Foreign Relations of the United States, 1969–1976, Volume XXXVI, Energy Crisis, 1969–1974

104. Memorandum of Conversation¹

Washington, January 3, 1972.

• SUBJECT
  • The International Oil Industry’s Future

• PARTICIPANTS
  • Department of State
    • John N. Irwin, Under Secretary
    • Nathaniel Samuels, Deputy Under Secretary, Economic Affairs
    • John R. Stevenson, Legal Adviser
    • Charles A. Meyer, Assistant Secretary, ARA
    • David D. Newsom, Assistant Secretary, AF
    • Rodger P. Davies, Deputy Assistant Secretary, NEA
    • James E. Akins, E/ORF
    • Claus W. Ruser, S/PC
    • Fred H. Sanderson, S/PC
    • Scott Custer, U
    • Gordon S. Brown, E/ORF/FSE
  • Industry Participants
    • J.K. Jamieson, Chairman, Standard New Jersey
    • George Piercy, Senior Vice Pres., Standard New Jersey
    • Rawleigh Warner, Chairman, Mobil
    • Henry Moses, Vice President, Mobil
    • Maurice Granville, Chairman, Texaco
    • Robert Dorsey, Chairman, Gulf
    • Otto Miller, Chairman, Standard California
    • J. O’Brien, Vice President, Standard California
    • G. T. Ballou, Vice President, Standard California
    • John McLean, Chairman, Continental
    • John Kircher, Executive Vice President, Continental
    • Robert Anderson, Chairman, Atlantic Richfield
    • John Simmons, Vice President, Atlantic Richfield
    • Nelson Bunker Hunt, Bunker Hunt
    • Marvin Watson, Vice President, Occidental
    • Mr. Williamson, Vice President, Occidental
    • John Swearingen, Chairman, Standard Indiana
    • John J. McCloy, Attorney
    • William Jackson, Attorney

The Under Secretary opened the meeting by noting that the Department had been following developments in the international oil industry with concern and in recognition of the national security implications of the industry. While we were aware that our views and those of the companies would not always be identical, we shared the goal of a stable oil supply for the US and the western world and appreciated the commercial and other benefits to the US of the oil industry. We had kept up a satisfactory dialogue on matters of common concern, but thought it might be useful to structure the dialogue a bit more closely, particularly with a view to the longer range problems of the industry’s future. He suggested that the industry might wish to form an advisory group to counsel the Secretary and to give a forum in which we could exchange views, and the companies could suggest how the USG could be helpful.²

Establishment of an Advisory Body

The company representatives said they welcomed the Under Secretary’s suggestion; however, they expressed some reservations on establishing a formal structure, to which legislative restrictions as well as anti-trust provisions might apply. They also felt that a close relationship between the industry and government might be subject to mis-interpretation both domestically and abroad. The Under Secretary said we felt the substance of organized exchanges with the companies was more important than the form of the exchanges, although a smaller group would be more reasonable if we wished to have a real exchange. We would leave it to the oil companies and their attorneys to work out a format in consultation with Mr. Stevenson, and we would in turn inform the Justice Department of developments.

Mr. Swearingen and Mr. Miller pointed out that the USG would inevitably face difficult policy decisions on oil issues, and that the industry would want to help anticipate them and have an input in USG deliberations. Mr. McLean said the industry would hope to come up with joint positions on important issues. Mr. Samuels said that the advantage of regular meetings would be to work toward common concepts of the problems facing us and how to deal with them. Coordinated staff work on the companies’ side would be needed.

Mr. Swearingen asked what subjects the Department had in mind for discussion. Mr. Irwin answered that we were already in regular contact on operational problems; although we would continue to work together on those problems we wanted specifically to discuss the longer range policy questions. For example, we were interested to know how the companies envisaged their relationships with the producing and consuming countries in the middle and late 1970’s; what should the companies and the USG be looking forward to, and how did the companies believe the USG could be helpful. Similarly, we would welcome the companies’ thoughts on what the USG could do in the OECD context, in reviewing the industry’s future capital requirements with our allies, encouraging them to raise stock levels further, or other actions.

US Public Opinion and the Oil Companies

Mr. Anderson pointed out that the results of the present negotiations would have a profound impact on the world’s energy situation in the coming decades, yet the issues were to some degree beyond the companies’ competence, involving the possibilities of world energy shortages, economic slowdowns and other issues of national and international importance. The public, meanwhile continued to view the energy crisis as purely a company problem. The State Department could help by pointing out the international importance of the issues involved and drawing the attention of the whole Administration to the present dilemma and the issues of general national interest which would be served by a solution. Mr. Warner added that the problems posed for the industry by its domestic critics weakened its bargaining hand internationally, as other governments saw in them signs of the companies’ impotence and disinterest on the part of the USG. Mr. Irwin answered that the Department and the Administration in general recognized the problem, though we couldn’t speak for the entire government. Mr. Akins commented that there were however no action recommendations before the government, although we intended to make some soon for action both here and abroad, in the OECD and elsewhere.

Libya

Mr. Warner asked how the USG saw recent events in Libya. Mr. Newsom answered that, although the Libyan move against BP had been based to some extent on Libya’s dispute with the UK over debt matters, it was also intended to prove the point that the Libyans were prepared to use oil as a political weapon. We could not assume that it could not happen to another company, even though the Libyans continued to stress to us that the BP nationalization was an isolated incident. Mr. Davies added that other Arab governments in general looked upon Qadhafi as crazy; we believed that Libyan actions would have only limited impact as long as the present Arab governments remained, although Qadhafi’s brand of fundamentalist socialism had some impact on the Arab masses. Mr. Piercy said it was unfortunate that Qadhafi had felt it necessary, even with a possibly valid claim against the British, to justify his action on political grounds. Mr. Irwin said that Qadhafi would evidently be willing to move wherever there was advantage, to which Mr. Warner answered (and Mr. Miller seconded) that the companies saw it important for that very reason to block Libya’s efforts to market the nationalized oil. Mr. Akins said the USG agreed that it would be most unfortunate if Libya could sell the oil profitably, and that we had supported the British diplomatically in their efforts to discourage purchases. Mr. McLean said that what was needed was a collective effort on the part of the US, the foreign oil companies and the consuming country governments; in the BP case, for example, the US should talk firmly to the Spanish, Italian, Japanese, and perhaps German governments.

Phantoms for Israel

Mr. Williamson said that an equally large concern of his company (Occidental) was that a USG decision to sell F–4’s to Israel might cause sweeping nationalizations in Libya. The company representatives returned repeatedly to the possible harm to US interests of a resumption of F–4 sales, and asked if any decision could not somehow be kept quiet. The Under Secretary said that, as a practical matter, it would be very hard to keep such a decision quiet if it were made. Mr. Jamieson asked if the role of any advisory group would be seen as purely limited to technical matters, or whether the companies could express their views on foreign policy issues as well. Mr. Irwin said the companies would be welcome to raise any pertinent issue.

Venezuela

Mr. Simmons asked how the USG expected to deal with new Venezuelan production quota legislation.³ Mr. Meyer noted that the USG was scarcely in a position to change the Venezuelan government action. He said that the new problem was highly germane to the question of USG-company consultations; we should carry out our exchanges on the basis of the existing political imperatives, rather than our “druthers.” In Venezuela, oil was politics.

Mr. Jamieson said that Esso would attempt to pass on the new Venezuelan price increases to the consumer. At the same time, the company might reduce offtake for economic reasons; although it might expose itself to possible penalty taxes, it was prepared to challenge the legislation in the Venezuelan courts. He added that the industry would be making a mistake if it leaned over backwards to avoid paying penalties; it would simply be speeding up the dissolution of contractual rights everywhere. Mr. Piercy commented that the Venezuelans had by this move virtually gained their goal of production programming, and if the principle were to flow to the Middle East, the companies would be squeezed. Mr. Warner asked what Esso would do if it lost in court; Mr. Jamieson said it might simply refuse to pay, as it had done in Libya.

Participation

The subject of participation was brought up at several points in the 1¾ hour discussion. Mr. Anderson remarked that Under Secretary Irwin had apparently had the subject in mind when he spoke of the long term future position of the companies in the producing states. Quite aside from the prospect of inadequate compensation, Mr. Anderson said, a real problem for the companies was the prospect of an unwanted and expansive new partner whose injection would have a severe impact on all company operations. Participation, he felt, was the best way to slow down the necessary growth of the international oil industry; his company would certainly see its capital operations overseas quite differently if it had an unwelcome partner. Mr. Irwin said that we were aware of the extraordinarily difficult problems involved, realized that they are problems for all the US, and felt this was a proper area for State Department interest. We wanted to establish a continuing dialog, and would want to do all we could within the context of the Tehran five-year agreements⁴ to support the companies against participation demands. On the other hand, as we looked beyond those agreements we saw that the countries would push their demands harder. We felt that the Department and the companies should exchange ideas closely on the subject, not with a view toward our telling the companies what to do or assuming responsibility for a solution, but in an effort to define the issues—on which we might well differ.

Mr. Akins noted that when company officials had called on the Under Secretary in December,⁵ we had not yet decided whether we could support them diplomatically in the Gulf on the participation issue. We had now decided that we would have to and felt it essential to work on the assumption that the five-year agreements will work. For balance of payments and other reasons, we feel it important that the companies remain in the production end. We will also point out in the OECD that participation can only raise the cost of their oil. Mr. Akins reminded the executives, however, that he had discussed with them individually what the USG could actually do in their support, and they had agreed that our levers were few if the countries move against the companies; in the Gulf we really could only call on the moral obligation of the rulers to see through the Tehran agreement.

Mr. Miller noted that approximately 60 percent of the foreign free world’s oil reserves were under US company control; this was an important national asset, particularly in view of our increasing reliance on imports. The companies felt that it was consequently very important from a national security standpoint that the State Department give the companies very strong support when the producing countries attempt illegally to abrogate the agreements on which our access to the oil is based. Mr. Watson seconded Mr. Miller, and pointed out that the concessions provided arbitration as a basis for settlement of disputes. Mr. O’Brien added that the companies considered participation to be illegal confiscation as much as the Libyan nationalization of BP; the USG should in general support the sanctity of agreements. The Under Secretary said that we were prepared to support the companies on the immediate issue. As we looked further into the future, however, we noted that the 60 percent of the world’s oil about which Mr. Miller had spoken was also concentrated in a very few countries. We would have to look at the practical aspects of the matter and the actual power relationships, irrespective of what we might think to be right. It would be no good being right if it led to confiscation.

Mr. Warner said that the companies had not yet decided what they would say to the OPEC negotiators on January 20. They could not say no, yet anything they might propose—e.g. a more satisfactory method of computing compensation than the book value principle of OPEC—would probably be unsatisfactory. It appeared that a crunch would inevitably come. If the USG were to base its entire argument on maintenance of the five-year agreements, however, it would create a wide open ball game for after 1976. In that event—if it looked as if participation were a sure thing—the capital investment to develop the necessary supplies of Middle East oil simply wouldn’t come forth. The effects would only be felt in 1985, but the decisions would be made now. The Middle East governments should understand the importance of maintaining an atmosphere of confidence to bring out the required investments. Mr. Samuels said that the companies should use their ingenuity in finding ways to persuade the producing governments not to force participation on them. The issue had to be faced, and the companies should search for alternative courses. The meeting ended with Mr. Granville’s comment that the companies would be in a better position to do as Mr. Samuels suggested if the countries didn’t believe that they could get away with unilateral action.

1. Source: National Archives, RG 59, Central Files 1970–73, PET 6. Confidential. Drafted by Brown on January 6; cleared in E/ORF, D, and U; and approved on January 19 in S and D.
2. Both Akins and McCloy agreed in a January 20 meeting that an informal, rather than a formal, consultative body was acceptable. McCloy stated that some of the corporate representatives present at the January 3 meeting were disturbed at Akins’ insistence that the companies change the nature of their relationship with the host producing countries by 1976, given the realities of the world oil situation, the companies’ weak position, and “severely limited” U.S. ability to help them. Akins stressed that company intransigence would “increase the drive toward nationalist retaliation within OPEC,” and that the companies needed sound and constructive proposals. (Memorandum of conversation, January 20; ibid., PET 3–1 US)
3. See Document 103. In addition, on December 31, 1971, Venezuela terminated the U.S.-Venezuelan Reciprocal Trade Agreement. (Memorandum from Eliot to Kissinger, January 12; National Archives, Nixon Presidential Materials, NSC Files, Box 797, Country Files, Latin America, Venezuela, Vol. II, 1972.
4. See Document 86.
5. See Document 96.