888.2553/10–3051: Telegram

No. 119
The Acting Secretary of State to the Embassy in the United Kingdom 1

top secret

2256. Substance fol shld be conveyed by Amb to Brit FonOff soonest.

With knowledge and consent of BritGov, US reps have held series talks with PriMin Mosadeq in endeavor formulate reasonable plan as basis for settlement of oil controversy which wld have chance of acceptance by him and Brit. In these discussions it has been made clear to Dr. Mosadeq that we were not negotiating and cld not negot on behalf of Brit interests, but that we hoped result might be development of a concrete proposal which wld be found acceptable by IranGov and BritGov. We have thus endeavored to obtain from him maximum concessions which wld make this possible. The mutuality of interests which we have with Brit in this matter, and recognition of probable effects upon oil investments elsewhere, have strongly motivated our efforts.
PriMin Mosadeq has indicated how far he wld be prepared to go with respect to several principal elements of problem, although it is understood that nothing that he has told us can be construed as a commitment until there is clear evidence that BritGov wld be prepared simultaneously to commit itself. In meantime it is imperative that substance of discussions between US reps and Dr. Mosadeq be held in strictest secrecy.
Brit shld understand that US has regretfully concluded, on basis of all evidence presently available, that no arrangement with IranGov is possible which wld entail return of AIOC to Iran in any form, or employment of Brit firm for operations in that country. We are fully aware of unfortunate precedent which acceptance of this fact may have upon operations of oil companies elsewhere. There has been some flexibility in positions that Dr. Mosadeq has taken with respect to other aspects of matter, but on this question there has been no flexibility. We are convinced that sit in Iran is such that present govt or any other govt cld not yield on this point. We are hopeful that if this conclusion is accepted by Brit, settlement can be reached and believe that suggested basis for settlement which we now put to Brit for consideration has much to commend it.
Principal aspects of possible settlement relate to questions of management of industry in Iran; status of Abadan refinery; compensation in light of various claims and counter claims of both parties; and necessary arrangements in connection with sale of oil.
Irans are convinced that they can, by employing fon experts in management and technical positions and fon oil co as consultant, effectively conduct operations within Iran relating to the production of oil. In conversation here, however, Irans apparently aware of the enormous difficulties inherent in their running complex refinery. In discussions of this problem and also of problem of compensation arising out of nationalization of refinery, we have explored possibility that Iran wld agree to exclude Abadan refinery from nationalization and permit AIOC to sell it to another fon co (preferably Dutch) which wld operate it. This suggestion is significant part of plan. It wld have advantage of eliminating question of compensation by IranGov for refinery and assuring effective management of refinery and control of products by responsible co. We believe, however, that Iran will not agree to sale of refinery to another Brit co or operation by another co as agent of Brit co, but may agree to ownership and operation by Dutch firm. No doubt appropriate arrangements cld be made between AIOC and Dutch firm for sale, which shld not be of concern to Irans. It is probable that Iran will insist that new firm not employ Brit technicians in Iran except perhaps in initial period of resumption of operations.
Suggested basis for settlement contemplates that NIOC wld be directly responsible for all aspects of production of crude oil. Although we wld have preferred agency arrangement, we believe that arrangement which Irans prepared accept wld be workable. While Dr. Mosadeq wld not agree to inclusion of conditions for internal operation of NIOC in agreement it is believed he wld be prepared to give adequate unilateral assurance at time agreement is negotiated, [Page 251] and make appropriate provision in NIOC statutes, upon fol pts:

NIOC will be governed by board of three Irans and four neutrals, to be employed by NIOC. Neutral gen manager (non-Brit) of nationality designated by IranGov with proven managerial competence will be appointed by and be responsible to board of directors. NIOC will, upon recommendation of gen manager and board of directors, retain as consultants a large oil co (Dutch) with internatl experience, through which NIOC will have access to modern technological methods and whose assistance will be obtained in creating within NIOC the necessary research and management org. Gen manager will be empowered to employ in NIOC necessary fon technicians on an individual contract basis. NIOC under management thus created will assure efficient operations of oil industry in Iran.

Plan envisages that if new agreement negotiated by Iran and Great Britain in which mutuality of interests between them is taken into account, and if AIOC permitted to sell refinery to another fon co, claims and counter claims of both parties relating to compensation for producing properties and other physical assets outside refinery will be offset against each other with no payments made by either side. This wld include Iran claims to past royalties under unratified supplementary agreement. Important consideration in relation to compensation is, of course, that AIOC wld continue to receive major portion of Iran oil at prices which wld make it finan attractive to them.
A primary concern in discussions with Irans has been that finan arrangements must be such as to make it profitable for AIOC to continue to buy large quantities of Iran oil over long period of time. Moreover arrangement must be such as not seriously to dislocate fabric of oil business throughout world. It is clear that IranGov will not accept “sharing of profits” as such. This problem wld be considerably simplified if refinery sold to another fon co which wld operate it. Under the plan IranGov wld receive its revenue from the sale of crude oil and from an income tax in conformity with existing Iran law (approximately 55%) upon the profit or fee recd by the refinery operating co. It is proposed that Iran agree that the refinery tax will not be increased nor the refinery nationalized during the term of agreement. Thus the price for which crude oil is to be sold to AIOC purchasing org for refinery and for export, and the amount of the refinery tax, wld be crux of finan terms vis-à-vis the IranGov.
Based upon Persian Gulf value of crude oil at $1.75 per barrel, a contract price of sterling equivalent to something in vicinity of $1.10 to AIOC purchasing org shld, in the considered judgment of US, be low enough to provide AIOC incentive to purchase the quantities previously refined and sold as crude, and wld not destroy [Page 252] the principle of 50–50 sharing of profits to detriment of existing arrangements in other oil producing countries. IranGov wld cover from proceeds at this price costs of production including necessary capital investments. We do not consider this price to be in excess of other nec costs, including production and pipeline costs, necessary capital investments in production and pipelines, and payments to local govts. Agreement wld, of course, have to include formula under which price paid to IranGov wld fluctuate in accordance with changes in internatl oil prices. It shld be made clear that Irans have not agreed to this price and that this will be most difficult pt.2 We consider it vital to other concessionary arrangements that the price established be in this gen order of magnitude.
Arrangements between AIOC purchasing org and new refinery owner might provide for operating expenses plus a fixed fee. Under this arrangement IranGov wld receive through taxation an established percentage of whatever “refinery profit” is set by the AIOC and the operating co.

Fol is outline of the elements of a settlement which, although it does not necessarily meet all of the present positions of either party, nevertheless, in our judgment, provides basis for settlement which might be found acceptable to both parties: Begin Suggested Basis for Settlement:

I. Management

The NIOC will be directly responsible for all aspects of exploration, production and transportation of crude oil in Iran and will make suitable arrangements to assure efficient operations in Iran.
Abadan refinery will be sold by AIOC (on terms to be determined by AIOC and the buyer) to a non-Brit fon concern which will operate it. This concern will be permitted to employ fon technicians of its own nationality or other nationality mutually agreed by IranGov and operating co. The buyer will undertake to train Irans as rapidly as practicable to the end that Irans will in time fill technical and managerial posts up to the highest level.
New owner will operate the refinery on the basis of costs plus an established refinery profit or a fee to be paid by the AIOC purchasing org, established in accordance with II (a) below. (See also II (c) below)
Kermanshah refinery, producing for internal Iran requirements, will be owned and operated by NIOC.
[Page 253]

II. Marketing

AIOC will establish a purchasing org to buy, ship and market Iran oil on behalf of the former customers of that oil, provided such customers evidence their willingness in writing to have the new org act in this respect.
Purchasing org will contract to buy for a period of fifteen years crude oil produced by the NIOC, for crude oil requirements of the Abadan refinery and for export. The quantity shall be a minimum of 30 mil tons per annum, after requirements for Iran internal consumption have been met. This rate to be reached as rapidly as tankers can be made available and the refinery brought to full operation.
Purchasing org will receive all products of the Abadan refinery, less up to one mil tons required for Iran internal consumption. Oil products produced by Abadan refinery for IranGov will be at costs plus reasonable profit.
Purchasing org will sell oil and products, in the first instance, proportionately to old customers of AIOC.
NIOC may market directly crude oil produced in excess of that sold to the purchasing org for the refinery and export. Such direct sales to other customers will, however, be at prices which wld not be prejudicial to the long-term contracts with the purchasing org.

III. Prices

Purchasing org must be able to buy both crude oil and refined products at prices sufficiently low to enable it to compete successfully in world oil trade and to assure that Iran remains competitive with alternative sources of supply. Taking into account all factors involved in determining a fair price under the present world pricing situation, the Iran and Brit Govts, with assistance of reps of the US, will agree upon the amount for which crude oil will be sold by the NIOC to the purchasing org for export and the refinery. The parties will agree upon a formula for equitable price adjustments at frequent intervals on the basis of changes in world oil prices.
Payments to NIOC for crude oil will be in sterling.
NIOC will bear the cost of production of crude oil including delivery to refinery or tidewater.
NIOC will decide what proportion of the proceeds of sales will, in addition to expenditures under normal cost figures for maintenance of existing facilities, be invested to expand production of crude oil.
All refined products for export will be turned over by the refinery company to the purchasing org under arrangements to be worked out by the new owner and the purchasing org.
It is recognized that Brit interests are entitled to compensation for the oil producing and other non-refinery facilities, and that claims and counter claims have been made by both Brit and Irans. In consideration of agreement between the two parties upon a new basis for conducting the Iran oil industry, for ownership and operation of the Abadan refinery, and for the sale and marketing of Iran oil, the claims and counter claims of the parties with respect to compensation will by mutual agreement be cancelled.
[Page 254]

IV. Other Provisions

IranGov will agree that taxes against the refinery will not be increased during the term of the contract, and that no additional requirements not now envisaged in the agreement and which wld have the effect of altering arbitrarily the agreement as conceived, will be imposed.
IranGov will undertake not to nationalize the refinery for the term of the agreement.
Immed upon formal acceptance by two parties of foregoing as basis for negot agreement, AIOC will commence shipments of oil and products now available at Abadan, prices to be those established under formula proposed herein. In order to alleviate current finan problems of IranGov, AIOC will immed make advance payment of 5 mil pounds to IranGov for oil to be purchased. End Suggested Basis for Settlement.

While not specified in “Suggested Basis for Settlement,” fol wld be understood by both parties:
“Non-Brit fon concern” in para I (b) wld be Dutch, although this not stated since discussions presumably will not have taken place between Brit and Dutch interests at time plan is agreed to by Iran and UK.
With ref para I (c), costs relating to operating refinery must in Iran view include expenditures for construction additional housing for workers.
While price for crude oil is not mentioned in Suggested Basis for Settlement great importance is attached to understanding by both parties that this wld under present circumstances be sterling equivalent of about $1.10 per barrel. Figure is omitted as inappropriate to be specified in US suggestion.
It is hoped that BritGov will give this matter most urgent consideration and inform us at earliest possible moment as to its reactions and view as to whether negot with IranGov might be conducted on foregoing basis. In this connection while it may be possible to make some modifications in the plan to meet any particular pts which Brit might have, we are not hopeful that major concessions beyond those indicated can be obtained from Iran.
It is proposed that if Brit advise us that plan wld be acceptable as principles under which negots can be resumed, we wld then seek Dr. Mosadeq’s tentative approval. He wld not be told of Brit concurrence, however, until after he has indicated his own approval. If he likewise approves (he may have to first seek authority from Tehran) and is prepared to accept a price figure agreeable to Brit, it is suggested that plan set forth in para 11 above be initialed simultaneously by Dr. Mosadeq and Brit Amb in Wash after which it is earnestly hoped that Brit negotiating mission will be sent to Wash within very few days to obtain agreement on practical steps required to carry out plan. We feel Brit will agree that negots in [Page 255] country other than Iran or UK wld be most advantageous. Dr. Mosadeq has indicated that he wld be prepared to stay here for such negots provided they can take place in immed future. He is accompanied by large staff including officials needed by him to conduct negots.3

We believe that, provided price question can be worked out on some reasonable basis, present time offers best opportunity for settlement before situation has deteriorated beyond recovery. We believe it very much in Brit interest, and in interest entire free world, not to lose this opportunity as another may not present itself.

Brit shld understand that while we are reasonably optimistic re chances of Irans accepting other features of plan we are less optimistic re chance they will agree to price for crude oil sales outlined in para 9. At this time there is substantial gulf between minimum indicated by Irans and maximum which we believe feasible. We are hopeful that they will come down, however, and our suggested solution is based on the assumption that they will do so.

You shld make it clear, in explaining details of proposal, that USGov does not wish Amer firms to serve either as consultants to NIOC or as operators of Abadan refinery. Moreover, it is our earnest desire that to fullest practicable extent technicians employed by NIOC or refinery be non-Amer, altho we wld be willing to assist in any practical way in assuring that operations are carried out efficiently.

You shld also emphasize extreme secrecy of this entire matter and fact that suggestions put forward above must be considered as suggested US proposals and not as plan agreed to by Mosadeq. It is earnestly hoped that there will be no leaks to press on any aspect of this proposal.4

  1. Drafted by Rountree and cleared by Bonbright, Linder, Nitze, and Matthews. Repeated to Paris, eyes only for Secretary Acheson, and to Tehran, eyes only for Ambassador Henderson.
  2. Following the discussion on Oct. 29 (footnote 3, supra ,) McGhee met again with Mosadeq Oct. 30 to consider the price question further. McGhee explained in detail the arrangements in Saudi Arabia and Kuwait, indicating that prices in those countries were well below $1.75, but Mosadeq remained adamant in his insistence on the figure. (Memorandum of conversation, Oct. 30; 888.2553/10–3051)
  3. At this point in the source text the following sentence was deleted before transmission: “In discussing foregoing with BritGov you shld emphasize that US wld be gravely concerned over consequences of failure to agree to settlement of dispute before PriMin Mossadegh returns to Iran.”
  4. The substance of this telegram was conveyed to the Foreign Office on Oct. 30, but no reply was immediately forthcoming. On Nov. 2 and 3, Harriman and Linder, who were on their way to Paris, stopped in London for discussions with the British who at that time indicated that they had a number of reservations about the proposals. Gifford also reported on Nov. 3 that the British would need to place the matter before the Cabinet before a final decision could be made, but would not feel justified in asking the United States to persuade Mosadeq to remain in Washington with a view to negotiating on the basis of the U.S. proposals. (Telegrams 2109, 2178, 2179, and 2181 from London, Oct. 31–Nov. 3; 888.2553/10–3151 through 11–351)