354. Memorandum From James H. Critchfield, Special Assistant to the Deputy Director of Operations, Central Intelligence Agency, to the Ambassador to Iran (Helms)1

  • SUBJECT
    • Conversations with Iranian Officials on Energy Matters—4–8 June 1974
1.
During my visit I discussed energy matters with The Shah, with Dr. Parviz Mina of the National Iranian Oil Company and with Dr. Bagher Mostowfi, the managing director of the National Petrochemical Company. Also I had the opportunity to visit Abadan and Kharq Island as a guest of NIOC. The value of my visit was enhanced by conversations on energy-related matters with you, Jack Miklos, Bill Lehfeldt and Dave Patterson.
2.
All the Iranians expressed the view that the nations of the world have not yet joined in a serious common effort to resolve the energy crisis; they view the ECG exercise as not very important and probably not relevant to what they see as the main issues. (Comment: Actually some of the ECG and OECD work may eventually be useful in consumer-producer talks; but I agree with their view that this is a pretty indirect approach while critical time is passing.)
3.
It is my impression that the Iranian focus on the problem of resource depletion has sharpened; there seems to be a greater sense of urgency about preparing for the time when oil production will fall off sharply. Keeping prices up clearly has priority over increasing production. There seems to be agreement that they should take steps now to maximize the conversion of oil and gas to petrochemicals to achieve maximum revenue with a stretch-out in the period of high income from exported products.
4.
Iran, like all OPEC members, will not have a revenue crisis if crude export levels are cut. All OPEC nations will prefer to sell less oil while attempting to maintain a rigid price structure. I detected no evidence that Iran will go for higher prices at Quito. But Iran may stimulate the others to revive some version of the Geneva Agreement in which inflation in imported products could be reflected in oil prices. I would not expect action on this at Quito2 because the necessary research to make a case has probably not been done by OPEC or any OPEC government.
5.
I made the point with Dr. Mina that world-wide production probably is outrunning consumption, that stocks are fairly high and it is likely that the majors may have to cut back selectively in liftings in the months ahead. In a sense this would be a replay of the 1967–68 situation when the Shah was pressing for an increase of about 18% in off-take with the companies arguing that growth in demand was only 6%. I asked Dr. Mina whether Iran would now, with excess revenues, be relaxed about reduced liftings if the OPEC price held. He said that they would settle for selling less while keeping the price high.
6.
The Shah came on fairly strong in the need to convert to nuclear power for electric utilities as rapidly as possible, to get the American companies and the USG involved in the program and to initiate a reshaping of Iranian consumer and transportation demands to increase reliance on electricity and reduce internal Iranian use of oil and gas as fuels. The Iranians appear genuinely convinced along the Shah’s line of “nobler purposes” in mankind’s consumption of fossil fuels.
7.
Here and in Washington there is a great deal of fuzziness about how much oil and gas Iran has. The relationship between price levels and proved reserves becomes particularly important. Both OECD and USG studies on supply and demand show that current prices will make a low demand on most OPEC production a decade ahead. [less than 1 line not declassified] the conclusion that the Saudis would maximize returns by limiting production to a low of 3 million bpd and a high of 8 million bpd caused consternation in Washington. In the brief exchanges I had with Iranians here, I did not get the impression that in their forward planning they have really hoisted aboard this developing consensus among the economists about the low value of a barrel of oil in 1980–90.
8.
The Embassy and the Iranians appear to agree that Iran may be on the threshold of some very large non-associated gas discoveries. Dr. Mostowfi was painstakingly conservative, however, in projecting the decline of crude and gas production and the switch to petrochemical product exports. His footnote was simply that if they found more gas [Page 1005]the time frame would be advanced into the 21st century. There seemed to be general agreement that associated gas would be consumed in reinjecture to maintain efficient reservoir practices and would not now figure in gas projects.
9.
The Iranians are consistent in asserting that:
(a)
The high price of oil has done a service to the world by creating financial circumstances that will force the industrialized consumer nations to give high priority to R & D in alternative sources of energy.
(b)
The cost of a unit of oil or gas must be limited to the cost of alternative sources of energy.
(c)
By rigidly maintaining an intolerably high price for oil, OPEC is forcing the consuming societies to urgently overhaul the existing profligate practices for consuming non-replaceable fossil fuels.
(d)
The consumer nations must sit down with the OPEC nations and work out a formula relating the cost of oil and gas to the cost of other major commodities traded on the international market.
(e)
The dialogue among the ECG nations is not the answer and is largely irrelevant to (a) thru (d) above.
(f)
International action to halt runaway inflation is essential.
10.
The Iranians do not appear to be impressed by what I described as King Faisal’s genuine concern that the balance of payment deficits may weaken the European economy to the point where the radical left-wing of European Socialist Parties and the Soviet Union may make major gains that will weaken the entire free world. Faisal has been advancing this view recently in telling his aides that the new bilateral deal with the U.S. (Fahd’s current trip to Washington)3 must not be at the expense of the threatened Western Europeans.
11.
If the Exxon letter4 made an impression on the Iranians, it was apparent only in the nuances of their comments. No one attacked the companies. No one mentioned “excess profits.” No one asserted that the OPEC meeting in Quito should produce a price increase. No one mentioned the Exxon letter. My comment to Mina that the companies were probably making 75 cents to $1.50 profit at various times in 1974 did not get a reaction at all.
12.
Finally impressions of Abadan and Kharq Island: I saw only one American in any of the facilities at Kharq—an engineer sitting side by side with what appeared to be a competent Iranian in the control room at the petrochemical plant. The psychological consequence of OSCO as a replacement for the consortium operating and marketing company (Dutch) was observable. The Iranians involved clearly understand what [Page 1006]the Shah meant when he said it would make a difference. The capacity of Kharq Island, given the prospect for export below the projected 8 million bpd level, is probably adequate. It appears to me that Kharq is from now on only a maintenance problem, the contribution of American technology has been made. I was told that the Iranian engineer running the T-jetty control room probably gets the equivalent of $12,000 a year. Dr. Mina told me that the substitution of an Iranian for an American cuts salary costs to one-third. He emphasized that decisions to do so are not based on nationalism but on competence to assume the responsibility.
13.
Finally, I could observe that a great amount of knowledge and information on Iran’s energy industry and policies reaches the Embassy—and never gets to Washington. Stated otherwise, I heard a lot in Iran that I have never heard in Washington or seen in cables, dispatches etc. Conversely, we sit on a lot of information that would be helpful to the Embassy. I leave Iran determined to do something about improving communications. In the final analysis there is nothing like a visit. I am grateful for all the help you and the Embassy gave me.
  1. Source: Central Intelligence Agency, National Intelligence Council Files, Job 80–B01495R, Box 5. Secret. Copied to Colby under a June 15 covering memorandum from Critchfield. (Ibid.)
  2. OPEC met in Quito June 15–17.
  3. See footnote 2, Document 353.
  4. Not further identified.