Foreign Relations of the United States, 1951, The Near East and Africa, Volume V

McGhee Files: Lot 53 D 468: “Petroleum”

Memorandum of Conversation, by the Officer in Charge, Arabian Peninsula Affairs (Awalt) and Richard Funkhouser of the Office of Near Eastern Affairs

confidential

Washington, October 30, 1951.¹

Participants:	Mr. Terry Duce, Executive Vice President, Aramco
	Mr. Floyd Ohliger, Vice President in Charge of Government Liaison in Arabia, Aramco
	Col. Eddy, Special Consultant, Aramco
	NEA—Mr. McGhee
	NE—Mr. Kopper
	Mr. Funkhouser
	Mr. Awalt

Summary:

Mr. McGhee expressed his pleasure at seeing Mr. Ohliger back again and hoped that his presence did not mean that there were grave developments in Arabia. Mr. Ohliger said that there were several issues raised recently by the Minister of Finance but that the problem which he thought most important of all had not yet become a demand on the part of the SAG. This, he said, was the growing interest among Saudi Arabs of purchasing stock in Aramco. This was true not only of wealthy merchants but also of some of the royal family including the Crown Prince who wished to invest money for his sons so that they could be financially independent of Government revenues in the future. The Company had suggested, Mr. Ohliger said, that they might invest in the parent companies but this was not acceptable to Saudi Arabs, first because they had less interest in investing abroad than in putting their money in Saudi Arabia, and second because investment in the parent companies would subject them to payment of a thirty percent income tax in the United States. Mr. Duce thought the urge to invest in home industry could be converted to development of satellite industries such as a fertilizer plant, lamp black industry, cement plant and ceramics which could be established in connection with the petroleum industry.

Mr. Ohliger was asked what objection there was to allowing Saudi Arabs to invest in Aramco itself. Mr. Ohliger replied that the sale of stock would offer the possibility of some of it getting into the hands of Jewish investors which would be objectionable to the SAG. He admitted, however, that it would be possible to control initial sales and to restrict transfer of stock by purchasers in such a way as to avoid Jewish investment. The real reason, it developed for Aramco objection to sale of stock was that there was only $11,000,000 of stock outstanding while the value of the firm exclusive of the oil reserves was substantially in excess of this amount. Consequently, any change in its stock position might require revaluation and subject the company to a very heavy capital gains tax.

Mr. McGhee asked whether there was likely to be any impact in Saudi Arabia of the firm’s liability to US taxation. Mr. Ohliger replied that there was none as yet but if taxes the company pays the Saudi Arabian Government are determined to be not deductible from US income tax, the SAG would undoubtedly crack down and insist that Aramco be made a Saudi Arabian corporation which would mean that no income tax would be payable in the US at all.

Mr. Ohliger said that there seemed to be developing in Saudi Arabia an urge to have a Saudi Arabian on the Aramco Board of Directors. This was prompted, he said, more by considerations of prestige than by any expectation that such a member could make an important contribution to their deliberations. Mr. McGhee asked why it would not be a good idea to appoint someone because of the good will which will undoubtedly arise from it. Mr. Ohliger disagreed saying that it would only enhance the prestige of the individual and not of the country generally. Mr. McGhee inquired whether the people of Saudi Arabia were generally satisfied with Aramco. Mr. Ohliger said that he was quite sure that such was the case although there was a considerable disappointment in the present loose control the King maintained over the country and his court. He added that these views were representative of about 25 percent of the population who were the more alert and substantial section of the population. He said that for the most part people were satisfied with the prospect of Crown Prince Saud succeeding to the throne. He stated that Aramco would have no difficulty in surviving the transition period when succession occurred even, he added, a forceful one if Saud’s succession is contested and if the event occurs in the next year or two. He could not guess what circumstances might prevail beyond that period.

Another demand made by the SAG, Mr. Ohliger said, was that the company relinquish the Dahana area from its concession. He expressed the firm belief that this request which emanated from Prince Faisal was prompted by pressure on the Prince from other interests who coveted the area for a separate oil concession. He suggested that these interests might be the Australian, Mr. Cotton, who spent several months in Arabian waters on his yacht the early part of this year, or the influential Alireza merchant family of Saudi Arabia. Prince Faisal had made the request, he said, on the grounds of the special religious importance of the Dahana area which could not admit non-Muslem enterprise there. Mr. Ohliger said the area had no religious significance whatsoever and the reason advanced was merely a pretext. The company had, therefore, refused the request of Prince Faisal and stated that it would give up areas in its concession only in accordance with the terms of the relinquishment program envisaged in the concession agreement. In this connection Mr. Ohliger said it was interesting to have learned (although he cautioned that no word of this should get back to Saudi Arabs because Aramco was not supposed to have the information) that Sheikh Abdullah Suleiman wrote to the King a week ago suggesting that all areas of Saudi Arabia outside the Aramco concession should be made over to British oil interests since the British had lost so much in Iran. Mr. McGhee expressed surprise that Sheikh Abdullah should be so considerate of British losses and so willing to assist them in Saudi Arabia.

Mr. McGhee inquired whether nationalization of oil in Iran would be likely to embarrass Aramco in Saudi Arabia. Mr. Ohliger replied that it could not do so for if Saudi Arabia wanted to nationalize, they would be glad to hand it over tomorrow and work out an arrangement with the Government for the operation of the company. The biggest ace in the hole for the company in such an event, he said, would be the necessity of the Government assuming the responsibility for operating costs which he said were running at the rate of $150,000,000 a year at present. Under the circumstances, he expressed his confidence that the company could work out an equitable agreement even under the cloak of nationalization. Mr. McGhee left to attend another meeting but remarked that he hoped that the outcome of conversations being conducted with Mr. Mossadegh would not embarrass Aramco.

The rest of the meeting was spent discussing (a) the $1.43 discount price and its effect on SAG–Aramco relations, (b) the possibility of accelerating the Aramco relinquishment program in order to satisfy SAG demands for new concession areas, (c) SAG demands that Aramco’s Jidda office be given more authority, and (d) precedents involving participation of local government and private investors in oil companies. Re (a) Aramco representatives stated that SAG had neither been told nor prevented from knowing that Aramco calculated its profit-sharing on a basis of $1.43 rather than the posted price of $1.75. Mr. Ohliger added that SAG was now asking for price information, that they would undoubtedly notice the price difference but that Aramco could explain this difference satisfactorily on the basis of customary discounts for long-term contracts. He admitted it might be more difficult to explain the fact that Aramco parents immediately sold the same oil for $1.75. Re (b) Mr. Duce repeated that the relinquishment program would not be speeded up but would follow the terms of the concession agreement. He added, moreover, that faster exploitation of unused areas could not be accomplished because of the supply problems involved, but agreed that the company might remain under attack for monopolizing so much of undeveloped Saudi Arabia. Re (c) Mr. Duce stated that this problem could probably not be resolved in view of the necessity of clearing important decisions with the four parent companies. Re (d) Mr. Ohliger stated that the Pacific-Western and Aminoil precedents had had no influence on local demand for stock participation in Aramco in that only private investors were involved. Mr. Eddy agreed that the incentive for local participation in oil operations would be difficult to divert to other industries and that the good effects of such industrial development might arrive too late to be of much help to Aramco in any short-run difficulties. Mr. Duce discussed the Venezuelan situation in which the Gomez family and their friends drew considerable personal profit from oil operations only to end up fleeing the country at the dictator’s death and the subsequent internal disturbances.

1. This memorandum was drafted during the period October 31–November 2.