Foreign Relations of the United States, 1958–1960, Volume V, Microfiche Supplement, American Republics

PE–21. Memorandum of Conversation, by the Director of the Office of West Coast Affairs (Siracusa)¹

Washington, January 20, 1959

SUBJECT

• IPC Problem in Peru

PARTICIPANTS

• Mr. Michael L. Haider, President of IPC and a Director of Standard Oil of New Jersey
• Mr. Milo Brisco, Vice President of IPC
• Mr. Martin Jones, Director of Public Relations, Standard Oil of New Jersey
• Mr. Siracusa, WST; Mr. Silberstein, WST

Mr. Haider explained they had come to fill the Department in on IPC’s problem in Peru. The company has been in contact with the American Embassy in Lima and Mr. Haider presumed the Department was generally familiar with the situation. At Mr. Haider’s request, Mr. Brisco explained that according to the terms under which it operates in Peru, IPC is obliged to supply 80% of the domestic market’s needs. The Lobitos Company, in which IPC recently purchased a 50% interest, must supply 15% of the domestic requirements and a few small companies make up the balance. Back in the early ’40s when this requirement was established, it was not an onerous one as only about 40% of IPC’s production had to be devoted to the internal market. Since then, as domestic consumption has risen, while production has been relatively stabilized, it has reached the point where some 80% of IPC’s production must be devoted to the Peruvian market. Mr. Brisco went on to explain why this obligation to supply the domestic market places such a burden on the company. At the beginning of World War II, the Peruvian Government placed price controls on many necessities. These controls were lifted after the war on everything except bread and petroleum products. With the exception of some minor adjustments allowed in 1953–54, the Government has hesitated to permit further price adjustments because of its fear of the political and social repercussions which might ensue. In the meanwhile, the sol has depreciated in value and production costs have risen. Today the controlled prices net IPC a return of only 70c⁄ a barrel at the well-head. He emphasized that this calculation is reached by subtracting only the costs of the refining and distribution operations and without including a profit return on those operations. The comparative price in the United States for the equivalent grade of crude would be about $3.25 a barrel. Today it costs IPC about a dollar a barrel to produce the crude which is netting only the 70c⁄/barrel return. Mr. Brisco pointed out that the Government-owned petroleum company which produces some 2600 barrels a day by itself and receives another 500–600 barrels in royalty crude is not obliged to supply the domestic market and in fact, has resisted efforts to make it supply that market on the grounds that it cannot do so profitably at the prices presently allowed. Most of the Government company’s crude is exported. It supplies small quantities for the refinery at Iquitos area where the controlled price is well above the price permitted in the rest of the country.

In response to a question, it was brought out that IPC expects to just about break even this year on its Peruvian operations, since the profit on the foreign marketing of about 20% of its production will be just enough to cover the losses on its domestic processing and sales of the other 80%. This contrasts to an overall profit last year of about $2-1/2 million and of some $12 million as late as 1954. IPC’s investment in Peru, however, is upwards of $200 million.

The relationship of IPC’s problem to the Peruvian balance of payments was also discussed. Under the present circumstances, IPC is not disposed to make additional investments needed to increase production and believes the day will soon arrive when Peru will be a net importer of petroleum. If, however, it can obtain satisfaction on the pricing problem, IPC would make investments in secondary recovery which it would hope would maintain output and possibly make a modest increase. This would maintain Peru’s ability to export petroleum for a longer period and put off the day when Peru would become a net importer of petroleum products, which while probably inevitable, would still be perhaps eight or ten years in the future. IPC does not, however, expect any major discovery which would alter the long-range prospect that Peru would eventually become a net importer.

In addition to the affect it is having on Peru’s balance of payments situation, Mr. Brisco pointed out that the unrealistic petroleum pricing policy is also serving to discourage development of Peru’s hard fuel sources. Peru, he said, has ample coal resources, but there is no inducement to develop them. He pointed out that at the Chimbote steel plant, they find it cheaper to use kerosene in the coal drying operation than coal.

Mr. Brisco then went on to review the proposal which IPC has made to the Peruvian Government, which the Government has so far not acted upon. In return for an adequate pricing policy, IPC has offered to place its operations under the 1952 Petroleum Law and give up its present fee-simple status for a 40 year concession and to pay the GOP a 50 percent tax on all its profits in Peru. It has further offered to extend $25 million in low interest loans to the Government for road building, housing and other projects.

When asked, based on their experience in the country and knowledge of its political problems, what might be the reaction to the kind of relief which IPC seeks, Mr. Brisco responded as follows: He said that the inefficiency and vacillation of the Prado administration has clearly cost it much of its support and in fact generated much opposition to it. He realizes that a sharp increase in petroleum costs would have a major public impact and said that he would not attempt to predict that this act might not be the straw that would break the camel’s back and bring about the overthrow of the Prado regime. On the other hand, he pointed out that many of the features of IPC’s offer to Peru are such that the Government could make a strong logical case to defend its actions and point out how it would serve the interests of the country.

In response to Hr. Haider’s request for comment on the proposals made by IPC, Mr. Siracusa suggested that, while he could not evaluate them from an expert point of view, he did recognize, consistent with what Mr. Brisco had said, that the proposals contained many points which should be appealing if evaluated logically. He said, however, that emotions are likely to prevail over logic and wondered whether, because of this, the inclusion of the 50–50 formula was sound. The feeling is fairly general, he said, that the 50–50 formula is on the way out and the Peruvian Government’s acceptance of it, as something almost passé might cause it problems and might be one of the reasons for its holding back.

Messrs. Brisco and Haider thought the point was well taken and merited study even though they thought that the proposal was an eminently fair one in the Peruvian context. Mr. Brisco then said that he should like to make it clear that IPC’s position is flexible and that it would be most happy to receive a counter-proposal from the Peruvian Government on which it could negotiate.

Mr. Siracusa said that he was certain the visitors were aware that Ambassador Achilles had been actively interested in their problem and had, in fact, discussed it on numerous occasions with the President and the Minister of Finance. Although both of these gentlemen assured the Ambassador of their intention to take necessary action, the Ambassador is not convinced that they will actually do so. In fact, he tends to believe that their actions will be much less courageous than their words.

Mr. Siracusa then said he felt it would be timely to support the Ambassador’s efforts at Lima. He would propose that Mr. Rubottom call in Ambassador Berckemeyer specifically for the purpose of discussing this case with him, indicating the Department’s strong interest, and urging him to recommend that his Government press for an acceptable solution.² He said that in discussions with the Ambassador he felt it would be appropriate to bring up the importance of solving the petroleum problem to Peru’s balance of payments problem, and thus to its credit-worthiness for the kind of development loans which it will be seeking shortly from the U.S. and other financial institutions. He said while such a relationship would not be mentioned as a quid pro quo, the fact that Peru’s ability to service loans will be affected by the petroleum situation made it logical and fair that the matter should be raised.

Mr. Brisco and Mr. Haider expressed their pleasure at the proposal to consult with the Ambassador. While they raised some questions about Peru’s desire for development loans, they did not in any way challenge the expressed intent not to make an IPC solution a quid pro quo for the loans. They left with Mr. Siracusa copies of a study recently made by the company reviewing the history of the problem and outlining the proposals made to the GOC, and also one made in 1954 by an independent consultant.³

1. Source: Department of State, Central Files, 823.2553/1–2059. Official Use Only. Co-drafted by Joseph A. Silberstein.
2. A memorandum of conversation of February 2 stated that Assistant Secretary Rubottom told Ambassador Berckemeyer that the IPC’s pricing problem in Peru was “an extremely serious one which was having an adverse effect” on the investment climate in Peru. (823.2553/2–259)
3. The referenced study was not found in Department of State files. The Peruvian Government raised petroleum prices and granted compensatory increases in transportation tariffs and wages on July 26. When an ensuing protest strike by chauffeurs unions became violent, the Government suspended constitutional guarantees on July 30 and broke the strike by August 2. Documentation on these developments is in files 723.00(W), 823.00, and 823.062.