McGhee Files: Lot 53 D 468: “Petroleum”

Memorandum of Conversation, by Richard Funkhouser of the Office of Near Eastern Affairs1

confidential

Subject: IPC Negotiations in Iraq

Participants: Mr. Charles Brewster, Socony
Mr. Thomas Kelly, Socony
Mr. Paul Anderson, Jersey
NE—Mr. Jones
NE—Mr. Funkhouser
NE—Mr. Barrow
NE—Mr. Kopper
PED—Mr. Eakens

On July 27, 1951 Messrs. Brewster and Anderson discussed the IPC offer to the Iraq Government, the main points of which were:

(1)
50/50 profit-sharing before foreign taxation.
(2)
Applicable to all three concessions in Iraq.
(3)
Minimum annual royalty never to be less than the value of 25% of the oil produced.
(4)
One-eighth of the oil produced payable in kind.
(5)
Payments retroactive to January 1, 1951 for IPC concession and January 1, 1952 for MPC and BPC concessions.
(6)
If signed by Council of Ministers, agreement to be put immediately into effect.
(7)
For payments to continue agreement must be ratified by May 1, 1952, otherwise reversion to present status.
(8)
IMF rates used throughout.
(9)
Production program of 22 million tons a year by January 1954 from IPC and MPC; 8 million tons a year by December 1955 from BPC.

Other points made included:

(1)
New York officials did not know of reported letter exchange allowing the Iraq Government to reopen negotiations if outcome of Iranian problem resulted in more beneficial terms to Iran.
(2)
Not known whether oil for the Iraq refinery would be over and above one-eighth now allowed.
(3)
Unclear as to terms covering disposal of Iraq share of crude.
(4)
IPC promised to step up completion date of 30-inch pipeline to April 1952, at which time 100,000 barrels a day would move through the pipeline. Use would be made of northern half of inoperative Haifa pipelines. Company felt that this move which cost the company $3,000,000 extra had been a help in the negotiations. The company has little concern over export licenses for steel pipe now since all but 60 miles, due in October and November were assured.
(5)
IPC partners expect to go through involved reorganization establishing local subsidiaries be established in Iraq to buy crude oil at cost from IPC, to transport the oil to the Iraq border and to sell the oil at international prices back to IPC parents. The profits of this operation will be subject to an Iraqi income tax which will result in the 50/50 profit-sharing on all IPC operations within Iraq exclusively.
(6)
IPC calculated its costs at 23 shillings per ton at this time, decreasing to 13 shillings per ton after the 30-inch line is opened. The selling price of crude over the same period is presently calculated at 94 shillings per ton, decreasing to 73 shillings per ton. 94 shillings minus 23 shillings equals 71 shillings or 66¢ a barrel. Thus, it appears that Iraq royalties will be greater than those in Saudi Arabia due primarily to greater benefits resulting from closer proximity to major markets. The profit on Saudi Arabian crude is determined on the basis of Persian Gulf prices or $1.43 whereas Iraq values its crude at $2.41 Sidon minus pipeline charges to Kirkuk. Saudi Arabian authorities can be expected to examine this price question closely.
(7)
The view was expressed that the greatest asset in the new agreement would currently lie in its propaganda value, i.e. all major producing states in the world, Venezuela, Saudi Arabia, Kuwait, Iraq, had now been offered or adopted the Venezuelan 50/50 profit-sharing formula. This could be used as a stabilizing platform for the concessions themselves and for the impact on opinion in Iran.
(8)
All agreed that many things could prevent final ratification of the agreement, that the two years delay over the AIOC-Iran ministerial agreement in Iran might be paralleled, that events in Iran probably provided the chief determinant as to whether an Iraqi Government and/or Parliament could see their way clear to sign this agreement.

  1. This memorandum of conversation was attachment B to a memorandum from Funkhouser to McGhee, dated October 12, concerning an appointment that afternoon with Ambassador Bonnet, who was expected to discuss the IPC Agreement, among other topics (McGhee Files: Lot 53 D 468: “Petroleum”). Attachment A was a copy of an airgram to Paris, not further identified and not found attached, and attachment C was a copy of telegram 1535 from London, September 26. For additional information on telegram 1535, see the editorial note, supra.
  2. This memorandum of conversation was prepared on August 13.