377. Letter From the Counselor of the Embassy in Iran (Stevens) to the Officer in Charge of Iranian Affairs (Hannah)1

Dear Norm: Enclosed is a summary of a conversation which [less than 1 line of source text not declassified] had with HIM on January 5.

I understand that in the past summaries of this kind have not been provided either to the Embassy or to the Department. We have now agreed that in the future the Embassy will receive such summaries and [less than 1 line of source text not declassified] pass copies of the original report to the Department. If this system does not operate satisfactorily please let me know and we will provide you copies from here.

Sincerely yours,

[Page 869]


In a 2 hour session with the Shah on January 5 the following political-economic information was obtained:
Ahmad Mehbod, designated by the Prime Minister as “Co-negotiator”, with NIOC Chief, for foreign contracts to develop offshore oil, has “no authority to sign anything.” U.S. oil firms should deal with NIOC. However, the only deal acceptable to Iran is (and “soon will be written into law”):
NIOC must have 50% stock in any operating company.
Foreign company will be required to advance all costs of exploration.
NIOC will pay for 50% ownership from its half of profits after production begins.
Foreign company must pay Iranian income tax on its 50% of profits.
Qum oil “must remain in Iranian hands.” U.S. technical and financial help is needed to develop the field, construct a pipeline to Alexandretta, Turkey, and install port facilities cost estimated by the Shah at “450–500 million.”
Iran has “no air force,” and “although we have long, vulnerable coast line to control, we have only two gunboats.” Vehemently: “We must have a navy. We hope to obtain it from the U.S. but if it is not available there we must have it from whatever source available.”
In answer to the recent Iranian invitation to a proposed Mid-East conference, Nasr declined saying he could not confer with a nation which occupied “an Arab island”; Saud did not “formally” decline but passed word it would not appear proper for him to meet with leaders of armed forces which expelled his troops from El Arabi Island.3
In transiting Iran enroute to Washington, Nehru sent the Shah only Christmas greeting (“apparently he doesn’t know I am Moslem”).
During his Moscow visit the Shah never promised the Soviets that “no foreign military bases will be built in Iran.” Although he was aware of the West’s “lack of interest” in such bases, he always responded to Russian urging with only the following words: “Iran will not be used as a spring board for launching aggression against the Soviet Union.”
The Shah still feels that Iran is “not ready” for the establishment of formal political parties. He is aware that several small groups are convening “but they are unimportant.”
The Shah is irritated by rumors that the U.S. is sympathetic to, and in touch with, NRM leaders. He is constantly striving to “broaden political base,” and all useful, loyal former followers of Mossadeq have been taken into the government (specifically Iran party members in the Plan Organization) but he is highly critical of Allayer Saleh, “who wears Mossadeq likeness on his label.”
Re “Taylor Report”3—the Shah is obviously cool; stated that “committee is studying this, and I think the Minister of Finance favors it slightly.” However, the Shah continued by saying it was his understanding that only a few “highly organized nations such as America, England and Scandinavia collected any such tax. How do you expect us to? Anyway it will take four or five years to make the required land surveys.” From this, the Shah launched into a revealing discourse on “unfairness” of penalizing the present generation and allowing the future ones to realize all blessings from “vast” oil income. He indicated that he is giving serious thought to widespread borrowing now to finance development and meet budgetary needs, with future generations repaying from expected rising oil revenues.
The Shah repeated his old pledge that he is fully committed to the West and “can never change.”
In the discussion of Mehbod, [less than 1 line of source text not declassified] pointed out (at Embassy request) that U.S. firms are puzzled as to Mehbod status; viewed him as “ignorant of oil business, irresponsible, opportunist and corrupt to extent he is openly asking for bribes to be passed on to higher levels.” The Shah said that Mehbod had denied these allegations and, in the absence of proof, the Shah is reluctant to take any action, but U.S. firms should be assured that they need pay nobody anything. He said he felt Mehbod “useful” because of his “energy, industry, imagination and commercial contacts.”
During the conversation, the Shah expressed optimism (probably reflected from Mehbod) that several U.S. firms would accept proposal outlined in Para 1 A above. He added that an Italian firm already had accepted, ([less than 1 line of source text not declassified] note: Embassy Economic Counselor subsequently revealed that the Italians turned the proposal down; Americans highly unlikely to consider. He added that he felt the Shah was not getting the true picture through Mehbod.)
At the conclusion of the meeting, the Shah [less than 1 line of source text not declassified] urged: “Please keep me advised on any oil developments. This is most important to us.” (The Ambassador and the Economic Counselor, told of this—as well as other subjects reported—approved [less than 1 line of source text not declassified] acting as channel to the Shah to expose false claims he is apparently receiving about progress toward anticipated “deals” for new oil areas.)
  1. Source: Department of State, GTI Files: Lot 60 D 533, Iran, Official Informal Letters from Tehran, 1957. Secret; Official–Informal.
  2. Secret.
  3. Reference is to the dispute between Saudi Arabia and Iran over Arabi and Farsi Islands in the Persian Gulf. The Saudis landed troops on Arabi island in October 1956 shortly after Iranian occupation of Farsi in September of the same year. In November, Iranian forces dislodged the Saudis from Arabi and took control of the island. (Despatch 613 from Tehran, January 24; Department of State, Central Files, 788.022/1–2457)
  4. Reference is to recommendations by Dr. Philip Taylor on ways Iran might increase its revenues by changing taxes on cultivated land and real estate from an income to capital value basis. (Toica A–337 from Tehran, August 17, 1956; Washington National Records Center, ICA Files: FRC 58 A 403, Box 18, Tehran)