The Ambassador in the United Kingdom
(Gifford) to the
Department of State
2844. Eyes only Bruce, Byroade and Nitze. Following is abbreviated text paper on Iran oil problem handed us by FonOff today under conditions set forth Embtel 2845 today:2
- There will be three stages of development:
- Inter-governmental discussions leading to agreement for assessment compensation by arbitration by ICJ or other impartial person or body.
- Agreement referred to under I having been reached, then
- Iran wld be free sell to anyone.
AIOC wld enter into commercial negotiations with Iran in endeavor make interim agreement for purchase oil during period until arbitration award announced.
Contemplated agreement wld be made by 100 percent subsidiary of AIOC referred below as “export company”.
- Seems that DMPA wld be prepared lift oil and advance considerable sums money against contracted quantities. Not clear whether they wld be prepared, as we shld hope, do this through export company, or direct. Quantities involved might vary between 1 and 3.5 million tons per annum.
- Following announcement arbitration award, longer-term arrangements wld be made by company with Iran to replace interim agreement and to give effect to arbitration award. Award cld be discharged in form of “compensation oil” over a period when it is assumed that company wld, in addition to receiving “compensation oil”, be purchasing oil.
Purpose this note is to give general review of ground to be covered in commercial negotiations between AIOC and Iran for interim agreement (Stage II(b) above).
Two important matters, beyond scope normal commercial negotiations for purchase of oil, on which agreement should be reached with Iran are:
- Essential that Iran shld agree not interfere with any tankers sent Iran ports for export company’s loadings, nor with any craft available to assist in handling tankers. This might be covered by [Page 523] exchange of letters between governments if it proves impracticable deal with it in arbitration agreement.
- Most desirable Iran shld undertake that proportion revenue from all sales of oil during period of arbitration be paid into neutral account, to be held against arbitration award.
These two points shld preferably be dealt with between governments or with some kind of governmental cover, and if possible before commercial negotiations begin. In any case, commercial negotiations cld not be concluded until satisfactory understanding on them had been reached.
- Fundamental feature Stage II is that Iran wld be free sell oil to all comers. Iran, therefore, may be negotiating with other potential buyers at same time negotiations with company proceeding. References in this note to possible terms and conditions of contract to be made by company relate solely to oil with which company wld be concerned; terms to be obtained by other buyers wld be matters for them to negotiate themselves. Company’s position wld be it can materially assist towards desired objective of achieving exports from Iran on substantial scale provided satisfactory terms can be arranged, and, of course, export company wld be free dispose of oil it acquires to anyone—including possibly DMPA (See II(c) above).
- Commercial negotiation will call for flexible approach; neither practicable nor advisable attempt in advance specify too much. Fundamental points are those relating quantities, prices and payment, but agreement wld also need be reached on other considerations (see paragraph 8 below) which must be covered in any normal commercial contract.
Quantities. Commitment which export company cld undertake and speed of build-up from stage of initial liftings depend—apart from price factor—on practical questions such as what qualities will be available, and conditions in port.
Assuming satisfactory price basis evolved, that good range products available, satisfactory specifications, and that port conditions satisfactory, this contemplated export company’s off-take (excluding any possible DMPA tonnages) might be developed within a year up to rate of 7.5 million tons per annum of products (or more in favorable circumstance) or say 10 million tons, allowing also for crude oil.
Price. There are basic considerations that arrangements must be such as not to risk undesirable repercussions in adjoining areas, and so framed as not inhibit transition later on to longer-term arrangements in Stage III. Still consistent with observance these basic considerations there is room for variety of method in reaching satisfactory result.[Page 524]
Eminently desirable pricing formulae be simple as possible and agreement include provision for export company to be given benefit any lower prices which Iran might quote others.
In case of crude, it is felt aim should be straight discount off Persian Gulf posted price.
In case of products, matter could be developed on either of two methods, both of which regarded as open for negotiation:
- Discount off US Gulf posted price for individual products (Platt’s “low”) together with provision for freight absorption element; or
- Crude oil price, together with charge for refining to give agreed yield of products.
Both in case of crude and of products, arrangements should include provision for payment of proportion of purchase price into neutral account, as mentioned in paragraph 2. Such provision most desirable as matter of principle and also in relation need to avoid appearance of disparity in other areas.
There is also question of price for oil in stock, which calls for separate consideration as costs of producing it have already been borne by company. There could be flat rate of payment per ton for all products (at rate approximating government price in adjacent areas) or, alternatively, payment cld be made at varying rates per ton for the several products at percentage of products’ low value. There is, however, possibility that claim will be made that oil in stock be regarded as asset belonging to AIOC, and therefore included in their claim for arbitration; if regarded in this way it would not call for separate treatment.
Payment. Contemplated that provisional payment wld be made on telegraphic advice of quantities loaded, cargo by cargo, thus ensuring flow of revenue to Iran as oil shipped. Provisional payments would be subject adjustment when full details of cargo available.
Contemplated export company wld pay in sterling; arrangements in respect convertibility wld be matter for inter-governmental settlement.
- Other considerations. Certain practical considerations, relevant to how soon shipments cld begin, will need be cleared. Will be appreciated many of these considerations will concern not only export company but also other purchasers.
Ships could not be sent to load until ascertained by appropriate expert inspection that tankers can be safely berthed, that necessary depth of water available at jetties (not known to what extent silting may have taken place) and that all other facilities for safe handling of ships are available. A shipping agency service (which [Page 525] might be established by some independent firm) will need be constituted, and consideration will have be given in matters as shore accommodation for ships crews.
Arrangements will need be made for certification quality and quantity of supplies loaded; wld seem advisable, in interests both of supplier and lifter, that independent inspection service be appointed do this work. Will in particular be necessary establish quality of oil in stock from which initial liftings wld be supplied. Assurance that oil to be shipped is of satisfactory marketable specification clearly essential as regards both supplies to be drawn from initial stocks and those from subsequent production.
Full text by pouch.3