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153. Memorandum From Robert Hormats of the National Security Council Staff to the President’s Assistant for National Security Affairs (Scowcroft)1

SUBJECT

  • Bilateral Oil Agreement

For URGENT transmission to Vail.2

Attached is the latest update on the US–Iran bilateral deal—HAK’s memo to the President, Robinson to HAK, and the latest exchanges with Ansary.3 I am not certain that Kissinger has given the attached memorandum to the President, but I believe that he has at least used it as a talking paper.

DOD appears to be dragging its feet in the preparation of the Robinson/Ellsworth memorandum to you.4 I am turning the screws on them a bit this morning, and expect that they will do something this morning by COB.

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Attachment

Memorandum From Secretary of State Kissinger to President Ford 5

Washington, undated.

SUBJECT

  • Iran—Bilateral Oil Negotiations

I met with Iranian Minister Hushang Ansary in London on Sunday, December 14, 1975, where we discussed the status of our bilateral oil negotiations.6 We reached tentative agreement on an acceptable formula under which the United States Government would purchase oil from Iran on favorable terms. This matter has been under negotiation for the past nine months. Negotiations were suspended in late August, due to Iran’s reluctance to conclude an arrangement immediately prior to the October 1 oil price increase.

At Iran’s request we re-initiated negotiations in November.7 We have now reached general agreement as to the basic formula, including a price discount, which I consider advantageous to the United States. This has been discussed with the Department of Defense and the Federal Energy Administration. I now seek authority to conclude such an agreement. The Shah is eager to proceed with the final stages of these negotiations and complete them by December 31; otherwise he insists that they be terminated.

I am advised that the authority of the Defense Production Act can be used to carry out the arrangements contemplated under this agreement. This Act requires a separate Congressional appropriation. Although the appropriation bill would not affect actual budgetary [Page 455]outlays, it could be a vehicle for wide-ranging Congressional debate. This prospect and the time required to get the appropriation may cool the Shah’s interest in an agreement.

Basic Objectives

It has been our intent in these negotiations to achieve four important goals:

1. To weaken the cohesion of OPEC through conclusion of a special arrangement with one of its members—Iran. This would cause a shift in our oil purchases from other OPEC members, which could prove to be an important step in undercutting OPEC’s solidarity on the price issue. This could be particularly effective during this period of excess supply and reduced exports, which has created concern on the part of certain OPEC members dependent on the level of export revenue for maintenance of their industrialization plans.

2. To achieve a significant saving in oil import costs with little or no financial risk to the United States Government.

3. To establish an assured source of oil to meet the United States’ needs at home or abroad (including Israel) not subject to Arab oil embargo.

4. To build a special political relationship with Iran—a nation which we consider essential in the preservation of political and military stability throughout the Persian Gulf area. This is not only important to inhibit the expansion of Soviet influence but also to preserve the military stability required to assure availability of critical oil supplies for the Western world.

Basic Plan

As a result of my meeting with Ansary I am confident that we can conclude an arrangement for supply of Iranian oil to the U.S. Defense Department for cash, at prices substantially below the world market. The basic terms of such an agreement would be as follows:

1. Period—Five years commencing January 1, 1976, but effective subject to our having Congressional appropriations.

2. Quantity—500,000 barrels per day.

3. Base Price—Fixed for five years at the present Iranian crude selling prices less a fixed discount yet to be negotiated.

4. Price Adjustment—Every six months commencing July 1, 1976, with base price to be increased by the percentage increase in the United States Wholesale Price Index for the previous six months but with the understanding that the adjusted base price will not exceed the established price for Iranian crude.

5. Payment—In cash, monthly, within a stipulated period after receipt of crude contracts.

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Direct Economic Benefits

The Department of Defense would sell the Iranian crude export contracts it purchases under this agreement to U.S. oil refiners for cash or equivalent value in refined products, using the proceeds to supply petroleum products to the U.S. armed forces or U.S. international security programs. A net financial gain can be expected to be realized from these transactions, consisting of:

—the discount provided under the purchase agreement, and

—the probability of a reduction in the adjusted price below the official OPEC price for Iranian crude which we anticipate will be established by periodic unilateral action on the part of OPEC. (In no event can the adjusted price exceed the OPEC price.)

We anticipate a minimum saving of at least 50 cents per barrel or $92 million annually with the possibility of substantially greater savings if OPEC continues to adjust prices to the higher level of international inflation as compared with United States inflation rates.

Indirect Benefits and Costs

Indirect effects may be less measurable but significant:

If this agreement touched off a round of price-discounting by other OPEC countries, the resultant break in OPEC’s price front and price-fixing capacity could yield vast economic benefits.

One cost of this benefit would be our yielding in this agreement to the principle of indexation of oil prices, a concession that Iran and others would be quick to exploit and which some other industrialized nations would deplore.

The agreement could cause political problems with other OPEC countries, particularly Venezuela and Saudi Arabia. It would cause a substantial shift away from Venezuela to Iran in the market for heavy crude. This could be interpreted by Venezuela as retribution for its nationalization of U.S. oil companies. Saudi Arabia may see such a U.S. arrangement with Iran as another anti-Arab and anti-OPEC move by the United States, quickly following our official and private actions against the Arabs’ boycott and discrimination practices.

I believe that the direct and indirect benefits of the proposed agreement are worth these risks and that the political problems are manageable. The OPEC countries are moving toward unilaterally imposing a price-indexing system in 1976. Our deal with Iran is calculated to undermine OPEC’s cohesion and lower its sights in designing the new pricing system. We can counter complaints by Venezuela and possibly Saudi Arabia by asking them to make us a better offer.

We will inform our IEA partners before concluding negotiations with Iran, so as to give them an opportunity to consider similar deals.

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Authority Requested

To accept the basic structure of an oil purchase agreement with Iran as outlined above, and to conclude negotiations on this basis with an estimated saving of at least 50 cents per barrel.8

  1. Source: Ford Library, National Security Adviser, Presidential Country Files for Middle East and South Asia, Box 13, Iran (7). Secret. Sent for information. Scowcroft initialed the memorandum.
  2. A handwritten note indicates this was “Done.” President Ford was in Vail.
  3. Kissinger’s memorandum is printed below. Robinson’s status report on the bilateral oil deal is attached but not printed. The exchanges with Ansary are not attached.
  4. Robinson and Ellsworth wrote a briefing memorandum on “Technical and Legal Feasibility of Proposed Bilateral Oil Agreement with Iran” which Hormats forwarded to Scowcroft on December 30. (Ford Library, National Security Adviser, Presidential Country Files for Middle East and South Asia, Box 13, Iran (7)) Robinson sent the memorandum to Kissinger in telegram Tosec 250092/305266, December 31. (National Archives, RG 59, Central Foreign Policy Files, N750006–0743)
  5. Secret; Sensitive.
  6. No record of the conversation has been found. However, in telegram 291531 to Tehran, December 10, the Department provided several alternative outlines of a bilateral oil agreement for Helms to give Ansary in preparation for the London meeting. (Ford Library, National Security Adviser, Presidential Country Files for Middle East and South Asia, Box 13, Iran—State Department Telegrams, From SECSTATE–NODIS (3)) In telegram 303084 to Tehran, December 24, Robinson requested Helms to advise Ansary that the regular procurement authority of the Defense Department could not be used as the legal basis of the proposed agreement. As a result, either the Defense Production Act or the Energy Act would have to be invoked, both of which required a Congressional appropriation. (National Archives, RG 59, Central Foreign Policy Files, P850012–2228)
  7. See footnote 7, Document 147.
  8. There is no indication of the President’s approval or disapproval.