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

880.2553/12–1252: Airgram

No. 272
The Acting Secretary of State to the Embassy in the United Kingdom ¹

secret

Washington , December 12, 1952.

A–869. Re Embtel 3058² and 3083³ current Dept views transit problem fols:

1. Dept finds ostentatiously successful oil industry unavoidably destined to be a primary target for Arab anger and frustration with their lot and with West. Vengeance for Western support of Israel inevitably will be taken out on oil vital to West. Demands for more of everything from Western oil companies has double attraction of gaining more at expense of West. This pressure most probably will tend towards decreasing profits to oil cos and taxes to Western Govts and eventually increasing price oil to West, this movement continuing until demonstrably shown that Arab states hurt by this tactic. Worst possibility which cld result from strained situation found in ME today wld be further nationalization of oil properties which Dept does not visualize at this time but which will always be threat. In national interest as distinct from commercial interest, some accommodation to pressure for increased payments if necessary, coupled with play for time seems only alternative feasible at this time. Do not believe present is time or case for diplomatic intervention.

2. There exist only very few pipe lines which cross internatl boundaries. Only others Dept knows about are lines connecting points in US and Canad. On these lines a US pipe line co collects a charge or a tariff from the shipping point in the US to the Canad border. Out of this income the US pipe line co makes the fol payments for right-of-way and as taxes: (a) fixed fee to private surface landowner for right-of-way; (b) property taxes, based on the value of the pipe line property within the jurisdiction, to states, counties, school districts, and other taxing jurisdictions and possibly other taxes in some states, such as income taxes; (c) Federal pipe lines transportation tax equal to 4 per cent of the transportation charge; and (d) Federal corporate income taxes equal to 52 per cent of the co’s profits. The total of these payments obviously exceeds 50 per cent of the profits realized from the segments of internatl pipe lines located in the US. Based upon US practice, Middle East Govts might well adduce arguments for payments which exceed 50 per cent of the profits of segments of pipe lines in their territory since they are functionally in the same position as the collectors of all of the above-mentioned payments made by US pipe lines.

Co arguments which the Dept has heard in favor of the fixed fee basis of payments neglect some of these factors and generally fail to recognize the multiple position of the ME Govts.

Notwithstanding the foregoing, the Dept as yet has not concluded that a 50–50 profit-sharing agreement is the answer to the pipe line transit problem in the ME at this time. It has not seen any analysis by the companies of the merit of 50–50 versus fixed fee payments for transit rights. Before reaching any conclusion it needs such an analysis for consideraton and use in its own studies of the problem. The Dept plans to request interested companies for a full analysis of the problem. The companies, however, already appear to have accepted the 50–50 principle in regard to pipe lines in their splitting of profits with Iraq on transportation to Iraq border.

Even though the 50–50 basis of payments might be considered sounder and more desirable, the Dept does not necessarily believe that it shld be initiated at this time. As indicated in para 1, cos may consider their best tactics for the time being to yield only if necessary, and then only the minimum amount required to reach an agreement. A fairly strong case can be made for this course since it may be some time before one can safely conclude that any agreement is really stable. This is all the more reason why both the cos and the US Govt ought to apply their best thought to this problem and decide what basis of payments should be the one on which sometime in the future a determined effort will be made to hold the line on payments. Without such an over-all plan agreements reached as a matter of expediency might well get out of line with the most desirable over-all solution to the problem.

At the present time it appears to the Dept that the only principle which has any chance of popular acceptance and understanding is that of the 50–50 sharing of profits based in the case of Tapline on the 66 cent differential between Ras Tanura and Sidon. While some co officials argue that this differential is not a pipe line tariff, it wld seem to make little difference whether or not this argument is technically valid. The differential exists and its existence is well known. The ME Govts know, or can guess, that the pipe lines are very profitable. Tapline has admitted to SAG that the operating costs of Tapline are 26 cents per barrel. In these circumstances it hardly seems likely that ME Govts will be satisfied with anything less than an equitable participation in the profits of pipe lines going through their territory.

3. It is untrue that differences within US Govt circles re merits of the fixed fee versus the 50–50 principle are delaying a decision re position the Ambassador shld take with Syria. No company has asked the Dept to take a position on the Syrian pipe line transit problem. Dept does not plan to instruct U.S. Ambassadors to take any position re fixed fees or other commercial questions at this time. In no case would the Dept take a position until it had fully studied the matter and had discussed all of its aspects with the interested oil companies, the UK, and possibly other interested govts. Dept will continue to recommend that field missions emphasize whenever appropriate disadvantages and other implications developing from the failure foreign govts to honor valid contracts. (Reference Deptel to Beirut 914⁴ rptd London 3298 and Beiruts 889⁵ not rptd London, copy for London attached. Also Dept conversations with Syrian Minister being forwarded.)

4. Dept wld appreciate Ortiz and Moline recommendations as well as all info available from IPC and FonOff re this problem.

Bruce

1. Drafted by Eakens and cleared by NE and OMP. Repeated to Amman, Baghdad, Beirut, Damascus, Jidda, and Paris.
2. Dated Dec. 1, not printed. It reported a representative of Socony told the Embassy the IPC board had decided not to discuss the 50–50 concept in relation to pipelines, and would stick to some transit fee arrangement equivalent to approximately two shillings per ton. (883.2553/12–152)
3. Dated Dec. 2, not printed. A Foreign Office official had been told by Shell officials that the IPC board had decided in a Middle East meeting that it would be desirable for the American and French Ambassadors in Damascus to let it be known that their governments did not favor extension of the 50–50 principle to pipeline transit fees. IPC felt it would not be helpful for the British Ambassador to take the lead since Britain had been in the forefront of much recent Middle East oil controversy. (883.2553/12–252)
4. Document 269.
5. Not printed, but see footnote 2, ibid .