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

165. Paper Prepared by the National Security Council Staff¹

Washington, February 16, 1973.

U.S. INTERESTS IN IRANIAN OIL

Present Situation—Shah’s Proposal and Companies’ Response

On January 23, the Shah announced that the consortium of oil companies operating in Iran faces two choices for the future:²

1. It can continue present operations until 1979, with some tax adjustments, after which it will enjoy no special privileges and receive no compensation.

2. It can turn over operations now to the Iranian national oil company, in return for which the companies will receive long-term purchasing contracts at discounted prices. The terms of compensation were not specified.

On February 12 the members of the oil companies’ consortium decided on a position that would be based on the Shah’s sales-purchase contract option but would seek to preserve most of the present company privileges within the general context of the 1954 agreement.³ They intend to propose to the Shah on February 22 a twenty-five year sales contract with the following provisions:

• —The 1954 agreement would be preserved with the fewest possible changes.
• —The companies would continue to operate in Iran under a management contract to NIOC.
• —The companies would be allowed to invest in Iran in the interests of expanding production.
• —The companies would be assured of profits at present rates—about 30 cents per barrel—over the life of the contract.
• —The companies will insist on compensation at updated book value for their assets in Iran.

In essence, the companies are trying to preserve the advantages of both of the Shah’s options in a framework that will minimize the chances of a negative reaction from the Shah and the prospects for undoing the participation agreements with Saudi Arabia. The Shah would be given the symbolic victory of taking full control of Iran’s oil operations, but little else. By wrapping the new arrangement within the old 1954 agreement, the companies hope to reduce the impact of the change elsewhere, and particularly in Saudi Arabia.

The First Issue: Could the Shah Be Forced Back?

The first issue which the companies—and the USG—had to address was whether to try to get the Shah to withdraw from his present position and return to negotiations on a financial package to meet Iran’s demands within the framework of the consortium, or whether to press for modifications of the Shah’s options to make them less disruptive to US interests. There have been two schools of thought:

• —A minority has argued for trying to reverse the Shah’s unilateral actions of January 23, whereby he threatened to break the contract with the consortium on flimsy pretexts. The US companies believe they have an especially strong legal case based on their record of performance, the terms of the agreement, the relevant laws of Iran, international law and the US treaty of 1955 with Iran (Treaty of Amity, Economic Relations and Consular Rights). If a stand is to be made on the issue of confiscatory nationalization, some would argue that Iran is the place to make it. The consuming countries have substantial potential influence in Iran, and it is at least worth considering whether it might be possible through concerted action to force the Shah to back down.
• —A majority has argued that it would be better to accept the Shah’s proposal as the starting place and to try to negotiate enough changes to preserve essential interests. This argument starts with the judgment that the Shah will be adamant in sticking with his two alternatives. A confrontation with the Shah which attempts to negate the framework he has set forth now seems undesirable on several grounds: it is clearly in the US national interest to avoid a confrontation with the Shah; he has told us his framework is non-negotiable; the British, Dutch and French will not support us in this; and the US companies have reached a decision to try to modify the sales contract option to protect their basic interests.

The conclusion reached in the discussion of this issue is that it is tactically necessary to approach the Shah within the framework he has established, not to try to force him to change his basic position. The overriding point for the USG is that this seems the best hope of avoiding a confrontation which would weaken the overall US-Iranian relationship. It is also true that this approach seems to have the greater chance of success. However, this approach is acceptable only if it is possible to preserve certain advantages of the present relationship between the consortium and Iran.

Working Toward a USG Position

If it is a valid conclusion that the companies should work within the framework established by the Shah rather than trying to force him from that position, the issue then becomes what kind of position the US Government can support. It is partly academic now that the companies have reached a position, but it is worth stopping for analytical purposes to examine basic US interests and to ask: If we are not to try to force the Shah to retreat, does one of his two options serve US interests better than the other? An added reason for posing this question is that the Shah could refuse the consortium’s proposal and force the companies to choose between the options as he has presented them.

The key issues for the US are the following:

1. What is the US national interest in the operations of American oil companies as producers in Iran? This question is basic because the answer begins to identify those elements in the present arrangements which it is important to preserve and those on which concessions can be made.

2. How do the Shah’s two options each affect those interests and other broader US interests?

3. Should the USG try to influence the position taken by the US companies?

4. What action, if any, is required of the USG?

Our Interest in US Oil Company Operations as Producers in Iran

In their heyday, US oil companies were seen as guarantors of oil supply to the Western world, as well as profitable business investments abroad. Today, since the producer countries have increasingly gained power and sophistication, the companies have lost some of their role as independent counterweights to the governments in producing countries and have more and more been reduced to a technical role in production, exploration and distribution—principally the last two. The companies will continue to play an important role in assuring that large quantities of oil are available on the world market and will make a positive contribution to the US balance of payments, but the companies alone will be unable to guarantee supplies. Producers, consumers and companies will henceforth all play a role in setting reasonable prices and in securing supplies.

The primary interests of the USG in the operations of US companies in Iran can therefore be reduced to three:

1. A general interest in protecting US enterprises against confiscatory nationalization and in restoring confidence in international contracts. Actions against US companies in Iran will have an impact on US foreign investments elsewhere, for acquiescence in Iranian violation of contract will make it more difficult to hold to that principle elsewhere. In Saudi Arabia the principle of compensation at updated book value is also at stake. The Saudis have served notice that accession to the Shah’s demands could cause them to reopen the recent participation agreements.

2. A profit margin for US companies in Iran that enhances their competitive position elsewhere abroad. US company profits from the sale of Iranian oil contribute positively to the US balance of payments. In 1972, this amounted to approximately $230 million, some of which could be lost under either of the Shah’s two options.

3. An interest in the technical contribution the companies can make through investment and management to efficiency in production and to aggressive exploration. This will be a factor in Iran and all oil exporting countries in the Gulf because of the projected expansion in production needed to meet the energy requirements of the 1980s.

The Effects of the Shah’s Options on US Interests

The consequences of the Shah’s two alternatives as he has presented them are discussed in relation to the major US interests identified above. It seems unlikely for the moment that the companies will move away from their position based on the Shah’s sales contract option, but it is instructive to look at their implications. If the Shah rejects the companies’ current proposal, they may yet be faced with a choice between the two options as they are. Modifications of the options will be considered subsequently.

Option 1: Continue operations to 1979, then end special status.

• Interest 1: Precedent of Confiscatory Nationalization
  • —No necessary short-term impact, provided that attention not focus on post-1979 arrangements. Time is gained to work on compensation formula after 1979. By that time Iranian oil production may have begun to peak out and the Shah may be more prepared to negotiate reasonable compensation. Saudis unlikely to react immediately to revise participation agreement.
  • —But Shah has announced that in 1979 he will take over without any compensation. Unless this can be modified, precedent could be very damaging elsewhere, depending on world energy situation in 1980s.
• Interest 2: Balance of Payments and the Repatriation of Profits
  • —Company profits through 1979 would continue on present basis. No short-term balance of payments loss anticipated.
  • —But, after 1979, if US companies lose favored position in Iran, balance of payments contribution from Iran oil operations will decline because there would be no opportunity to negotiate continuation of profits at anything like the present level.
  • —In view of uncertainties over future prices, however, it will be difficult to estimate b.o.p. effects precisely.
• Interest 3: Technical Contribution of US Companies
  • —Reduced US company role in Iran and little new investment as 1979 takeover approaches.
  • —But possibility of working into agreement a formula for amortizing any new investment between now and 1979.

Option 2: Long-term Sales Contract at Discounted Prices

• Interest 1: Precedent of Confiscatory Nationalization
  • —Serious problem if terms are bad. Might disrupt Saudi participation agreement. The Shah’s two proposals if unchanged would violate existing agreements, including a treaty with the US.
  • —But Shah has indicated he may be willing to follow similar compensation formula to that used in Saudi Arabia. Saudis may simply renegotiate to insure their profits equal Iran’s, without calling participation into question.
• Interest 2: Balance of Payments and Repatriation of Profits
  • —Will depend on price advantage under long-term contracts. If profits per barrel remain close to 30 cents as at present, then no loss under this option.
  • —But the Shah will be reluctant to provide consortium with same profits they now receive under this option. Likely to allow higher discounts (25–30 cents per barrel through 1979) then reduce to lower level.
• Interest 3: Technical Contribution of US Companies
  • —Less involvement in Iran, with possible adverse effects on availability of large quantities of Iranian oil on world market. Also less incentive for new exploration.
  • —But prospects for contract work with Iranian national oil company open possibility for companies to continue most of current operations.

Comment: With respect to each of these three interests, US companies have seriously weighed pros and cons in preparing the consortium response to the Shah. US national interests do not seem to diverge significantly from those of the US companies and thus we will want to include their judgment of costs and benefits in reaching our own conclusions. In short, the choice is between maintaining profits over the next six years with a sharp drop at that point and trying to maintain a position with probably diminishing profits over a twenty-five year period. Both options are equally bad in terms of damage to the principle of honoring contracts. In summary:

Advantages of Option 1 (Status quo to 1979)

• —Less disruptive in short-run.
• —Buys time to work for modifications after 1979, so that final option might include both compensation and future sales contract.
• —Participation agreements less likely to be affected

Advantages of Option 2 (Sales Contract now)

• —The Shah has made it clear that he prefers a long-term sales contract and will be quite angry if the companies reject this alternative.
• —The Europeans prefer this option, with modifications. Their purpose may be quite divergent from ours in that they would probably like to see the special US position in Saudi Arabia—where the greatest reserves are located undercut. That there is advantage in an option which has their support rather than giving them an opening to take a separate course.
• —The US companies, along with the European members of the consortium, have now chosen to build their position from this base. There is no point in fighting both the companies and the Iranian government.
• —If the sales contract is respected and the discount prices are comparable to present ones, this option could provide good prospects for stable supply and reasonable prices.

What US Actions Are Appropriate?

The American companies have asked for USG support for the modified sales contract proposal that they intend to put to the Shah. They are particularly concerned by the prospects of being caught in a cross-fire between Iran and Saudi Arabia that might be set off by consortium acceptance of the sales contract idea. The consortium intends to present its proposal to the Shah on February 22–23. The USG has the following choices:

1. Do nothing before the companies present their proposal to the Shah. The argument for this approach is that the Shah is unlikely to be moved by a general approach now, and we should not engage our prestige until we can weigh in on concrete issues after we see how the Shah reacts to the companies’ new proposal.

2. Send a general message. Such a message might concentrate on issues of broad interest to the US like the principle of honoring contracts and the need for Saudi-Iranian cooperation in the Persian Gulf. The argument for a general approach is that anything more now would create the appearance of direct collusion with the oil companies.

3. Although the Shah does not regard oil as an appropriate subject for the USG to address, there is the possibility of a USG approach related to the response the companies intend to make to the Shah’s proposals. The choice is among these elements:

• —Specific backing for the companies’ proposal.
• —General expression of preference for modifications of the Shah’s sales contract option.
• —A more generalized discussion of the principles that need to be preserved in any agreement (respect for contracts, adequate compensation, etc.).
• —Ways of presenting the new agreement to insure that the chances of disruption of the participation agreements will be minimal.

In any approach to the Shah, the US will have to consider both form and timing. The choices seem to be:

• —A high-level emissary, or
• —A Presidential letter
• —An approach before February 22, or
• —An approach after the consortium has made its presentation.

In addition to talking with the Shah, the USG will want to consider ways of communicating the new agreements to the Saudis. The objective would be to preserve the general structure of the participation agreements by limiting any changes to financial adjustments rather than renegotiation of basic principles.⁴

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Kissinger Office Files, Box 137, Country Files, Middle East, Iran–Oil, 5 Feb 1973–7 Sep 1974. Secret. Transmitted to Scowcroft under a February 16 covering memorandum from Saunders.
2. See footnote 3, Document 157.
3. The details of the companies’ position were relayed in a February 13 memorandum from Saunders to Scowcroft; National Archives, Nixon Presidential Materials, NSC Files, Box 602, Country Files, Middle East, Iran, Vol. IV, 1 Sept 1971–Apr 73.
4. The NSC Staff prepared the following by February 17: a draft of a memorandum to Nixon explaining their preference for sending a letter to the Shah instead of an envoy; a draft of a letter to the Shah emphasizing Iran’s role in world peace and the need for returns on investments contributing to world welfare and progress; and a draft of a letter to Heath informing him of the nature of the Presidential letter to the Shah. (Ibid., Kissinger Office Files, Box 137, Country Files, Middle East, Iran, Oil, 5 Feb 1973–7 Sept 1974) On February 18, Scowcroft informed Kissinger that the companies had asked for U.S. intervention with the Shah and submitted the drafts to him for review. (Ford Library, National Security Adviser, Scowcroft Daily Work Files, Box 1, Chronological File A, February 16–20, 1973)