880.2553/12–1853
No. 321
Agreed Minutes of the Second Session of
the United States-French Talks on Middle East Oil
Present:
- French
- M. Clauzel
- M. Maillard
- M. Blancard
- M. Benard
- M. Carraud
- M. Queuille
- Department
- NE—Mr. Hart
- NE—Mr. Gay
- OMP—Mr. Armstrong
- PED—Mr. Eakens
- L/E—Mr. Czyzak
- NE—Mr. Fritzlan
- PED—Mr. Miller
Second Meeting, December 18, 1953, 3:00 p.m.
The discussions resumed with M. Blancard continuing his justification of the necessity of basing the 50–50 arrangements on a discounted price. He noted that the companies producing oil in the Middle East must continually find new markets for their greatly increased production. This is a difficult problem for those companies without large established markets able to absorb the increases. It is absolutely necessary for these companies to give discounts to dispose of their large surpluses of oil. M. Blancard illustrated this point by citing the discount that Gulf allows Shell under their long-term contract and also the similar discount allowed by AIOC to Petrofina Belge. M. Blancard concluded that CFP is thus justified in receiving a discount from IPC for the crude it markets in France. Also CFP must offer a discount to move its surplus crude onto other markets. For such crude, a profit sharing arrangement based on posted prices would not be a true 50–50 arrangement as the net return accruing to CFP is not the posted price but the discounted price.
Mr. Eakens replied by stating that the Department did not advise Aramco on the matter of reducing the current discount, but it would now seem impossible for Aramco to withdraw its offer to reduce the discount to 2 per cent. In any event, Mr. Eakens continued, there seem to be some arguments for basing the 50–50 arrangements on the posted prices. The posted price is a public figure that is not dependent on accounting procedures for its computation. This would tend to make its acceptance easier for all parties. Probably actual sales prices which are used in Venezuela would be [Page 757] a better base but if large amounts of oil are sold in the Middle East under the posted price, the posted price would tend to drop.
Mr. Eakens stated that he believed a distinction should be drawn between the discount taken by IPC and that taken by Aramco. The IPC negotiated its discount with the Iraq Government and the Government was therefore explicitly aware of its existence. However, this was not true in the Saudi-Aramco agreement. Here the agreement was made on the basis of Aramco’s selling price with the discount not specifically negotiated.
M. Blancard replied that the posted price is a retail price or the price at which spot sales and single cargoes are sold; that large amounts of oil sold under long-term contracts almost inevitably are priced below the posted price.
M. Blancard then turned the discussion to the retroactive feature of Saudi Arabia’s demands. He reiterated the French position that acceptance of this demand would be an unfortunate breach of the principle of stability of contracts. He observed that acceptance would also carry the implication that the companies had not dealt fairly with the countries in the past. This would be especially unfortunate for IPC at this time since the company’s relations with the Government have been very friendly and satisfactory. M. Blancard was apprehensive lest this implication would add force to the ever present demand for nationalization. Also, he stated, if the IPC was forced to make retroactive payments, CFP’s share of the payment would approximate $25,000,000. M. Blancard expressed the opinion that a lump sum payment of this type would cause difficulties for CFP. M. Blancard continued by noting the oil companies operate under widely varying fiscal laws that might give each a different viewpoint towards retroactive payments. The French laws are such that CFP could not receive credit against past taxes for retroactive payments. He concluded by posing two questions. Will Aramco accept the demand for retroactive payment? And, if so, what would be Aramco’s status under U.S. fiscal laws?
In answer to the first question, Mr. Eakens stated that it is our understanding that Aramco will resist Saudi demands and negotiate the best settlement possible in the circumstances. Mr. Czyzak agreed to inquire as to the answer to the second question and report at a later meeting.1
M. Maillard at this point put forward the additional consideration that such large retroactive payments would tend to aggravate the unbalanced situation existing in the Middle East between the producing and non-producing countries. He cited the fact that of the $500 million a year payments to the Middle East countries, [Page 758] only $20 million went to the transit countries and the remaining $480 million went to the producing companies. M. Clauzel stated this would aggravate the already unbalanced conditions and tend to increase the difficulties being faced by both IPC and Tapline in their attempts to negotiate with the transit countries.
M. Clauzel began discussion of the transit problem by setting forth the French views. He noted that under the terms of the Barcelona Convention the use of a country’s territory for the transit of goods should be free, except for small service charges. Thus, the 50–50 principle should not apply to transit payments. He stated that the negotiations of one company will have important effects on the position of the other company and expressed concern lest either weaken. M. Clauzel concluded that to abridge the principle of free transit would create a dangerous precedent which might have serious effects elsewhere in the world. He cited the possibility that the Egyptian Government might in the future seek to levy substantial tolls on the traffic through the Suez Canal should such a precedent be created by the pipe line companies.
Mr. Armstrong stated that there is good reason to pay for the movement of oil through pipe lines on the same basis as freight is ordinarily paid, that is on tonnage and mileage. He reported that in discussions with representatives of both Tapline and the American members of IPC, efforts had been made to encourage them to give careful thought as to where their negotiations were leading. From all indications, Mr. Armstrong reported, neither Tapline nor IPC is considering making concessions.
Mr. Eakens mentioned that there was a precedent in the U.S. which should be given consideration. There is a pipe line running from Portland to Montreal through which Venezuelan oil is run. The U.S. treats the portion lying within its borders the same as any other corporation and taxes its profits at the current 52 per cent rate. One possibility would be to separate the producing and pipe line operations in the Middle East and then to have profits accruing to the pipe lines taxed in each country at the tax rates applicable to all other companies. The danger in such a course is that taxes which on the face were non-discriminatory but which in fact were discriminatory might be levied against the companies.
In answer to a question by M. Maillard, Mr. Eakens replied that the companies do not thus far seem to have adhered to any principle in their transit negotiations. Payments currently being made consist of loading fees, transit fees and security payments. They also include a lump sum payment to each transit country because it is not taking the 200,000 tons of oil annually which it is entitled to purchase at world prices. The companies seem to be divided between whether to offer to pay a fee based on the ton-mile principle [Page 759] or whether to negotiate a lump sum payment for the right of transit.
Mr. Hart inquired whether the French had done any thinking on what position the companies should take if their refusals to renegotiate are fruitless.
M. Blancard answered that they were strongly opposed to any type of profit-sharing arrangement. If it is necessary to increase the payments to the transit countries, then it should be done using the current system of payments and merely increasing the amounts.
Mr. Eakens concluded the discussions for the afternoon with the observation that the IPC by basing their 50–50 agreement with Iraq on the border price of $1.84 per barrel may have set a difficult precedent. Sharing the profits on the basis of the border price in effect means that the company is now sharing with Iraq that part of the profits resulting from the transportation of Iraq oil from the oil fields to the border, which is a substantial part of the distance to the loading ports.