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

Memorandum by Mr. Richard Funkhouser of the Office of African and Near Eastern Affairs to the Assistant Secretary of State for Near Eastern, South Asian and African Affairs (McGhee)

secret

[Washington,] September 14, 1950.

Subject: Discussions with British on AIOC

It is recommended that the whole question of the AIOC Supplemental Agreement¹ be explored with the Foreign Office with the following emphasis:

(1) We have no doubt in our minds that Persian Gulf oil operations have been and continue to be exceptionally profitable from a commercial standpoint, particularly AIOC operations. It is sophistry to suggest oil companies can’t pay and do much more.

(a) We know Aramco paid off its total investment in five years of operations. AIOC has been operating for 40 years with production costs under 10¢ a barrel and the price of crude oil at $1.00 to $3.00 a barrel. Greatest Iranian development took place chiefly during a period of lowest costs.

(2) We recognize that Middle East states are demanding and cannot be prevented from obtaining an increased share of benefits (financial and otherwise) from foreign oil operations.

(a) The 50–50 sharing of profits agreement in Venezuela, wherein Venezuela earns three times total benefits to all Middle East states, is well known in Tehran.

(b) Saudi Arabia has been earning over the past three years royalties now promised but not yet paid by AIOC.

(c) If Pacific Western finds production in the Neutral Zone, it seems apparent that royalty rates throughout the Middle East will again be revised upward. Oil consultants have advised the Department that there is little doubt but that Mr. Getty will be able to sell his oil.

(d) In view of Saudi Arabian demands for renegotiation of the entire 1933 Aramco concession contract with special emphasis on a Saudi Arabian income tax, it might be to AIOC’s advantage to obtain early acceptance of the less onerous terms of the Supplemental Agreement before revision of the Aramco contract takes place. The income tax feature could involve as much as $45,000,000 a year which is the Aramco income tax in the U.S. and the sum paid by Creole to the Venezuelan Government on production equal to AIOC’s.

(e) The strongly nationalistic tendencies of Near East states might be emphasized and some comment made about our inclination to treat seriously Razmara’s threatened cancellation of the AIOC concession.

(f) The AIOC problem is simplified by disagreement over only non-financial terms.

(g) The Department has in the past and will continue in the future to discourage excessive demands by the Iranian Government and other governments in the Middle East. It might be mentioned that our Petroleum Attaché, Lager, informally took an exceedingly strong position in favor of the Supplemental Agreement offered Iran by AIOC. We are trying to obtain a period of relative stability regarding financial terms of concession contracts.

(3) Razmara has demanded:

(a) Installment payment of royalties due under the new agreement. Purpose: implementation of 7-year plan, political stability, and improved atmosphere for Majlis ratification.

(b) Four points to sweeten agreement in order to obtain Majlis ratification. (1) Ten-year Iranization program. (2) Examination of AIOC books in order to check on Iranian share of profits. (3) Oil prices in Iran equal lowest given any other customer. (4) Inspection of oil production exported.

(4) AIOC has agreed to give Iran an advance of 8 million pounds and to study some means of sweetening the agreement. The advance amounts to merely paying royalties on a current basis (old rate) rather than when due at the end of the year. It is a small concession. The 8 million pounds will go a long way toward balancing the Iranian budget but will contribute little to the solution of the other major issues, i.e. implementation of the Seven-Year Plan, ratification of AIOC agreement, stability of Razmara Government.

(5) Our position should be to urge the Foreign Office to accept Razmara demands.

(a) Sums due under the Supplemental Agreement (as of January 1, 1949) amount to 23 million pounds. This advance or a large part of it would provide funds necessary for economic progress, political stability, would, if properly publicized, improve the atmosphere for ratification of the agreement.

(b) None of the four non-financial points mentioned by Razmara seem, in our opinion, unreasonable or of a scale of importance which can compare with what new financial demands (such as an income tax) Iran might make or with the issues at stake, i.e. ratification of the agreement, life of the concession, stability of concession contracts in the area, economic progress and political stability in Iran, and stability in the world oil supply picture.

(6) You should emphasize the world oil supply picture. According to our oil companies, loss of Iranian oil could not he replaced. The Korean war has already created shortages even with U.S., Venezuela, and Middle East production at record levels. Europe has only six weeks stocks and, as Ministry of Fuel and Power representatives told us, three months would be required to divert Western Hemisphere supplies to AIOC normal markets (if supplies could be found). Ministry of Fuel and Power representatives were alarmed at this situation and the lack of U.S. plans to supply Eastern Hemisphere markets in such an Iranian emergency. While admitting the need for and promising to speed up U.S. oil mobilization plans, we told these representatives in effect that we felt that (a) first responsibility lay with the U.K. Government to take corrective action in Iran, (b) the situation in Iran demanded exceptionally liberal treatment.

(7) Mr. Loftus’ comment on our September 11 oil talks:

“On the AIOC matter I think the most important conclusion that emerged from the oil discussion was that every sign points to the probability that the British Government is trying to ride two horses and is not really anxious to effect a settlement of the AIOC dispute on reasonable terms. The unanimous view of the company representatives that the Iranian position is reasonable and that compliance with it would be a sound commercial proposition indicates clearly that AIOC could not be holding out against a settlement unless it were not really being urged by the British Government to effect a settlement. This is perhaps the most important point for Mr. McGhee to have in mind in his London discussions.”

1. For further documentation on the interest of the United States in the negotiations between the United Kingdom and the Anglo-Iranian Oil Company, see pp. 445 ff.