887.2553/11–2351
Memorandum of Conversation, by Richard Funkhouser of the Office of Near Eastern Affairs
Subject: New IPC Agreement with Iraq
| Participants: | Mr. C. S. Brewster, Socony Vacuum Oil Company |
| Mr. Paul Anderson, Standard Oil Company (New Jersey) | |
| Mr. Thomas Kelly, Socony Vacuum Oil Company | |
| NEA—Mr. A. F. Lager | |
| NE—Mr. Kopper | |
| NE—Mr. Gnade | |
| NE—Mr. Funkhouser | |
| PED—Mr. Eakens |
Mr. Brewster reviewed developments surrounding the September and October negotiations with the Iraqi officials in London. He described the long hours of work required of the lawyers representing the five groups; he mentioned that the Iraqis showed complete cooperation during the negotiations; he stated that their only preoccupation [Page 340] was to remove points from the new contract which would be seized on with profit by the opposition and to develop phraseology which could be translated comprehensibly into Arabic. Mr. Gibson, IPC General Manager, was the official IPC negotiator whenever Nuri was involved; with Pachachi and Mahmoud, Herridge and Lawson of IPC handled the negotiations. Various representatives of the different groups were brought in when specific problems arose. Herridge and certain IPC lawyers were back in Baghdad putting the legislation, contracts and translations into final shape for the reopening of the Majlis in December. They would remain on hand to answer questions during the debates. Nuri was quoted as being confident of early ratification.
Mr. Brewster stated that the IPC agreement consisted of the original agreement, amendments to the original agreement and a new agreement. He stated that there was no agreement with regard to the passage of the necessary income tax legislation. Whereas the companies desired an income tax passed before the new agreement was ratified, the Iraqis claimed that the opposition would prevent them from passing such legislation without having first debated the merits and demerits of the agreements for which the income taxes were intended. The company was proceeding on the assumption that the tax law had been passed. It developed that IPC would pay its income tax on a current basis. This differed from the Aramco case in Saudi Arabia and was likely to give Aramco trouble.
The company tried to tie the contract to IMF rates but settled on making the contract a sterling agreement in which they were free to deal at prevailing sterling rates. The Iraqis wished to have their sterling payments made only in Baghdad. An agreement was worked out allowing the company to pay pounds to an Iraqi account in London or supply Baghdad banks with London bankers’ drafts. The Iraqis tried to get a commitment from the British Government to the effect that the U.K. would never block Iraqi sterling balances as was done in the case of Iran. The U.K. Government was unable to make this guarantee but a compromise was reached with the U.K. Government guaranteeing that sterling involved in oil development would not be blocked.
In case of disagreement over payments the agreement calls for a 90 day cooling off period before the Iraq Government is permitted to suspend shipments. It provides for an additional 90 days before the Iraq Government can cancel the contract. These clauses can only be invoked upon failure of the company to make proper monetary payments. Failure of the company to fulfill any other obligations is not involved in oil suspension or contract cancellation clauses.
To implement the new agreement Socony is forming four subsidiary companies, one U.S. and one U.K. company each with subsidiaries [Page 341] in Iraq. Each of the other partners in IPC will form at least one Iraq subsidiary each; the Iraqi subsidiaries are required in order to take advantage of the income tax route. The U.K. subsidiaries will handle oil trade within the sterling area; the U.S. subsidiaries all other trade. For example, Socony will assign its assets in the Near East Development Company to a new 100% subsidiary, Socony Overseas Supply Company. Socony Overseas Supply Company will have a British subsidiary, Standard Fuel Oil, Ltd. and an Iraq subsidiary as well. Standard Fuel Oil, Ltd. will also have an Iraq subsidiary for sterling area trade. The French on the other hand can avoid French taxation by forming a Moroccan subsidiary and its Iraq incorporated counterpart.
The Iraq subsidiaries of IPC partners will buy Iraq crude at the prevailing rate of “cost plus a shilling”, carry the oil to the Iraq border where it will be sold back to the original company at world prices and a profit thus made. It will be on this profit that a 50/50 profit-sharing arrangement will be based. The details of this arrangement include the following points. (Principal details are given in Baghdad and CIA reports.)
Subsidiary No. 1 will deal in “rights” which will be assigned to it for nothing. These rights, which are to buy this oil at the cost of production (plus one shilling) plus transportation within Iraq, will be sold to subsidiary No. 2. The Iraq subsidiary will sell this oil back to subsidiary No. 1 at the Iraq border. This price will be $1.75, the Mediterranean posted price ($2.41) minus (67¢) transportation costs to the Iraq border and a long-term discount. Production and transportation costs in Iraq are estimated at approximately 24¢ leaving the company with a $1.50 profit which will be split 50/50 or 75¢ each. Both subsidiary No. 1 and subsidiary No. 2 will show a profit. (Estimated at 86% for subsidiary No. 2 and 14% for subsidiary No. 1.)
The total payments will be determined first by payments to Iraq of 25% of the value of Kirkuk and Mosul and 33⅓% of the value of Basra crude. The rest of the 50/50 will be made up by income tax. Iraq is free to take of the oil produced from Iraq in kind and sell it as they desire or force the company to buy the oil without discount. The value of this crude will be posted prices. The profits shared will be made on the basis of a discount price for the company. For Basra oil this discount will be 90½ shillings posted price minus 78½ shillings per long ton (IPC price) or 32¢ per barrel. 32¢ per barrel has been worked out to conform with the 32¢ per barrel Aramco discount. The company argues that this discount follows the normal pattern of international oil trade in which companies merit cut prices for buying large quantities over long periods. The company states it has informed the Iraq Government of the details of this discount arrangement in order that no misunderstanding or accusations develop that the [Page 342] arrangement is not a true 50/50. The company realizes that this point may be a source of conflict in the future. Department officers pointed out at great length the dangers to be anticipated from this 60–40 profit division which went under the name of 50/50. It was mentioned that Venezuela does not allow such discounts. The companies state that in the earlier stages of their 50/50 agreement in Venezuela discounts were allowed.
Other points included: (1) Gulbenkian had caused no serious obstruction to date but was expected to demand that the other companies pay part of his income tax, since he had been accustomed to getting his oil at cost. (2) The company estimates that in 1953, 20¾ million tons will come from the IPC concession, 1¼ million tons from the Mosul areas, and 8 million tons from the Basra concession. The Mosul pipeline is being constructed now to K–2 where it will be tied into the “southern 12 inch line”. (3) The minimum payments guarantee is such that if the price of crude oil drops from $2.41 to $1.90 the company will receive less than 50/50. (4) If the tax fails to bring the Iraq share to 50/50, a “make-up” payment will be added. It is anticipated that the “make-up” payment will be needed for 1950, 1951.
Mr. Anderson mentioned that the new agreement might have serious repercussions within the international oil business. He mentioned (a) that the Iraq royalty per barrel was considerably more favorable than any in the Middle East, (b) that IPC was paying income taxes on a current basis unlike Aramco in Saudi Arabia, (c) that price adjustments for gravity would result in two prices being posted in the Persian Gulf.