141. Memorandum From Acting Secretary of State Irwin to President Nixon1

  • SUBJECT
    • Petroleum: OPEC Developments

Summary and Conclusions. The participation settlement reached October 5 between the Saudis and the international oil companies looks toward 51% control by the producing governments by the early 1980’s but on terms the companies and consumers can find acceptable.2 The agreement has to be approved by the Arab states of the Persian Gulf, and then implementing agreements must be negotiated. Efforts by the Libyans to obtain better terms may endanger the agreement, and a confrontation between the companies and the Libyans seems certain. The [Page 352]Iraqis will also attack the agreement, but for the present seem unready to fuel any crisis which may develop.

Participation Settlement Negotiated. Representatives of the major oil companies holding concessions in the Middle East and Saudi Minister of Petroleum Ahmad Zaki Yamani have successfully negotiated a framework agreement for eventual 51% participation by the producer governments in the major oil producing concessions. Yamani will now seek approval of the agreement from the Arab states on whose behalf he has been negotiating (Kuwait, Abu Dhabi, Qatar, and Iraq); it is expected that all but Iraq will eventually approve. Specific implementing agreements will then have to be negotiated in the approving countries.

The terms of the agreement have not yet been released and there are some aspects of the settlement which are still open. The terms appear to be satisfactory for the companies, who have received a compensation settlement which, although not generous, is not confiscatory, and have been able to negotiate terms which assure them of relatively stable access to the necessary oil supplies at reasonable prices. Consumer nations will probably be unhappy at the slightly higher prices which will have to flow from this settlement, but nonetheless will probably agree that the companies got as good a deal as possible in view of their limited negotiating leverage.

The producing governments who accept this agreement will take 51% control of the concessionary companies by the early 1980’s at the latest (this is one of the points which has not yet been nailed down). The bulk of the oil, however, will continue to be marketed by the companies during this period, thereby assuring some stability of supply.

Iran, which has chosen an alternative route to participation which does not involve equity partnership in the producing company, will wish to renegotiate parts of its still-unconcluded agreement on future relationships with the oil consortium. The more radical states of OPEC, however, particularly Libya and Iraq, will attack the agreement and may cause considerable difficulty for Yamani in implementing it.

Libyan Moves. The Libyans have always indicated that they did not consider the OPEC formula for participation satisfactory, and will criticize Yamani’s acceptance of a compensation basis greater than the depreciated (net) book value of the assets. They have now begun to move toward participation on their own terms. Last week they concluded an immediate 50/50 participation agreement with the Italian company ENI which, even though it involved special circumstances, set an unfortunate precedent for compensation at net book value. The Libyans have quickly seized this precedent to present an ultimatum to the American company Bunker Hunt for an equivalent settlement; this company (which used to be the partner of British Petroleum before its nationalization last December) is in a vulnerable position. The Libyans obviously hope to move through it to isolate the other companies, one [Page 353]by one. The companies, however, are likely to support Hunt (through their Sharing Agreement) if he refuses to settle on the Libyan terms. Smaller oil companies are likely to support Hunt because each will feel that its turn may be next; the larger companies will support him because they fear that a Libyan success in securing a net book value compensation settlement would destroy their carefully-achieved agreement for the Persian Gulf. A prolonged confrontation with the Libyans seems likely.

Iraqi Situation. The one Arab state of the Gulf which is unlikely to accept Yamani’s proposal is Iraq, which, like Libya, insists that compensation should be paid at net book value only. The Iraqis will want to negotiate a tougher settlement but do not have the financial security of the Libyans (whose foreign exchange reserves exceed $3 billion); they have been under an austerity regime since their nationalization of the northern IPC concessions last spring, and promised Arab financial aid has not all materialized. The Saudis, who promised a loan, have not made it and will presumably try to use this fact to keep the Iraqis quiet during the period necessary to put their participation agreement into effect. The companies are also anxious to keep their disputes with the Iraqis on the back burner for the coming period, and will extend the period during which they will refrain from taking legal action against buyers of their nationalized oil.

The Department is following developments closely and is remaining in continuing contact with the American companies.

John N. Irwin II
  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 250, Agency Files, National Energy Office, Vol. I, March 1972–Feb 1973. Confidential. According to an attached note, this memorandum was incorporated into the President’s October 11 daily briefing.
  2. The details of the participation agreement and an analysis of its contents are in INR Intelligence Note RECN–31, “OPEC: Participation Agreement,” November 2. (Ibid., RG 59, Central Files 1970–73, PET 3 OPEC)