Foreign Relations of the United States, 1969–1976, Volume XXVII, Iran; Iraq, 1973–1976

178. Memorandum From the Deputy Secretary of State (Robinson) to Secretary of State Kissinger¹

Washington, June 5, 1976.

SUBJECT

• Bilateral Oil Negotiations with Iran

Frank Zarb has devised a proposal for a six-year agreement to buy Iranian oil for the Strategic Petroleum Reserve at a fixed price of about $11.25 per barrel. He hopes to get clearance from you, Simon, Greenspan, Lynn and Scowcroft this weekend and present it to the President on Monday,² check it out with some key Congressmen (without identifying Iran) on Wednesday, and put it to Ansary in London on Friday afternoon.

A draft of Zarb’s memorandum to the President is attached.³

I have discussed the concept with Zarb, Greenspan and Scowcroft during its formulation and encouraged Frank’s acceptance of responsibility for working out a mutually attractive deal.

In brief, FEA would seek legislation enabling it to offer to a dependable foreign supplier a contract to supply oil at today’s prices over the six years required to fill the Reserve, starting in 1977. In order to induce the supplier to accept a price freeze, the legislation would empower FEA to offer a substantial advance payment at contract-signing, a further substantial advance payment when the first oil is shipped, and the balance at the completion of the deliveries in 1982. If Iran is the supplier, the maximum amount of purchase could be about 300 million barrels, or 140,000 barrels per day, with 40% of this in heavy crude and 60% light. These proportions are important to Iran’s reaction to the proposition, because Iran now is selling all the light crude it can produce.

For Iran this proposition offers the advantage of a cash advance of at least $1 billion (Zarb wants authority to go as high as $1.6 billion), thereby obviating Iranian borrowings abroad at about 9% interest, and incremental sales of about 45,000 barrels per day of heavy crude. For these gains Iran would have to take off the commercial market about 75,000 barrels per day of light crude and sell it to FEA at a fixed price, foregoing likely commercial sales at rising prices.

For the United States, this proposition would assure reliable additional oil supply for three-fifths of the Reserve at a fixed price while market prices probably rise by at least 5% annually. If the 5% average annual OPEC price increase prediction is correct, the fixed price feature would save FEA about $500 million.

I doubt that Ansary will accept these terms, but there is enough balance in the proposition to make it a legitimate offer. OMB and Treasury may object to what amounts to a loan to Iran and a very large FY 77 appropriation to fund the advance payment. Zarb is hopeful of getting Congressional support, but this has not yet been tested.

I have agreed to his suggesting a meeting with Ansary to present the plan on next Friday,⁴ provided he obtains full Administration support well before departure. I propose to send Rud Poats along to show the State Department’s continued interest, to help with the tactics, and to give us an independent basis for communicating with Ansary after the meeting.

Recommendation:

I recommend that we clear Zarb’s memorandum to the President and support his efforts to obtain OMB, Treasury and CEA endorsement.⁵

1. Source: National Archives, RG 59, Central Foreign Policy Files, P840132–0004. Secret; Nodis.
2. June 7.
3. Attached but not printed.
4. Zarb met with Ansary on June 11. In an August 3 memorandum to Kissinger, Zarb recounted that Ansary was uneasy with a price freeze for such a small volume of sales, but appreciated the ideas of advance payment and an expanding petroleum reserve and promised to make counterproposals. (Library of Congress, Manuscript Division, Kissinger Papers, Box CL–153, Iran, Chronological Files, 1 August–1 November 1976) On August 12, Robinson sent Kissinger a report of Zarb’s August 9 follow-up meeting with Ansary, during which Ansary knowingly presented “unattractive” counterproposals, including a rejection of the price freeze, a reduced price discount, and payment of 25 percent of the total sale up front. Zarb concluded that Ansary was under no pressure to make a deal. (Ibid.) See Document 189.
5. Kissinger initialed his approval and wrote: “except that I would defer Congressional consultation until we see what Ansary’s reaction is. Otherwise we will be faced with having to defend a less favorable deal.”