91. Intelligence Note Prepared in the Bureau of Intelligence and Research1

RECN–17

Oil: New Confrontation Over “Participation”?

Having wrung sizeable tax increases from the oil companies this year, major oil exporting nations are thinking of mounting a campaign this fall for partial control of the companies’ producing subsidiaries, according to reliable reports of the July 12–13 Vienna Conference of the Organization of Petroleum Exporting Countries (OPEC).2 Their initial target is thought to be a 20 per cent equity participation, to be increased later. Algeria is alone among the major exporting countries in already having obtained, by nationalization, no less than 51 per cent ownership in all the oil companies operating there.

The Vienna meeting is also said to have asserted OPEC’s “natural right” to participation in “downstream” operations—oil transportation, refining, and marketing—but production or “upstream” operations, which can be nationalized by OPEC governments if other means fail, [Page 217]will clearly have first priority. A special conference to give form to the exporting countries’ demands was reportedly set for September 22, but an unconfirmed British report has this meeting advanced to late August.

OPEC’s oil tax victory over the oil companies earlier this year marked a definite shift in bargaining power in favor of the exporting countries. Taking advantage of a tight tanker situation and an unexpectedly rapid growth in the demand for oil in 1970, OPEC won large tax increases in oil exports under threat of a shutdown in production. This victory has caused world-wide increases in the prices of crude and petroleum products, and jarred governments in Europe, Japan, and other consuming countries to consider the possibility of new oil trading arrangements. The OPEC bargaining position will remain strong provided the supply of oil does not outrun demand by a substantial margin and the exporting countries refuse to allow the companies to play off any one country against the others.

An Iraqi goal as far back as 1932, participation became an OPEC objective in its 1968 Declaratory Statement of Petroleum Policy, which adopted as the basis for changing concession terms the Napoleonic code doctrine of “changed circumstances.” OPEC has studied and debated participation without agreeing on an approach compatible with its members’ diverse ideologies and economic circumstances. For some, participation seems largely political—control with the companies remaining in charge. Others seem to entertain notions of going into business themselves. If so, they may seek the right to take a share of concession oil in kind to dispose of as they please.

Most OPEC spokesmen have in the past treated participation gingerly, counseling a gradual buildup in government ownership to 50 per cent through negotiation and with compensation. Complete nationalization of production by one or even all OPEC countries has in the past been called “suicidal” by some OPEC members on the ground that the governments would be unable to refrain from competing with each other. With a potential oversupply of oil in proven reserves, the reasoning goes, competing nationalized supplies could drive prices down to actual production costs and governments’ oil revenues to zero. Holding the downstream cards, the international companies would reap all the profits.

To avoid such a situation the producing countries would have to form a cartel which would establish production and marketing quotas and participate downstream. Most observers have little faith that the OPEC countries, despite the victory unity brought them earlier this year, could form a cartel. The July meeting in Vienna reportedly displayed the characteristic OPEC mix of militant and moderate views on how fast and far to proceed, with moderation prevailing. Libya, which has close ties with Algeria, reportedly urged that 51 per cent control be demanded immediately; but another military country, Iraq, seems to have gone along with 20 per cent as an initial share. (If each of the [Page 218]six companies in the Iraq Petroleum Company surrendered one-fifth of its holding, the Iraqi Government’s resulting 20 per cent share would be the largest single holding.)

Although all reports thus far concern equity participation, Venezuela, usually an OPEC trailblazer, appears to have adopted a more flexible policy which obscures the nationalization issue but satisfies domestic political needs. Legislation which became law July 30 gives the government vague but broad discretionary powers over the oil industry.

Association with government-controlled oil companies of Europe, Japan, and the other consuming areas may be a feature of any program the OPEC countries decide on. Such deals would give the government-controlled companies the independence from foreign oil companies they desire and might obtain for the exporting countries the downstream participation they want. OPEC may also focus on 1975, when the new tax agreements expire. Some OPEC governments then will be in a stronger financial position to press new demands. The London “Economist” reports that OPEC’s ultimate goal is the revocation of all concessions by 1979. We have no confirmation of this report, but it is not implausible.

Some observers fear another grand confrontation this fall between united fronts of oil companies and OPEC, complete with threats of an oil embargo, if OPEC presents an ultimatum on participation. In the unlikely event OPEC should decide to use its bargaining power to the full this year, fall is the time to do it.

However, participation is not as simple or universal an issue as last winter’s cry for “more money.” The great variety of concession arrangements and local needs may deter collective bargaining. Some companies, furthermore, are reported prepared to accommodate reasonable OPEC demands. An OPEC move thus may result in an initial test of strength followed by a series of low-key and extended local negotiations. Each side will seek to divide the other and to appeal to interests of the consuming countries. OPEC’s interests appear to lie in negotiating rather than imposing participation, particularly since its economic leverage this fall may not be as great as it was last winter. The demand for oil does not seem to have increased in recent months as rapidly as expected. Storage tanks are reported full and the tanker shortage evaporated this summer, although another shortage is not impossible.

The intentions of the OPEC countries may become somewhat clearer when the resolutions of the Vienna meeting are published on August 13.3

  1. Source: National Archives, RG 59, Central Files 1970–73, PET 3 OPEC. Secret; Limdis; No Foreign Dissem. Prepared by Harvey T. Clew and approved by Arthur P. Allen (INR/Economic).
  2. Abu Dhabi, Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, Venezuela. (Nigeria joined July 12.) [Footnote in the original.]
  3. The major resolution passed by the Vienna meeting, as noted in telegrams 4984 and 4996 from Vienna, both August 13, focused on downstream operations. (National Archives, RG 59, Central Files 1970–73, PET 3 OPEC)