355. Letter From Howard D. Page, Director of Standard Oil Company, New Jersey, to the Deputy Assistant Secretary of State for Near Eastern, South Asian, and African Affairs (Rountree)1
Dear Bill: In your conversation last week with Dave Shepard, you suggested we give you a memorandum of the reasons we felt it would not be in the best interests of a Middle East country, like Iran, now having oil production on a 50/50 basis, to sign new agreements giving them more than 50% of the profits.
Let me first make clear we have no claim or feeling such government lacks the legal or even moral right to do this. They clearly have such rights. We do believe, however, that such action would not be in their long-term interests. While having no doubt on this point, we have some difficulty in demonstrating it decisively, as there are clearly some short-term advantages that might accrue from the action. We do believe that such gains would prove to be short-term, and that the net, long-term effect of terms giving such a government more than 50/50 would be to its disadvantage.
We wish to suggest the following for your consideration.
- 1.
- The capacity of the large companies already producing oil in the Middle East to develop and market oil from new areas far exceeds that of the remainder of the oil industry. None of these companies would bid more than 50/50 for a new area, and the knowledge that bids higher in this respect would be considered might deter them from bidding at all. Thus the proposal to consider terms higher than 50/50 would deprive a country of many bids, including those from the most capable companies in the industry.
- 2.
- Company payments above 50/50 would add to the cost of oil from a new area, making it less competitive in comparison with that from other areas, thus tending to restrict marketing and development.
- 3.
- Where the reason for offering new areas is the immediate need for cash (as the Iranians allege) this is much better served by the receipt of a cash bonus payment on signing of the agreement, than by a higher government share of profits which would not materialize for several years. Obviously a company could offer a much larger bonus payment if not faced with taxation above 50% when production started.
- 4.
- Terms giving the government more than 50/50 on a new area might put it under fire for not having obtained better terms on present agreements. This might have serious consequences to such a government, particularly in Iran, where strong opposition to the Consortium Agreement, at present without much of a case, would be thus given fresh ammunition.
In hoping and urging that 50/50 not be breached in the Middle East agreements, we are, of course, not trying to deprive governments from getting the most they can, taking advantage of a competitive market for their resources. We think these governments should do this very thing—and can, without deviating from 50/50. Our constructive suggestion is that governments asking for bids specify 50/50, but invite bids as to initial premium or bonus payments. This, of course, is the pattern followed almost universally in the U.S., where the landowner (including U.S. and state governments) is invariably given only a 1/8 royalty, but is offered premiums per acre to induce him to sign an oil lease.
Very truly yours,
- Source: Department of State, Central Files, 888.2553/5–156.↩