888.2553/3–1754: Telegram

No. 437
The Ambassador in the United Kingdom (Aldrich) to the Department of State1


3992. From Hoover. Limited distribution. American group delivered to AIOC this morning reply to Fraser’s memorandum of March 14 (Embtel 3964 to Department 169 to Tehran).2

Following is summary: [Page 951]

AIOC and American groups respective proposals of March 12 differ in following respects:
AIOC wants other participants to pay pounds 280 million for 60 percent interest in consortium, whereas American group believes pounds 171 million would be fair 60 percent value.
AIOC wants from Iran compensation pounds 530 million, whereas American group believes under proposed arrangements AIOC not entitled compensation for future profits.
AIOC wishes receive compensation from Iran in form of free oil. Aside from question whether compensation is for future or past, American group strongly opposes principle of compensation in this form.
Memorandum cites favorable comparison proposed transaction with previous purchase by US companies of forty percent interest in ARAMCO. Under much more advantageous conditions surrounding that purchase, including fact oil was then in short supply, amount being offered by companies to AIOC is comparable taking into consideration difference physical conditions in the two countries. After reviewing AIOC proposal for compensation (both from consortium and Iran) totaling pounds one billion, memorandum concludes figures are unrealistic and do not appear to have any commercial basis.
Memorandum cites facts consortium not proposing enter established and going enterprise in stable and convenient area; that American group proposing participate only at request US Government and primarily for purpose assisting Iran improve and stabilize its economy. Nevertheless, despite adverse factors, group has proposed payments to AIOC based on full commercial value of latter’s rights as if its concession in Iran were still in operation and had been modified to accord with other major oil agreements throughout world. Group considers suggestion of March 12 was generous one, as it was meant to be.
As stated by AIOC, method proposed for payment to AIOC was payment by consortium. Re AIOC’s comment that this means they would pay themselves to extent of forty percent, since AIOC will retain forty percent interest in consortium companies do not see who else they could pay. Re remaining sixty percent, other participants would not ask Iran pay half through amortization or otherwise; their charges to expense in accounting to Iran would not raise their costs above those in similar enterprises in neighboring countries, so that Iran would profit from its oil to as great a degree as its neighbors profit from their oil.
Re AIOC’s proposal that it receive compensation from Iran, memorandum establishes position Iran cannot justifiably be asked compensate for loss of future profits if arrangement concluded on [Page 952] fifty-fifty basis. Insofar as AIOC proposal intended obtain compensation for loss of future profits, group considers proposal would be paramount to being asked to be paid twice, once by consortium and once by Iran. Group believes damages and counterclaims re losses suffered in past three years, and re loss “internal consumption facilities” which consortium would not take over, are for Iran and AIOC to negotiate at the time Iran’s arrangements with consortium negotiated. Only interest of American group this connection is in ascertaining that amount to be paid by Iran is not unreasonable so as to jeopardize stability of consortium’s arrangements with Iran. Payments of such compensation should be made out of Iran’s receipts of royalties and income tax, and should not be in form of “free oil” of kind suggested by AIOC.
Memorandum dwells at some length on groups opposition to receipt by AIOC of free oil from Iran. Group believes this would violate fundamental principle that any settlement must not adversely affect existing oil production concessions in other countries. AIOC’s proposal would violate fifty-fifty arrangements existing elsewhere, since it would mean that Iran would be retaining for its own account a percentage of the oil produced each year until a total of 110 million tons is reached, in order turn over that oil as compensation to AIOC.

Memorandum concludes with statement no settlement Iran is worth making unless it provides sound and permanent basis for good relationships between Iran and proposed consortium. Free oil proposal does not meet this text because it would mean that Iran would be paying compensation for a loss for which AIOC would already have received effective compensation. Accordingly, proposal might well endanger negotiations with Iran. In an unlikely case that it did not, it might jeopardize sound and permanent basis for continued good relations with Iran. Differences between market price of oil and free oil given to AIOC would provide excellent propaganda for those in Iran who might wish make use of it. Any such result would be to disadvantage not only of AIOC but also of other members consortium.

End summary.

Copy of above memorandum has been given to Foreign Office at urgent request of Eden for his use in connection his meeting this morning with Fraser.
Shell representatives have submitted to AIOC separate memorandum setting forth position similar to that of American group. Memorandum notes with respect to total amount of money which AIOC asked from consortium leaving aside value of compensation—namely pounds 430 million—that market value of issued ordinary [Page 953] shares of AIOC in 1948 before threat of nationalization was pounds 183,750,00, and today is pounds 207,668,00.

  1. Repeated to Tehran and to Paris.
  2. Not printed. (888.2553/3–1554)