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

880.2553/9–2453

No. 312
United States Record of the Fourth Session of the United States–United Kingdom Talks on Middle East Oil¹

secret

[Washington,] September 24, 1953.

Subject:

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

Participants:

• British Embassy Team—
• Mr. Harold Beeley, Counselor
• Mr. R. W. Bailey, Political Officer, Near East
• 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. Beeley inquired whether we had obtained information from the American oil companies concerning their views on the legal aspects of the U.K. suggestion that British and American pipeline company representatives consult before and during the course of any negotiations for the purpose of meeting the demands of the transit countries.

Mr. Robertson indicated that we had consulted the American companies and had obtained the following information. A Tapline official indicated that his company was considering the transit problem in terms of establishing a separate pipeline company with a published tariff and revenues accruing to the transit countries on a basis of taxation of the profits. While these views have not been one hundred per cent accepted, there were senior officials in each of the parent companies thinking along these lines. Information obtained informally indicated that the British companies in IPC are also considering the transit problem along similar lines. In reply to an inquiry, the Tapline official had responded that while it would be desirable to hold consultations at the management level with the British companies and for the negotiators to consult on the ground during the course of negotiations, his company would be reluctant to follow such a course in view of the risks involved under anti-trust legislation. An official of one of the American participants in IPC had informed us that his company would welcome the opportunity of closer consultation between IPC and Aramco on the transit problem. He did not see how success can be achieved without such cooperation. He believed that chaos may result unless some basis for cooperation is found. He did not feel, however, that the thing suggested by the British could be done in view of the risks involved under the anti-trust laws. Although his company could not cooperate with the British companies in the way proposed, he was hopeful that something constructive could be developed from the British proposal.

Referring to the principle of taxation on profits of a proposed separate pipeline company, Mr. Beeley inquired whether Tapline was considering this matter in terms of the 50–50 principle. Mr. Robertson replied that this item had not been covered in our recent conversations with the American companies but possibly Mr. Eakens could throw some light on the subject. It could be speculated that with the acceptance of the 50–50 principle on oil production the Saudi Arabian Government might logically seek to apply this principle to any separate pipeline company, once the latter is established.

Mr. Beeley then inquired if we were prepared to state our views on the merits of an oil treaty or some form of commodity study group. Mr. Hart asked Mr. Robertson if he would comment on this subject.

Mr. Robertson replied that we had considered informally a number of possible alternatives which could be considered in a study of the matter. They were in the nature of reflecting the thinking of some of the Department officials concerned. They had not been formalized in any way and were not being set forth in any sense of a commitment on the part of the Department of State. In any consideration of some form of multilateral oil treaty containing the general provisions of the Anglo–American Oil Agreement of 1945, we would be confronted with the question of to what extent would the criticisms and opposition to the earlier 1945 agreement prevail today. While the situation may have changed in some respects, it could best be appraised in terms of consulting the industrial and Congressional critics. This we have not done. It might be possible to overcome such criticisms and opposition, for instance, by restricting the terms of reference of a multilateral oil treaty to considering disputes arising between foreign nationals holding oil contractual rights in producing countries and the producing countries concerned. A petroleum commission or council, with the governments of the foreign nationals and the producing countries concerned participating, would be much more limited in scope than the broader terms of reference of the 1945 agreement. Should there be a dispute, for instance, between a producing country and a foreign oil company over whether the company had properly accounted for revenues accruing to the country, the dispute could be referred voluntarily by both parties to the newly established council or commission. This body could arrange to employ competent outside accountants to audit the books of the company under its supervision and report on the result of such an audit. Reference of disputes to the new body should be voluntary on the part of both disputants with suitable provisions against any encroachment on the sovereignty of any producing country or the corporate rights of any foreign oil company. While an oil study group could also be considered, it is doubtful whether an approach such as this without treaty status could be very effective due to the lack of legislative sanction and in view of anti-trust limitations.

Mr. Armstrong observed that the situation concerning oil was different to that which prevailed concerning other commodities for which treaties and study groups had been established or for which agreements had been negotiated. Wheat and sugar were the subject of agreements while cotton, tin, wool and rubber were the subject of international study groups. Large companies were not in the picture in other commodity groups in the way in which they figure in oil, i.e., as operators in the producing countries. The role of the producing countries had been one of sitting back, leaving operations to the companies and demanding increasing revenues. The consuming countries were numerous and the major ones were the homes of the companies which operate in the producing countries. Consumers are so widely scattered and so numerous that few countries could be said to represent an identifiable consumer interest. On the other hand, the consumers of cotton, for instance, were largely the manufacturers who took the raw material and made it into some finished product. There was also the disturbing factor that in the case of oil, U.S. domestic companies had been very much opposed to the establishment of any international body to deal with oil problems. We would be sure to arouse considerable U.S. domestic antagonism and criticism should it become known that a multilateral oil study group or treaty was being considered. Three principal sources of antagonism could be considered as: (1) the coal and domestic petroleum elements who are strenuously opposed to foreign oil imports; (2) anti-trust elements which would undoubtedly view an international oil group as a smoke screen for getting around the limitations of anti-trust legislation; and (3) elements in American business and government who have never shown any particular enthusiasm for international commodity agreements. There was considerable U.S. opposition to the pre-war producers agreements in tin and rubber. There is probably less receptiveness in the new Administration than in the former toward international commodity agreements. Furthermore, the establishment of a study group on oil might complicate within the U.S. current study group arrangements on other commodities such as tin and rubber which could be harmful to both the United States and the United Kingdom.

Mr. Metzger observed that generally he agreed with the observations of Mr. Armstrong. He added he would like to remark particularly on the anti-trust effect of establishing a study group or an oil treaty at the present time. If an oil treaty were negotiated permitting exchange of information within industry, it could have the effect, depending on its terminology, of amending anti-trust legislation in this respect as such a treaty, once ratified, would govern. In the absence of specific legislation for a study group or in a treaty permitting such exchanges of information, the provisions of the anti-trust laws would not be changed. At present there is no specific legislative authority for the participation of the U.S. in commodity study groups. Our ability to regularize this situation might be adversely affected by any public knowledge of plans to establish an oil study group. There is no specific provision in the sugar or wheat agreements for consultations among industry. All exchanges of information are among participating governments and the governments in turn work out their own arrangements for consulting with industry.

Mr. Beeley stated that the Foreign Office takes the view that this is not the time for establishing an international petroleum council. However, his Government welcomes the opportunity of exploring and discussing the matter. His Government’s views are based on two fears: (1) anything in the nature of an international oil council would provoke further “ganging up” on the part of the Arab States and pose serious risks; and (2) a body of this kind would tend to be divided into two camps, the producers and the consumers. Furthermore, neither the producers nor the consumers could be counted on to support the broad area of agreement which exists between the governments of the U.S. and the U.K. It might, therefore, become a three-sided affair. He added that in his personal view, it might be desirable to explore further this matter at some time in the future.

Mr. Armstrong observed that should the Arab States go a long ways in establishing a regional organization, amounting to a bloc of governments, there may be some merit in taking defensive action. We could then raise with the Arab States the question of the consumer/producer relationship. Mr. Beeley inquired whether he had in mind establishing an economic commission for the Middle East under ECOSOC such as existed in the Far East. Mr. Armstrong replied that we had not particularly liked the regional economic commission idea in the beginning, but that some of these commissions had done useful work. A general discussion followed in which it was indicated that a proposal for the establishment of an economic commission in the Middle East under ECOSOC, considered in 1948, may have been overcome by events deriving from the Palestine hostilities.

Mr. Metzger stated that, from a legal point of view, there was a disposition against regional adjustment bodies outside and independent of the international court, as they impinged on the prestige of the court. Any proposal to establish another tribunal on a multilateral basis to handle oil disputes might complicate as well as duplicate the work of the international court and detrimentally affect its prestige. The establishment of a regional international court in the Latin American area had been opposed by the United States for the same reasons.

At this point Mr. Eakens observed that the establishment of machinery to handle disputes at a technical level should be more attainable than a general study group in the United States. Most of the difficulties in the past, as in the case of Iran, had arisen out of disputes on concessions. It would, therefore, be advantageous to have some machinery to deal with such disputes at a technical level before they got out of hand. Mr. Beeley interjected that the producing countries might be reluctant to submit disputes arising within their own borders to any international body whose findings may have the effect of impinging on their sovereignty. Mr. Hart stated that he felt this would be the situation in Saudi Arabia. Mr. Eakens continued that the problem of disputes between the oil companies and the producing countries will become more difficult and more serious once the 50–50 principle has been reached. The companies will then have little if any further ground to give in meeting demands for greater payments to the sovereign governments without getting out of line with payments in the other producing states. Because of the limitations on the private companies in dealing with sovereign countries, some machinery might be necessary to cope with this situation.

Mr. Metzger stated that the judicial method for settling disputes was less easy where large groups were arrayed on vital subjects than when the matter was confined to less important matters.

At this point Mr. Hart announced that the Saudi Arabian Government negotiations with Aramco were being postponed from September 24 to a later date at the request of the Saudi Government. Mr. Eakens stated that, according to Aramco, the negotiations were postponed until November at the request of the Saudi Arabian Government.

Turning again to the question of an international oil body, Mr. Armstrong stated that if machinery is set up to ascertain the facts or arbitrate disputes, agreements which at present were between private companies and producing countries would in time be converted to agreements between governments in view of the intercession of the British and American Governments on behalf of their nationals holding contractual rights.

Mr. Beeley stated that the Foreign Office is apprehensive over the application of the 50–50 principle to any division of pipeline profits. He added that it is important that the two types of enterprise not be confused. In production arrangements, the government’s part is considerable in that it provides the resources which are the subject of exploration and production, while in pipeline operations the government takes a very small part as it is primarily a matter of moving the oil. In the latter case, the company makes all the effort.

Mr. Hart stated that under the Saudi Arabian Government Income Tax Decree of November 5, 1950 the net profit of companies operating in Saudi Arabia is taxed at a rate of twenty per cent. Under another Income Tax Decree promulgated on December 26, 1950, an additional income tax is levied on companies engaged in the production of petroleum or other hydrocarbons. Under the latter, the rate is fifty per cent of the net operating profits of such companies, less all other payments to the Saudi Government, thus making the effective rate on Aramco fifty per cent. Under Tapline’s concession, Tapline is exempted from all tax levies for the duration of the concession agreement, but at the end of fifteen years is committed to the payment of a reasonable transit fee at least as favorable to Saudi Arabia as payments by Tapline or any other pipeline to any other Middle East country, taking into account mileage and through-put.

Mr. Eakens observed that under the IPC arrangement with Iraq, half the profit between the well and border prices was split with the Government. This situation would not be affected if Aramco made a similar concession in Saudi Arabia. Furthermore, the United States Government subjects its pipeline companies to a fifty-two per cent tax as a part of the general tax structure. It would, of course, be better if the foreign countries concerned enacted general income tax measures rather than single out the oil companies for special taxes. Mr. Beeley observed that there would be no objection to general tax laws or if all exactions from the pipeline companies amounted to fifty per cent. However, his Government was opposed to special laws applying the 50–50 principle to the profits of the pipeline companies.

A general discussion followed in which it was pointed out that IPC and Aramco pay special charges for police protection and other services. However, IPC pays a rather small charge for police protection over and above the 50–50 split with Iraq, while Aramco contribution for this service is computed as a part of the 50–50.

At this point Mr. Eakens observed that the oil companies have put themselves in a special position and made themselves vulnerable to being singled out for special exactions by having negotiated transit concessions under which they have tax immunity. The oil companies probably will continue to be singled out so long as they are not willing to give up this special position. This might be a matter to be explored with the companies.

Mr. Beeley concluded that the discussions at this point seemed to have exhausted the agenda. He hoped that it might be possible to consider a meeting at least once every three months to review the Middle East oil situation. He inquired whether it would be possible to meet once more to tidy up loose ends and to consider the desirability of a quarterly review. It was agreed that the final session of the current talks be held on Thursday, October 1, at 3 p.m., in the NEA conference room.

1. Drafted by Robertson.