Office of the Historian

880.2553/12–2352

No. 275
Memorandum of Conversation, by William McMaster of the Petroleum Policy Staff

confidential
Washington, December 23, 1952.1

Subject:

  • Principle of Division of Pipe Line Profits.

Participants:

  • Messrs. Duce and Chapman, Arabian American Oil Co. (Aramco)
  • Messrs. Noble and Britton, Trans-Arabian Pipe Line Co. (Tapline)
  • Mr. Funkhouser—NE
  • Messrs. Eakens and McMaster—PED

This meeting resulted from an offer by Mr. Britton to come to Washington for a discussion of the pipe line transit payments problem in the Middle East.

Mr. Eakens opened the meeting with a general summary of the Department’s thinking and position on the matter at the present time. He said that contrary to reports in New York and even in London, the Department has taken no position favoring the application of the 50–50 profit-sharing principle to pipe line transit agreements. He said, in fact, that the Department has not taken a position on any of the substantive questions involved in this problem. The present fixed-fee basis of payments, however, seems to [Page 631] have certain shortcomings. Current payments are not established on the basis of any principle under which any level of payments can be defended as fair and equitable. There is nothing more sacrosanct about a payment of four shillings per ton of oil transiting a country than the payment of one shilling per ton. What seems to be needed is some principle of payments toward which the companies would work, on which a firm stand could eventually be taken. Such a principle would not have to be established at any particular time, but it would seem that both the companies and the government should have in mind as a long range solution the establishment of some principle on which an attempt could be made to achieve stability. Before reaching any conclusions on the problem, the Department wished to have the benefit of a complete analysis by the companies and their views in regard to it.

Mr. Noble said that some studies of the problem had already been made in New York. The studies had resulted in the conclusion that the one thing the three countries are looking for is equal benefits among themselves. He believed that this conclusion is an overriding consideration which should be kept in mind in any analysis of the problem. In every case, each of the three countries has asked for an escalation clause in their agreement, which actually amounted to “most favored nation” treatment. Mr. Duce added that the escalation applied not only to payments, but to benefits of every kind. It is “an ascending spiral” to which he does not see any end.

Mr. Britton said he had given the problem of payment for transit rights a great deal of thought. Speaking as an individual, not as a spokesman for his company. Mr. Britton said he would like to present an exploratory viewpoint.

At the outset, Mr. Britton said, you must establish a basic principle designed to stabilize the situation. He thought that establishment of the pipe line tariffs was the proper basis of accomplishing this. In order to determine the proper tariff, he thought a thorough study should be made which would cover, among other things:

1.
The cost of the competing facilities.
2.
The efficiency of pipe line operations. (It is to the advantage of the transit countries that pipe lines are competitive with alternative transportation facilities.)
3.
Pipe line profits projected for 10 or 15 years.
4.
The advantages to the countries transited by pipe lines based upon reasonable payments.

The views of the Department’s representatives and those of Mr. Britton seem to be in complete agreement on the need for the adoption of some principle of payments in this field.

[Page 632]

At this juncture Mr. Britton and Mr. Duce each read excerpts from confidential reports they had received from the Middle East which dealt with the adverse effect in the Middle East of the FTC Report and the cartel investigation.

In conclusion, the companies were requested to analyze the whole problem, including various possible bases of payments for transit rights together with arguments for and against each basis, and to submit the analysis to the Department. The company officials undertook to do this.

  1. This memorandum of conversation was prepared on Dec. 29.↩