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

7. Memorandum From Samuel M. Hoskinson of the National Security Council Staff to the President’s Deputy Assistant for National Security Affairs (Scowcroft)¹

Washington, February 2, 1973.

SUBJECT

• Iranian Oil Situation

The following traces the evolution of the Iranian oil problem over the past year and delineates the more important implications of the present situation.

Background: Last Summer’s Agreement

The story begins last spring when the Shah and the consortium of Western oil companies operating in Iran reached an agreement on a long term “package” settlement of their relationship.² The basic agreement was that the Shah would extend the consortium’s operating concession to 1994 and approve its construction of a new refinery in return for a substantial increase in crude oil production, the turning over to the National Iranian Oil Company (NIOC) of the consortium’s old refinery in Iran, agreement to buy that refinery’s output at an “advantageous” price and the tying of Iranian taxes on the consortium to foreign exchange expenditures.

From our perspective this was a favorable outcome. There were substantially increased revenues for the Shah, the companies had secured a stable long-term relationship and, of equal importance, a responsible alternative to the “participation” approach being simultaneously pushed by the Arabs had been established. With this in mind, the President sent the Shah a message commending the responsible way in which the negotiations had been carried out.³

During the course of the summer, while the technical finishing touches were being put on the agreement, the Shah became increasingly concerned about the continuing OPEC “participation” negotiations led by the Saudis. Finally, when the companies agreed to sell the Arabs a 25% participation in their operations now and 51% by 1982, the Shah reopened his negotiations with the consortium. The thrust of the consortium’s approach was to sweeten the basic “package” settlement so that Iran would receive at least as much revenue as it would under a “participation” settlement. The Shah, motivated as much if not more by a strong desire to maintain his leadership position in the international oil world—turned down the consortium offer and demanded what amounts to complete participation (really nationalization) by 1979.

Present Situation

At this point, the Shah’s demands have narrowed to a single one. The consortium must sell to Iran all its assets and consortium–Iran relations will be governed by a sales contract with either (1) immediate effect, or (2) effect upon the expiration of the basic 1954 operating agreement in 1979.⁴ More precisely:

—Under Option 1, the basic agreement would be set aside immediately and replaced by a long-term sales contract with the Consortium members under which the latter would have access to Iranian oil on a preferential basis. The contract could be for 20 to 25 years and would give Iran and the Consortium about the same revenues per barrel as those provided for in the participation agreements arrived at with other Persian Gulf states.

—Under Option 2, the basic 1954 agreement would continue in force until expiration near the end of 1979, but would be adjusted now to provide benefits to Iran equal to those under existing participation agreements. Should member companies take this option, benefits to Iran would accrue, retroactive to January 1, 1973. In October 1979 these arrangements would be replaced by a non-preferential sales contract under which consortium members would be on the same footing as all other prospective purchasers of Iranian oil.

In the sellers market likely to prevail for at least the next ten years, this non-preferential sales contract relationship is the one which appears to offer the most to a producing country and is presumably the one all producing countries have as their goal in disposing of crude not needed in any of their downstream operations at home or abroad. Under both these options increased producing country revenues under the participation agreements with the other Gulf states, which the Shah is demanding for Iran, will have an adverse effect on the US balance of payments, by reducing company profits unless the increased cost of crude is passed on to consumers (the overwhelming bulk of which are presently outside the United States), or by increasing the per barrel cost of crude to refiners, or both.

The relative advantages of these two options are detailed in the attached.⁵

There is one final important foreign policy element that should be noted. Because of the almost complete loss of confidence on both sides between the Shah and the consortium, there may be a tendency for the companies to band together and reduce their offtake in favor of what they may perceive to be more secure sources in the Arab world. If they do, the Shah will react sharply and because of our government’s identification with the consortium position, we might rapidly move into a difficult period in our bilateral relations with Iran.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Kissinger Office Files, Box 137, Country Files—Middle East, Iran Oil. Secret. Sent for information.
2. For information on the agreement signed in June 1972, see Foreign Relations, 1969–1976, volume XXXVI, Energy Crisis, 1969–1974, Document 124.
3. See ibid., volume E–4, Documents on Iran and Iraq, 1969–1972, Document 208.
4. An August 5, 1954, statement by the Government of Iran and the representatives of the oil consortium describing the oil agreement is in the Department of State Bulletin, August 16, 1954, p. 232.
5. Attached but not printed is a report entitled “Implications of Iranian Demands,” which outlined the effect of the Shah’s two options on both the United States and the oil companies.