75. Memorandum of Conversation1
SUBJECT
- EXXON’s views on IEA, OPEC, and Nationalizations
PARTICIPANTS
- Clifton Garvin, Chairman, Exxon
- J.K. Jamieson, Chairman, Exxon (retired)
- The Secretary
- The Deputy Secretary
- Thomas O. Enders, Assistant Secretary for Economic and Business Affairs
- Monroe Leigh, L
- Donald Hart, EB/ORF/FSE (Notetaker)
The Secretary: I understand the oil companies are knocking the IEA. Why is this?
Jamieson: I don’t know what you mean unless it is on the aspect of getting too much control. We have been supporting the IEA, but it sometimes seems to be moving too far towards control rather than making policy.
Garvin: The concept of the IEA is top-notch. Excellent. It’s moving right along. If you don’t mind my being honest . . .
The Secretary: I know what you think anyway.
Garvin: . . . there are philosophical differences. We feel that the IEA emphasizes some areas that are not as important as others.
The Secretary: I understand that it is not you who are knocking the IEA. Not you two. I don’t have any reports on you.
Garvin: I have been speaking to Yamani for months . . .
The Secretary: Would you like coffee or tea?
Garvin: There is an actual problem and it is the data collection of the IEA. It’s trying to get to the point that some countries want—data company-by-company. Actually these countries are 2 years behind. What they want is crude price information to see if they are getting screwed compared to some other countries. Crude prices are now so simple that the UK and Germany, for example, are getting crude for just about the same price.
The Secretary: The point is that if the IEA collapses, your negotiating position collapses in the whole Arab world. The IEA must be [Page 256] strong and, more importantly, must look strong. Take the minimum safeguard price. I have heard great philosophical objections to this but I have yet to hear a practical objection to it. It represents no threat to existing prices. It is to prevent a drop in prices in the event of a fall in oil prices. As a matter of fact, it’s primarily to prevent the U.S. from becoming a high-cost energy country while the rest of the world would enjoy low-cost energy.
Jamieson: The trouble I have with that is that I don’t see a low price coming.
The Secretary: Well then, either the situation would never happen or the minimum safeguard price would become necessary. Suppose we go into development of alternative energy sources? This could drop oil prices.
Jamieson: In the time frame we are looking at, it would not have much effect.
The Secretary: What harm does it do? It’s a symbolic gesture to producers?
Garvin: What they are laughing at is to see so much effort being spent on this and not on other things. Yamani has said to me, “what does $7, $8, $9 mean?”
The Secretary: The minimum safeguard price is primarily symbolic and it is insurance if one wants to use it.
Garvin: If a company were putting in 10 coal mines, this would be more plausible to the producers.
The Secretary: I agree the program is not having plausible results. Last year now, we had them psyched.
Enders: If we win on oil decontrol, that will be a step. If not, we will be in one helluva mess.
Garvin: I agree that the IEA is a central political element.
Jamieson: It is a necessity if we consider a future embargo possible. God knows, I don’t want one.
Enders: If the cartel has to cut back, how can we make it more uncomfortable for them?
Garvin: A decision is not fundamental. Except for 2 or 3 countries, the allowables that are set do not have an effect on production levels. They are set so high. Each company makes its own decision on production. We try to do it equitably as between, say, Iran and the Gulf. The Shah gets numbers, you know, and would get on our backs.
The Secretary: Who gives him the numbers? You do, don’t you?
Garvin: No. No. He gets the numbers the same as we. They must be reported to the governments.
The Secretary: Who determines the production at a price?
[Page 257]Garvin: They do. They say that each barrel that is sold must be sold at 93% of posting.
The Secretary: You adjust deliveries on the basis of price.
Garvin: Yes, but we just don’t know the answer as to the elasticity of demand. We have tried to find out how much of the reduction in demand is due to recession; how much is due to the whole jaw-boning. We don’t know the answers.
Ingersoll: If you had decontrol at the end of the month, then you would know.
Garvin: Yes, we might have more of the answer, but the reduction has been in total energy use, you know, not in gasoline. In Japan, gasoline is up to 1973 levels.
Enders: Once the price is fixed, then the amount of production is worked out by the companies. Then it’s how to avoid getting the Shah on your back. Therefore, the cartel is able to make the liftings come out acceptably to it. Is there a way to interfere?
Jamieson: To take an extreme case, you could cut Iran and raise Saudi Arabia.
Garvin: Wait. In Iran, you have Dutch and British companies, too, for whom this might not work out.
The Secretary: Well then, what about going all the way up in Iran?
Garvin: You would get just one million barrels per day more. You would probably take it out of Saudi Arabia but Yamani doesn’t need it.
Ingersoll: What must be done is to increase his ability to spend.
The Secretary: Not with the U.S. bureaucracy we have. We have too many school teachers. They want to sell him things that are useful. I don’t care if they are useless as long as they cost him lots of money.
Jamieson: Perhaps you would like to hear about our situation in Saudi Arabia. Cliff has been negotiating.
Garvin: Progress is just about zero. Saudi Arabia desires 100% ownership of the concessions that were to run until 1999.
The Secretary: What if you insist on your legal rights?
Garvin: Well, they would say we have none.
Jamieson: I believe that to take that position would force them to nationalize us completely.
The Secretary: What’s the difference between nationalization and 100% ownership?
Jamieson: Well, we would still be in there with a vehicle to operate the company.
Garvin: The Saudis have said that they prefer to take over on a voluntary basis. They say they’ll pay net book value. They say that they [Page 258] don’t want the companies to leave. They say they want the companies’ technical expertise. Not the capital. They have plenty of that.
Leigh: They got it from you.
Garvin: They say they want to sell you crude. It sounds simple so we have been trying to make a new arrangement, a viable arrangement to help expand the operation and particularly to help with industrialization. But it is not at all simple to bring this about. Yamani is very emotional. He has changed his thinking during two years. He was very angry last summer so he got the King to put on an 85% income tax and 20% royalty. That was punitive taxation. The net effect is that the companies have been experiencing a negative cash flow. Yamani did this deliberately and he admitted it in November, telling me that the reason was that you were not being serious in negotiating. He was nationalizing us through fiscalization. I asked him if he could undo it. He answered, “If I want to.” So here we are in August after 8 meetings with him. We are trying to get another date around Labor Day. I don’t know. You see, he has become accustomed to the nice income he is getting. In Venezuela, we are in the same bind.
The Secretary: How do they nationalize you by fiscalization?
Garvin: By the tax and royalty rates. They leave a 22¢ margin on the 40% production which is equity oil. This is not enough for the cost of capital. We are still expanding there. The companies are putting in $1 billion per year. We are committed to an agreement to increase capacity to 12–12.5 million barrels per day by the end of 1976.
The Secretary: Why?
Garvin: Because of the damned dilemma we are in because of people like Yamani. We are not willing to put down the gauntlet.
The Secretary: Why not?
Garvin: We are probably being led down the garden path by Yamani. The new arrangements. He throws out the proposals we make.
Enders: About what?
Garvin: Our intent is to make a long-term arrangement. I don’t like net book value compensation but if it’s part of a long-term arrangement package . . .
Leigh: So you get a long-term package that is 5 years and after 1 year it’s no good.
Enders: The November action was a major factor in the viability of the cartel.
The Secretary: How low can Yamani go?
Ingersoll: He can go to 3–4 million barrels per day.
Garvin: The Saud Government had only $1 billion a year. Last year, Saudi Arabia got $24 billion. Foreign reserves are $20 billion as of [Page 259] July. The Saudis announced a $142 billion Aid Program. I asked Yamani about this and he said this will keep the developing countries off his back. He knows very well he can’t spend that kind of money.
The Secretary: Do you deal with the King?
Garvin: All authority has been delegated to Yamani.
Jamieson: We feel that Yamani is in an even stronger position now.
The Secretary: Don’t they have needs?
Garvin: We have no bargaining position.
The Secretary: Yamani doesn’t care if you feel good.
Ingersoll: In Venezuela it could be tougher.
Garvin: Venezuela produces about 2.5 million barrels per day.
Ingersoll: You could just get out.
Jamieson: What you are suggesting would mean the company applying sanctions to Venezuela without the U.S. Government saying to do so.
Ingersoll: That is what I am saying.
The Secretary: Saudi Arabia wouldn’t play along with it.
Jamieson: No, Saudi Arabia wouldn’t let us get away with it.
Garvin: These countries are trying to keep their prices set at levels competitive with each other. This is true of Venezuela with its complex system of pricing. Except for Saudi Arabia, no other country has been cut back much more than any other. Saudi Arabia will be willing to take the bigger cut.
The Secretary: It has no needs.
Jamieson: And it is concerned for its relationship with the others.
The Secretary: That is why I could never see how the Shah could break the oil price, as some have argued. We would have 5 million barrels per day cheaper but it wouldn’t break the others.
Jamieson: Just take an across the board $1 cut and see how much more production is needed to maintain revenues.
Garvin: I don’t see any way to break OPEC.
The Secretary: Analytically, people can’t get it that the key is Saudi Arabia, not the Shah. There are only 2 things he could do. He could sell his excess production. So then, Saudi Arabia has to go down by 1 million barrels per day. Or he could unilaterally lower his price. But even if he did, so what?
Enders: No. It would have to be the other way around, with Saudi Arabia doing it. How could you create the conditions to put heat on them?
The Secretary: If anyone needs heat put on them, it’s the Saudis. But they don’t need the money. They could cut the price.
[Page 260]Garvin: You won’t break up the OPEC in this way.
The Secretary: I agree. The Saudis have to get along with the radical Arabs. They are just too weak domestically not to.
Garvin: Even if you succeed in defusing the Arab/Israeli issue this may surprise you, but it wouldn’t solve the OPEC problem.
The Secretary: Defusing the Arab/Israeli issue will only reduce the extreme case, of an embargo.
Enders: Over time, though, it could make a considerable difference if Saudi Arabia is at 5, 7, or 9.
Jamieson: You must realize that the others are reserve-limited, for example, Libya. If demand had continued to increase as in the early ’70’s, they would all have become reserve-limited, Saudi Arabia too.
The Secretary: We have never unleashed Tom on the Saudis. That would be quite an experience.
Garvin: I am not sure I would want to be there.
The Secretary: Oh, so you know Tom, do you?
Garvin: There is an issue that bothers me. I have come to despair of there being alternative energy sources in any reasonable time-frame.
Enders: Not in the mid-’80’s?
Garvin: It will still be on a small scale. We see the US still depending on imports for 50% of its needs in the 1980’s. FEA doesn’t say this, but I would put money on it.
Enders: The FEA’s study is counting heavily on NPR–4 and the OCS.
Jamieson: The trouble with the FEA study is that it overestimates the rate of finding and marketing new production. It overestimates secondary and tertiary recovery. It overestimates the possibilities of developing coal. It is overoptimistic all the way through. FEA says the U.S. will be importing 3 million barrels per day in 1980. We say the US will be importing 10 million b/d.
Enders: The FEA estimates U.S. imports at 8 million b/d in 1980 and 5.5–6 million in 1985. You people have it at 12 million in 1985.
Garvin: We don’t just look at the United States. We are thinking of the rest of the world too.
Ingersoll: What about Mexico?
Garvin: I just don’t believe all that is said about Mexico.
Ingersoll: And China?
Jamieson: There is not enough. 3.5 million barrels per day.
Enders: Yes. In the 1980’s China could produce 5 million barrels per day at most.
Ingersoll: How do you see the possibilities for conservation?
[Page 261]Garvin: I think you have seen all that you are going to see right now.
Jamieson: We see the U.S. importing 9–11 million b/d in 1980. Project Independence says 5 million b/d.
Enders: The President’s program says 30% would be covered by imports by 1985.
Garvin: As I look at the practical problems and at other countries, at the problems of Europe and Japan, I see a long dependence on OPEC. I want to be tough with them, but I feel that I must live with them. Therefore, I am motivated to try to find a relationship with them that I can live with.
The Secretary: If I hadn’t just negotiated with Israel, I’d say let them take over. You ought to see Rabin.
Garvin: Venezuela will be the first 100% takeover. By August 24, by their own timetable, the Venezuela Congress will finish the bill. Then the Government of Venezuela has 120 days to negotiate, at the end of which the concessions expire. Once again our company seems to be the leading horse. I fear a crunch is coming. They are offering net book value. This is nothing. I see that former president Betancourt announced that the companies have agreed to net book value. That is not true.
The Secretary: We also have a decision to make as a government on whether to bring in other factors, political.
Garvin: It is late. President Perez is out on a limb.
The Secretary: So what to do with OPEC? People say to be tougher.
Jamieson: There is a great desire from Saudi Arabia for industrialization. This is all we’ve got to work with. To be perfectly realistic, we don’t have much bargaining strength.
Enders: In the Venezuelan case, should the Government take up the companies claims if there is net book value and the long-term arrangement is phoney? This would change the situation politically and economically.
Jamieson: With the trend that could be set by Venezuela, it would become more difficult to explore off-shore. With the trend and with a changed tax treatment of foreign operations, there would be no incentive.
Enders: There is a real question. When you have a narrow balance, it is better to show your teeth.
Garvin: We are in a dilemma. They are not going to make us an offer with which we will be comfortable. The companies will have to say that we prefer walking away to taking the offer. In that case, I would not be worried about the crude but there would be a loss of US presence.
[Page 262]The Secretary: I am not worried about a loss of presence in Venezuela. Yes, I would be about a loss of presence in Saudi Arabia. A loss of presence in one country wouldn’t bother me. If you have ideas, I want to hear them.
Garvin: I have despaired of putting reason into Yamani.
The Secretary: From my experience, I have learned that if you show weakness in such a situation, you are dead. But what would show strength? To buy oil from Russia?
Jamieson: They don’t have enough. They send 1 million b/d to the West.
The Secretary: If we took Russian oil, this would only strap Europe.
Jamieson: Yes.
The Secretary: It couldn’t happen to a nicer group of people. I found this discussion very instructive. I mean it. If you have ideas, some options to suggest, I would like to hear from you.
- Source: National Archives, RG 59, Central Foreign Policy Files, P820123–2003. Secret; Nodis. Drafted by Hart.↩