140. Memorandum of Conversation1

  • SUBJECT
    • Saudi Investments in the United States; Saudi Proposal of a Special US-Saudi Oil Relationship; OPEC Negotiation
  • PARTICIPANTS
    • Ahmad Zaki Yamani, Saudi Arabian Minister of Petroleum and Mines
    • James E. Akins, Director, Office of Fuels and Energy

Saudi Investments in U.S.

Shaikh Zaki and Mr. Akins commented on the widespread assumption that the speech Mr. Akins gave to the Mid-East Institute on September 29 and the one given by Shaikh Zaki the next morning had been carefully coordinated (both speeches are attached).2 Mr. Akins said that he had vigorously denied such allegations. The reaction had usually been indulgent smiles, but he was undisturbed. If we had reached the same conclusions on the world oil situation and on probable future developments, this should scarcely be surprising.

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Saudi Proposal to U.S.

Mr. Akins said however that he was quite surprised at Shaikh Zaki raising in an open forum the proposal he had made the previous day to Deputy Secretary of State John Irwin: that Saudi Arabia and the United States enter into an agreement which would allow entry of Saudi oil and investments into the United States without restrictions.3

Shaikh Zaki elaborated on his proposal. Saudi Arabia, he said, clearly has the largest oil reserves in the world. It knows that much of the developed world in the next few decades will be dependent on imported oil and that Saudi Arabia will supply much of this oil. He said Saudi Arabia is fully aware of its own weakness and how unique the situation is. He said he “knew” that the “United States and others” had considered occupying Saudi Arabia but he hoped we realized how impractical such a move would be. He said the oil installations could and would be reduced to rubble at the start of an invasion; that the same fate would meet all Arab oil installations and that production could not be resumed no matter how strong the occupying army. In the meantime the developed world would be brought to its knees. He said he firmly hoped that Saudi Arabia would not be faced with such a prospect; that it hated and distrusted the communists and that it wanted to be friendly with the United States, the strongest country in the free world which could protect it. He said there were of course, political problems which disturb our relations; and the United States “must not underestimate the danger of the Palestinians and their power to disrupt United States interests in the Middle East.” But he said that Saudi Arabia thought it could overcome these obstacles.

The United States, continued Shaikh Zaki, will need large quantities of imported oil in the future. Saudi Arabia has the oil. What better relationship could there be? Saudi Arabia will invest in the refineries, the ships, the marketing outlets, the petrochemical plants which we will need in the future. This will “more than offset” the money the United States will have to pay for imported oil. And with an investment of many billions in the United States, the “new interdependence” Mr. Akins had talked about in his speech would be [Page 349]achieved. The United States on its side would give a preferred position to Saudi oil in its markets; and would encourage investments.

Shaikh Zaki concluded by saying that there would be no lack of other countries anxious to conclude agreements with Saudi Arabia if we did not wish to pursue the matter. He said the Japanese had already made specific proposals to Saudi Arabia but “I don’t like doing business with them.” He said there had been inquiries from Germany and “others” but that Saudi Arabia wanted to tie itself to the United States and would not move until it knew our reactions.

Mr. Akins said that the Saudi proposal was indeed exceedingly interesting. He said the Saudis knew of the talks we have had with Canada and Venezuela; but this was a proposal quite unlike anything we had discussed with either of those countries. He said he thought there might be objections from the rest of OPEC or from the Arabs (Shaikh Zaki said he could handle any such problems), and wondered why we would even need an agreement. Would it not be possible he asked to reach the same goals without a formal agreement? We would welcome Saudi investment in the United States. The President’s assistant Mr. Peter Flanigan had made this very clear to Prince Saud a few weeks ago.4 In fact, Mr. Flanigan had told the Prince that if Saudi Arabia ever had problems in investing in the United States he should let him (Mr. Flanigan) know and he would straighten them out immediately. It was clear that we will have to increase our oil imports in the next decade and if Saudi Arabia had invested in the refineries or other petroleum using firms in the United States, it would be perfectly logical for these firms to use Saudi oil. The duty is so small (10.5¢/barrel) that it would not seem worth trying to get an exception for it.

Free entry of Saudi oil, outside the quota, would have some interest now; but with the price differential between domestic and foreign oil narrowing, and with our growing imports, even this would not seem to be of lasting benefit to Saudi Arabia. We had however considered free entry in the Western Hemisphere context. Western Hemisphere producers had been given a preferred position in the Task Force Report on Oil Imports5 and the world understood our Hemispheric policy. If we were now to make a formal arrangement with Saudi Arabia, we would have to make the same offer to other Eastern Hemisphere countries, certainly Iran and Indonesia, but also Kuwait and perhaps others. Shaikh Zaki said he would have no objection to our doing this, but would like to point out that no other country could offer us what Saudi Arabia had. Kuwait, he said, is limiting production; the production in Iran and Indonesia will soon be limited by physical factors; and “neither has any capital to invest in the United States.”

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Mr. Akins said that we will give his proposition the most careful consideration. He hoped that Shaikh Zaki could look at the mutual advantages which would arise from a less formal understanding, from increased Saudi investments in the United States, without an “agreement.” Shaikh Zaki said he would and asked if he and Mr. Akins could get together sometime soon to discuss the United States reaction.

Comment: The Saudi proposal is incomparably more attractive to the United States than our suggestion to Venezuela on the exploitation of the heavy oils. In the Saudi proposal, Saudi Arabia gives us access to the oil; it invests in the United States, thereby giving us a guarantee on the continuing deliverability of the oil; and it keeps prices low. The development of the heavy oil in Venezuela would require an enormous U.S. investment in Venezuela for a lesser quantity of oil; the cost of the oil would be high and the balance of payments drain would be great. We would need treaty assurances from Venezuela on the investment, and these would be hard to get. In the past, an argument in support of the Western Hemisphere oil has been that we get a higher proportion of the cost back in increased trade. The new Saudi proposal includes more than off-setting investments in the United States.

While there is no doubt that the Saudi proposal, if fully implemented, would reduce the hazards of importing Arab oil, there would still be domestic U.S. political objections to it and there can be no guarantee that the Saudi government will permanently endure or that it could fulfill its guarantees in crisis conditions. In short it would seem that we have no overriding reason to abandon our earlier position that extreme reliance on the Arabs, even on one friendly Arab country, would be dangerous to the United States.

If we accept or reject the Saudi proposal there is little doubt that other consumers will soon be pounding on Yamani’s door with proposals of their own. If we reject the offer there is little doubt that the Saudis will be receptive to some of the European countries; and the oil world could quickly become polarized with a series of direct consumer-producer deals. This could effectively eliminate our oil companies from production and possibly even from down stream operations. The game could spread to other OPEC countries and the ruinous competition among consumers which we foresaw by 1976 could begin this year or next.

Current OPEC Negotiations with Companies

Shaikh Zaki repeated much of the information already given us by the oil companies. He said the two sides were close together on buy-back prices for the oil, and “there will be no problem in reaching agreement.” He said Saudi Arabia wanted to proceed to 51% participation by 1979, whereas the companies would like to delay another five years, but here too, “there should be no problems.” He said the main obstacle is the difference on compensation, with his offer now about $400 million, [Page 351]and the companies asking for $600 million. He said this was much more important an issue than money alone. OPEC had said that compensation should be net book value and he had already gone far beyond that. Nonetheless, he thought that he could sell the package, more or less as it stands now, to Kuwait, Qatar and Abu Dhabi. With support from these three he was prepared to go back to OPEC and face Iraq and Libya who will be strongly opposed. If he were to give more on compensation he would not be able to bring Kuwait along; and he said that Iraq was constantly importuning Kuwait to follow its line and not that of Saudi Arabia. He said he was prepared for an onslaught from Iraq but this did not bother him. He also said that it was important to the moderate Arabs that Iraq’s nationalization of the IPC not be successful.

The company-OPEC meetings were to be resumed in New York October 1. Shaikh Zaki said he hoped to reach an agreement in a short time, but was not sure whether it could be concluded in New York or would have to be continued elsewhere. He said his time was limited, and the companies at last had also concluded that time was not on their side.

  1. Source: National Archives, RG 59, Central Files 1970–73, FN 9 US–SAUD. Secret. Drafted by Akins on October 2.
  2. Akins’ speech was not attached and not found. The text of Yamani’s speech before the Middle East Institute, September 30, was transmitted in circular telegram 179548, October 2. (Ibid., PET 17 US–SAUD)
  3. At their September 29 meeting Yamani told Irwin that once participation was achieved, Saudi Arabia wanted to invest in downstream oil operations; otherwise it was not in Saudi Arabia’s economic interest to increase oil exports and accumulate surplus cash reserves in depreciating currencies. Yamani hoped the United States would give Saudi oil “special treatment.” If it did, the result would be “a huge Saudi investment in downstream facilities in the U.S. with an obligation by the Saudis to move their oil to these facilities in future years. Not only would this assure future energy supplies to the U.S. but would also benefit the U.S. balance of payments.” (Ibid., PET SAUD) The memorandum of conversation is printed in full in Foreign Relations, 1969–1976, volume XXIV, Middle East Region and Arabian Peninsula, 1969–1972; Jordan, September 1970, Document 164. The Embassy in Jidda’s assessment of Yamani’s offer is ibid., Document 166.
  4. See footnote 4, Document 134.
  5. See Document 32.