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

880.2553/9–153

No. 309
United States Record of the Second Session of the United States–United Kingdom Talks on Middle East Oil¹

secret

[Washington,] September 1, 1953.

Subject:

• Second Session—U.S./U.K. Talks on Middle East Oil

Participants:

• British Embassy Team—
• Mr. Harold Beeley, Counselor
• Mr. R. W. Bailey, Political Officer, NE
• Mr. J. A. Beckett, Petroleum Attaché
• U.S. Team—
• NE—Mr. Hart
• NE—Mr. Robertson
• OMP—Mr. Willis Armstrong
• PED—Mr. Robert Eakens
• L/E—Mr. Stanley Metzger

Mr. Hart opened the meeting by informing the group we had received certain information concerning the Arab League Petroleum Committee meeting of July 5, 1953. This information was based on communications from Cairo and indicated that the Director of Mines for Fuel Affairs was Egypt’s delegate to the July 5 meeting. The Director had been most uncommunicative both before and after the meeting. However, from other sources we had learned that the topics for discussion were a unified petroleum policy (largely wished by Egypt) and the Haifa oil refinery—where it obtains its crude and how to intensify the boycott against it. Exchange of information among Arab countries on petroleum matters was also discussed. Furthermore, these subjects were to be discussed at a meeting of the Economy and Finance Ministers of the League member states, possibly in September. Another report indicated that the member states of the Arab League had worked out an arrangement to keep each other promptly informed of any changes affecting the petroleum industry in the respective countries. This suggested that if any member state is able to improve its take from the international oil industry, the details will be promptly available to other members for such exploitation as they can give them.

Mr. Beeley thanked Mr. Hart for this information and stated that his side had not as yet received such a detailed report. Promptly after the first session on August 27, the British Embassy had asked London for information on this subject. London had relayed the inquiry to Cairo and the British Embassy at Cairo had made an initial reply based on information obtained from the Assistant Secretary General of the Arab League. This communication stated that the Petroleum Committee had recommended a coordinated oil policy and had considered the subject of Arab oil boycott as applied to foreign firms engaged in sale and assembly activities in Israel and the Arab States. The Petroleum Committee had met twice. Mr. Hart observed that we had information on the application of the boycott to American marketing firms but would like to check the matter as regards those having assembly plants.

Mr. Beeley then reminded the group that this session was to deal with subjects under two headings, namely the Aramco and IPC negotiations and the problems of transit. Mr. Eakens detailed developments in this respect on the basis of consultations with American companies, particularly Aramco. Aramco is scheduled to resume negotiations with the Saudi Arabian Government early in September. The parent company instructions to Mr. Davies, President of Aramco, were to go only as far as necessary to reach agreement with the Saudi Arabian Government. Mr. Davies had informed the General Manager of IPC concerning Aramco plans. He had also discussed this matter with Mr. Loudon of Shell Oil in London. Aramco may have to go to a basis of posted or realized prices in calculating the 50–50 principle in its negotiations with the Saudi Arabian Government. This would have repercussions on IPC. Aramco was authorized to make concessions on the discount. It hopes to make a settlement without retroactive payments. However, it has been authorized to make concessions in the latter respect but serious problems may arise if required to make retroactive payments all the way back to the beginning of 1950. The basis for making retroactive payments would be complete implementation of the 50–50 principle to the benefit and at demand of the Saudi Arabian Government.

At this point Mr. Hart observed that Aramco considered the application of discounts in 1950 were justified by the very large investments involved in developing its facilities in Saudi Arabia and marketing outlets outside of the country. There followed a general discussion as to whether posted prices once established would be self-adjusting. It was observed that situations differ in the various producing countries. Kuwait revenues were based on actual sales contracts as negotiated, usually below the posted price for the area. Mr. Eakens observed that discount in sales to subsidiaries or parents of the producing company are harder to explain than discounts in sales to outsiders, particularly when the Arab governments were involved.

Mr. Beeley thanked us for information obtained from the American companies and informed the group that he had certain information in respect to IPC. In September 1951 the Iraqi Government had by letter informed IPC that if Iran or Saudi Arabia or any other producing state received a higher revenue per ton, it would require a corresponding upward re-adjustment of the agreement concluded between Iraq and IPC. IPC replied by letter that it would agree to consider such a matter if it arose. The wise policy for IPC would be not to haggle over terms but to make the Government of Iraq an offer if the situation arose. Iraq now gets a border price representing an increased share as the oil proceeds in transit. In consequence, Iraq enjoys this advantage over Saudi Arabia which as yet may not enjoy the benefits of the border price. Mr. Eakens interjected that the Saudi Arabian Government had raised the border price question early in its negotiations with Aramco but negotiations in this respect had not as yet been concluded.

Mr. Beeley then turned to the possibility of the resumption of activity in the Persian oil fields. Because of the delicacy of any future negotiations in Persia, it was extremely important to the U.K. that the principle of discount be maintained in the Arab States. The elimination of any discount in negotiations with Arab States may have a most unfortunate effect on negotiations in Iran. In turn, any concessions made to Iran may later plague the oil companies operating in the Arab States. The situation which may eventually evolve in Iran could result in a nationalized company selling to marketers or consumers with or without a discount.

Mr. Armstrong asked whether it would be possible that a settlement with Iran would be made for compensation with no arrangement for marketing; Iran making a separate arrangement with distributors selling through outside agents at or under posted prices. Mr. Beeley replied that Iran could not do this as it was not capable of taking on the obligation for compensation programs plus capital outlays involved in establishing an enormous marketing organization. Mr. Beckett joined in to say that compensation would have to be paid over a period of time and it was difficult to envisage that it could be paid in any other way. Mr. Beeley added that the U.K. may arrange to purchase the oil at the Persian Gulf on some sort of sharing-of-the-revenues arrangement with Iran under which Iran would in turn make payments on compensation from its part. Mr. Beckett added that such an arrangement would in all probability relate to products as Iran had never exported crude in any substantial quantity and presumably the refinery would be put back into operation as soon as possible.

Mr. Metzger suggested that such an arrangement with a discount for compensation purposes may be attractive. Mr. Beckett replied that AIOC would insist that compensation be separated so that discounts would not be chargeable to AIOC marketing cost.

Mr. Armstrong then surmised that the Iranian negotiations could conceivably encompass a number of alternatives under which AIOC with its large marketing outlets as purchaser, and also as recipient of compensation, may come into the picture. Even if the discount principle were abandoned in the Arab States, it could be included in any Persian arrangement under some other name. He hastily added that he was not arguing for or against any particular arrangement or any size of discount or in behalf of posted prices or realized profits. AIOC seems to be a logical outlet for Iran to market its oil on which its economy so heavily depends for revenues.

Mr. Hart inquired whether the discount problem could be resolved by offering some form of compensation. Mr. Beeley thought not. He added that what his Government wanted to prevent was a situation whereunder all the states lined up, replaced individual companies with nationalized organizations and expressed a desire to sell at seaboard to marketing organizations should the Iranian case take that turn. Any arrangement in Iran will become known and may pose a most unfortunate precedent.

Mr. Armstrong inquired whether the situation in Iran was not different from that in the Arab States in that Iran had a big refinery and sold products, whereas oil was sold primarily in the form of crude from the Arab States. Mr. Beeley reminded him that Aramco had a good size refinery and he doubted in any event that this would make much difference.

Mr. Beckett stated that the Persian Government cut had come out of crude sales and refinery operations were paid for as a service. The removal of the discount in basing accounting on posted prices would result in going beyond the 50–50 principle. If the companies cut the posted price, Iraq could go on the market with up to 12½% of the crude which it had the right to demand under the concession arrangement.

Mr. Beeley suggested that the group turn its attention to the transit problem. Mr. Robertson indicated that our consultations with Aramco indicated the following information: The American parent organizations were studying the problem but had reached no conclusions. They were considering the various methods for computing payments to be made to the countries transitted. One alternative could be an equal division of a total sum among the countries transitted. Another alternative would be on the basis of mileage. Still another would be on the basis of ton miles. Finally, the transit company could call on representatives of the Arab Governments to decide among themselves how to divide up periodically stipulated sums. Consideration was also being given to establishing a separate company with a published tariff on a basis which would be competitive with tankers. This arrangement would be much easier to explain than the present situation. Sales of stock in such a company might also be involved.

Mr. Beeley observed that IPC also had not finalized its position. The Foreign Office feels that some form of tax agreement based on profits would more likely be acceptable to Syria and Lebanon than other forms of payments. However, the British companies objected to the principle of taxation in that it would almost be impossible to limit the sovereignty of the countries concerned in respect to increasing rates of taxation once that principle has been established. IPC prefers payments on a ton-mile basis. However, this will not satisfy the Lebanese as they feel that their short miles of transit are as important as the long transit miles of Syria. The British were also considering some form of separate pipeline operating company for IPC but would be reluctant to make such a move because of the implications involved.

Mr. Beeley stated that in view of the many complexities involved in reaching agreements between our governments as to principles which might be applied, there was increasing importance on the need for closer company consultations. The complexities not only dealt with the various aspects of operations, the types of payments involved, the political situations in the different countries, but also taxation measures both in the producing countries and the countries of residence of the parent organizations. As regards the transit companies, some tax method would be preferable to a 50–50 sharing of profits. He hoped the companies could find something which would stand up to examination. His Government would be inclined to back up any agreed company position that seemed reasonable. The question was raised as to whether the electric power supply arrangement between Norway, Denmark and Sweden might not be a good example. Mr. Armstrong thought not in view of its pooling aspects.

Mr. Hart then suggested that Syria and Lebanon, as transit companies, may wish to take crude from the pipelines for local refineries. He also mentioned that the countries transitted perform certain services in return for revenues such as providing police protection. Referring back to Mr. Beeley’s suggestion for closer company consultation, Mr. Robertson stated that aside from the limitations of anti-trust laws, the American companies had mentioned the limiting factor involved in competitive and negotiating practices whereunder each company desired that its hole-card not be revealed. Mr. Armstrong added that a special committee is studying antitrust and its implications and these studies would take some time. Our people were aware of the benefits derived from the anti-trust laws, as well as the complications when applied abroad.

Mr. Beeley said he would like to emphasize the need for closer Aramco–IPC consultation and wondered if this may not be further pressed. He was informed that the Aramco discussions with IPC in London had been evidence of progress in this direction and was considered by the companies as being as far as they could go in view of the anti-trust implications. Mr. Beeley continued that closer company consultation was necessary if agreed positions were to be arrived at in order that a reasonable case could be made for our Ambassadors to support at the diplomatic level for the purpose of smoothing over company problems.

Mr. Beeley suggested that the next meeting consider the means whereunder the U.S. and U.K. Governments and companies could closer consult and the additional item of educating the Middle East people to lay a foundation for better understanding. The participants agreed with this suggestion and that the next meeting take place at 3:00 p.m. on September 9. Since both Mr. Hart and Mr. Armstrong would be taking leave between September 12 and 22, it was also agreed that an additional ad hoc meeting could be held if any urgent question came up; otherwise, the next following meeting could take place soon after their return.

1. Drafted by Robertson.