McGhee Files: Lot 53 D 468: “Petroleum”

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


Subject: Discussion of AIOC Problem with U.S. Oil Companies Operating in Middle East

Participants: NEA—Assistant Secretary McGhee
Jersey—B. B. Howard, P. Anderson, G. Keogler
Gulf—R. Rhoades, C. Wisner
AramcoJ. T. Duce
SoconyJ. C. Case, T. Kelly
Caltex—(Bahrein Petroleum Co.) W. H. Pinckard, M. Lipp
Pacific Western—B. B. Hadfield
Superior—R. Johnson
GTI—Mr. Rountree
GTI—Mr. Ferguson
NE—Mr. Jones
NE—Mr. Funkhouser
PED—Mr. Moline

Mr. McGhee reviewed in particular detail the history of the AIOC controversy in Iran including past and present political developments. Mr. McGhee stated that our objectives in order of importance were to maintain peace, to keep Iran on the side of the West, to maintain the flow of oil, and to protect concession rights in Iran and other parts of the world. He stated that it had been and continued to be the U.S. view that as a minimum nationalization had to be accepted as an accomplished fact. He stated that the U.K. to date had not made an offer which we felt had any chance of being accepted by the Iranians. Unfortunately, our position and activities vis-à-vis either the Iranians or the British could not be profitably made known to the public at this time. If we made it known that we favored British acceptance of nationalization in order to salvage at least an operating contract, the U.K. would believe their position sabotaged. There also could be adverse consequences in other oil producing states to such a public U.S. acceptance of nationalization. On the other hand, if we publicly opposed nationalization, the Iranians would accuse the West of conspiracy and there would be a good chance that they would turn their backs on the West. Mr. McGhee mentioned that we could not oppose on legal grounds the sovereign right of a foreign state to nationalize and even if there were no such legal position [Page 310] and precedent there existed no effective means of persuading Iranians to revoke nationalization other than by the use of force. We considered force no solution even if we were in a position to use it.

Mr. McGhee stated that the U.S. position could be expressed in simple terms: We were urging the U.K. to come up with an offer which was capable of being accepted in Iran. This we would support fully. We had reason to believe our course in Iran had placed us in a position where our influence still meant something. We were also forcefully pressing the Iranian Government to sit down with the British to discuss the problem and we were pointing out all the difficulties Iran would face trying to operate the oil fields without AIOC.

Mr. McGhee mentioned that the U.K. press had accused the Department of not supporting the U.K. position, of forcing them to accept nationalization which we ourselves do not favor, of permitting the development of a situation out of which U.S. companies would profit which was the Commie line. Mr. McGhee described how important it was for us to prevent US–UK relations from becoming more strained at this point. Mr. McGhee added that on the other hand Iranians were highly resentful of the US–UK high level discussions on the Iranian oil problem and other indications that the U.S. and U.K. were ganging up on Iran to prevent nationalization. Mr. McGhee mentioned the delicate position which currently obtained in Iran, stressed the deep feeling of xenophobia, and added that nationalism was a force which usually proved successful. The U.S. Government was anxious to keep that nationalistic fervor working at least not counter to aims whereas the activities of the Tudeh were endeavoring to align the Nationalists with their objectives.

Mr. McGhee asked for the individual company reactions to our handling of the Iranian situation, what the industry as a whole felt about the possibility of U.S. companies involving themselves in Iran, what impact Iranian nationalization was having in their concession areas and what could be done to protect their position in their different concession areas. Mr. Keogler expressed the following views (a) The U.S. Government might make a firm stand publicly and privately against nationalization and unilateral cancellation of contracts; (b) it was disadvantageous to have the Iranian Government decide what damages should be paid to the company; (c) Iranian oil was in effect already nationalized so that nothing necessarily need be changed; (d) there would be an adverse impact on all other contracts in the world if Iranian expropriation were successful; (e) American businessmen would be discouraged from operating anywhere in the world if such lawlessness and such legal interpretations proved successful; (f) international law was principally made up of accepted or unaccepted principles which were subject to extremely varied interpretation; (g) it might be necessary to develop the proper [Page 311] international principles to reach a successful solution of this vital international problem and (h) perhaps the U.S. Government or U.S. industry should indicate that they would not handle the oil. Mr. Case stated (a) that this might be a time to use force since such vital oil could not be allowed to be lost; (b) that nationalization in the U.K. was different from Iranian nationalization in that to his best knowledge no foreign interests were directly affected by nationalization in the U.K.; (c) that if international law could not support opposition to nationalization then the matter should be decided on the basis of fundamental principles which should not allow such arbitrary action and disregard for the international obligations and responsibilities which all sovereign states should accept; (d) that Iran would face many difficulties over the years by such action; (e) that Iranian production might fall off drastically and development move ahead faster in other regions in order to make up the loss for Iranian oil; (g) that there were many difficulties involved in attracting technicians, obtaining supplies, equipment, in keeping up with technical improvements, and in paying compensation to AIOC if such in fact were contemplated. Mr. Howard stated that Iranian credit would be seriously impaired and Iran’s future adversely affected by the loss of foreign capital. Mr. Brewster felt that some of these fears and reactions might be publicized by industry and that industry might particularly speak its mind on the inadvisability of U.S. companies involving themselves in Iran. Mr. McGhee asked if the other companies represented had similar opinions regarding the inadvisability of working in Iran at this time. Different company representatives stated that this was entirely true as regards their own companies but could not speak for the industry as a whole. It was the consensus that the industry itself could not take steps to dissuade those not represented at this meeting from adopting similar policy. Not only was the expression made that the Justice Department and the Federal Trade Commission would have objections to this voluntary “restraint of trade” but that any industry ban would be disregarded by any company so interested. Mr. Howard expressed the view that if any U.S. group went in it would amount to cutting the industry’s own throat since “concession jumping” would be fatal for concessionaires in other parts of the world. “Highway robbery” was the expression used by Mr. Case and he stated that it could not be possibly considered by responsible companies. Mr. Pinckard added that it would probably be most embarrassing to the U.S. Government at this point as well as to U.S. industry. Mr. Pinckard also stated that the time might conceivably arrive however when it might be advisable to have U.S. technicians rather than technicians of an unfriendly country.

Mr. McGhee asked the group if they knew of any U.S. companies actively discussing operations in Iran. Only negative responses were [Page 312] made to that point. Mr. Howard mentioned that the Ryan group was interested in getting the Basra concession away from the Iraq Petroleum Company and that operations in Iran might similarly have appeal to this group but made it clear that he had no indication that such was the case. Mr. McGhee stated that he had felt that this would be the position that American companies would take and he fully concurred with the thought that aloofness on the part of U.S. industry would seem appropriate at this time. He mentioned that were American interests to offer to run AIOC’s installations our relations with the U.K. would be seriously affected and that the opportunity for the U.K. to pick up the pieces from this controversy would be lost. This it was stated was the party line which the Communists were currently exploiting; unfortunately it was being given press support in the U.K. McGhee also agreed however that if it appeared that situation so deteriorated that it became a choice between either Communist technicians or U.S. technicians, the Department undoubtedly with U.K. support would have already urged U.S. companies to take action.

In answer to the varied views and suggestions by industry representatives, Mr. McGhee expressed the following positions. He reiterated and re-emphasized the Department’s dilemma with regard to public statements as listed above, i.e. alienation of either the U.K. or Iran with consequent adverse effect on any compromise. Mr. McGhee developed the U.S. position regarding nationalization at considerable length stating that there were many precedents for nationalization, that the government position had been and continued to be in accordance with U.S. international declarations and agreements that we could not oppose the right of sovereign states to nationalize as long as prompt and effective compensation were paid. He referred to the Mexican, Bolivian and Central European expropriations. He mentioned that the oil industry was fully experienced, however unhappily, with the facts and precedents in this regard. He stated our Legal Advisers felt that no court of international law would reverse any Iranian decision to nationalize even if jurisdiction over such a problem were accepted. It was stated to industry representatives that even assuming there had been no contrary body of legal precedent and opinion in this respect, there existed no known method other than the use of force making the Iranians reverse their nationalization decision. This was perhaps the real key to the situation; the legal aspects providing the shadow of the problem, how to apply pressure in any effective way was the substance. “Nationalization” sentiment in Iran was ubiquitous and deep-seated; it was confused with “independence”. It was doubted whether even threats to boycott Iran by U.S. companies would be effective or appropriate in view of the fact that Iranian oil, particularly Abadan production, was currently irreplaceable, that Iranian [Page 313] xenophobia went so deep that failure to sell their oil would be preferred to revoking nationalization and that such a boycott would provide an opportunity for Russian action. Mr. McGhee stated that the U.S. Government here and in Iran was continuing to impress the Iranians with the difficulties of developing their oil resources without the Anglo-Iranian Oil Company and specifically mentioned the shortage of technicians, specialized material, tankers and other facilities, the adverse impact on the Iranian economy of inefficiently handled oil development, the tendency for traditional Iranian customers to develop more stable alternative sources of supply to the long run detriment of Iranian oil development, and the difficulties of attracting other foreign capital into Iran following unilateral cancellation of a legitimate contract. Mr. McGhee stated although we could not make a strong stand against the sovereign right of a foreign state to nationalize, we were strongly opposing unilateral cancellation of contracts. Mr. Hadfield expressed the view that this too would appear to be a tenuous position since the sovereign state could divest private individuals of property rights and there was little difference between property rights and contractual rights. He advised against taking refuge in what he considered a weak position.

Mr. Howard stated that it was tragic that there was no solution to this problem. Mr. McGhee stated that he could not concur that there was no solution and indeed felt that there was no reason for the Anglo-Iranian Oil Company not to continue operating in Iran, that it depended on the way the British behaved and how we acted in bringing this situation about. Mr. Howard expressed the view that the next move would appear to be up to the British and that they should make an offer which was capable of being considered favorably by the Iranian Government. Mr. Howard wondered whether the U.S. Government felt that the policies of the Anglo-Iranian Oil Company were conducive to such a settlement and specifically asked whether the Department had confidence in Sir William Fraser’s ability to facilitate the resolution of this problem. Mr. McGhee declined to state the Department’s views on the individuals concerned with AIOC policy and added that it was unnecessary to describe AIOC’s method of operating to American industry representatives.

Mr. McGhee stated that the U.S. Government highly valued the prestige which it had developed not only in Iran but in the Middle East area and although we had to be extremely careful about risking this prestige, it was urgent to go as far as we could to support the continued operations of the British oil company. Mr. McGhee described various types of operating arrangements which U.S. Government felt could meet the irresistible Iranian demand for “nationalization”. He stated that the government was fully aware and had been [Page 314] for at least the past year of the potential danger which nationalization of AIOC would have on other concession contracts in the world. It was obvious that if Iran won better terms than the profit-sharing agreement or in other words if nationalization proved successful, it would be difficult to prevent other oil producing states from moving the same way. The dilemma was particularly acute since the West might have little alternative but to try to make whatever form of “nationalization” resulted in Iran a success.

There was some discussion of how to resolve the dilemma of opposing sovereign rights of governments to do anything they wanted within their own boundaries. No mention was made of the possible usefulness of some international oil forum to which both countries and companies could turn. Mr. Duce subsequently mentioned that in the last analysis no contract could keep an oil company secure if the foreign state wished to make it difficult for the company to operate and that the only practicable solution was to keep the government satisfied with the company operations.

Mr. Rhoades mentioned that even if a contract violation were established, there would be no apparent means of collecting damages since the Iranian Government had ultimate control in determining the amount of such payments. Mr. McGhee stated that compensation was the last thing AIOC wanted. He reported that there was no satisfactory basis for protecting AIOC against nationalization and that in the view of our lawyers Article 21 did not override the sovereign right of Iran to make that decision. He added that the U.K. did not take the position that Iran could not nationalize. Mr. Pinckard stated that it was probably difficult for the British Government to take a strong stand against nationalization in view of their own actions in this field.

Mr. McGhee stated that the U.S. Government was anxious to employ induction rather than coercion to Iran. He felt that threatening Iran could result in a break with the West. The limitations however which would apply to such a forceful policy in Iran might not necessarily apply however to similar moves in other oil areas. He expressed the view that concessions in other parts of the Middle East and Latin America seemed relatively secure from nationalization. He felt that the example which Aramco had set in its fast, effective negotiations with the Saudi Arabian Government was the way to secure the stability of other concessions by “keeping ahead of the game” and by removing pressures before they became acute.

Different industry comment was made expressing the view that Iranian oil was essential to the West, that Iran was negotiating with an effective gun in the back of AIOC, that the West was not in a position to threaten Iran as effectively as Iran could threaten the West, that the industry had some skepticism over whether or not companies [Page 315] not represented at the meeting would make advances to Iran regarding the development and handling of Iranian oil and made some expressions of criticism regarding reported AIOC moves such as cutting off advanced royalty payments. Regarding a public statement which would serve to protect the validity of concession contracts in other parts of the world, industry representatives expressed various conflicting views which resulted in deferring to whatever decision the Department believed best.

Mr. McGhee stated that if it were possible to find any silver lining to the serious storm which existed, it might be that if any Iranian leader could make an agreement with Anglo-Iranian Oil Company and get away with it, it would have to be a man as popular as Mossadeq. Other favorable features of Mossadeq’s current power were that he was honest, he was anti-Russian, he had promised that Iranian oil would continue to its present consumers and that British technicians would continue to be used.

Mr. McGhee ended by expressing the hope that the Department had described to the satisfaction of industry the complexities of the Iranian problem, the merits and demerits of the bad alternatives now open and the policies and action which the Department followed and was contemplating. He apologized for holding the industry representatives for such a long meeting. He hoped to obtain the confidence and continued advice of the oil companies primarily affected by these developments. On behalf of the industry representatives Mr. Pinckard thanked Mr. McGhee for his thorough and detailed explanation of the problems involved in the Iranian issue and expressed sincerest congratulations for what he considered the best possible handling of an “impossible” situation.

  1. This memorandum was prepared on May 18.