880.2553/3–2651: Telegram

The Chargé in Jordan ( Fritzlan ) to the Department of State 1


164. From McGhee. In effort clarify question of future of oil concessions in Middle East, which at present preoccupies not only Iran and Iraq but to a considerable extent all Middle East producing and pipeline transit countries, fol is put forward to Dept as well as to capitals concerned for comment as background for my discussions in London on April 2 and 3. I will naturally not expect go further than informal exchange of views. The fol conclusions are proposed with respect to the issues involved (Egypt being excluded as a special case):

That the question can only be resolved by establishment of more precise and comprehensive US–UK Middle East oil policy and by closer coordination of future US–UK action.
That financial receipts, at least by SAG, Iran and Iraq, shld be on the same or on a demonstrably comparable basis. Kuwait, Bahrain and Qatar might be persuaded catch up gradually in light of their lesser needs.
That the basis for receipt shld be simple enough to be generally understood in the countries concerned, shld provide a return per barrel at least equal to that under the new Aramco contract, and shld not sound less equitable than the 50–50 concept. This is complicated by the fact that Aramco’s 50–50 arrangement is after US taxes and consequently can never provide a uniform basis as between US and UK companies. It is difficult, on the other hand, to see how AIOC can settle for less than 50–50 before taxes, which, with profits from other operations even if restricted to those in Iran, wld probably put AIOC ahead of Aramco and weaken Aramco’s contract. Organizational structure of IPC does not of course, lend itself to the 50–50 approach.
That over a period of time allocation of production between countries shld be related to their productive capacities and financial needs. Iraq is the only country with any real complaint along this line at present.
That full benefits to peoples of producing countries and consequently full appreciation contributions of US, UK and companies, can only take place if all receipts are invested in sound development projects which will constitute permanent compensation for depletion principal physical asset producing countries possess.
That the present failure of certain producing and transit countries to get refining capacity adequate for their needs and the present pricing system for petroleum products, constitute greater liabilities to the producing companies through irritation which threatens their producing and transit concessions, than can be compensated for by the profit derived by the same countries as marketers. A “basing point” pricing system is subject to legitimate criticism by both producing and transit countries. One cannot defend the principle that the price of coal in. Newcastle shld be that in Pennsylvania plus carriage to Newcastle.

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In light of the foregoing, the fol course of action is suggested for consideration:

1) That the US and UK, after consultation with their companies concerned, make at the earliest opportunity a joint statement of Middle East oil policy based insofar as possible on the above conclusions. Such a policy might state at the outset that both govts consider the oil resources of Middle East to be the inalienable and indisputable natural heritage of the peoples of Middle East who must in the final analysis receive the benefits from its exploitation and whose govts are its ultimate owners.

Such a declaration might point out, however, that in light of the unique capital, technical and admin contributions which western oil companies have made and can make and the fact that production of oil in Middle East is dependent on outside markets which have been developed by western companies, a basis exists for fair contracts between Middle East Govts and companies assuring maximum financial realization to Middle East countries and fair returns to companies and at same time permitting both make maximum contribution toward a common effort.

It might be further pointed out that such contracts shld result in working partnership between countries and companies which shld make question of nationalization irrelevant. Since experience all over the world has shown that the principle of sharing of profits between country and company is an equitable arrangement and one conducive to the interests of both parties the US and UK Govts support this principle as a policy in the Middle East.

The proposed declaration might also include some gen statement to the effect that allocation of production between countries shld be on an equitable basis, and that receipts from oil shld, in justice to Middle East peoples whose fast depleting oil is their principle asset, be invested in sound economic development projects.

The declaration might further state that producing and transit countries shld be assured adequate supplies of refined products at fair prices related to actual costs, and that this shld be done in the manner best suited to the desires and interests of the country concerned. It is suggested that nationalization of distribution in those countries desiring it might to a considerable extent relieve pressure for nationalization of production, and that if this proves to be the case the companies might be well advised to assist the govts in developing the necessary marketing facilities.

2) In execution of the foregoing policy, it might be best, at least at the outset, not to attempt to clarify the complex issue of whether the 50–50 split is before or after taxes of the country in which the company is domiciled for reasons previously given. It would appear preferable to either: (a) let each company work out with the country concerned what the 50–50 arrangement actually means in practice and how it shld be implemented, attempting if fair not to exceed the Aramco per barrel figures, or (b) adopt a flat royalty rate per barrel, adjustable from time to time, based on the Aramco formula, which could be offered Iraq and Iran, and possibly later the smaller sheikdoms. Since the Aramco formula appears to be generally regarded in [Page 291] the Middle East as a fair basis and is at present the most favorable in the Middle East, it might be accepted without further clarification of the tax issue and provide a relatively stable base for all countries for an indefinite period. Such action may, however, serve to highlight the tax issue.

3) Since the move for nationalization has gone so far in Iran special measures will probably have to be taken to reflect this fact. Probably, as in Mexico, the word concession must be abandoned. Perhaps the oil resources must be placed ostensibly under the control of some Iranian auth, which in turn will negotiate and supervise an operating agreement with AIOC providing for suitable AIOC technical control and 50–50 division of profits. The solution may take the form of an Iranian company with AIOC represented and having operating, if not ostensible control. It is believed that generous concessions of a formal nature wld be justified if the ultimate objective, which shld be to assure operational control by the companies and adequate profits to reflect their past investment and to justify their continued participation as operator, is achieved. It is hoped that the Brit companies are by now sufficiently chastened to recognize this as a Middle East fact-of-life. It is believed that the US Govt shld not allow itself to get involved in the details of any new agreement such as the extent to which AIOC profits outside Iran are included.

4) The joint US–UK declaration might envisage creation of a neutral commission, with US representation, to arbitrate any points of issue involved in putting into effect the proposed new policy.

5) It is believed that participation in a declaration corresponding to that above might, without getting the US Govt directly into the Iranian and Iraqi negots, provide useful basis upon which AIOC and IPC can have some hope of negotiating a stable agreement with their respective govts. It shld also serve to stabilize the situation in Saudi Arabia, Syria, Lebanon and the Sheikdoms. It is believed that such a declaration shld preferably be made prior to the report of the Majlis Oil Commission now scheduled in about two months.

The comments of all addressees are invited. [McGhee.]

  1. Repeated to Tehran, Baghdad, Jidda, London, Damascus, and Beirut.