Foreign Relations of the United States, 1952–1954, Iran, 1951–1954, Volume X

888.2553/10–2052: Telegram

No. 229
The Ambassador in the United Kingdom (Gifford) to the Department of State¹

top secret
priority

London, October 20, 1952—5 p.m.

2288. Eyes only Bruce and Byroade. At outset of first mtg Oct 19 with Strang and others of Brit team,²Strang said that they wld like to get immed into certain specific probs such as the adequacy of the amount of compensation, the effect upon other producing countries of the absorption of the quantities of oil from Iran contemplated by our proposal, management probs and questions of price.

Nitze said that we had come over with no specific plan, that we had been working hard to develop tools which might be useful in working out a solution to the oil controversy, that we wished to discuss the gen concepts underlining a solution and that he wld like first to get from the Brit any ideas that they might have as to how the tools that we had developed cld be employed in arriving at a settlement.

The Brit had no ideas of their own to put forward and reverted to their specific questions. There followed first a discussion of the adequacy of the compensation. Butler said that the Brit figured 30 mil tons of oil and products wld represent a value of about approx 5 pounds per ton or $420 mils. Nitze indicated that we thought the replacements cost new of the facilities might be in excess of such a figure, that the orig cost to AIOC was certainly less than such a figure, that the depreciated value was far less and pointed out that AIOC had had the benefit of the depreciation reserves accrued in the past. He went on to say that in our view $420 mils of compensation wld in fact compensate the fair value of assets taken and wld include some allowance for unilateral rupture of the contract. The Iranians, on the other hand, cld well argue that $420 mils was less than the replacement cost new of the physical assets. Flett said the Iranians had been seeking pounds 350 mils of insurance against the former AIOC facilities in Iran. Rowan argued that any figure such as we contemplated might have an adverse effect on other concessions and reverted to impartial arbitration as being the preferable method from their standpoint.

There followed some discussion of the prospect of Iran agreeing to impartial arbitration on any basis acceptable to the UK. It seemed to be gen agreed that this was unlikely.

There followed a discussion of the impact on other producing countries of a restoration of Iranian prod in the quantities contemplated by our proposal. Nitze said we were quite aware that a real prob was involved. However, the rate of increase in East Hemisphere requirements had been approx 700,000 barrels per day in recent years. (Butler questioned this.) This rate might decline somewhat in the future, but over a period of two or three years it shld be possible to absorb Iranian prod without too much difficulty. In the meantime, Kuwait, Saudi Arabian and Iraqi production was probably abnormally high and some reduction in these rates might make possible the absorption of restored Iranian output. The Brit noted that under the concession terms Iraq prod had to be increased by certain amounts each year. There followed a discussion of the quantities to be purchased contemplated by our proposals. Nitze said that Henderson had indicated that a reduction of the 25 mil ton figure to 15 or 20 mil tons might make the proposals more acceptable to the Iranians. Brit team indicated that smaller quantities might also be easier from their standpoint. Butler indicated that he had rather come around to the view that it might be best from the UK’s point of view to get compensation and not get involved in the probs of helping Iran market the rest of its prod.

There followed a discussion of management. Nitze said we thought this was a difficult prob, but not insuperable. He asked whether the Brit wld have any objection to an Amer firm such as Bechtel–McCone, Kellex or the Brown firms, assisting the Iranians in the operation of the properties in Iran. Rowan said they wld have no objection provided there had been a settlement of the compensation issue. Nitze said that the coordination of distributing and refining operations might be somewhat easier if the distributing company were a Dutch company rather than a subsidiary of AIOC. He said that he understood that The Royal Dutch Shell was handled as a Brit enterprise in the UK Treas operations. Rowan confirmed that this was true until 1956 when it comes up for renegotiation. Rowan said the Treas had serious probs with the fon exchange difficulties that cld be anticipated were Iranian prod to be restored in such a way as to move substantial quantities into sterling areas. He said that prior to nationalization the Treas had had to convert considerable quantities of sterling earnings by Iran into dols. The Bank Melli had cooperated in holding Iranian dol purchases to a minimum, but nevertheless, substantial conversions had had to be made. Similar probs wld arise and under more difficult circumstances were Iran again to become a substantial earner of sterling.

There followed a discussion of the possible advance of up to $100 mils against an oil purchase contract by DMPA. Nitze said that we hoped the full $100 mils wld not have to be used and that AIOC wld be able to participate in either making in advance or in making a contribution as part of the settlement of compensation and claims.

At this point Strang suggested that AIOC reps and Levy be invited to join the mtg to discuss prices; Nitze suggested that there be a prior discussion of Mr. Henderson’s initiative in Tehran and the tactics which might be followed. He then outlined the proposal described in London’s tel 2281 of Oct 19.³ A report on the subsequent mtg with AIOC reps will follow.

Gifford

1. Repeated to Tehran eyes only for Henderson and to the U.S. Mission at the United Nations in New York for the Secretary of State. (888.2553/10–2052)
2. A report on this meeting was sent to the Department in telegram 2281 from London, Oct. 19. (888.2553/10–1952)
3. Not printed. (888.2553/10–1952) The proposal dealt with, among other things, the portion of compensation for the company and the time period and quantities of oil to be covered in a purchasing agreement.