3. Telegram 416 From the Embassy in Iran to the Department of State 1 2


  • Tehran 0408

Summary: At Shah’s instructions, PriMin Hoveyda has “notified” Ambassadors of four countries represented in consortium that unless $1 billion is forthcoming in oil revenues during coming Iranian year, Iran will undertake unilateral legislation either depriving consortium of 50 percent of its interests or making “cost oil” available for GOI marketing. Obviously Shah hopes USG and others will exert pressure on companies to increase liftings.

Noting that consortium had indicated to Shaw at Zurich that expected $1 billion in revenue to GOI during next Iranian year would be cut to $900 million, PriMin Hoveyda evening third said he notifying Ambassadors of four countries represented in consortium that unless consortium produces as GOI expected unilateral legislation will be enacted, either a) depriving member companies of 50 percent of their interest which will then be made available to other companies: or b) requiring member companies to provide oil at cost for GOI to market as it sees fit. Hoveyda added that legislation is already being drafted.
With Hoveyda apparently awaiting my reaction, I pointed out that unlike British USG not rpt not directly involved. As friend of GOI and consortium, however, we sincerely hoped partnership which had proved so fruitful would continue. Consortium’s record, I said, is almost phenomenal. From 1954 when Iran was flat on [Page 2] its back consortium production has reached point where Iran is in neck and neck race with Saudi Arabia for MidEast leadership. In past two years alone, production has shot up 32 per cent.
Hoveyda said GOI has carefully calculated all factors, including commercial capabilities of member companies as well as Iran’s needs. echoing point Shah continually emphasizes, Hoveyda insisted consortium members should take into account Iran’s constructive policies and support progress of Iran rather than paying vast sums to tiny sheikhdoms, e.g. Kuwait and Abu Dhabi, whose needs are only fraction of those of Iran. He exhibited advertisement from some British newspaper describing enormous profits to be made in oil-rich Dubai.
Hoveyda went on to say that Iran’s momentum simply had to be maintained. One billion dollar income from consortium (aside from extra income from other oil activities) included in budget he has presented to Parliament. Military budget cannot be cut. Hence $100 million shortfall would affect development budget. If later is reduced, anticipated 12 percent growth rate would suffer sharply and this intolerable.
Parenthetically, I noted morning papers indicated military budget up 20 percent which contrary to 12 percent figure which PriMin had forecast during our annual review last spring. Hoveyda contended that military increase is actually only 13 percent of total budget, i.e. current and development.
Noting regret that oil issue has so quickly reached point of such drastic ultimatums I gave as my impression there been break-down in communications. Hoveyda insisted he himself had told consortium reps in Paris and again in New York that specific amount of $1 billion would be required. When I asked whether they had indicated compliance, Hoveyda acknowledged they had only indicted matter would be studied. I suggested more forthright exchanges of views between two parties.
Expressing sincere hope GOI-Consortium partnership would not break down, I pointed to sorry plight of Iraq, which had gone down road of unilateral legislation. Hoveyda said conditions are different from Mosadeq days. 0il would not rpt not stay in [Page 3] ground. GOI itself can find markets. Besides there are plenty of private entrepreneurs, including Americans definitely interested. He also noted French anxiously seeking more oil supplies. I expressed doubt GOI Could readily pick up $1 billion from other sources for coming year’s budget.
Hoveyda said if rupture takes place with consortium, oil industry throughout MidEast would be adversely affected. I voiced counter view that Arab producers would be delighted to market additional oil if Iran gets in trouble. I also referred to Edith Penrose’s thesis on liklihood of break in oil prices as more entrepreneurs get into act.
Reiterating USG considers itself friend of both parties, I praised Iran’s remarkable progress which in no small measure due to oil income. We share his desire, I said, that momentum continue for Iran is wholesome example for MidEast. Hoveyda recalled warm words which President Johnson and other leaders had voiced in this connection. At stake, I said, is not only creditworthiness of Iran but over-all favorable investment climate for which, as John Mccloy has stated during his Tehran visits, GOI’s relations with oil companies is “bellwether.”
Asked whether publicity campaign of type employed by GOI year ago would be undertaken, Hoveyda said that not rpt not anticipated for the present.
Meeting closed with both of us expressing hope that problem can be resolved without major upheaval.
Comment: Hoveyda seemed to have little info other than that Shah had ordered him to “notify” us four ambassadors. Fact that he had note-taker present (for first time) would indicate, he wished have record to show Shah both of his remarks and our responses. Hoveyda was aware Shah greatly upset, but his demarche was restrained, an apparent attempt to put most reasonable face on GOI’s position.
  1. Source: National Archives, RG 59, Central Files 1967–69, PET 6 IRAN. Secret; Priority; Limdis. Repeated to London. In 1968, the consortium resorted to shifting the production year from the Gregorian calendar to the Iranian year, from March 21 to March 20. This allowed it to meet Iranian targets temporarily by counting the following year’s first quarter into the 1968 figures. By 1969, however, this device could not keep pace with Iranian demands.
  2. Prime Minister Hoveyda informed the U.S. Ambassador that if Tehran did not receive $1 billion in oil income, the Iranian Government would propose unilateral legislation to obtain the required revenue.