6. Research Memorandum Prepared in the Bureau of Intelligence and Research1
- The Middle East: Relations Between Governments and Petroleum
- Concessionaires—The Participation Issue
One of the latest of the numerous issues that have arisen between Middle Eastern governments and the holders of petroleum concessions in their territories concerns a demand by governments for participation in the exploitation of previously granted exclusive concessions. Governmental participation in the ownership and operation of petroleum concessions is not a new idea. A number of recent concession grants to foreign oil companies have been set up as joint ventures, in which the national oil company of the country concerned is a participant—a partner—in the exploitation of the concession—often a 50 percent partner. Until very recently, however, there had been no publicized suggestions (in the Middle East) that concessions previously granted should have their terms altered to provide for governmental participation. This paper examines the new demand, its implications, and the progress of its application.
The principle that governments of oil-producing countries have a right to participate in the ownership of petroleum concessionaire companies, even though the concession agreement makes no provision for such participation, has been publicly sponsored by OPEC (the Organization of Petroleum Exporting Countries). Presumably, therefore, all the members of OPEC2 endorse this principle and could be expected at some time or other to present to the holders of exclusive petroleum concessions in their territories a demand for an equity share in the producing company. For various reasons, however, it is probable that the first and principal targets for that demand, when and if it is made, will be the “Big Four” concessionaire companies—Aramco in Saudi Arabia, the Kuwait Oil Company in Kuwait, the Iraq Petroleum Company and its affiliates in Iraq, and the Consortium in Iran.
So far, no specific demand has been made. Iran has threatened unilateral enforcement of participation but only if its revenue demands [Page 9]are not met by the Consortium.3 Public statements on participation have been made in some other OPEC countries, but only in Saudi Arabia has any government official had even an informal discussion with the concessionaire company on the subject. Nowhere have the manner, the timing, and the expected results of participation in existing exclusive concessions been set forth in more than the vaguest of terms. It would appear that none of the OPEC countries, except perhaps Iran, is prepared to make a real issue of participation in the near future—possibly not at all as long as governmental oil revenues continue to grow at somewhere near the rate governments expect. Iran’s threat to spur the OPEC countries into concerted action to gain participation if Iranian revenue demands are not met cannot be taken seriously. For more than one reason, there is virtually no prospect of concerted action that would serve to bolster Iran’s demands, primarily because those demands could be met only at the expense of other oil-producing countries.
The probable results of the acquisition by governments of even a modest equity participation in such prolific concessions as those of the Big Four would be either (1) an increased per-barrel revenue for the government on oil exports, thus putting a further direct squeeze on oil-company profits, or (2) the provision to governments of sizable amounts of oil at production cost, the sale of which, probably at cut rates, would be likely not only to diminish the companies’ own sales but further erode the crude-oil price structure. Since crude oil prices are already gradually falling and measures now in force will insure to governments a rising proportion of oil export profits over the next five or six years even if no further steps in this direction are taken, the concessionaire companies may be expected to dig in their heels on the participation issue. Governments would probably have to resort to extremely drastic measures in any attempt to force participation on their concessionaires—measures that would be likely to leave both sides worse off. We doubt that, with the possible exception of Iran, Middle Eastern governments are prepared or will be prepared in the next few years to take that risk, barring unforeseen developments that would seriously threaten the normal growth of their oil revenues.
Who Are the Targets?
In the welter of petroleum concessions or contract arrangements that govern the production of Middle Eastern oil, certain ones overshadow all the rest—distinguished principally by the amount of oil that is produced under them and their importance in the economic life of the countries concerned. These are the exclusive agreements under [Page 10]which the great Middle Eastern oil consortia operate—the Arabian American Oil Company (Aramco) in Saudi Arabia, the Kuwait Oil Company (KOC) in Kuwait, the Iraq Petroleum Company (IPC and its affiliates) in Iraq, and Iranian Oil Participants, Ltd. (the Consortium) in Iran. Certain others are of at least equal importance to the economies of the countries concerned but the countries are small, and the scale of operations does not compare with that of any one of the Big Four.
In North Africa, among the large producers (Libya and Algeria), the situation in Libya in regard to the size and importance of oil revenues is similar to that in the Middle East, in Algeria less so, although still in the vital category. For reasons to be explained below, this paper will confine its attention primarily to the Persian Gulf area.
It is not surprising under these circumstances that the Big Four are the primary targets of the participation demand. The other exclusive concessions in the Middle Eastern area (and elsewhere) would undoubtedly be affected if participation were agreed to by one or more of the Big Four, but it is unlikely that the demand will be pressed in the case of the smaller concessions until and unless it succeeds against the larger ones.
The Approach of the Major Oil-Producing Countries
The cause of participation has been championed by the Organization of Petroleum Exporting Countries (OPEC) which, at its June 1968 meeting in Vienna, recommended to its members4 that they adopt, as one of the bases of their petroleum policies, the principle that “where provision for Governmental participation in the ownership of the concession-holding company under any of the present petroleum contracts has not been made, the Government may acquire a reasonable participation on the grounds of the principle of changing circumstances.” How do the more important individual oil-producing countries view the subject of participation?
1. Saudi Arabia
It was Saudi Arabia’s Petroleum Minister, Ahmad Zaki Yamani, who first publicly proposed the principle of governmental participation in existing exclusive concessions in the Middle East. The occasion was a petroleum seminar at the American University of Beirut in early June 1968 (prior to the above-mentioned OPEC meeting). Yamani probably knew that the principle would be on the OPEC agenda (he may even have put it there himself) and for his own purposes jumped the gun. (Francisco Parra [illegible—who was at?] that time Secretary General of OPEC, has publicly maintained that the resolution which embodied the [Page 11]participation principle and other petroleum policy recommendations was the work of months of consultations among representatives of the member countries). Whether or not the idea was originally Yamani’s is not known to us, but there is reason to believe that Yamani was in search of a lively issue or issues that would maintain his utility and prestige as a petroleum minister and champion of the rights of Arab petroleum-producing countries. Aramco had been under the impression that all major outstanding questions between itself and the Saudi Government were settled and that the company could look forward to a, hopefully, long period of peace and quiet. It seems apparent that such a sterile prospect was not satisfactory to Yamani. Inaction on his part would be likely not only to diminish his prestige but subject him to criticism from both domestic and external sources as derelict in his duty to improve the Saudi Arabian Government’s (and indirectly other Arab governments’) position relative to that of the concessionaire. The fact that governmental revenues from oil operations were bound to rise as production and exports grew to match increasing world demand for oil would presumably not suffice to excuse him from additional efforts.
The suspicion that the participation demand is, at least at present, more of a ploy than a program is reinforced by the fact that the demand has not yet been either officially or unofficially presented to Aramco nor has it been expressed, either privately or publicly, in other than very general terms. The details of its application have apparently not been formulated. For instance, it is not clear whether, if and when the demand is officially made, it would be only for an equity share in Aramco, which operates solely in Saudi Arabia, or in addition for an equity share in some or all of the downstream activities (transportation, refining, distribution) of Aramco’s parent companies. Yamani has said that participation “should” extend to downstream operations. This would require arrangements with one or more of the parents, since Aramco itself has no downstream facilities, nor in fact does it sell oil for export except to its parent companies. Any sales made to “outsiders” are made by the parents. The extent and timing of participation have also been left vague. Yamani has spoken both of an eventual 50 percent “share in Aramco” and a 50–50 “partnership with Aramco” (which are not the same thing), but has indicated that he would not expect to start off with 50 percent. As for timing, Yamani has said that “control over all oil operations is our objective” and that “the major part of our long-term plan will be achieved within ten years from now. However, it may take up to 25 years to attain full control.”
In a discussion with an Aramco official, during which the Aramco man brought up the subject of the OPEC resolution, Yamani attempted to downgrade the importance of the resolution and his remarks at the Beirut seminar but did finally admit that he (or the Saudi Government) [Page 12]considered the participation issue applicable to Aramco. He said, however, that he had no intention of forcing Aramco to agree to participation but thought the company itself would come around to accepting the idea within five years. He served notice that he would be “nagging” the company on the issue at every suitable opportunity. Participation in downstream activities was not mentioned in this discussion.
Another Saudi official, ‘Abd al-Hadi Tahir, Governor of the Saudi national oil and mineral company (the General Petroleum and Mineral Organization—Petromin) has also commented publicly on the participation issue in a speech delivered before an international conference of oil technicians. He attempted to justify the concept but gave no details concerning the manner and timing of its implementation.
In Kuwait, the subject of participation has not been discussed with the concessionaire, the Kuwait Oil Company (KOC). However, the Kuwaiti Minister of Finance and Oil, ‘Abd al-Rahman al-’Atiqi, stated the Kuwaiti Government’s views on participation in an interview in early November 1968 with an editor of a Middle Eastern economic publication. More importantly, it was ‘Atiqi who apparently sparked a discussion of the issue at the 17th OPEC Conference in Baghdad later in November. The issue was not originally on the agenda of the conference but, after ‘Atiqi had brought it up, it was placed upon the agenda by motion of the Iraqi Oil Minister, Rashid al-Rifa’i, a motion seconded by Kuwait. The outcome was a directive to the OPEC Secretariat to prepare studies on the various alternatives open to member countries in regard to participation. The Secretariat studies will provide a basis for further study by a special committee of experts from member countries. Like Yamani, ‘Atiqi has given no details of his concept of participation, although he too apparently considers that it should apply to downstream operations as well as those of the producing company.
The Iraqi Government, as a member of OPEC, has obviously supported the principle of participation. However, because of the number of Iraq’s other long-unresolved disputes with its concessionaire, the Iraq Petroleum Company (IPC), which give little promise of ever being resolved except by outright nationalization, it appears unlikely that the participation issue in Iraq will be anything more than the latest and not the most pressing in a long line of demands. The Iraqi Government, in fact, has a better claim than other Persian Gulf states to participation with its concessionaire. It was clearly stated in the British-French petroleum agreement of 1920 that if a private petroleum company were constituted to develop Iraqi (Mesopotamian) oilfields, the “native Government” or other “native” interests should be permitted, [Page 13]if they so desired, to participate to the extent of a maximum of 20 percent in the share capital of such a company. In the later contract which finally granted a concession to a private company (the Turkish Petroleum Company, later renamed IPC), it was agreed only that if the company were to offer shares to the general public (which it never did), Iraqis should be given a preference to the extent of at least 20 percent of the share issue. The OPEC resolution of June 1968 recognized the Iraqi claim to participation by adding to the paragraph quoted above that “If such provision (for participation) has actually been made but avoided by the operators concerned, the rate provided for shall serve as a minimum basis for the participation to be acquired.” However, the Iraqis have apparently not brought up the subject with the concessionaire since the June OPEC meeting.
Although Iran, through OPEC, has subscribed to the principle of participation, the Government claims that it has not in fact been much interested in the subject and has blocked Saudi Arabian moves toward united OPEC action to enforce it. However, on several occasions when Iran and its concessionaire, the Consortium, have locked horns over Iranian oil revenue demands, which the Consortium says it is far from being able to satisfy, the Government has threatened to enact legislation that would give it participation in the concessionary company. It has also recently threatened to induce other OPEC members to join with Iran in enforcing participation throughout the Middle East if Iranian revenue demands are not met. This last threat is extremely hollow. In the first place, there is no evidence of any Saudi Arabian move toward immediate enforcement or in fact any “enforcement” of participation—quite the contrary, if Yamani’s words are to be taken at face value. Secondly, the Arab countries are most unlikely to take concerted action to enforce or threaten the enforcement of participation at Iran’s behest. They suspect that Iran’s revenue goals could be achieved only at their expense. Also, the Arabs have probably not forgotten that efforts to get Iran to join with them in oil embargos at the time of the Arab-Israeli war in 1967 were none too politely rejected and that Iran thereby profited substantially. Last but presumably not least, Iran’s supply of oil to Israel is hardly a secret.
Final confrontation between Iran and the Consortium was avoided for the Iranian year 1348 (approximately 1969) by a compromise, but the level of revenues from the Consortium upon which Iran has based its Fourth Development Plan (roughly 1968–72) virtually ensures that the problem will come up again (and the threats also). Each year, compromise becomes less and less possible.
Iran has also introduced a variation on the participation issue by suggesting that members of the Consortium who were not willing to [Page 14]increase their offtake to the extent desired by the Iranians should sell part or all of their equity interest to another company or companies that would like to have more oil. In fact, the Iranians have themselves been scouting around for potential new members for the Consortium. Presumably, if the present members should refuse to sell, Iran might attempt to expropriate, in some manner, a part of their interests in order to turn this part over (or sell it) to a newcomer.
In contrast to the situation in the Middle East where long-established single concessionaires almost completely dominate the oil scene, Libyan oil is being produced (and searched for) by a wide variety of concessionaires. Libya has, of course, like its fellow members of OPEC, endorsed the principle of participation. Whether the large number of concessionaires would make it harder or easier to obtain participation is difficult to say. Certainly the number would tremendously complicate the administration of participation if it were obtained. In any case, the Libyan Government presently has other oil matters engaging its attention, including participation ventures with new concessionaires, or with the old concessionaires on new acreage, and in all probability will not get around to serious consideration of participation in established concessions for a number of years to come.
Algeria is not a member of OPEC, although it has sent observers to OPEC meetings and in April 1969 applied for membership. Consequently, it has not been associated with other states in a demand for participation in established concessions. Of the Middle Eastern and North African states, however, Algeria is the only one that has already succeeded in obtaining such participation. For the most part, its success can be ascribed to the special relationship which exists or has existed between the Algerian Government and the French Government and to the special relationship which exists between the French Government and French corporate entities, whether public or private. Other than that, however, in one instance an American company was persuaded by governmental harassment and a threat of complete expropriation to surrender to the Algerian national oil company 51 percent of its share of an established producing concession. The share was rather small, but the principle, in the Algerian viewpoint, has been established. Nevertheless, since Algerian relations with oil concession-aires are largely conducted on a government-to-government basis, the Algerian situation is sufficiently different from the Middle Eastern so that Algerian experience in regard to participation is only peripherally relevant to the argument of this paper.[Page 15]
7. General (Middle Eastern)
As it now stands, the demand for participation in the Big Four countries, Saudi Arabia, Kuwait, Iraq and Iran does not appear to be urgent. Saudi Arabia, Kuwait, and Iraq have not presented such a demand to their concessionaires, and Kuwait and Iraq have not even discussed it with them. In Iran, the demand was presented only as a possible alternative to something more greatly desired, and, for the present, has been dropped. The OPEC decision at Baghdad to institute studies on the subject by the Secretariat and a “committee of experts” may have added a new dimension to the demand, in that the mere existence of such studies could be a spur to action. However, the studies are likely to require a substantial amount of time for completion, and the “experts” can presumably only present various alternatives among which the decision makers must still choose. They must also choose whether to act in concert or separately. If separately, each may want to wait until someone else tries it first. If in concert, they must agree on a course of action, including how far they are prepared to go if their demands are refused. Whether or not there are studies, a number of problems will remain. With the possible exception of the Iranian case, a real confrontation on the participation issue (i.e., an attempt to enforce it) would seem to be some distance in the future. However, if the Iranian Consortium should give in under pressure and permit participation by the Iranian national oil company, every other exclusive concession holder in the Middle East (and elsewhere) would be wide open to immediate demands for equal treatment.
What Does Participation Mean?
It would seem that none of its advocates has a very clear idea of the implications of participation. At any rate, none of them has yet been willing to explain in any detail how the principle will be applied and what the results will be, particularly as regards downstream operations. The general principle of participation in oil production (leaving downstream activities aside for the moment) at first glance seems simple enough. The government or one of its agencies, presumably in most cases the government-owned national oil company, would acquire an equity interest in the private company which produces oil from the concession area in question. (Participation could also be arrived at by forming a new company in which the private concessionaire and the governmental company would be partners. At present, this does not seem to be contemplated.) From there on, however, the questions multiply, and so far few of them have been answered.
The first question—how much of an equity interest—has been partially answered, in that Saudi Arabia has indicated its eventual aim would be a 50 percent interest. Its initial aim has not been clearly expressed but the figure of 10 percent has been mentioned. Iran has also [Page 16]talked about a 50 percent interest. Question two—what the government expects from participation—has been answered in part but in vague terms. Saudi Arabia’s Petroleum Minister seems to want control over or at least a larger voice in the management decisions of the company. Iran quite simply wants more revenue, and Kuwait also seems primarily interested in revenue.
As for management control, it does not appear that a 10 percent interest would give a government any more control over the company than it now has. Even a 50 percent interest could do no more than produce a stalemate in decision-making unless backed by governmental action to enforce its desires, a recourse governments already have. Furthermore, the most important decisions affecting the producing companies’ operations—amount of investment and of offtake—are in fact made by the parent companies, not by the producing company.
As for revenue, it is not clear in what way governments would wish to use their equity interests to acquire more revenue. Ostensibly, it could be done in two main ways—with innumerable variations in detail. First, the governmental partner could take a share—corresponding to its equity—of the oil produced by the company. This oil could be disposed of by the government as it saw fit, presumably by sale abroad, or an arrangement could be made for the producing company or its parents to sell all or some part of the oil for the government’s account (or “buy the oil back” from the government). Secondly, the government could permit the company to take or sell all the oil as usual on its own account and then claim an equity share of the company’s profits in addition to the taxes and royalties it would normally receive.
No Middle Eastern government now has nor does it seem likely to acquire for many years, the markets it would need to dispose of any appreciable percentage of a major concessionaire’s output of oil. Even 10 percent of, for instance, the Iranian Consortium’s output is a far cry from 50 percent of the output of the small joint ventures in the Persian Gulf. In fact, it is reported that the National Iranian Oil Company (NIOC), which is the 50 percent governmental partner in most of the above-mentioned joint ventures, is unable to sell its full share of the oil produced, and the excess is taken by its partners. Since the foreign partners in these ventures are virtually all “oil-hungry,” they are willing to buy NIOC’s oil, even at current market prices, since they are buying elsewhere at those prices. In the case of the major concessionaires, there would seem to be no economic reason for them to buy the government’s share of oil, since if they want more oil they can increase their own production, in one area or another, and get additional oil at tax-paid cost or, at most, at an “overlifting” price which is lower than the current market price. If the company merely sells the government’s oil for it, it is obvious that the company could have sold its own oil to those purchasers and has consequently sacrificed part of its own market.[Page 17]
As for receiving dividends, this too presents some problems. Most of the large oil concessionaire companies do not pay “dividends,” in the usual sense. However, the actual practices of the producing (or trading) companies are admittedly not an insuperable barrier to paying some sort of “dividend” to the government. An assumed “profit” can be computed, as it is now computed to provide a basis for paying royalties and income taxes. If a company had agreed to participation and the payment of a dividend, it would presumably not want to pay it on the basis of a “profit” derived from the fictitious posted prices that are used to compute royalties and taxes. Nevertheless, the logic or equity of a particular method of computation of any payment to a government is not, in the end, relevant. If the government insists, the company must, as usual, decide whether it will accede to the government’s demands or accept the risks inherent in refusal.
However complex the situation might be in regard to paying dividends or buying back the oil, a way could be found to produce the desired effect. There appears to be little doubt that whatever other benefits participation might be expected to confer on a government (the appearance, at least, of influence over management decisions or merely the prestige and political advantages of part ownership), a participating government would also, and probably primarily, expect an addition to its revenue. This would mean that participation must provide for something additional to, not merely a substitute for, the concessionaire’s own payments. Consequently, the dividend or buy-back arrangements would seem to be preferable from the government’s point of view and, for that matter, from the concessionaire’s point of view, since governmental sales of oil could have unwelcome repercussions on the concessionaire’s markets and on the crude oil price structure. If governmental sales merely replace the concessionaire’s sales, the concessionaire’s offtake will decrease, and the overall result might in fact be a decrease in the government’s revenue.
Participation in downstream Activities
When Middle Eastern government officials speak of participation in downstream activities, one may assume they are referring to activities outside their own countries. Most Middle Eastern concessionaires have at least one kind of “downstream activity” within the concessionary country (i.e., a refinery) and participation in the producing company would presumably include the refinery, thus perhaps providing the government with refined products to sell abroad. IPC is the only known producing company that has downstream activities in its own name and corporate structure in another country; that is, its pipelines through Syria and Lebanon and its refinery in Lebanon. Presumably, an equity interest for the Iraqi Government in IPC would include these.
If the expectations of Middle Eastern governments from participation in the producing companies are unclear, their expectations in regard [Page 18]to downstream activities are even more so. The OPEC participation resolution appeared to be directed solely toward producing companies; that is, the actual concessionaires, not their parent companies. Middle Eastern government officials who have commented on the participation issue have added a demand for participation in downstream operations, which would require some sort of arrangement with the parent companies. Equity participation in the parent companies is, of course, not difficult to arrange. The shares of the major companies are quoted on various stock exchanges and are available to anyone. Presumably this is not what the Middle Eastern officials have in mind. Do they want an equity and a management share in all of the worldwide downstream activities of each of the parent companies? Perhaps what they have in mind is no more than that Esso, for example, should take in the government as a partner the next time it builds a refinery somewhere. The next question is: which government? If each of the OPEC countries where Esso has producing interests wants a piece of the action, what’s left for Esso? And whose oil will the refinery use? Will each country want a share in each new project undertaken by each of the parents of its concessionaire? It is no wonder that OPEC did not go into the question of participation in downstream activities and that subsequent pronouncements by Middle Eastern officials have been anything but specific.
In regard to participation in either production of oil or downstream operations, the question of payment has been evaded by governments or not mentioned. An equity interest in one of the Big Four consortia would be expensive. It is probable that, if OPEC or the producing country governments have given any thought to the matter of payment, they have in mind valuing the concession at the depreciated book value of actual investment, ignoring the future income that might be expected over the remaining life of the concession, and would furthermore expect to pay for their share of this modest value over a number of years out of their equity profits. This, in effect, means virtually no payment, unless the government is able to find extensive new markets for oil which the concessionary company (or its parents) could not have found.
Can Participation Be Enforced?
It is obviously impossible for a government to participate in (i.e., share) the oil or the profits from an oil concession without the consent and cooperation of the concessionaire. The consent may be unwilling—the concessionaire may give it only to avoid a more drastic action on the part of the government—but if it is not given, the government has only the options of taking over the concession completely or of dropping its participation demand. The concessionaire’s profits are out of reach; payments for sales, insofar as there are sales and not merely book transfers to parent companies, are made outside the producing country. The oil itself and the producing, refining, and export facilities installed in the producing country are the only things subject to unilateral action [Page 19]by the government of that country. Neither the oil nor the facilities can be shared without the at least tacit consent of the concessionaire. It is not inconceivable that a tacit consent not involving direct cooperation might be given; i.e., if the government took over one or more of the concessionaire’s producing fields, the concessionaire could decide to continue to produce from the remaining ones. This type of consent has been given, at least temporarily, by IPC and its affiliates in Iraq, where the government took over most of their concession areas. The circumstances differ in that no producing fields were taken by the Iraqi Government, although one proven field, not yet producing, was included. The problem becomes more complex if producing fields are taken, since they are hooked in to the gathering and terminal systems of the whole producing area. Some fields may not even have entirely independent production facilities. They may share certain ones, such as a gas-separator facility, with other fields. In the case of the takeover of a producing field, tacit consent without cooperation would not work unless the government were prepared to install an entirely separate production, internal transportation, terminal and loading system. Sharing the installations already in place would require the active cooperation of the concessionaire.
The only real weapon at the disposal of governments to obtain the consent of concessionaires to participation is, as it has been in other disputes, the threat of complete abrogation of the concession. The final utilization of this weapon by any one country, however, is likely to be disastrous for the country and only moderately harmful to the concessionaire. Most of the shareholders in Middle Eastern concessions could, with only temporary difficulty, obtain their requirements of oil, in case of loss of production in one country, by expanding production elsewhere. However, if all or a sufficient number of the governments of countries which are large producers were to act in concert—prepared to go so far as to shut down production simultaneously for a considerable period of time in order to gain their ends—it would be a different story. Replacement of any large percentage of Middle Eastern oil at the present time at reasonable cost is not possible and probably will not be possible for many years to come. Western Europe and Japan are dependent upon Middle Eastern oil for a high percentage of their energy requirements, and if the oil companies are to assist in supplying these requirements, they must have access to Middle Eastern oil.
We do not, however, believe in the likelihood of such concerted action in the foreseeable future to back up demands for participation. In spite of the OPEC recommendations, the approach to participation by the individual member countries has been at best lackadaisical or, in the case of Iran, a threat designed to obtain other benefits. While Iran may repeat the threat in the future and might attempt to carry it out if its demands are not met, we cannot see its efforts being reinforced by the Arab oil producing countries.[Page 20]
Most oil companies operating in the Middle East—certainly at least the international majors—are determined not to provide governments with cost oil, either by way of an equity interest or merely by turning over supplies of oil to them at cost. Since governments would not be subject to royalties and taxes (or would be paying them to themselves), they could afford to cut prices in order to find markets, and the greater the amount of oil at their disposal, the greater the temptation to do so. It would be less disadvantageous to the companies to “pay dividends” to governments or buy back their equity share of oil, but either of these measures would mean one more increase in per-barrel revenue to the government and a corresponding decrease in company profits. Governmental exactions have already reached such a high level and realized prices have declined to such an extent that company resistance to further encroachment on profits may be expected to be very stiff. Although it is true that smaller companies, some of them quite new to overseas production operations, have entered into joint ventures with governments on very generous terms, it would seem that some of these companies have had or will have cause to regret it. Oil exploration is a gamble, and oil companies are gamblers. When they are bidding for concessions, they have visions of a tremendous strike—like that of the Occidental Petroleum Corporation in Libya. Under those circumstances, even if the unit profit is small, high volume will insure a generous return on the investment.
There are indications that some of the joint-venture companies that have found oil in only moderate quantities (to say nothing of those that found none) may not be so well pleased with their bargains. Atlantic-Richfield for instance, a 12½ percent partner in the Lavan Petroleum Company (LAPCO), has had, along with its other American partners, considerable difficulty with NIOC, its Iranian Government partner, over the posted prices of the oil they have found. Exaggeratedly high posted prices for the computation of taxes and royalties are one of the principal means by which a government can enhance its own revenues at the expense of a foreign concessionaire. It may be significant that when Atlantic-Richfield took over the Sinclair Oil Corporation, Sinclair reportedly pulled out of a joint venture in Saudi Arabia with the Natomas Company and the Saudi Government’s Petromin. The international majors have been wary enough to stay away from joint ventures in the Middle East, given the stringent financial terms that governments are demanding and considering the general downward trend of crude oil prices. If Middle Eastern governments are in fact serious about participation in the major concessions, it appears that they will have to be prepared to resort to very drastic measures and even then success in terms of appreciably higher revenues or significant influence on management is doubtful.
- Source: National Archives, RG 59, Central Files 1967–69, PET 10. Secret; Limdis; No Foreign Dissem. Sent to Rogers as a memorandum from Thomas L. Hughes.↩
- Abu Dhabi, Indonesia, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia, and Venezuela. [Footnote in the original.]↩
- See Intelligence Note 361, May 9, 1969, and telegram 76751 to Jidda, Beirut, and Dhahran, May 15, 1969, published in Foreign Relations, 1969–1976, volume E-4, Documents on Iran and Iraq, 1969–1972, Documents 14 and 15.↩
- Abu Dhabi, Indonesia, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia, and Venezuela. [Footnote in the original.]↩