McGhee Files: Lot 53 D 468: “Petroleum”

Memorandum of Conversation, by Richard Funkhouser of the Office of Near Eastern Affairs

Participants: Assistant Secretary McGhee
Colonel J. F. Drake, Chairman, Gulf Oil Corporation
Mr. D. Proctor, Vice President and General Counsel, Gulf Oil Corporation
NE—Mr. Funkhouser

Colonel Drake stated that his company anticipated Kuwait demands for a profit-sharing arrangement following the Aramco model. Although Gulf would expect to stop Kuwait demands considerably short of Aramco royalties (estimated at approximately 56¢ a barrel for 1950) the company would like to put itself in a position to obtain the same U.S. tax credit Aramco expects to get, thus taking major burden of any royalty increase off the company. Any sharing of profits formula as well as the tax credit, according to Colonel Drake, was now prevented by the corporate set up of Kuoco and its non-profit provisions. [Page 279] The Kuwait Oil Company is a British Corporation which sells oil at cost plus one shilling.

Colonel Drake stated that the company was considering corporate changes whereby the Gulf share of Kuwait oil would be owned directly by an American company with a British subsidiary operating the concession at the present arrangement of cost plus one shilling. U.S. company would sell oil at world prices, show taxable profits and, if Kuwait levied an income tax, would be in the Aramco position of obtaining U.S. tax credit. Colonel Drake indicated that some opposition could be expected from the British to this arrangement but believed that the British would have the same control over Kuwait operations as exist under the present arrangement. Colonel Drake stated that he wished to inform the Department of these ideas and hoped that he could count on the Department’s support for making these changes.

Colonel Drake reviewed briefly the background of the Kuwait Oil Company showing acquisition of the Kuwait concession was due exclusively to Gulf’s efforts and that they had only been prevented from obtaining a 100% American concession by the Foreign Office. It was at that time that Foreign Office insisted that not only half the concession be given to the Anglo-Iranian Company but that the American share should be worked through a British subsidiary. Mr. Proctor stated that Gulf would approach the Bureau of Internal Revenue on the tax free reorganization which they hoped to effect.

Mr. McGhee in answering different questions stated inter alia that the State Department as in the case of Aramco could not advise oil companies on specific terms which should be offered concessionary countries. In the case of the Aramco contract, the Department did not recommend that the 50–50 arrangement be offered nor was the State Department called to approve the contract once it was signed. He stated that Gulf might be well advised to discuss the tax features with the Treasury Department and particularly pointed out the possible danger of being made a party to any avoidance of U.S. taxation. Mr. McGhee stated that as in the case of Aramco the U.S. Government would be glad to support the company in its negotiations with the Sheikh of Kuwait along general lines should such support become necessary. Mr. McGhee felt however that the British Government was in the best position to assert influence on the Sheikh of Kuwait and could be counted on to do their best to keep the Sheikh’s demands within reason.

Mr. McGhee stressed the importance of encouraging the Sheikh of Kuwait to put any increased royalties to capital formation, development of useful facilities, education, etc. Putting these additional royalties to optimum use would also be facilitated by presence of British advisers on the spot.

[Page 280]

It was felt that the British could agree to the corporate change suggested by Gulf, particularly in that it appeared that British control would be in no way jeopardized and in that their pressure on the company to give up 50% of their concession and to work through a British subsidiary seemed to place on them an obligation to put the American company in the position to take advantage of any tax benefits which Anglo-Iranian Oil Company would be able to profit by.

Mr. Proctor stated that another reason for Gulf’s desire to change the corporate structure of their Kuwait operations was a fear that the British Government might move farther into the nationalization of industry; Gulf would be most reluctant to have its properties in Kuwait taken over by British Government nationalization of Kuwait Oil Company, Ltd.

Colonel Drake stated that in arguing for less than the 50–50 profit sharing deal it would be mentioned that Kuwait oil was of lower quality and value than Saudi Arabian and Iranian oil, that it was recognized by ECA price schedules that transportation of Kuwait oil was more expensive than either Iranian or Saudi Arabian oil; the Trans Arabian pipeline, it was added, made it even more difficult for Kuwait to make the same profits as Aramco. Colonel Drake minimized chances of any early completion of the Middle East pipeline in which he stated Gulf could obtain a position if they so desired.

Colonel Drake stated that he was sailing for London March 2 for talks with AIOC and the U.K. on the above matters, promised to keep the Department informed of any developments, and thanked Mr. McGhee for the informative discussion. Mr. McGhee stated that the Department would give these problems close attention and reaffirmed the Department’s interest in assisting Gulf in any foreign problems which developed.

  1. This memorandum of conversation was drafted on January 17.