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

887.2553/6–1653

No. 296
Memorandum of Conversation, by Herbert Liebhafsky of the Petroleum Policy Staff

confidential

[Washington,] June 16, 1953.¹

Subject:

• Iraq Petroleum Company (IPC) Paper for Pipe Line Transit Negotiations with Syria and Lebanon.

Participants:

• Mr. Charles Darlington, Socony Vacuum Overseas Supply Company
• Mr. Funkhouser—NEA
• Messrs. Eakens and Liebhafsky—PED

Mr. Darlington, representing the Socony Vacuum interest in the Iraq Petroleum Company, had requested the meeting to obtain the Department’s reactions to certain negotiating proposals which IPC was considering with a view to presenting them to Syria and Lebanon as a basis for negotiating pipeline transit agreements with those countries.

Mr. Darlington stated at the outset that he believed the question of renegotiating the existing agreements was quiet at the moment and not likely to be reopened before autumn. He believed the transit countries were watching the current Aramco negotiations with Saudi Arabia, and that the results of those negotiations would serve as the basis of the demands of the transit companies upon IPC. He mentioned that IPC had given a copy of its negotiating paper to the British Foreign Office but had not yet obtained any reaction from the British. He then inquired whether Mr. Funk-houser had heard whether the Middle East oil questions had been discussed by the representatives of the Arab League at their Beirut meeting.

Mr. Funkhouser said he had heard oil had not been formally discussed, even though it was on the agenda. It may have been discussed informally among the Ministers. The Department did not yet know why the question had not been considered there.

Mr. Eakens then asked Mr. Darlington whether he did not believe that it would be wiser from the standpoint of both the United States and the companies for the United States not to identify itself specifically at this time with any of the negotiating proposals contained in the IPC paper.

Mr. Darlington agreed. He considered it most important, however, for the companies to keep the Department informed of the progress of negotiations and of their thinking in the matter in order that the Department would be in a position to support them if this became necessary at a later date. He believed that Aramco was making a great mistake in not keeping the Department informed of the progress of its negotiations with Saudi Arabia. He said that Aramco was primarily under the control of Caltex, and while Socony Vacuum held an interest this was only a minority interest.

There was some general discussion of the Aramco offer to the Saudi Arabian Government during which such information as the various parties had of these negotiations was mentioned. Mr. Darlington explained that the price under the McNaughton formula had been arrived at as a weighted average of Basra, Kuwait, Qatar, and Iraq oil prices, including long term contracts. The trouble with the McNaughton formula was that it was tied to tanker rates. McNaughton was a geologist who had been hired by the Saudi Arabian Government to assist it in determining oil prices.

Mr. Eakens questioned whether the price under any formula, such as the McNaughton formula, was not certain to give rise to future difficulties as long as the price under the formula differed from actual prices at which the companies sold Saudi Arabian oil to bona fide arm’s-length purchasers. Mr. Darlington said that Mr. Jennings favored the use of actual prices in settling with Saudi Arabia except perhaps for a 10 per cent discount, but that his view had not prevailed.

Mr. Funkhouser said that there were various climates of opinion in the Saudi Arabian Government. The present Finance Minister was a conservative and appeared to have the interests of both the oil companies and Saudi Arabia at heart. He was moreover friendly to the United States. Some others were shortsighted and radical. It was hoped that American oil companies in the area would so conduct their negotiations as to assist in the development of the regions and also to support those elements of the Middle Eastern Governments which were friendly to the United States.

Mr. Eakens asked Mr. Darlington if he did not believe that since IPC was a British company with a minority American interest it was not up to the British Government to take the lead in such assistance as the company may need in negotiations with Syria and Lebanon, and for the United States to play a supporting role.

Mr. Darlington agreed completely. He also agreed the United States would have to play a primary role with regard to Aramco, which was an American company, if this became necessary.

Mr. Eakens and Mr. Funkhouser then commented in detail on the IPC negotiating proposals for Mr. Darlington’s benefit, it being understood by all parties that the comments were informal, personal, and in no sense represented the official position of the Department. The comments were discussed and Mr. Darlington expressed appreciation for the work which had been done in making them available to him. Mr. Darlington agreed that he would use the comments only as points that he had developed in studying the problem, and that he would not attribute them to the Department. He indicated that he might use the points as a means of stimulating thinking in regard to the pipe line transit problem. A copy of these informal comments is attached.²

In conclusion, Mr. Darlington said he appreciated the opportunity to discuss these questions with Department officials and hoped in the future to keep them informed of developments in the negotiations between IPC and the transit countries.

1. This memorandum of conversation was prepared on June 18.
2. The comments, which were not generally favorable to the majority of the IPC negotiating positions are not printed. One section mentioned the fact that the pipelines, by negotiating privileged tax-free positions for themselves, had made themselves vulnerable to discriminatory pressures in the Middle East. The paper also suggested that IPC had no convincing explanation for rejecting a 50/50 division of the profits for pipeline transit as well as for production, especially since the U.S. Government tax of 52 percent after the depletion allowance applied to pipelines.