308. Memorandum From the Department of State Executive Secretary (Brubeck) to the President’s Special Assistant for National Security Affairs (Buridy)0
SUBJECT
- Status of American Oil Companies’ Negotiations in Indonesia
The established American oil companies in Indonesia, Standard Vacuum (Stanvac) [Standard Oil of New Jersey and Socony Mobil] and Caltex Pacific (Caltex) [Standard Oil of California and Texas],1 have been engaged in negotiations with the Government of Indonesia (GOI) since early 1961 with a view to reaching agreement on future exploration, production and distribution rights. Shell has been similarly engaged. Under Law No. 44 (1960), oil is a resource belonging to the people of Indonesia and the GOI is the legal custodian thereof. However, the Government may delegate to others as contractors the responsibility of developing this resource. Stanvac, Caltex and the Shell Oil Company produce 90 percent of Indonesia’s petroleum. American oil company investment in Indonesia is approximately $300 million. Indonesia derives in foreign exchange from the export of oil approximately $120 million a year.
The GOI’s basic aim in these negotiations has been to secure not only an immediate improvement in GOI foreign receipts from the industry (changed from 50/50 split to 60/40 split), but also eventual state ownership of all domestic marketing facilities and supporting elements including refineries and processing plants. The foreign oil companies would remain and be primarily concerned with exploration, exploitation, production and export. Concessions would be replaced by contractual relationships between the companies and the GOI.
An important stage in these negotiations was established on May 14, 1963, when the GOI promulgated and made public Regulation No. 18 (Embtel 1751, Tab A)2 which (a) fixes June 15, 1963 as the end of the transitional period referred to in Article 22 of Law No. 44. Under Law 44, existing contracts may continue in effect for a “limited period of time which shall be as short as possible,” pending their renegotiation as “contracts of work” in line with the provisions of the new law; (b) any oil company that elects to do so may request an extension of five months from [Page 671] April 26, 1963 for the purpose of winding up its affairs and terminating operations. A Government committee will be established to determine “a reasonable and proper” settlement between the Government and such company; (c) any oil company desiring to continue doing business in Indonesia after June 15, 1963 will be permitted to do so on the basis of a new regulation which becomes effective on June 16, 1963. The terms of the new regulation are not yet known; (d) during the period from August 28, 1961 through June 15, 1963, the financial regulations set forth in Law No. 476 (1961) will be applicable. (A legal analysis is at Tab B.)3
Law No. 476, among other things, provides in Article 7 that the division of earnings between the Government and the oil companies will be performed by payments on the basis of 60 percent for the Government, 40 percent for the oil companies.
Regulation No. 18 (referred to in the third paragraph above) interprets Article 7 of Law No. 476 as the sharing of production profits after deducting operating costs, but excluding excises, import and export duties, and other Government collections which do not constitute taxes on corporate revenues.
The oil companies have informed the Department that administration of Regulation 18 by the GOI would be tantamount to expropriation of their properties. They regard their situation on that date as presenting them with the alternatives of (1) operating under contract concluded by that date, (2) winding up their business within five months after that date, or (3) operating under the administrative control of the GOI. They say that (2) and (3) are unacceptable. After June 15, they will cease exports unless agreement is reached.
Governor Harriman, other officers of the Department of State and officers of the American companies having interests in Indonesia, agreed on a plan of action on May 17 which is at Tab C.3
Following up previous instructions to Ambassador Jones, the Department telegraphed him on May 18 that notwithstanding conversations with First Minister Djuanda and Subandrio, he must see Sukarno immediately and comply with instructions contained in Deptel 1037.4 (Tab D, Deptels 1037, 1040, 1044, 1045)5 Ambassador Jones is to attempt to induce Sukarno to instruct Minister of Basic Industries Saleh, who has been conducting these negotiations, to stop over-trading and come to prompt agreement on a 60/40 basis and end attempts to whittle the companies’ 40 percent down. Ambassador Jones replied on May 19 that he is [Page 672] seeking an appointment with Sukarno prior his departure for Tokyo which is scheduled May 22. He hopes to reach Sukarno, May 21.
- Source: Department of State, Central Files, PET 15–2 INDON. Confidential. Drafted by Jarvis and Czyzak; cleared in draft by Bell, Ingraham, Barnett, and Andrew Fensor, Chief of the Fuels and Energy Division, Bureau of Economic Affairs, and by Sullivan.↩
- Brackets in the source text.↩
- Dated May 10, not attached. (Department of State, Central Files, PET 15–2 INDON)↩
- Attached but not printed.↩
- Attached but not printed.↩
- See footnote 1, Document 306.↩
- Telegrams 1040, 1044, and 1045 to Djakarta, May 18–19, all reinforced instructions to Jones in telegram 1037 to make the démarche on the oil conflict with Sukarno. (All in Department of State, Central Files, PET 6 INDON)↩
- Printed from a copy that indicates Brubeck signed the original.↩