profligacy and instability and increase the company investment in the people in whom the long-term security of concessions rests.

Aramco should be urged to facilitate Saudi Arab efforts to establish financial order by continuing royalty payments at a fixed dollar rate in place of gold sovereigns. Payment in gold provides an uncertain base for Saudi Arab financial stability and is used by other Middle East producing states to demand revision of their royalties.

Low royalties in sparsely inhabited areas such as Qatar, Kuwait, Trucial Oman are of special concern only if major oil companies divert attention from their concessions in important Middle East states. Increased royalties in these sparsely inhabited countries contribute little to U.S. policy objectives.

Other recommendations re concession contracts are:

(a) The U.S. Government should urge oil companies to include in concession contracts provisions calling for automatic renegotiation of financial clauses every 5 to 10 years. (b) The U.S. Government should consider encouraging the adoption of general legislation rather than negotiated concession contracts. (c) The U.S. Government should consider support for an International Petroleum Council or some international instrumentality which could arbitrate differences between producing countries and companies.

4. Development

The U.S. Government should seek the progressive development of Middle East oil resources in order to preserve Western Hemisphere reserves, to assure the Eastern Hemisphere of adequate oil supplies and to maintain political stability and economic progress in the Middle East. U.S. Government should discourage companies with different interests from concentrating on developing least important areas and should encourage greatest development in areas of population and states which have strategic importance to the U.S. and to the area, i.e. Iran, Iraq and Saudi Arabia.

In general the U.S. Government should seek maximum development in U.S. owned concessions. However, the U.S. Government should, whenever serious internal dissatisfaction with retarded production jeopardizes the stability of individual concessions, encourage approximately equal development of the resources of these three countries at least until it appears that the potential reserves of these three countries are unequal. For this reason the Iraq big-inch pipeline to the Mediterranean and development of the Basra and Mosul concessions should be encouraged, while no special U.S. consideration would seem to apply to the big-inch pipeline project from Iran and Kuwait.

Although development of Western Hemisphere production and reserves would be greater without increased development of Middle East production, active discouragement of Middle East development cannot be attempted. However, present ECA price cuts may indirectly work to this end by decreasing the relative profitability of Middle East oil development.

The U.S. Government should urge companies to maximize the efficiency of their oil operations, including the utilization of natural gas, in order to safeguard the legitimate interests of all parties concerned.

The U.S. Government should promote the entry of new competition into the Middle East, particularly the competition of U.S. companies and particularly U.S. independent companies. U.S. oil policy objectives in the area can best be fulfilled by and with American companies with American personnel and American methods. This does not counter the recommendation calling for replacement of American oil personnel with local personnel.

The control of Middle East resources by the major international companies is subject to serious criticism by both friendly and unfriendly states. The successful participation of independent U.S. companies is a requisite to elimination of that criticism.

As stated earlier, companies such as AIOC, IPC and Aramco holding huge concession areas of over 100,000 sq. miles each should be encouraged to relinquish all parts of these concessions which the companies do not plan to develop in the near future. Both IPC and Aramco concessions are approximately the size of the whole Mid-Continent oil region in the U.S. and contain as much oil. Although the analogy is imperfect, to have had the Texas–Oklahoma–Louisiana oil fields controlled by one company would have had obvious disadvantages. Each of these concessionaires has already disproved areas in their concessions which should not be retained.

5. Labor

U.S. Government should encourage the U.S. companies and other foreign companies through their respective governments to increase the total benefits to the people in the country of their operations. Labor relations is the field for maximum efforts and attention.

Oil companies should identify their oil operations with the peoples of the area concerned by equalizing conditions of work between foreign and local employees, by maximum utilization of local employees, etc. This should be effected by encouraging companies to educate at home and abroad, train at home and abroad, employ at staff and working levels, promote as quickly as possible a maximum number of locals. Companies should be encouraged to improve low-cost family housing, de-emphasize bachelor establishments, remove marked differentiation between housing built for foreign and local employees, etc. Oil companies should be cautioned against overdependence on contract labor in view of the widespread complaint against contract labor’s inferior conditions and practices.

The U.S. Government should urge the establishment of grievance machinery to avoid the accumulation of unseen pressures, to prevent subversive movements from going underground, etc.

Oil companies should be encouraged to apply to the Near East area other advanced programs regarding hospitalization, sanitation, health, pensions as employed in more sophisticated oil producing states, such as Venezuela.

The U.S. Government should increase the Labor Attaché positions in the area.

6. U.S. Relations with Foreign Governments

The U.S. Government should continue endeavoring to block foreign governments from making unreasonable demands on oil companies.

The U.S. Government should always be prepared to point out the advantages gained by oil producing states from operations of foreign companies.

The U.S. Government should continue to emphasize the necessity for respecting valid concession contracts.

The U.S. Government should endeavor to discourage any moves by Middle East oil states to form cartels to increase royalty rates in the area or to control production.

The U.S. Government should continue urging oil producing states to put royalties to capital formation.

The U.S. Government should continue endeavoring to modify legislation unattractive to foreign enterprise and other restrictions to the expansion of the oil industry abroad.

The U.S. Government should not engage in petroleum activities and should discourage in every appropriate way tendencies of Middle East states to engage in oil activities. The U.S. Government should continue to discourage any moves towards nationalization or expropriation of oil properties.

The U.S. Government should assist operations of government oil organizations where such state organizations already exist while continuing to point out the disadvantages of government oil operations in general. The U.S. Government should admit exceptions to these rules in such cases as the Iran Oil Company and in other instances where government operations have special reasons for existence; e.g. Iraq refinery.

The U.S. Government should endeavor to give non-producing states realistic evaluation of their oil potentialities.

The U.S. Government should continue to urge the reopening of the Haifa pipeline and the Suez Canal tanker movements to Israel.

The U.S. Government should continue to press for the earliest settlement of Persian Gulf boundary problems and the delimitation of Persian Gulf submerged area.

7. Distribution

The U.S. Government should continue to make known to U.S. oil companies at every appropriate opportunity that the use of business practices which tend to divide markets, limit access to markets, fix prices, establish quotas or in any other way restrain competition or foster monopolistic control is contrary to U.S. policy.

The U.S. Government should assure that oil supplies are made available to all countries on a non-discriminatory basis.

The U.S. Government should discuss with oil companies at home and abroad the role played by the Gulf of Mexico Basing Point system in arousing antipathy of N.E. governments against Anglo-American oil companies, the incentive for governments to enter the oil business provided by such exaggerated prices, and the contribution to the viability of N.E. and West European estates which prices connected to Persian Gulf costs could make.

The U.S. Government should discourage group company ultimata to countries behind in oil payments.

8. Management

The U.S. Government should encourage Middle East oil companies to decentralize authority and place key officials in the field. Field officials should be always available for authoritative discussions with representatives of the country of their operations. The U.S. Government should point out the danger of having company officials of U.S. or allied oil interests in the field with the colonial approach to foreign oil operations. The U.S. Government should urge U.S. companies with Middle East interests to maximize use of Americans in the field, particularly during contract negotiations. The U.S. Government should continue urging companies to employ in Middle East operations techniques found successful in Western Hemisphere and to utilize in the field officials familiar with Western Hemisphere operations.

9. Security

The U.S. Government should effect immediate completion of defense, evacuation, denial, demolition plans and disseminate necessary information to proper company and government officials at home and abroad. This information should be coordinated with plans of the U.K. and U.K. companies. Department officials should maintain closest liaison with Defense attachés in field, particularly with regard to organization and implementation of above plans.

The U.S. Government should effect continual alert in the field for sabotage of oil installations and effect closest contact with company and country security officers. Companies and countries should continue to differentiate between Communists and those with legitimate complaints.

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Suggested topics for discussion:

1. Iran

(a) What is the exact influence of the British Government in AIOC affairs? How can the company best be persuaded to liberalize its thinking? What would temporary shut-down of Iranian production mean to the UK? the US? World oil trade?

(b) Would renegotiation of the 1933 Aramco concession be expected to force renegotiation of the AIOC Supplemental Agreement? What would be the effect on AIOC of an Iranian income tax?

(c) Would AIOC agreement to pay now under terms of unratified Agreement stabilize or jeopardize the stability of the concession? How stable is the concession?

(d) At what point will financial demands by Mid-East oil producing states stop? What might be considered fair royalties? Can Pacific Western live with 55¢ royalties?

(e) Mid East states are demanding the Venezuelan sharing of profits arrangement. Will they be successful? Is this arrangement appropriate for the Middle East?

2. Iraq

(a) How stable are the three I.P.C. concessions?

(b) Does I.P.C. know how company operations are regarded by Iraqis? How can this opnion be sampled? Would increased attention to press and public relations in Iraq be useful? What useful moves could be made?

(c) When will there be a chance of reopening the Haifa lines? Or sending tankers to Haifa from Tripoli or through the Canal? What can the company or the US–UK Governments do? How will continued closure affect I.P.C.? Iraq? Will diversion to Arab port be effected?

(d) Will I.P.C. be able to unify the three concessions? What would be the result of such unification or the lack of unification to the company? to Iraq?

(e) What would be the effect of denial of export licenses for the I.P.C. big-inch? Will Iraq ever allow passage of the AIOC big-inch? Will Syria allow passage of Iraq big-inch?

(f) How do I.P.C. current royalties compare with others in the area?

3. Saudi Arabia

(a) What developments can be expected from the Government’s demand for renegotiation of the 1933 contract? Can the company divert these demands into other channels keeping contract intact? What effect would payment of income tax have on other concessions? What effect does payment in gold have on other concessions?

(b) What should be the role of U.S. Government in response to increased government demands on concession contracts?

(c) How stable is the Aramco concession? What SAG action could be expected if increased payments were denied?

(d) What development problems exist?

4. Kuwait and other Sheikhdoms

(a) Do boundary problems constitute a source of serious instability in the area? Would it be advantageous for the SAG and Sheikhdoms to negotiate directly on boundary disputes, etc.?

(b) Will lower royalties in Sheikhdoms seriously affect the competitive position of companies operating in Saudi Arabia, Iraq, Iran? Will royalties in these Sheikhdoms be forced up to those existing elsewhere in the area?

5. Near East States

(a) How can government moves to increase control of oil business be discouraged? What justification is there for this development? Did Jersey’s departure from Egypt have advantageous effect?

(b) What will be the effect in the Middle East of latest ECA moves to reduce Persian Gulf product prices? Will completion of Tapline have any effect on prices? How useful is the application of U.S. prices to Middle East countries?

(c) Is there any danger of expropriation of oil properties in Egypt? What would be effect of expropriation on other concessions in area?

6. Problems suggested by company representations.

1. An undated reference slip attached to a copy of this paper noted that it was prepared by Funkhouser for McGhee for the files, as requested. A summary of the September 11 meeting with oil company officials was prepared by Funkhouser for McGhee on September 18. That summary is printed in U.S. Senate, Foreign Relations Committee, Hearings before the Subcommittee on Multinational Corporations of the Committee on Foreign Relations on Multinational Corporations and United States Foreign Policy, 93rd, Congress, 2nd Session on Multinational Petroleum Companies and Foreign Policy, Part 8, Appendix III, pp. 341 ff.