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

880.2553/12–2153

No. 322
Agreed Minutes of the Third Session of the United States-French Talks on Middle East Oil

secret

[Washington, December 21, 1953.]

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

Third Meeting, December 21, 1953, 10:00 a.m.

Mr. Czyzak began the meeting by reporting that under the U.S. income tax laws a taxpayer may amend his returns covering the past three years. Thus, if Aramco agrees to make retroactive payments to Saudi Arabia, it may amend its returns for the past three years to take account of the adjustments made to the Saudi Government. Whether or not the claims would be allowed, would be for the Bureau of Internal Revenue or the courts to decide.

Mr. Eakens then resumed discussion of the transit problem by making the following observations. The Department has as yet an open mind on a solution to the transit problem but believes it important eventually to arrive at a sound and defensible basis of payments. Mr. Eakens questioned whether the pipe line transit problem can be considered merely that of moving a commodity in transit across the countries involved. The pipe line companies in fact are operating businesses with a large capital investment within the transit countries and would seem to be fairly comparable to the position of railroads except that they are performing the service of transportation only for themselves. One possibility would be for the pipe line companies to be incorporated as separate entities which would negotiate with the governments as internal business enterprises rather than as shippers moving goods through their territory.

Mr. Armstrong recalled that in the past work had been done internationally on transit problems. However, he did not believe that heretofore pipe lines had been considered as a means of transit. Therefore, he stated, it might be necessary to examine the pipe line problem as it relates to other transit problems. He noted in regard to the suggestion that pipe lines be operated as internal business enterprises, that this would necessitate giving up the tax free arrangements, thus exposing the companies to the risk of discriminatory tax laws. Although, if such were the case, the U.S. would undoubtedly make representations.

Mr. Czyzak explained that discrimination is only considered to exist in situations where individuals or companies are penalized because of their nationality. If the tax laws were drafted to be applicable to all, but, in fact, only applied to pipe line companies, a problem would arise as to whether that could be proved to be discrimination.

M. Blancard, in reply to a question from Mr. Gay, agreed that it was unfortunate that the profit-sharing arrangement between IPC and Iraq was based on the border price of crude. He stated that the well head price would have been a more fortunate choice. However, M. Blancard did not believe that this need be taken as a precedent for the nonproducing countries. He held that the situations were quite different as between producing and transit countries. He agreed there was some justification for a 50–50 arrangement in a producing country, in that its irreplaceable natural resources are being depleted. However, he did not believe any justification existed for sharing profits with a transit country. M. Blancard again mentioned the danger that any profit sharing solution might be used as an unfortunate precedent by other countries that control strategic transit routes such as the Suez Canal. He concluded by adding that to admit the profit sharing principle as applicable to the pipe line problem would be to create another barrier to decreasing the price of oil in the Middle East.

Mr. Eakens replied that on the other hand there seem to be many advantages for a 50–50 arrangement. It would represent a principle on which companies could base their negotiating positions. Such an arrangement would also have an appeal to fairness and equity. It would allow the companies to point out that the transit countries are being accorded the same treatment as producing countries. And, finally, it would represent a strategic line for restricting demand by the countries for larger and larger payments.

Mr. Armstrong agreed that the present system of bargaining holds the seeds of trouble in that no principles are being utilized by either the companies or the countries. There is now no logical way of arguing that one solution is more just than another. This would seem to allow the countries to continue to raise their demands in the future without restriction.

Mr. Hart, however, cautioned that it is misleading to apply Western principles of fairness, equality and logic to the situation that now applies in the Middle East. The companies face in that area demands arising out of internal social and political pressures and it is very doubtful whether abiding by formulas in negotiations can defeat these demands for petroleum products. He questioned whether a solution might not be to make available supplies of cheap products in those areas.

Mr. Armstrong maintained that if the companies decided to utilize the profit sharing principle as a basis for negotiating their transit problem, they would not necessarily have to apply it immediately. The companies could continue negotiating for minimum payments, having the 50–50 principle in mind as a limit. If this limit should be reached, then the principle could be used as a basis for refusing to go further.

Mr. Hart disclosed that some consideration has been given to the possibility that the pipe line companies incorporate as separate entities and then make available blocs of stock to the public in the transit countries. This might create some internal pressure to help in limiting the governments’ demands.

M. Blancard believed, however, that this possibility could cause considerable difficulties and could even become dangerous. He pointed out that as the investments in pipe lines are huge, the public could only afford a negligible share of ownership. Also such difficult questions would be raised as the price per share to be charged and whether or not the shares would be voting shares. Finally, it might be very difficult to refuse to permit the local government, if it should desire to do so, to obtain some of the outstanding shares.