880.2553/4–554
No. 336
United States Record of the First
Session of the United States–United Kingdom Talks on Middle East
Oil1
Subject:
- US–UK Middle East Oil Talks Meeting, 3:00 P.M., April 5, 1954
Participants:
- Messrs. Beeley, MacGinnis, Brook and Druitt—British Embassy
- Mr. Armstrong—OMP
- Mr. Dorsey—NE
- Mr. Fritzlan—NE
- Mr. Gay—NE
- Mr. Metzger—L/E
- Mr. Eakens—PED
At this meeting discussion was completed on the first three items of the agenda attached as Annex A.
I. Pipe Line Transit Agreements in the Middle East
The British representatives generally indicated the status of the views and plans of IPC in regard to pipe line transit negotiations. IPC does not expect to engage in negotiations with Syria until after [Page 797] the Syrian elections. Meanwhile neither Syria nor Lebanon is being informed of the IPC position. This position, which was previously communicated to the Department and in regard to which the Department did not raise any questions, is that IPC will offer to pay each transited country 7 per cent on its investment within the country. Seven per cent is the return which is permitted oil pipe line companies to disburse as dividends under the consent decree entered into by the United States Government and the oil pipe line companies several years ago. In discussing the 7 per cent formula it was noted that pipe line companies in the United States under the consent decree have an incentive to so establish their rates that their earnings remaining after payment of the 52 per cent corporation tax will be equal to 7 per cent of their approved rate base. They do not have an incentive to earn more because higher earnings cannot be paid as dividends and when left in the company do not become a part of the rate base.
It was also noted on the U.S. side that the 7 per cent formula would probably work out to be much more favorable to IPC than to Tapline because of the higher pipe line differential which IPC currently enjoys. The 7 per cent is probably substantially less than one-half of the pipe line profits now being realized by IPC whereas it seems likely that it will closely approximate half of Tapline’s profits.
Recognizing that Tapline is certain to be directly affected by IPC’s proposal of the 7 per cent formula, the British suggested that there was need for IPC–Tapline consultation on this question. It was observed on the U.S. side that it was assumed that coordination was taking place through the common American interests in IPC and Tapline.
One question which IPC has not yet decided is whether the 7 per cent should be made as a single payment or whether it should be broken down as the payments now are among a number of different types of payments. The British representatives seemed generally to think that there was merit in combining into a single payment the entire amount due the transit countries in lieu of taxes and other payments. A lump sum for all purposes might assist in forestalling new reasons for new types of payments.
U.S. representatives indicated that it would be useful to know when IPC is going to make its proposal to the Syrians. They also suggested that if IPC would keep the American Embassy informed regarding developments, the U.S. would be in a position to be as helpful as possible in the event problems arose. The British agreed with this suggestion.
[Page 798]II. Saudi Arabia
A. Status of Aramco–SAG negotiations
The U.S. representatives briefly reported on this point. The negotiations have been postponed from month to month since last fall and currently are postponed until early in May. It seems doubtful, however, in view of the beginning of Ramadan, that the negotiations will begin before June.
The British inquired whether there had not been some letters exchanged between Aramco and Saudi Arabia. They were informed that the Department was not aware of any except the Aramco offer last fall to adjust the settlement price to the posted price less 2 per cent. It developed that this letter was written after the U.S.–U.K. oil discussions last fall and hence was not discussed at that time. In the discussion the British questioned whether the Aramco offer did not jeopardize the 50–50 principle. The Department representatives expressed the view that the 2 per cent was probably sufficient to cover marketing costs and hence did not jeopardize 50–50 as long as oil was sold at posted prices. If any significant amount were sold below posted prices, however, and settlement were made on the proposed Aramco basis, the Saudi Government might receive more than 50 per cent of the profit. It would seem likely in such circumstances, though, that there would be a strong tendency for posted prices to be readjusted to actual prices so that in fact the proposed Aramco basis of settlement should not be out of line with 50–50 either very significantly or over any long period of time.
B. Status of Onassis tanker deal
The British were informed that as late as three weeks ago the Onassis tanker contract with Saudi Arabia had not been confirmed by the King and the Council of Ministers. In fact, an Arab radio broadcast took the U.S. to task for references to such a contract because, according to the broadcast, there was no such agreement. The Department’s latest information, however, is that the Onassis contract is under consideration by the Council of Ministers. The provisions of the Onassis contract were discussed in general terms.
The British had information on Onassis’ activities to the effect that he is believed to be making efforts to negotiate a similar contract with Iraq, and possibly also with Iran, under which he would be given the exclusive right to ship all or part of the oil produced in those countries. It was agreed that both sides should endeavor to develop any further information which may be available in regard to such negotiations. The British were concerned over the Onassis contract with Saudi Arabia because they view it as a flag discrimination and they think it also violates the right of the companies to handle their oil as they see fit.
[Page 799]It was generally recognized that in view of the rebates which are provided for in the Onassis contract, the contract would violate the 50–50 principle.
C. Implications of boundary questions for international oil development
At the beginning of the discussion of this question the Department representatives made it clear that the Buraimi boundary problem was being handled in different channels and that they did not wish to discuss the Buraimi problem as such.2 The British did say, however, that they wished to make their position clear in regard to the Buraimi dispute. Their proposal to Saudi Arabia for settlement of the dispute did contain stipulations to the effect that IPC was to continue to carry on its exploration work in the disputed area. The British recognized, however, that any territory which was awarded Saudi Arabia in the settlement of the dispute would come within Aramco’s concession, and they did not wish to do anything which would in any way compromise Aramco’s concession. If the territory in which IPC is exploring were awarded to Saudi Arabia, IPC would be interested in obtaining a concession on that territory if Aramco were willing to give it up. On the other hand, if Aramco did not wish to give up territory in which IPC had been working and which had been awarded to Saudi Arabia, the British would of course recognize Aramco’s concession rights and IPC would withdraw.
The British expressed the view that Saudi Arabia was trying to round out its boundaries to the south and southwest and that the Buraimi question undoubtedly arose because the Buraimi route was one of the routes most used. The British suggested that in addition to Buraimi there were two other areas in which Saudi Arabia’s southern boundaries were important. One of these was the boundary with Muscat, but the foreign relations of Muscat are not under British control although at the Sultan’s request the British are acting for him on the Buraimi question. The other areas where the southern boundary of Saudi Arabia is important is with the Aden Protectorate, including the Hadhramaut. Recently there have been two incidents concerning this latter boundary. In the first case an Aramco party was asked by British officials to leave an area north of the Violet Line which had been agreed upon between the British and the old Ottoman Empire in 1914. In another case an Aramco party crossed the Violet Line and was asked to leave.
These two incidents pointed up the boundary question in that area. While the British were not anxious to take on any other boundary problems until the Buraimi question had been resolved, [Page 800] they did invite an expression of U.S. views regarding the Aden–Hadhramaut boundary with Saudi Arabia. The Department’s representatives agreed to look into this question and subsequently to inform the British of their views.
III. Reexamination of Attitudes Toward 50–50 Oil Concession Agreements
There was some general discussion on this point from which it was evident that there had been no significant new developments since the last U.S.–U.K. oil talks. One suggestion to which no one took exception was that as soon as all of the principal concession agreements had been brought up to a 50–50 basis the time would have arrived when serious thought would have to be given to whether the U.S. and U.K. Governments were not going to have to take a more direct interest in the substantive provisions of concession contracts.
The British had one point in this connection that was giving them some concern. This was the question of oil companies being required to provide facilities for the general public which would normally be provided by governments. It came up in Kuwait recently when the Kuwait Oil Company was asked to build a 1 million pound school for Kuwaiti children. The British believe that such demands should be resisted and the Kuwait Oil Company is resisting this request. The British stated that IPC and the Consortium in Iran will take the same line in regard to similar demands.
It was generally recognized that the oil companies would have to provide schools, hospitals, and other facilities for their own workers and their workers’ families, but it was agreed that it was not proper for them to provide normal governmental facilities and services for the general public. How to maintain such a position would always be a problem since there would probably always be minor exceptions which could not be resisted.
One point which the British made was that an oil company would tend to become less of an empire within a country if it confined such facilities to its own personnel.
Two questions were raised in this connection: One was whether the expenses of the education of the fifty Iraqis, which is provided for in the IPC agreement, are included in the cost of operating the concession or whether such costs are outside. The British were not sure of the answer to this question and undertook to provide the answer at a subsequent meeting.
The British raised the question as to whether the royal decree which terminated the recent strike in Saudi Arabia did not require Aramco to provide certain service to the general Saudi Arabian [Page 801] public. The Department representatives undertook to provide the answer to this question.
- No drafter was listed for any of the three talks with the British. Circular airgram 6556, May 13, transmitted the record of the three talks to Department of State representatives in the Middle East for information and any comment they might wish to make on them. (880.2553/5–1354)↩
- For documentation on this topic, see Documents 1466 ff.↩