96. Memorandum of Conversation1

  • SUBJECT
    • The Oil Companies and the OPEC Demands
  • PARTICIPANTS
    • Under Secretary John Irwin
    • George Piercy, Standard New Jersey
    • Henry Moses, Mobil Oil
    • Jones McQuinn, Standard California
    • Allan Martin, Gulf
    • Allan DeCrane, Texaco
    • John Simmons, Atlantic Richfield
    • Rodger Davies, NEA
    • Robert Smith, AF/E
    • James E. Akins, E/ORF/FSE

Representatives of the international oil companies called on Under Secretary Irwin December 2 to inform him of their attitude toward [Page 224]OPEC demands for compensation against currency revaluations, and participation. Mr. Piercy, who acted as spokesman for group during most of hour and a half meeting, said that the subject of compensation was the only one currently under active negotiation between the companies and OPEC members. He outlined the companies’ objections to OPEC’s claim for compensation, noting the companies believed that the Tehran and other 1971 agreements2 had covered any possibility of currency revaluations under their escalation terms. Both the text and negotiating history of these agreements supported the companies he said; the OPEC countries had opted against use of any outside inflation index and had selected a flat 2½% rate covering everything.

Mr. Piercy also briefly reviewed the OPEC argument that a major currency revaluation such as the present one was not covered under the previous agreements; that whereas they were prepared to abide by the terms of the Tehran and other agreements, they wanted a separate settlement on the currency issue. In order to sidestep the apparently irreconcilable nature of these positions and keep negotiations going, the companies had proposed technical discussions in Vienna to study and assess the monetary and trade ramifications of the OPEC and company positions. This did not mean, Mr. DeCrane added, that the companies accepted the validity of the OPEC demand, but they did hope to avoid a negotiating impasse and defuse the situation to a point at which the OPEC countries might be able to back down from the high initial positions they had taken.

Vienna Talks with OPEC. The Vienna discussions had made some progress toward developing a common framework for the necessary studies, Piercy continued, but there had been no agreement on substance. The talks were about to recess in order to allow the government delegates to return home to brief their principals before the December 7 opening of the OPEC conference in Abu Dhabi. At Vienna, the OPEC countries had apparently been backing away from possible compensation formulae pegged to trade patterns, as these did not appear to support their position adequately. They were now talking about compensation based solely on monetary changes: i.e. an overall 7–8% at present, but perhaps as high as 14% if the full range of revaluations now being discussed by the Group of Ten came into effect. The company representatives had the impression that the OPEC side was treading water to see if new parities would be established. If the IMF dollar/Sterling rate were changed, for example, to correspond with the actual selling rate, it would deprive the companies of their argument that countries receiving Sterling were actually benefitting as a result of the difference between the rates at which the companies were calculating [Page 225]their payments ($2.40) and actually buying the appreciated Sterling (c.$2.48). When Mr. Akins asked if the companies would in fact reduce their Sterling payments should a new IMF parity be set, the company representatives said that their payments procedures were set by agreements, which they would continue to follow when it is to their advantage, even as it was now to their disadvantage.

Mr. Irwin asked if the companies expected negotiations over this issue to reach crisis stage. The company representatives said they didn’t know; they expected a continuing “scrap.” Mr. Akins noted that the US Government would not be able to give the companies strong support on the issue: the OPEC countries were essentially right in pointing out that the currency dislocations were the result of US action. US démarches might actually hurt. If the companies did in the end come to some settlement on the issue, however, we hoped that they would not characterize it as a breach of the Tehran agreements; this would only hurt their position on other issues. The company representatives indicated they understood the USG position on both points. The Under Secretary seconded this point.

Participation. The Under Secretary directed the discussion to the participation issue by asking if the OPEC position that the Tehran agreements would be honored applied to participation. Mr. Piercy reviewed the OPEC arguments as to why this issue should be considered outside of the Tehran framework. The Under Secretary noted that the USG first got directly involved in the international oil situation at the time of his trip last January because of the strategic emergency, but that we did not want to get more and more involved. We would of course hope to see the Tehran agreements lived up to, given the USG involvement in obtaining the rulers’ assurances. Without wishing to imply that the USG had or would take a position on the merits of the present issue, the Under Secretary offered as his personal view that the participation demand seemed a far more serious reopening of the Tehran agreements than the adjustment for parity changes. At the same time, we had to look at both issues with the recognition that LDC pressure for greater participation would inevitably grow. Summarizing, the Under Secretary said that the basic USG concern was over the broader political and strategic aspects of maintaining access to oil. A lesser, but still serious concern is the specific issue of continued observance of Tehran agreements.

Mr. Piercy said that the basic position of the companies was that the Tehran and other settlements had traded a high cash cost for a period of stability; now those assurances of stability were being undermined. The companies’ legal position would be similar to that on the compensation issue. The Under Secretary pointed out that the “assurances” had been given to the USG in the context of his mission last [Page 226]January on which he had: (1) argued that the producing countries should not resort to a shutdown in production as part of the bargaining process because of the grave strategic consequences for the West; (2) said that the companies were prepared to negotiate in good faith but needed more time because of their only just having received clearance from Justice to consult with each other on a negotiating position; and (3) argued for the need for assurances against the ratcheting or spiral effect of escalating demands between the Gulf states and the Mediterranean states. He assumed that Iran would argue on both the parity and the participation issues that the Tehran agreements were not being violated, i.e., that the Iranian interpretation of the agreements was just different from ours.

The Under Secretary subsequently asked if the companies saw a link between the two issues; if they gave ground on compensation, would it prejudice their position on participation? Mr. Moses answered, and the others concurred, that although there was no necessary legal connection, politically it would make a tremendous difference.

The pattern of negotiations over the participation issue was still evolving, Mr. Piercy continued. Officials from the Aramco group of companies had requested a meeting with Saudi Minister Yamani to discuss the matter, in view of his apparent designation by the other OPEC states as the leader in negotiations on this issue, and because of his long identification with the proposal. Messrs Moses and DeCrane, who had attended that meeting, said that the companies had reviewed their objections to participation with Yamani and had asked Yamani to take the lead in opposing the current OPEC drive. Yamani had asked for a second meeting on the subject, to be held sometime in January. It was apparent to the companies, Mr. Moses said, that the OPEC countries would claim that their demands were justified on the basis of changed circumstances since the time that the concession agreements were signed, and regardless of the Tehran agreements’ provisions (the companies had learned that OPEC lawyers had advised last January that the text of the agreement would not prejudice the OPEC claim for participation). The companies realized, however, that the participation demand was more than a purely commercial or legal problem, and that it involved basic psychological and political needs in the producer states. The Under Secretary noted that this drive for national control of resources was a problem the world round and should be seen in light of the political pressures in the producing countries. The policy considerations for the USG were also very complicated. Mr. Akins pointed out that the companies, in fact, did not yet have a common position on the participation issue; each one spoke for himself for the present.

Comparative Negotiating Strengths. The Under Secretary asked how the companies saw the power balance in any negotiations on the OPEC demands. The company representatives mentioned that a number of factors were working for them. The present tanker surplus, the conservative [Page 227]outlook of some of the major Gulf producers, a possible lack of cohesiveness among the OPEC states, and the growing potential of new sources of energy; but that overall power was firmly with the OPEC countries. The question was how they would exert this power. The companies felt that the OPEC countries (except Libya) would not want to shut down production if it came to a crunch. That left the possibility of participation through legislative action. The Under Secretary asked if the industry could absorb the effect of a possible Libyan shut down; Mr. Piercy answered that European demand could most likely be met for 6 to 8 months with some drawdown in the presently high stock levels.

Mr. Akins asked what the Shah’s position was on participation. Mr. Piercy said that the companies did not have a really good reading of the Shah’s mind; the Iranians seemed somewhat lukewarm on the issue because of the approaching expiry of the consortium agreement in 1979. The companies hoped that they would be able soon to clarify with the Shah their future relationship in Iran. (Mr. Akins had previously urged the consortium members to make their views known to the Shah before the consortium concession renewal became an issue in Iranian internal politics.) Mr. Moses said he felt the Shah would be unlikely to give up the leverage the present uncertain situation gave him. The Under Secretary noted that the USG’s interest was to keep the best possible overall relations with the Iranians; while this might not be specifically helpful to the companies, the absence of good relations would certainly make things worse for them.

The Implications for Europe. Mr. McQuinn said that the effects, were OPEC to use its negotiating power to impose a settlement on the companies, would be harmful to the US and its OECD partners. Mr. DeCrane said that many of our allies overlooked this; they felt that a producer takeover would benefit them by introducing lower prices through competition. The effect, in fact, would be just the opposite—their supplies would become more insecure and the prices would certainly go up in time. The OPEC countries were certainly not unaware of the advantages of a producer’s cartel, and OPEC was already looking into the possibility. With world demand increasing at its present rates, moreover, it would not even require any production controls to raise price, but simply to limit the rate of growth in production capacity. In addition, the Europeans could not assume that the oil would not be used for political purposes: with 20% participation, the OPEC countries would control as a possible political lever over 5 million barrels/day of production. In addition, their percent of participation would inevitably go up. Mr. Piercy said that the companies hoped the USG would help convince the Europeans of the importance of the issue.

Middle East. Mr. DeCrane said that the Middle East situation also created political problems for the companies: for example, when the [Page 228]Aramco partners had asked Yamani to oppose the present trends in OPEC, he had said it would be most difficult politically, and asked the companies to remember that Saudi Arabia was now Egypt’s friend, as it had not been in 1967. Mr. Piercy and others said that anything which would work toward peace would make things much easier, to which the Under Secretary agreed.

Closing Comments: Participation. In closing, Mr. Piercy said that the companies would have to look at ways to blunt the OPEC thrust, as headed by Yamani, toward participation. Mr. DeCrane said that the companies would make efforts to avoid participation, but would try equally to avoid confrontations with the OPEC states along the way. He hoped the USG would be able to suggest in OPEC capitals, in a low level way, that confrontations be avoided. (In conversation earlier, the company representatives had suggested that the only way to stop Yamani’s push toward participation was to get through to King Faisal (perhaps by lower level approaches to the Saudi Minister of Finance or other financial advisors). While they welcomed a high level US démarche to Persian Gulf rulers if necessary, they thought it would probably be premature at present. It might even misfire with Faisal, who would be apt to get onto “his subject” of the Middle East situation rather than the question at hand.

  1. Source: National Archives, RG 59, Central Files 1970–73, PET 3 OPEC. Confidential. Drafted by Brown (E/ORF/FSE) on December 7 and approved in U on January 10, 1972.
  2. Reference is to the Tehran and Tripoli agreements; see Documents 86 and 88.