170. Memorandum of Conversation1
- Oil Participation Negotiations
- Mr. William Greenwald, Exxon
- Mr. William Lindenmuth, Mobil
- Mr. George M. Bennsky, EB/ORF/FSE
- Mr. Francois Dickman, NEA/ARP
- Mr. John Rouse, NEA/IRN
- Mr. A. Tupper Brown, L/NEA
- Mr. Charles Pittman, L/E
- Mr. Gordon S. Brown, EB/ORF/FSE
Mr. Greenwald and Mr. Lindenmuth called, at our invitation, to brief us on the contents of the oil companies’ recent agreements with Iraq and Iran, and the implications of those settlements for the stability of the participation agreements. They appeared to believe that the agreements which had just been reached could be defended, and that the major problem would be to convince Yamani that the new arrangements in Iran were not prejudicial to his participation agreement.
Iran Settlement Mr. Greenwald led off explaining the Iranian settlement, which he noted was still under negotiation. He said that Yamani had already been briefed on both the Iraq and Iran settlements by Aramco, and seemed to be most concerned over the Iranian settlement. Mr. Greenwald said that the companies would probably try to address Yamani’s anxieties by arguing that the Iran settlement, though different in form, was no better for the GOI than participation; in fact the Shah would only get financial terms which made his arrangements equal to participation. A different form of settlement was necessary due to the different legal conditions in Iran following 1951 nationalization. The companies would tell Yamani, Mr. Greenwald said, that he could have the same arrangements as Iran if he wanted them—they believed, however, that he was generally satisfied with the participation agreement, and although he would argue with the companies over the terms of the Iran and Iraq settlements, he would eventually settle with perhaps a [Page 429] small increase in the buy-back prices. Mr. Greenwald said they would try to address Yamani’s probable objections to the Iran deal as follows:
- —Cash flow. Mr. Greenwald noted that Yamani’s prime concern was the comparative revenue generated by participation and the Iranian settlement. The fee at which the companies would buy the oil in their new Iranian arrangement was as a result the key element: it was the balancing mechanism which made sure that neither side came out ahead. It would be worked out by comparing, on an annual basis, the revenues Iran was actually receiving against the revenues which it might have obtained under the most profitable possible calculation of the participation terms applied to Iran’s situation for the same year (there were nine variables involved in the analysis, he said). In this way, the financial arrangements would be fully comparable to participation at any time.
- —Form of agreement. Mr. Greenwald said that Yamani might object to the fact that the companies had reached an entirely new agreement with Iran, whereas they had kept the old concessions intact with the participation states. The companies, he said, would point out that their old agreement in Iran was a sales contract in form anyway, and that they would expect to be bringing many of its terms into the new agreement under their understanding with the Shah.
- —Operating Responsibility. Mr. Greenwald observed that hard negotiations with the Iranians remained on the degree of operational control which the companies would retain, but that he expected that, as a practical matter, they would retain about as much as in Saudi Arabia. He said that the companies would be able to argue to Yamani that they had not been reduced to simple purchasers, but that they would retain an important management role as service contractors and, even if the contract were ended after five years, they would still have an important consultative role in the management, stemming from their provision of capital.
- —Capital Requirements. The companies would be able to tell Yamani, Mr. Greenwald said, that they would be required to put up even less capital under their Iranian arrangement than they would have needed under a participation settlement and still maintain necessary production levels. He indicated the companies would probably elect to commit themselves to about 40–45% of the capital requirements (though he expected that the GOI might in the end expect them to produce the rest as well).
- —Oil for Marketing. Mr. Greenwald said the companies could point out to Yamani that Iran would have access to no more than about 20% of total production for its own marketing, while the participation countries would have access to 51%. (He mentioned that the Shah had deliberately kept the amount of oil available to NIOC low, saying that [Page 430] he preferred the companies to move the bulk of it as NIOC couldn’t do so efficiently.)
Iraq Settlement Mr. Greenwald said that, while the US companies were “not proud” of the IPC settlement, they felt it could be defended to Yamani and the Shah. Mr. Lindenmuth, who came in later (his plane having been delayed) said that the settlement was the best the companies could have gotten—he had come to feel while he was in Baghdad that the GOI would indeed have nationalized BPC had the negotiations failed.
Mr. Greenwald said that Mr. Jamieson had fully briefed the Shah on the Iraq negotiations as they stood in the last week of February, and thought the Shah would not react negatively.
Compensation was the key issue for Yamani, the two said. The total compensation received by IPC (including the shared CFP oil), would however exceed the updated book value, (and was over 25 times net book value) so that Yamani had no argument against what the companies had accepted. The companies would receive approximately $450–500 million total compensation (330–340 for value of the free oil; 150–160 for value of their share of CFP’s preferential-price 10 year purchase contract). The total updated book value, on the other hand, was about $460 million (410 for Kirkuk, 40 for Law 80 nationalization, 8 for the IPC pipeline and terminal in Lebanon). On the settlement of past claims, the companies didn’t come out too badly either, considering the size of Iraq’s counterclaims.
Mr. Greenwald said that neither the Shah nor Yamani should be overly disturbed at the fact that the companies had been unable to contract for long-term major quantities of the nationalized Iraqi oil; they recognized that their situations were different and in fact wanted the companies to sell much or most of the oil. Lindenmuth pointed out that the companies had all but agreed with the GOI for some additional quantities of Kirkuk oil (4 million tons in ’74, 12 in ‘75) through a Shell contract which they would share. The price had not been established because of the uncertainty concerning devaluation, etc, but negotiations would resume in September. The Iraqis had been unable to commit themselves to sales beyond 1975, but had not seemed prejudiced against the idea.
Mr. Greenwald said that the US companies were unhappy that they had not been able to secure a participation settlement as part of the general package; the Iraqis would give them trouble over the issue in future, he feared. Mr. Lindenmuth however, said that the GOI had been demanding terms which would have created an immediate leapfrogging situation with Yamani; the best the companies could do was shelve the issue for the time being. The Iraqis seemed in no hurry as they were aware that participation in BPC, with its important expansion program, [Page 431] would be expensive. Perhaps the delay in dealing with the issue would allow time for new developments in participation negotiations elsewhere which would make eventual settlement easier.
Libyan Negotiations Mr. Greenwald said that the Libyan negotiations on participation were progressing slowly; the LARG had shown no intention of reducing their demands for 50% participation or their refusal to accept the Gulf buyback provisions, though they were showing some flexibility on compensation. He said that he, personally, feared that the independents would break away from the common front and make their own deal with the LARG. In answer to our questions, he said he did not know if the majors could in this event hold to the Gulf terms, but noted that the three best concessions (and consequently most inviting participation targets for the LARG) were almost entirely owned by the independents—Hunt, Oasis, and Oxy. He also said he did not know what Yamani would do if the independents made a more advantageous deal with the Libyans—he had once indicated a readiness to accept such a conclusion, but the companies had not tried to pin him down on it.
- Source: National Archives, RG 59, Central Files 1970–73, PET 4 IRAN–US. Limited Official Use. Drafted by Brown. A stamped notation reads: “19 Mar 1973.”↩