Foreign Relations of the United States, 1964–1968, Volume XXXIV, Energy Diplomacy and Global Issues

191. Telegram From the Embassy in Iran to the Department of State ¹

Tehran, October 25, 1966, 1445Z.

1860. Iran Oil.

1. Shah 25th presented Iran’s case vis-à-vis Consortium in same terms as Hoveyda (para 2 Tehran 1817),² i.e. unresponsiveness of Consortium to Shah’s appeals and GOI’s proposals. Shah said at London yesterday Consortium had “asked” for month to give matter further study. Shah readily agreed but he hoped by end of month GOI would receive forthcoming response.

2. Shah stressed usual theme that Western oil companies and govts fail to appreciate role Iran can and must play in this region. While companies deny Iran 17 percent increase, Saudi liftings were up 26 percent last year and will be so again this year. Shah added that he does not object to high Saudi increase since Faisal is investing money wisely in economic development and also is required to build up military security. What is irritating, Shah said, is large offtake from places like Kuwait and Abu Dhabi with small populations and even Libya with its 2,000,000.

3. I assured Shah oil companies been very sympathetic to Iran’s problems, and been trying to do their best. They have, however, problems and commitments elsewhere which cannot be ignored, and their markets are limited. An annual influx to Iran nearing $600,000,000 from the Consortium convinces me, I said, that Consortium treating Iran very well. Saying it not necessary to make speeches re what happened in 1951,³ I noted Iran would probably be even better off today had it not on that occasion fomented confrontation with oil companies. While implying he expected no similar impasse this time, Shah quickly, though bit lamely, said Consortium should know that if companies suspend production this time other Mideast producing countries would stand by Iran. In any case, he said, such calamity here would affect stability of whole Gulf area, a result which would harm oil companies as well as Iran.

4. I expressed gratification for his intention to avoid disastrous show-down. Making clear I not spokesman for companies, I said it behooves reasonable men in situations of this kind to sit down and determine what is possible and realistic. Shah emphatically agreed. I went on to express view that a main consideration is to avoid setting precedent which other Mideast countries will follow. Such “escalation” I said can in end only harm achievement of Shah’s objectives. Shah agreed with this thesis also.

5. First step, I told Shah, is definition of problem. In this connection we been a bit confused by impression gleaned in London talks of immediate financial need and by Hoveyda’s indicating this not true. Shah said chief problem is financing Iran’s upcoming five-year plan. GOI realizes, he said, that 12 percent growth rate of last year cannot be maintained. However, 8–10 percent growth rate is necessary to achieve level of investment needed to reach 8–10 percent rate Iran’s economists have determined annual 17 percent increase in income from Consortium is required. Since Consortium keeps saying that 12 percent is highest figure possible, way must be found to fill 5 percent gap. Thus GOI has successively proposed: a) advance payments by Consortium to be repaid after 1970 (he did not specify formula for repayment); b) equivalent amount of crude which Iran Govt can provide to noncompetitive East Europe markets (he did not specify formula under which crude would be provided); and c) relinquishment of some of agreement area so that Iran can arrange production of crude for East Europe (he gave no indication re extent of relinquishment).

6. Re East Europe, Shah said Soviets are very annoyed by Romanian-Iranian cooperation both re tractors and oil. Just yesterday, he said, Soviets made approach to Iran (he declined to be specific when I asked how serious was the approach) to purchase oil from Iran. Shah speculates that Soviets want Iranian oil so that they can maintain their monopoly on Romanian oil imports. Shah said Soviets been selling oil at $3.00 per barrel to satellites, whereas highest price at which NIOC been able to sell is $1.35 except NIOC’s transactions with Consortium which are at $1.84. When I speculated that both Soviets and Romanians might have in mind importing Iranian crude and exporting at least some refined products to markets now served by Consortium, Shah expressed skepticism but agreed it is worth looking into. I tried to pin Shah down whether Iran already has specific deal with Romanians or other East Bloc countries. Shah gave no affirmative indication. We did, however, do some arithmetic which showed that 5 percent of present Consortium production would mean 100,000 barrels per day. Shah wanted this translated to tons per year which came out to nearly 6,000,000 tons. Shah gave distinct impression this more than Iran needs for East Bloc, at least for foreseeable future. He mentioned only Romania and Poland as prospective buyers. (Incidentally, PriMin Hoveyda leaves 27th for Romania where Romanian-Iran oil transactions may receive further consideration. It may have been Hoveyda’s trip which prompted NIOC’s deadlines last few days.)

7. At end of one and one-half hour discussion of number of subjects, Shah returned to oil question. We reviewed Iran’s position as giving Consortium any one of three options: a) advance payments; b) cost oil for East Europe; c) some relinquishment.

8. Comment. Obviously moratorium arranged in London yesterday took pressure off this discussion. Shah was cordial and seemingly reasonable. Apparent lack of specifics re any of three options is hopeful sign. Also there is some hope that third course may not be necessary if adequate response forthcoming on either of first two courses. Our impression is that first course is unacceptable to companies for precedent and other reasons. While we cannot guarantee that question of relinquishment will not arise, it appears companies are on right track if they can come up with something along lines of Warder’s “loan oil” proposal (Tehran 1842) or Embassy’s suggestion (Tehran 1818)⁴ re utilizing “royalty oil” provided for in Consortium agreement.

Meyer

1. Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1964–66, PET 6 IRAN. Confidential; Priority. Repeated to London.
2. Dated October 22. (Ibid.)
3. Prime Minister Mohammad Mosadeq nationalized Iranian oil production in 1951, resulting in an embargo on Iranian oil. Mosadeq’s government fell in 1953.
4. Telegrams 1818 and 1842 from Tehran, both dated October 25, are in the National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1964–66, PET 6 IRAN.