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

136. Memorandum From Harold H. Saunders of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)¹

Washington, August 3, 1972.

• SUBJECT
  • Saudi Arabian Oil Negotiations—A Compromise Figure for Compensation

You have asked for a gross number which could represent a fair settlement between the Saudi government and ARAMCO on compensation for the agreed Saudi share of participation in ARAMCO. The two criteria for such a number are (a) that it be enough above net book value to satisfy the companies and (b) that it be low enough so that the Saudi government will not appear to have sold out the OPEC countries.

On this latter point, two issues are involved: (a) There is the political principle in the “anti-imperialist” world that the oil under the ground belongs to the countries and not to the companies. This is at odds with the companies’ point that it was their investments that made this oil available to the countries and they should get some compensation for that. (b) The companies are worried about establishing the principle of net book value in part because the net book value of their assets in Kuwait and Iraq is much lower even than in Saudi Arabia. It must be remembered that the Saudi negotiator, Yamani, is technically negotiating on behalf of OPEC.

As a framework for discussing such a number, it is worthwhile to think of the following numbers which set the outer framework for discussion:

• —It is generally agreed that the net book value in the ARAMCO negotiations is $190 million. This represents 20% of the present agreed net book value since the negotiations involve payment for 20% Saudi participation.
• —The last industry offer to the Saudis in the present negotiation totals about $1.1 billion. This includes the following components:
  • —The net book value figure of about $190 million.
  • —In addition, the Saudis would pay a sum of money adding up to $900 million over a period of years. This would be calculated at a rate based on production of oil so that the Saudis could pay out of ongoing production.

It is between these outer limits that the present negotiations are taking place. In the course of the present negotiations, the following thoughts have been thrown out either officially or privately:

• —The OPEC (Saudi) negotiator in rejecting the companies’ last formula suggested a formula of net book value plus 25–50%. This would add up to about $250–285 million.
• —Prince Saud told a State Department official privately that he thought the number might be raised to a little less than three times book value. This would result in a figure around $550–$600 million.
• —Guesses about the companies’ position have been hazarded privately that if the OPEC offer could be raised to four times book value or about $750 million a company position might be crystallized.

The one other point that has to be considered is how any level would compare with Iran’s settlement. The two cases have many differences, but as I understand it, a highly oversimplified judgment based on technicians’ calculations is: A settlement at $600 million would be enough better than the Shah’s settlement to cause him to seek adjustments, whereas a settlement around $750 million would be a little better but not vastly so. That judgment may be the basis of the notion that a company position might be crystallized around $750 million or four times book value.

I suppose as a matter of general principle one should shave the estimates even of the technical people somewhat, although I’m told their analysis seems to be pretty straight. If one were to do this, we would be talking about a figure around $700 million. This would be just a little above splitting the difference between net book value and the last company offer which would produce $650 million.

I provide these figures just to give you a framework for judging what you may get from Jamieson. He may prefer that no figure be offered at all, and in any case he would presumably need to talk to the three other owner companies involved.

As you see, this is an inexact science!

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 630, Country Files, Middle East, Saudi Arabia, Vol. III, Sep 1971–Apr 1973. Confidential; Sensitive. Sent for action. Kissinger and Haig initialed the memorandum, which has the notation “OBE.”