139. Intelligence Note Prepared in the Bureau of Intelligence and Research1

RECN–26

OIL OUTLOOK: CAUTIOUS OPTIMISM

Participation talks between company representatives and Saudi Arabian Oil Minister Shaykh Zaki Yamani, who is acting on behalf of the Arab Persian Gulf members2 of the Organization of Petroleum Exporting Countries (OPEC), appear to be making progress. Final agreement on implementation of 20 percent participation (ownership) in oil company operations by host governments is a distinct possibility by the end of September, the deadline set for agreement by OPEC. Finishing touches are being put to the new agreement between Iran and the consortium of Western oil companies operating there which will extend the consortium’s operating concession to 1994. Less certain is the current status of mediation of compensation for Iraq’s nationalization of the Iraq Petroleum Company (IPC), which seems to have stalled. However, it may just be a case of both sides waiting to see what happens in the participation talks before going further.

Outside of the Persian Gulf there are some rumblings against the companies. Of most immediate concern are renewed rumors of impending Libyan action against the oil companies operating in that country. Less threatening was the opinion voiced at the Venezuela-inspired Latin American Petroleum Conference that the international oil companies are “unnecessary middlemen” and should be replaced by government-to-government oil sales.

Persian Gulf: Real progress appears to have been made in the latest round of talks on the implementation of participation in oil production by host governments. The talks, with Saudi Arabian Oil Minister Shaykh Zaki Yamani representing the Arab Persian Gulf members of OPEC, and executives of Esso, Royal Dutch Shell, and Texaco representing the companies, have lasted longer than expected and have moved to the cozier atmosphere of Yamani’s villa outside of the initial meeting place, Beirut. Prior to this session Yamani held talks with Aramco in Saudi Arabia, presumably to get an idea of Aramco’s plans for future investment and production in Saudi Arabia.

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The talks have focused on the key question of compensation for the share of company operations to be acquired by the host governments. The governments insist that compensation can be only for the book value of physical assets. The companies demand compensation for lost future production, i.e., output from the share of their operations turned over to the governments. Some imaginative proposals have been put forward to escape from this impasse.

Yamani has expressed OPEC members’ willingness to pay something more than the book value of the assets they will acquire. One formula is to combine book value with profits for one year on 20 percent of production in a package labeled compensation for an “on-going concern.” If the companies accept such a proposal, it is probably because they expect an additional form of compensation under the arrangements to be made for marketing the governments’ share of oil. This means that the governments would sell their share of oil to the companies for less than the prevailing market price, allowing the companies to make a profit on the oil when they resell it.

By limiting “formal” compensation to the value of the assets acquired, even including token payment for such intangibles as “ongoing concern,” and refusing compensation for lost oil production, the governments would not compromise their principles of no compensation for oil in the ground. At the same time, a marketing arrangement such as described above would provide a formula for compensating the companies for lost production that would not be affected by how large the governments’ participation may become, even to the point of 100 percent ownership. Of course, to the extent the governments find they are able to market their own oil, or to the extent the differential between the price the companies pay for the governments’ oil and the one at which they sell it may narrow, this formula loses its value.3

Final touches are being applied to the new agreement between Iran and the consortium of Western oil companies operating in the agreement area in southern Iran. The new agreement will extend the consortium’s operating concession to 1994 and approve its construction of a new refinery, expected to be located on Kharg Island where a loading terminal is now located. In return, the consortium will increase crude production to 8 million barrels per day (b/d); turn over the [Page 346]Abadan refinery, the second largest in the Persian Gulf, to the National Iranian Oil Company (NIOC); sell 20 percent of its output to NIOC at an “advantageous” price (i.e., less than market price); and tie the posted price for crude after 1975 to an index of goods imported into Iran. On the consumer side a major oil supply has been assured, while for Iran the attractive feature of the agreement is that its national oil concern will be able to market sizeable amounts of oil abroad. The “advantageous price” provision for oil sold to NIOC has implications for the buy-back arrangement being made in the participation negotiations.

While the major Persian Gulf supplies of crude oil are almost assured, there remains some uncertainty in Iraq. Mediation of the Iraq seizure of the Iraq Petroleum Company seems to be at a standstill. However, it may be that this is simply a matter of the two sides waiting for the final outcome of the participation talks before proceeding on this related issue. The latest word from IPC sources is that co-mediator and IPC executive Duroc-Danner has gone to Baghdad for the purpose of moving the talks from OPEC-sponsored mediation to direct negotiations between Iraq and the company.

Libya: The most immediate threat to world oil supply is the possibility of a partial or complete cut-off of Libyan oil. Rumors are rife about an impending Libyan Government partial or full nationalization of additional oil companies4 on September 1, anniversary of the overthrow of King Idris.

However, Libya does not now have the critical place in world oil supply it had in 1970. Lower tanker rates make Persian Gulf oil readily available in Western Europe at prices more favorable than those for Libyan grades. The less competitive position of Libyan oil is reflected in decline of production to a 5-year low of 2 million b/d, which is rapidly being overtaken by Nigeria’s output, now at 1.8 million b/d. Libya’s ability to affect the total oil supply has also been lessened by resumed exports from Iraq’s Mediterranean pipeline and rapidly rising Algerian exports, now at almost 1 million b/d, up 23 percent over peak 1970 levels.

The net result is that while Libya can damage the companies operating there, alone it cannot seriously hamper the worldwide flow of oil or even the flow to Western Europe. These factors may deter the Libyans from taking adverse action against oil interests in the country at this time. However, the Libyan Government’s actions are difficult to predict.

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Latin America: The first Latin American Petroleum Conference recently held in Caracas aired the subject of the role of international companies in the oil trade. Discussion at the conference characterized the international firms as “needless middlemen” and recommended easing them out of intra-Latin American oil trade by encouraging government-to-government oil sales. On a continent where government-owned companies already play an important role in refining and marketing, this cannot be considered entirely an idle threat. However, given the relative inexperience even of long-time producer Venezuela in international oil marketing and the continued need for company investment in exploration and production, the companies are likely to be around in Latin America for quite a while.

  1. Source: National Archives, RG 59, Central Files 1970–73, PET 2. Confidential. Drafted by Cecchini; approved by Arthur P. Allen, Acting Director, Office of Economic Research and Analysis, INR; and released by Weiss.
  2. Abu Dhabi, Kuwait, Iraq, Saudi Arabia, and Qatar. [Footnote in the original.]
  3. The oil companies briefed Department personnel on September 28 on the current status of participation talks with Saudi Arabia. According to company officials, Yamani had departed from the OPEC formula of net book value by adding on factors that increased the net book value, but the two sides remained “fairly far apart” on a total figure, with Saudi Arabia suggesting $400 million and ARAMCO $600 million. Other issues remained under negotiation, including buy-back oil. (Circular telegram 177818, September 28; National Archives, RG 59, Central Files 1970–73, PET 3 OPEC)
  4. Libya nationalized BP’s assets there in 1971. [Footnote in the original.]