134. Memorandum of Conversations1
- United States and Saudi Arabian Views on Oil and Energy Policy and on the Current OPEC Negotiations
- Amir Saud bin Faisal, Saudi Arabian Deputy Minister of Petroleum
- Muhammad Joukhdar, Saudi Arabian Deputy Governor of Petroleum and Minerals Organization
- Mr. James Schlesinger, Chairman, Atomic Energy Commission, July 26, 10:00 a.m.
- Mr. Peter Flanigan, Assistant to the President, July 26, Noon
- Mr. Hollis Dole, Assistant Secretary of Interior for Mineral Resources, July 26, 3:00 p.m.
- Mr. John Nassikas, Chairman of the Federal Power Commission, July 27, 10:00 a.m.
- Mr. John Irwin, Deputy Secretary of State
- Mr. George Lincoln, Director, Office of Emergency Preparedness, July 28, 10:00 a.m.
- Mr. John Connally, Former Secretary of the Treasury, July 29
- Mr. Henry Kissinger, NSC, July 31
- Senator Clifford Hansen, (R. Wyoming) Dinner evening July
- 26 Senator John Tower, (R. Texas) July 28, 3:00 p.m.
- Senator William Fulbright, (D. Arkansas) Dinner evening July 29
- Mr. James Akins, Director, Office of Fuels and Energy, Department of State
Mr. Akins attended all of the meetings except four: with Chairman Schlesinger and Chairman Nassikas, both of whom were briefed by him prior to their meeting and both of whom informed him fully afterwards; and with Secretary Connally, who came to Washington to see Saud, and with Henry Kissinger.2 Our only accounts of the latter two meetings has come from Saud, himself. Mr. Akins also met alone with Saud on July 25, 28, 31 and August 2 and 5. Mr. Joukhdar attended all the meetings except those with Mr. Akins, with Secretary Connally and Dr. Kissinger. A full memorandum of the conversation with Deputy Secretary Irwin has been separately prepared.3 This will be an amalgum of that and all other meetings.[Page 326]
I. Background of the Visit
Amir Saud arrived in New York the afternoon of July 24; neither the Department, the Embassy in Jidda or the Saudi Embassy in Washington had been informed in advance. He called Mr. Akins the morning of July 25; said he had come to discuss Saudi views on the “participation” issue and wished to learn the American views on energy policy.4 He apologized for the short notice but asked if appointments could be made with appropriate officials in the U.S. Government dealing with energy matters.
In subsequent conversations Saud said that the Saudi Government had been disturbed by the intransigence of the companies, by their lack of understanding of the Saudi and OPEC positions and their refusal to see that new arrangements between the Governments and the companies must be developed. It was clear to the Saudi Government that the intervention of the United States Government would be necessary to bring about a satisfactory resolution of the problem. Saud said that his government had noted Secretary of the Treasury Connally’s statements on the necessity of the U.S. Government taking over negotiations from companies;5 the Government assumed that the United States Government had already done this in reaching the new arrangements in Iran.6 Accordingly, King Faisal, on July 10th, wrote to President Nixon and asked him to intervene with the companies.7 He decided that, as a follow-up and more personal approach, Prince Saud should come to Washington to give the views of his Majesty and the Saudi Government.
II. The Main Saudi Points
A. Saudi Reserves
Saudi Arabia has a reasonably good idea of its own petroleum reserves and it knows how large these are in comparison to the total world reserves and how large they figure in the world supply picture over the next two decades. The increasing reliance of many of the [Page 327] industrial states on OPEC and specifically on Saudi Arabia, “frightens” the Saudi Government. This is an enormous responsibility, and it is an enormous danger. Saudi Arabia’s great wealth could incite its neighbors or even some of the great powers to move against it.
B. The Participation Issue
There has been a tendency in Saudi Arabia to have as little as possible to do with the details of oil production. Some still believe all the Kingdom should do is to take measures to increase its income by instructing Aramco to increase production and by increasing taxes and royalties. This would certainly be the easiest way of handling the relations with the oil companies; and it probably would also be the most profitable. There are two dangers in such an approach: one for the companies and one for the government. For the companies it would have meant the probability—in fact the certainty—that the Saudi Government would, in a very short time, have imposed production controls on Saudi oil. It is quite possible that Saudi Arabia would not have been able to absorb the income from oil production and would have concluded that it would be better to leave the oil in the ground for future exploitation. And it is unlikely that production could ever reach ten million barrels/day. Saudi Arabia recognizes that this could have repercussions on many of the consuming nations. The danger to Saudi Arabia would have been less clear but more insidious. The effect on Saudi Arabia’s public morality is bad enough now. Money is being given to the Government and the people without their having earned it; it is only because their soil happens to contain large oil reserves. If income increases, with no corresponding efforts by the Saudis, then the entire people would be corrupted.
The Saudi Government has decided that it is imperative that it control the operation of the oil resources in the country. This is not only for the reason mentioned above (i.e. to give the Saudis a direct stake in the operation of the oil industry) but because in this age it is impossible to allow foreign private companies to control the destiny of the country. In the past, Saudi Arabia has made suggestions to ARAMCO: in some case it has made demands; but the final decision on what action would be taken was made by the companies. ARAMCO has been cooperative and the Saudi Government believes that its relations with it are better than that of any other country of the Middle East with its concessionary companies. Nonetheless, it must have the final say in the operation of the industry which is vitally important to its own well-being.
C. 50 vs 51 percent participation
OPEC has decided that participation will start out at 20 percent and rise to 51 percent. The Saudi Government is in full accord with this [Page 328] OPEC position. The companies attach great importance to whether the Government’s share will rise to 50 percent or to 51 percent, but this is not necessarily a crucial issue. If the minority shareholder’s position is protected and if action cannot be taken which would hurt its interests, then there is little difference between 50 or 51 percent participation.
There seems to be considerable understanding among some of the companies of the necessity of moving forward to 51 percent participation. The Saudi Government knows that some companies are still opposed but even in those companies there are some officials who realize that this is inevitable and that the companies should make the best of it. The Saudi Government has no intention of reducing ARAMCO to a powerless appendage to its oil operation in Saudi Arabia.
D. Future Relations with ARAMCO
Saudi Arabia in no sense intends to expel the companies or replace their personnel with Saudis. ARAMCO has been forthcoming in training Saudi Arabians and the Government is grateful. But with the planned expansion of the country, increases of production of oil and investment inside Saudi Arabia, it is quite clear that for the foreseeable future the oil companies and their expatriate staffs will be needed to operate the industry efficiently. In fact, Saudi Arabia envisages in the next few years a vast transformation of its character: other Arabs will come into the Kingdom, will be naturalized and will take up duties as Saudi citizens; the oil companies will maintain their present staffs, perhaps even enlarge them.
There is still a wide gap between the government’s and the companies’ positions. On the question of compensation the original company position was “not serious” as it would have resulted in an increased cash flow to the companies throughout the life of the entire concession. In other words, if such a proposal on compensation were accepted, every oil company would demand total nationalization immediately. The most recent offer of the companies was considerably better. It amounts to $1.80 for every barrel produced in one year; this amounts to about six times book value. The OPEC position is still “book value” as a basis for compensation, but the Saudi Government has recognized that it should pay more than this basic sum. This can be done through various buy-back arrangements; or perhaps there are other ways it could be handled. The Saudi Government has not been inflexible in dealing with the companies, as the companies evidently have told the U.S. Government. The latest Saudi offer was considerably above book value; in fact, it was almost three times book value.
One thing was established in the initial company-government talks, was that the participation negotiations would not be a typical [Page 329] commercial transaction; ARAMCO was not a willing seller and the Saudi Government was the only buyer. Compensation therefore would not be tied to what ARAMCO might be able to get for the concession were it selling it on the open market.
There is no doubt that if ARAMCO had made an offer of participation a few years ago the settlement would have been much higher; in fact, it very likely would have to be higher than the recent company proposition. Even if it had been made before the nationalization in Iraq and Libya, the Saudi offer would have been more favorable. Now that the radicals in the Arab world have moved against the companies and have had some success in taking over the operation it would be very difficult—in fact it would be impossible—for the moderates to appear to yield to the companies.
The Saudi Government believes that the question of compensation should not be over-emphasized however. The companies have a long and profitable future in Saudi Arabia and in other producing countries if they reach a reasonable accommodation with the governments. The Saudi Government is sure that ARAMCO will do this although it may be difficult at times and conceivably could be impossible. King Faisal and his Government hope that the United States Government will be influential in advising the companies to make a quick and adequate settlement with them.
F. Unilateral Saudi Action in Case No Agreement Reached
Saud said that it was quite clear in the letter from King Faisal to the President that the Saudi Government looked on this matter very seriously. If the companies did not reach a rapid accommodation with the Government, Saudi Arabia would have no choice but to take unilateral action. (Mr. Akins said that this was not our interpretation of the King’s letter; indeed we did not get any such sense from the careful reading of the text). Saud said he had come to Washington to reemphasize this fact. It was not a threat against the companies; it was that Saudi Arabia would itself feel threatened by the companies and particularly by radicals in OPEC if it did not reach a satisfactory solution. Saudi Arabia believes that if the companies will not reach an agreement at least comparable to the one reached in Iran or probably to be reached in Iraq, then Saudi Arabia will lose its position of authority in OPEC and the guiding power will devolve on the radicals. Saudi Arabia has not helped Iraq and at present does not intend to. Iraq had taken its action against the IPC without consultation with the other members of OAPEC and it must be prepared to take the consequences. Iraq has already been hurt; civil servants salaries have been cut and there is even some possibility of suspension of salaries. If Army salaries are cut, quite possibly there will be a change in government in Iraq.[Page 330]
Saudi Arabia looks forward to the billions of dollars it will have at its disposal in a very short time. It does not regard itself as a financial institution, even less as the banker for the world. It believes it would be imprudent to keep this money much longer in banks in the Middle East, Europe or America; and Saudi Arabia must start looking seriously at investment possibilities at home and abroad. It is already considering downstream investments in oil, in tankers, in petroleum refineries and even in marketing outlets: it is not thinking in terms of starting new ventures itself but rather buying into existing companies. The capital available would make it possible to take over smaller companies, if this is the route Saudi Arabia decides to follow. Saudi Arabia does not intend to limit its investments to petroleum related activities and would be prepared to invest in other projects in the developed or the undeveloped world. (The question of investment in the Arab world was raised several times but was not directly answered by Saud.) Saudi Arabia is also looking at massive investment inside the country. It will have the capital to buy factories and have them built in Saudi Arabia, but as its experience so far in this field has been bad, Saudi Arabia would prefer to have companies invest in Saudi Arabia in joint ventures with the Saudis. In such cases, the interest of the foreign investors in profits would be far greater than if the plant were merely built for the Saudis or even if foreigners were managing it for them. Saudi Arabia would be willing and would be anxious to start such a program right now, but it has only vague ideas as to how to go about it. It would be willing to entertain any suggestions or offers from foreigners. Saudi Arabia would be particularly interested in petroleum related activities such as petrochemical plants, or in energy intensive industries, such as manufacture of aluminium, which could use natural gas now being flared.
If Saudi Arabia does indeed embark on a program of investment at home and abroad it will very likely need all the capital that can be generated by oil production in the country. In this case, and only in this case, oil production could rise to the limits ARAMCO foresees for the country, i.e., 25–35 million barrels per day by 1985.
H. Reliability of Saudi Oil
Saudi Arabia has read with some concern statements made by many American officials about the unreliability of Eastern Hemisphere oil. It interprets this as meaning Arab oil. Saudi Arabia would like to point out its extraordinary record of supplying oil to the West. The boycott of Britain and France in 1956 was not effective and was widely recognized as such. The boycotts of the United States, the United Kingdom and West Germany in 1967 lasted no longer than a week in [Page 331] Saudi Arabia and even then the deliveries to the Bahrein refinery, which supply the American forces in South East Asia, were never interrupted. Furthermore, Saudi Arabia played the major role in the Khartoum conference which resulted in the lifting of the boycott on the three countries. It was only after the boycott was lifted that Saudi Arabia agreed to make its payments to Egypt and Jordan. Saudi Arabia would like to have a special relationship with the United States, similar to that currently enjoyed by Iran. While an outright alliance is out of the question, a closer political and economic relationship with the United States and with Western Europe would be something that should be carefully considered by both the United States and Saudi Arabia.
Saudi Arabia nonetheless recognizes the United States concern about the unreliability of Eastern Hemisphere oil. It knows many threats have been made to use it as a political weapon. Much of this can be attributed to the unrest in the Middle East and to American policy which many Arabs believe to be anti-Arab. Rather than talking about insecure oil, the United States might well consider policies which would make this oil more secure.
III. The American Position
A. Basic Importance of Saudi Oil
Most of the American officials and particularly Deputy Secretary John Irwin, Peter Flanigan and James Akins told Saud they recognized the extreme importance of Saudi Arabia to the world supply of energy over the next few decades. All expressed a strong desire that the current negotiations between the companies and the OPEC Governments be worked out in a manner satisfactory to both parties.
Oil is extremely important to the well-being of the Kingdom of Saudi Arabia; it is scarcely less important to the health and stability of all developed nations including the United States. The main concern of the United States Government is that the oil continue flowing and that it be available on reasonable terms to all consumers.
B. Basic Importance of Companies
We had another important concern however; that is the well-being of our oil producing companies abroad. There is the traditional protection given to investments abroad; there is also our interest in the contributions of their investments to our balance of payments. In the case of the oil companies there is much more: we believe the oil companies provide the best means of finding and developing oil reserves, taking the oil to consuming areas, refining and marketing it. When governments have tried to take over this function they have not proven to be very successful.[Page 332]
We recognize the sovereign right of any nation to nationalize property within its borders. We have always insisted that the compensation be fair, prompt and adequate. When we read the initial OPEC offer of compensation; that it be on the basis of depreciated book value only, we were astounded. Mr. Flanigan said that book value is of some theoretical interest to accountants but it has no relationship to the true value of property. Frankly, he said, he would consider compensation limited to book value, “confiscation.” Most others with whom Prince Saud spoke made the same point.
Mr. Irwin pointed out that Saudi Arabia itself intends to invest heavily outside its own borders. The issue of compensation for its own property may sometime become acute for Saudi Arabia. We would have thought that Saudi Arabia would do well not to speak of compensation in terms of book value. The United States has given and loaned funds to many developing countries. This will probably continue, but there are limits as to how much we can do as a government. We believe that much of the investment must be done by the private sector. The United States itself was developed by British and other European capital. Without this, it is doubtful that the United States economic advance could have been as rapid or as dramatic as it was. We know that circumstances have changed but we still believe that private capital could give the impetus to economic advance throughout the undeveloped world. For this reason we are apprehensive at any proposal to compensate on the basis of book value alone. And on this point, we are perhaps even more rigid than the oil companies themselves. If the final OPEC settlement is indeed on this basis, the principle could spread elsewhere and there would almost certainly be an inhibitory effect on foreign investment throughout the world. This would, in a short time, harm the economies of these countries and they would probably call for increased loans or gifts from the developed countries, who in turn might be reluctant to comply in view of undeveloped countries unwillingness to encourage private investments. In short we would not like to see a settlement on book value alone even if there were other “sweeteners” somewhere in the background.
Mr. Irwin and Mr. Akins said that the United States Government until recently had not become involved in matters between the oil companies and the producing governments. Any thing we do now is still quite minor. We had no intention of emulating either the Communists or the Japanese where the Government actually carries out negotiations. (In the conversation with Secretary Connally, another view was [Page 333] expressed. Secretary Connally told Saud that the question of energy supply was too important to be decided by the companies. The United States Government would very likely play a much greater role in negotiations with the producing governments than it has in the past; in fact it might take over all negotiations itself.)
The United States was most pleased with Saudi Arabia’s intention to invest downstream. Saudi Arabia could buy stocks on the New York exchanges; it could, with its enormous capital, buy out individual companies or buy controlling interest in them. It could start new factories from scratch; it could invest in hotels or land; in short the possibilities for investment in the United States are almost unlimited. Mr. Flanigan spoke at length on this subject; said that he was responsible for encouraging foreign investment in the United States and he urged Saud to let him know if ever there were any obstacles to such investments.
F. Attitudes of the Companies
We had talked with the companies and found them realistic and flexible. We know that the first company position would be turned down by the OPEC negotiators but the companies expected this. We would not wish to get involved in the details of the negotiations but we believe that the latest company offer (which seemed to be about ten times as good as the first one) had much to recommend it. It was about six times book value; but the important thing, from the Saudi point of view, was that the compensation was to be paid for out of the income of the 20 percent participation share. Over the 10 or 12 year period set for compensation, the net cash flow to the Saudi Government would always be positive. This seemed to us to be an excellent arrangement for Saudi Arabia. It nationalizes; it takes control and the compensation is extended for many years. And at no time during this period would Saudi Arabia be called to add other funds for payment.
G. Alternative Energy Supplies
Chairman Schlesinger and Chairman Nassikas reviewed for Saud our problems and our potential in nuclear energy and natural gas. In the long run, nuclear energy will meet much of our needs, but in the short run we will need increased imports of petroleum. Whether there is a crash program in the United States to develop new energy forms depends largely on action by the Administration and the Congress. And their will to move depends on the availability of foreign oil, on its cost and on the threats that are made by producers to exploit our dependence on imports. The greatest stimulus to increased action on energy supplies in the United States is the threat by OPEC to cut off or to restrict oil deliveries to gain political or economic goals.[Page 334]
IV. Results and Conclusions
The first concrete result of the visit was probably the statement made by King Faisal on August 3 that Saudi Arabia did not intend to use oil as a political weapon;8 it did not believe the Arabs should try to do so; and the United States could not be greatly hurt in any case as it had alternative sources of energy.
There is also good reason to believe that there will be more flexibility in the government position when talks resume. Saud told us that OPEC would be reasonable; Mr. Joukhdar said just before he left that we “would be pleased” with the new OPEC position; and Hassan Yassin, a friend of Saud, told Mr. Akins on August 6 that Saud understood our position, and that “we will compromise on the compensation issue.” All three urged that these statements not be passed on to the companies; they said they feared that “if the companies think we will yield, they won’t move at all; and then we’ll have a real confrontation.”
Signs of a lack of frankness or at least faulty communication between OPEC and the companies appeared during the Saud visit. The companies maintained that the OPEC negotiators were absolutely inflexible, with Yamani’s maximum offer for compensation being book value plus twenty-five percent. Saud said the companies had deceived us; that OPEC was flexible and, indeed, the latest OPEC offer was considerably above book value. The companies told us that their greatest worry was the disposition of the participation oil; Saud said that this issue was settled very early in the discussions. We told each side of the statements made by the other and suggested that it would be profitable to both if they would clear up the misunderstandings.
- Source: National Archives, RG 59, Central Files 1970–73, PET SAUD. Confidential. Drafted by Akins on August 8.↩
- See Documents 135 and 137.↩
- Dated July 28; National Archives, RG 59, Central Files 1970–73, POL 7 SAUD.↩
- In the meeting with Flanigan on July 26, Prince Saud stated that “the root of the participation drive” was the desire “to be more than passive recipients of royalty revenues with respect to their principal natural resources. Thus, the OPEC nations are looking for control—the power to regulate rates of production so that income to the producing nation is maximized, the ability to gain footholds in downstream refining and marketing activities, and so forth.” In response to his reiteration that OPEC’s offer of compensation was at depreciated book value rates, Flanigan stated, “depreciated book value is nothing more than an accounting device which is considered at least in this country to have very little relation to the purchase value of particular assets.” (Memorandum for the files, July 26; ibid., Nixon Presidential Materials, White House Special Files, Subject Files, Confidential Files, Box 8, [CF] CO 128 Saudi Arabia, 1971–1974)↩
- See paragraph III. D below.↩
- See Document 124.↩
- See Document 129.↩
- As reported in telegram 2195 from Cairo, August 9. (National Archives, RG 59, Central Files 1970–73, POL 15–1 SAUD)↩