Foreign Relations of the United States, 1952–1954, The Near and Middle East, Volume IX, Part 1

886A.2553/4–2152

No. 252
Memorandum of Conversation, by David Longanecker of the Office of African Affairs

confidential

[ Washington ,] April 21, 1952.¹

Subject:

• Status of Aramco-SAG discussions of concession terms.

Participants:

• NE—Mr. Jones
• NE—Mr. Kopper
• NE—Mr. Await
• NE—Mr. Sturgill
• PED—Mr. McMaster
• AF—Mr. Longanecker
• Arabian-American Oil Company:
• Mr. Duce
• Mr. Chapman

Messrs. Duce and Chapman called to inform the Department on the status of the discussions between Aramco and SAG on the latter’s request for revision of various terms of the existing concession. Mr. Duce reported that the major SAG proposals together with Aramco’s position thereon and the status of discussions are as follow:

(1) Taxes to SAG to be computed on the basis in income before payment of foreign taxes. Aramco has accepted this proposal.

(2) Revision of existing tax payment time schedule to correspond more nearly to SAG financial needs.

Aramco has agreed to a time schedule of tax payments which will provide SAG with a steady flow of income on a monthly basis and place the company’s payments on a more current basis. Beginning in September 1952, the company will pay SAG $10,000,000 a month for four months against 1952 earnings. The balance of 1952 taxes will be paid in eight monthly installments. By August 1953 these payments will have amounted to the total 1952 taxes due SAG. In August of each year thereafter, Aramco will estimate the current year’s earnings and will pay the tax thereon on the basis of twelve equal monthly installments. In January of each year Aramco will file a preliminary tax return covering the preceding year’s earnings, deduct payments made between August and December, and pay the outstanding balance due in eight monthly installments. In September of each year, the company will file a firm declaration of earnings in the preceding year and make any additional tax payments owing to SAG. Approximately 25 percent of the taxes will continue to be paid SAG in sterling.

(3) Equal SAG representation on the Aramco Board of Directors.

SAG originally proposed equal representation on the Board of Directors of the company but changed its proposal to three directorships having a 50 percent vote. The company has refused equal SAG representation either in membership or on a voting basis. In lieu thereof Aramco has proposed giving SAG two directorships. In view of SAG representation on the board, the company proposes to transfer a number of functions from the board to the stockholders, including approval of budgets, salaries, dividends, and modification of concession arrangements.

Mr. Jones inquired whether the company’s proposal to transfer functions from the Board of Directors to the stockholders is designed to vitiate SAG’s eventual participation on the board. Mr. Duce answered, “not necessarily”, adding that IPC stockholders have had a great deal more control over IPC than Aramco stockholders have had over Aramco. Aramco believes it is desirable to carry out the proposed transfer of functions and will inform the Department of the changes it will be necessary to make in the Aramco by-laws to effect the transfer.

(4) Registration of Aramco as a Saudi Arabian corporation, and transfer of Aramco’s headquarters, transfer of the meetings of the Board of Directors and of Aramco accounting to Saudi Arabia.

The company does not intend to agree either to changing the registration of Aramco or to holding the meetings of the Board of Directors in Saudi Arabia. It is agreeable to keeping the books and to moving the company’s headquarters to Saudi Arabia. It is willing to transfer the Chairman of the Board and two directors to Saudi Arabia. The transfer of possibly as many as three or four hundred employees from the U.S. to Saudi Arabia will probably be involved in the new arrangement. In response to Mr. Jones’ inquiry, Mr. Duce replied that he does not think the new arrangements will mean an increase in the total number of employees of the company.

(5) Payment of a minimum royalty—understood to be $100,000,000 per year for four years.

Aramco does not intend to accede to this request as such a guarantee should not be undertaken by a commercial private enterprise and is actually meaningless. In the earlier discussions Aramco pointed out to SAG that the company has always endeavored to cooperate on all occasions when the government has been in financial difficulty. Recently, for example, the company converted to dollars the unused portion of the sterling it paid SAG on royalty account in 1951.

(6) All proven oil bearing structures or fields must be brought into production within two years. Failure to do so will obligate Aramco to pay SAG the amount of revenue to which SAG would be entitled if the fields were in production.

Aramco has opposed this request but may be forced to accede to it. In this event, the company would start to develop the new fields but would link them to existing fields in order to average out production over all of the structures consistent with the total marketing possibilities.

(7) Obligation to relinquish one-half of the entire concession at the end of five years, and one-half of its proven fields by the end of the next five years.

The company considers unreasonable the SAG request that at the end of five years, half of the total concession area be relinquished. The existing agreement provides for relinquishment of 33,000 square miles beginning in July 1949, every three years until 1955, after which the relinquishments will take place every five years until 1970. The company is preparing to turn back to SAG the second block of acreage under this arrangement in July of this year. Aramco would be glad to include in these relinquishments the controversial boundary areas, after the company is reasonably satisfied they contain no important oil prospects, but feels certain that SAG would regard such action on its part as prejudicial to SAG’s claim to these areas. While the company may be forced to accept acceleration of the existing relinquishment rate to the extent of turning back half of the total concession area at the end of five years, it does not intend to agree to release any proven acreage. In response to a question by Mr. Awalt, Mr. Duce stated that the islands off the coast below Qatar are inhabited by people belonging to a tribe which owes allegiance to SAG. In this connection, there are a number of promising oil structures under these islands as well as in near by underwater areas. In addition, there is one promising salt dome structure located in a small peninsula on this coast.

(8) Right to take and dispose of all natural gas not used by Aramco.

The company has not taken a final stand on this proposal but will discuss the matter further with SAG. SAG is interested in the availability of natural gas for establishing a fertilizer plant. Mr. Duce estimates a fertilizer plant could be established at a cost of approximately $30,000,000. A three-way deal might be worked out, involving U.S., Arabian and Pakistani interests, for the production of sulphate of ammonia. Eventually a more complete fertilizer could be produced by the addition of phosphates, important deposits of which are reported to exist and could be developed in Lebanon if the proposed new rail link is completed in Saudi Arabia.

(9) Reduce to $500,000 per month the sum withheld by the company in payment for the railroad.

The company has accepted this proposal, which means that amortization of the railroad debt will extend over seven years instead of three years.

(10) Offshore areas are subject to the same concession terms applicable to the mainland.

Aramco does not accept SAG’s position and intends to discuss the matter further. The company particularly objects to the application to the offshore areas of the 50/50 profit sharing and tax arrangements until these areas are brought into actual production.

(11) Transfer of Tapline facilities in Saudi Arabia to Aramco.

The company has proposed a SAG tax on that portion of Tapline in Saudi Arabia and has authorized the Aramco officers negotiating these points with SAG to agree to a Saudi Arabian-Jordan border price of $1.73 per barrel. The price is made up of $1.43 f.o.b. eastern terminus of pipeline, plus 20 cents actual pipeline transit cost to Saudi Arabian-Jordan border, plus 10 cents profit. The higher price basis, $1.73 per barrel, will increase SAG’s share of profits only by one-half of the 10 cent profit figure, or by 5 cents a barrel.

The company is undecided on a settlement price for the crude oil shipped by water from Ras Tanura. It is aware of the possible impact on these price negotiations, of the current MSA-Department of Justice action on the price of Arabian crude shipments to Western Europe under ECA/MSA financing. (In response to a request by ECA/MSA, the Justice Department has recently transmitted a claim to the stockholding companies in Aramco for a refund of the overcharge for Arabian crude financed by the ECA/MSA up to date. These claims total from 50 to 75 million dollars.)

The price on which the 50/50 profit sharing arrangement is based is $1.43 a barrel whereas the quoted price at Sidon is $2.41 a barrel. SAG would like to participate in the Sidon price. In this connection, IPC has agreed on a price at the Syria–Iraq border of $1.74 a barrel and it is likely that this aspect of the IPC agreement will strengthen the SAG position. IPC has also agreed on a price of $1.51 at Fao, which is also in contrast to Aramco’s $1.43 price basis. Mr. Duce stated that this price question is the most difficult problem between the company and SAG.

. . . . . . .

Resumption of the discussions between the company and SAG were orginally scheduled for April 22 but will be delayed for a week or so.²

1. This memorandum of conversation was prepared on May 6.
2. When the Aramco negotiators returned to reopen the discussions on Apr. 25, the Minister of Finance refused to deal with a group headed by Ohliger because he wanted to deal only with the top Aramco people. Arrangements were then made for the chairman of the board and president of Aramco to head the negotiating team and discussions resumed on May 5. Most of the conversations were on oil prices, before an amicable adjournment of the negotiations on May 15 at the request of the Saudi Arabian Government. Further discussions were to be postponed for the duration of Ramadan, from May 25 to June 23, and it was considered possible that they might not begin again until fall. (Telegrams 631 and 633 from Jidda, Apr. 30; 646, May 5; 662, May 14; and 678, May 20) Documentation is in Department of State file 886A.2553. For information on the resumption of negotiations later in the year, see Document 271.