887.2553/9–153
No. 310
Memorandum of Conversation, by the Chief
of the Petroleum Policy Staff (Eakens)
Subject:
- Views of American Participants in IPC on the Middle East Oil Situation
Participants:
- Mr. Charles F. Darlington, Socony-Vacuum Oil Company, Inc.
- Mr. Charles Lockett, Standard Oil Company (New Jersey)
- Mr. Robertson—NE
- Mr. Eakens—PED
Mr. Darlington and Mr. Lockett are the chief officials of the Near East Development Company through which Jersey and Socony jointly hold their 23.75 per cent interest in IPC.
They were invited to come to Washington to discuss their views as the American participants in IPC on the Middle East oil situation. The Department wished to be fully informed concerning their views in connection with the U.S.–U.K. oil talks now in progress.
The company representatives were first asked whether they believed closer discussions on their part with the British oil companies would be desirable. They were also asked to what extent IPC knows of the plans of Aramco and Tapline through their ownership in the two companies. Mr. Darlington said that Aramco had in the past prevented the American IPC partners from keeping IPC fully informed regarding Aramco’s operations. This resulted mainly from the California and Texas interests in Aramco holding back Jersey and Socony. Mr. Harding of Socony once stated that California and Texas had “sealed his lips” regarding Aramco’s operations. Mr. Darlington believed that Socony and Jersey would generally favor closer discussions whereas California and Texas probably would not. He felt, however, that the companies already were going about as far in such discussions as they would be willing to go without antitrust clearance. Mr. Lockett, however, did not believe that the companies would wish to discuss everything with IPC. He felt that there would be Aramco matters which, as a matter of tactics, Aramco would wish to keep to itself. For closer discussions to be carried out, Mr. Darlington believed that some new mechanism having government sponsorship or sanction would be required.
There was then a lengthy discussion of the negotiating position of Aramco in regard to the removal of the discount and the basing of the payments to the Saudi Government on posted prices. The two company representatives disagreed on Aramco’s basis of negotiation. Mr. Lockett contended that Aramco was authorized to agree to settle with Saudi Arabia only on the basis of net realization. Mr. Darlington on the other hand, said that the 50–50 to which Aramco was authorized to agree was to be based on posted prices whether or not such prices were realized in actual sales. Mr. Darlington telephoned later to say that his interpretation was correct and that in a subsequent discussion he had with Mr. Lockett, Mr. Lockett agreed. New instructions, however, had been sent to Mr. Davies, Chairman of Aramco, on Friday, August 28. These instructions [Page 726] did not change the basis of negotiations previously agreed to but they did introduce a proposal for the establishment of buffer companies which would operate as follows: A buffer company would be established by each of the Aramco parents. The buffer companies would purchase oil from Aramco at a discount of 18.3 per cent off the presented posted price of $1.97, or at $1.61 per barrel for 36° A.P.I. gravity oil. This is the same percentage discount which was in effect under the old price when Aramco sold to its parent companies at $1.43 per barrel and the posted price was $1.75. If the oil which a buffer company has purchased from Aramco is sold at the posted price, the buffer company will make the sale direct to the user of the oil. It will then share equally with Saudi Arabia its profit on the purchase from Aramco and the sale at the posted price the same as Aramco shares its profits on producing and selling to the buffer company at $1.61 per barrel. If the oil which a buffer company has purchased from Aramco is not sold at the full posted price, the buffer company will sell the oil to another subsidiary of the same parent company at the posted price and the subsidiary which buys the oil from the buffer company will sustain any loss in the transaction. The buffer company thus makes all sales at the posted price and accounts for its profits to the Saudi Arabian Government on the basis of the posted price regardless of the actual price at which the oil is sold.
Apparently this proposal of settling with Saudi Arabia on the basis of posted price, whether or not such prices are actually realized, was put forward and insisted upon by California and Texas. Socony and Jersey apparently would prefer to settle with Saudi Arabia on the basis of net realized prices. In response to an inquiry as to why California and Texas were willing to go this far, Mr. Darlington said that they are scared, that Aramco is their only concession in the Middle East and that they feel that this is necessary in order to protect their concession. Mr. Darlington also volunteered that California and Texas being relative newcomers in such concession operations are more “evangelical” than the older and more experienced companies.
As to the 50–50 plan generally, the company representatives felt that it is here to stay and that there will be no alternative but for IPC to go to the full 50–50 when and if Aramco does so. Mr. Darlington personally did not think that going to 50–50 was going to settle anything. He believes that after 50–50 has been agreed upon the Middle East countries will continue to endeavor to obtain a larger and larger share of the profits from the oil operations within their countries.
While the company representatives do not like the idea of retroactive payments, they believed that whatever arrangement is made [Page 727] by Aramco with regard to such payments will have to be made by IPC. They did not believe that they would be relieved of having to make retroactive payments to IPC if the Aramco discount was simply reduced rather than completely abolished. The British participants in IPC, as indicated by the British representatives in the U.S.–U.K. oil talks, apparently believe that they would be less vulnerable to retroactive payments if the discount were reduced rather than wiped out altogether. IPC naturally will regret having to make any changes in its concession agreement simply because of a change in the oil situation in the Middle East outside of Iraq and over which IPC has no control. IPC is at peace with Iraq and there is no pressure on the part of Iraq to get rid of the existing discount. The discount was negotiated with Iraq in the 1951 negotiation and it was fully understood and accepted by Iraq. Mr. Darlington felt, however, that the letter which IPC had written to Iraq saying that IPC would consider a change in the concession terms if better terms were made by some other company in the Middle East represented a firm commitment on the part of IPC to raise payments to Iraq if such payments were increased elsewhere.
In regard to the renegotiation of IPC’s transit agreements with Syria and Lebanon, very little is happening at the present time. IPC considers that its negotiations with Syria have simply been suspended and that they will be resumed again at such time as Syria indicates it wishes to do so. The company representatives did not believe that there is much to be done in regard to the transit negotiations. They believe that the pattern which will be established by Aramco will have to be followed by IPC. The Aramco negotiators are authorized to agree to a tariff for the part of Tapline in Saudi Arabia and to split the profit based on this tariff equally with the Saudi Arabian Government. Aramco has in mind a tariff of 40 cents per barrel between the Persian Gulf and Sidon and the establishment of roughly 66 per cent of this figure, or about 25 cents per barrel, as the tariff applicable to Saudi Arabia. Until the Aramco negotiations are completed and it is known what arrangements have been made with Saudi Arabia in regard to Tapline, there is not much to be done in regard to transit arrangements with the other countries.
- This memorandum of conversation was prepared on Sept. 23.↩