886A.2553/2–452: Telegram

No. 246
The Ambassador in Saudi Arabia (Hare) to the Department of State1


409. Owen flew here Feb 25 fill-in Aramco negots on instrs directors who foresee agreement most points but may break up in disagreement some points and wanted Emb have advance notice supplement account given on my recent visit Riyadh (Embtel 383, Jan 26).2

Owen said shift scene negots to Dhahran peculiar in sense supposedly made on King’s orders at Prince Feisal’s request when latter impelled proceed Dhahran for boundary negots, whereas on arrival Aramco group Feisal expressed surprise see them and said he had expected they wld remain Riyadh and finish work in short time. Result is counselors Jamal Husseini and Khalid Gargoni now out picture and Shaikh Abdullah and Najib Salha have field to themselves.3

Agenda on basis King’s letter plus additional points introduced by SAG now known as “eleven points”. Status each is:

Saudi desire SAG tax be computed before foreign tax: Aramco agreed when explanation failed convince Saudis;
Revision tax payments to make current: After King’s discussion complicated formula adopted of which immed effect is payment $40 million more this year than according present arrangement;
(3) and (4)
Organizational points including Saudi demands (a) Registration as Saudi Corp, (b) Board meetings in SA, (c) transfer headquarters SA, (d) Transfer books SA, (e) Equal SAG representation on board, (f) 50 percent SAG vote on board: Aramco (a) refusal SAG registration and believe SAG will not press, met (b) and (c) by agreeing give board chairman and pres to field and apppoint new director in field, (d) agreed transfer books, (e) offered two directors but Saudis, after demanding equal representation, wld not go below three and matter stalled here with Aramco apparently prepared [Page 572] stand to breaking point because of problem in Aramco organization, of effect on other area agreements where two is maximum board representation and also of fact Aramco negotiators said won’t yield on point and feel wld be mistake submit now, (f) refused 50 percent SAG control, pointing out SAG although partner in enterprise, not partner in Aramco.
Saudi demand minimum royalty $100 million for four years after cessation production for any reason: Aramco refused request as fantastic but discussion not complete;
Saudi demand for relinquishment without compensation areas in which oil found but not developed within two years: Aramco made strong rebuttal and question deferred for study because of technical aspects;
Saudi demand for relinquishment within 5 years 50 percent of concessionary area: Aramco indicated favored as rapid relinquishment program as cld reasonably be worked out and stated no objection to other responsible companies entering field. Like (6) after discussion reserved for study with Aramco forsees wld take about six months and hopes SAG will agree;
Saudi request reduction railroad repayment to $500 per month: After discussion, during which Aramco pointed out burden which such demands placed on cash position company and effect on stockholders, Saudi request accepted;
Saudi complaint re non-utilization gas: Aramco explained studies made in past and difficulty economic utilization. However, said glad share all info with anyone interested and, if decided exploit, sell gas, pay royalty and share profit fifty-fifty as provided in concession. Saudis agreed.
Tapline: Essential factor here SAG desire early profits as contrasted present 15-year provision for amortization and discussion inevitably led price differential of $1.43 at Qaisuma and $1.93 at Sidon. Saudis first suggested shortening 15-year period to 5 and Aramco agreed, but Saudis reneged and countered with suggestion Aramco take over tapline completely. Aramco said cld not act beyond SA border and suggested charging $10 million annually for tapline transport facility in SA, which wld net Saudis $5 million as 50 percent tax. Saudis said not enough and Shaikh Abdullah suggested formula which wld place total increase in price attributable transport in SA at $20 million of which SAG wld get $10 million in taxes, but Salha objected still not enough and matter remains under discussion;
SAG letter re taxes: Feisal suggested, and Aramco agreed, refer to subcommittee. Main point is SAG claim $2 million minimum royalty for offshore shld not fall under 50–50 arrangement whereas Aramco maintains clearly does so.

Thus, as matters stand, most points disposed of except number board members, minimum guaranteed royalty and price formula for tapline with impasse reached on first and last two still under discussion. In meantime, directors of 4 parent companies, who obviously had done best be both patient and reasonable, are beginning get somewhat fed up, particularly with kicking around they have [Page 573] been getting by Shaikh Abdullah and Salha since removal negots Dhahran and they are apparently digging in toes to point where prepared break off negots without agreement all points on agenda.

Having discussed situation fully and frankly with directors both during and before negots, my feeling is they have exhibited commendable forthrightness and reasonableness in negotiating with Saudis and that compromise agreement on the three main outstanding points probable except for dispute re number members on board which, curiously enough, outside observers wld probably find difficulty in understanding point at issue as between 2 and 3 members. In circumstances, acrimonious breakup of negot in failure agree on this point, however valid Aramco’s reasons may be, cld be unfortunate from relations standpoint and I have asked Owen convey thought to directors that, if they feel necessary stick on this point, they shld be very careful to handle in such way as show reasonableness their position.4

  1. Repeated to Cairo and Dhahran; tramsmitted in two parts.
  2. Not printed; the Ambassador advised the Department of State that King Ibn Saud had expressed appreciation of the high caliber of the Aramco negotiators although making clear he approached the topic of Aramco and big business generally in terms of extreme nationalism. (886A.2553/1–2652)
  3. Telegram 435 from Jidda, Feb. 17, not printed, reported the Aramco negotiators had come to Jidda and told officers of the Embassy that conversations became very difficult as Najib Salha and Yassin took over, and Prince Faisal abdicated responsibility. In conclusion, however, the negotiators said the general spirit in the discussions was not unduly discouraging, and they had been impressed by the friendly attitude of the King when they made a farewell call at Riyadh. (886A.2553/2–1275)
  4. Despatch 341 from Jidda, May 21, transmitted to the Department of State a summary of the discussions and conclusions of the Aramco-Saudi Arabian negotiations during January and February, received from the Jidda office of Aramco. (886A.2553/5–2152)