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210. Intelligence Note From the Director of the Bureau of Intelligence and Research (Hughes) to Secretary of State Rusk/1/ Washington, August 31, 1967. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1967-69, PET 15-2 ALG. Secret; No Foreign Dissem; Controlled Dissem. SUBJECT The Algerian Government has formally announced the nationalization of five US-owned companies engaged in distributing and refining oil (Esso Standard-Algeria, Esso Africa, Esso Saharienne, Mobiloil Nord-Africaine, and Mobiloil Francaise)./2/ The companies' assets have been transferred to the state-owned company, Sonatrach, which has long had its eye on the Esso and Mobil distribution networks, as well as their holdings in the Algiers refinery. Two other Mobil affiliates, both producing companies, have escaped nationalization. The decrees authorizing the nationalizations provide in principle for compensation after an inventory of the companies' assets, but the details have yet to be spelled out. /2/The Algerian Government announced the nationalization on August 30. (Telegram 30198 to Algiers, August 31; ibid., PET 15-2 ALG) Political Motives Uppermost. In nationalizing the Esso and Mobil affiliates, Algeria appears to have been guided mainly by political considerations. Despite strong pressures from the domestic left, Industry Minister Abdesslam Belaid had previously resisted nationalization of the distributing companies on the grounds that Sonatrach would be unable for some time to absorb them efficiently, and that they would eventually fall into the government's hands anyway; indeed, the government has for some time been employing a strategy of graduated harassment. The Middle East crisis has produced compelling reasons, however, for overriding Abdesslam's reservations. Unable to translate its hard line against Israel and its Western backers into effective military action, the Boumediene regime can at least point to its nationalization of US oil firms as proof of its militancy. Prospects for the Producing Firms. The Algerian Government's intentions towards US oil-producing companies remain unclear. Its short-term goal appears to be to force the producers to accept the government's demands on a wide range of unresolved issues (tax reference prices, arbitration, new investment)./3/ It is currently using both the carrot of new offers of cooperation and the stick of possible nationalization. Two major US producers, Phillips and Sinclair, have been approached with tentative offers of participation in new companies to be jointly owned by the Algerian Government and the US firms. The latter would contribute their present concessions as an investment and, in return, would be allowed to manage the new firms without harassment. However, even should the US companies agree--the initial reactions of the field representatives have been positive--they would have little assurance of long-term security. In Algeria political, rather than economic, considerations will continue to shape government policies in the petroleum sector. /3/See Intelligence Note 654, "US Oil Companies in Algeria: The Tightening Noose," August 10, 1967 (Confidential/No Foreign Dissem/Controlled Dissem). Footnote in the source text.]
211. Memorandum of Conversation/1/ Washington, September 25, 1967. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1967-69, PET 15-2 ALG. Limited Official Use. Drafted by Dick. SUBJECT PARTICIPANTS Mr. Findley began the discussion by stating that Esso was unhappy that a note was sent to the Government of Algeria without Esso first being consulted as to the content of the note./2/ Mr. Findley stated that Esso objected to the note in that it gave the Algerian Government the alternative of merely paying compensation for the nationalization of Esso interests rather than insisting upon rescission of the actions and restitution of the property. Mr. Findley stated that the ordinances and decrees enacted by the Government of Algeria were clearly discriminatory, arbitrary and confiscatory and that thus restitution was the only appropriate remedy under international law as interpreted by the United States. /2/The text of the note was transmitted in telegram 38371 to Algiers, September 15. (Ibid., PS 8-4 US-ALG) Mr. Salans pointed out that the historical United States position was not that restitution was the only appropriate remedy under the circumstances but rather that damages by the United States has always been considered to be an equally satisfactory form of reparation. Mr. Belman brought out the point that the OECD Draft Convention on the Protection of Foreign Property confirmed this fact. He referred specifically to the notes and comments to Article 5 of the Draft Convention which discussed "full reparation" in the event of an illegal act. He pointed out that these notes and comments were altered at the insistence of the United States to state that "in practice, such reparation will generally take the form of damages." He stated that the reason for the United States insisting on this language is because of a United States Supreme Court decision holding that the federal government could never be bound to restore property it had taken by eminent domain. Mr. Belman went on to say that the United States position for the OECD draft with respect to this question of reparation was reached following consultation with the Business and Industry Advisory Committee and was concurred in by that Committee. Mr. Belman stated that he worked closely with Mr. Haitt of Shell Oil Corp. on this question and that to his knowledge Mr. Collado of Standard of New Jersey had been involved. Mr. Findley stated that he was unaware of what had transpired in connection with the OECD Foreign Property Convention and was grateful for the information regarding the United States position on reparations and how it had been developed. Mr. Findley stated that he believed the United States position was a poor one since it would have the effect of selling the United States investment community down the river overseas. He felt that foreign governments (especially those in the Middle East) would have less hesitation about nationalizing United States properties in violation of international law since they only would be required to make some compensation which was rarely ever prompt, adequate or effective. Mr. Salans pointed out that the promptness, adequateness or effectiveness of compensation was a separate question. Mr. Salans suggested that since the United States note had already been delivered to the Government of Algeria, no decision be taken at the moment on what the tactical position of the United States should be with respect to reparations and that any such decision would await a reply from the Government of Algeria. Mr. Findley agreed with this course of action. Mr. Dick pointed out that the Government of Algeria in 1964 took the position that "either compensation or restitution at the discretion of the Algerian authorities" was the appropriate remedy with regard to the properties nationalized pursuant to the decrees of 1963.
212. Action Memorandum From the Assistant Secretary of State for Economic Affairs (Solomon) to the Under Secretary of State for Political Affairs (Rostow)/1/ Washington, October 12, 1967. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1967-69, PET 6 IRAN. Confidential. Drafted by Akins and cleared by Eliot and Oliver. SUBJECT The December, 1966 agreement between the Iranian Oil Consortium and the Government of Iran included the following points: the Consortium would at least match the overall Middle East production increases in 1967 and 1968 (they had been running at about 10.5 percent increase each year) and would make best efforts for subsequent years. Specifically, the Consortium agreed to try to increase production from an average of 1.9 million bbls/day in 1966 to about 2.1 million bbls/day in 1967 and to 2.35 million bbls/day in 1968 (an increase of 11-12 percent per annum). Early this year the British became skittish about these production goals and asked us to urge the American companies to make sure they would meet them. The Secretary told the British Ambassador on March 3 that we had no reason to believe they would not be able to and we were hence not willing to raise the subject with the companies. Furthermore, we had no indication that the Iranians were dissatisfied with the agreement. Because the IPC pipeline remained closed for the first two months of this year and the Arabs stopped shipments to the United States and the United Kingdom in June and July, Iranian production has increased much more this year than expected and in the first nine months it has averaged over 2.4 million bbls/day. Production will probably drop below these levels for the remainder of the year but the Consortium expects the average for the year to be at least 2.25 million bbls/day--an increase of 17 percent over 1966 levels and 150,000 bbls/day more than the projected increase for the year. (FYI: We believe the Consortium estimate is deliberately low to allow room for bargaining. Production for the year will probably average closer to 2.35 million bbls/day--the level which has been projected for 1968.) This compares with an estimated increase in the Arab Middle East (not including North Africa) of only 7 percent for the year. Although the Shah expressed his satisfaction with the December, 1966 agreement, the Iranians apparently now wish to extract a new commitment for 11 percent increases per annum based on December, 1967 capacity (not production) of 3 million bbls/day, arriving at 4 million bbls/day production in 1970 with a production capacity of about six million bbls/day. The Consortium believes it is highly unlikely that production figures can be anywhere near this amount in 1970 unless there is some further unexpected deterioration in operating conditions in the Arab world. At an annual increase of 11 percent from 1966, Iranian production in 1970 should be about 2.9 million bbls/day; capacity at that time should be around 3.6 million bbls/day. The Consortium has been reluctant to increase capacity much beyond actual production, at least partially because of the Iranian tendency to insist that production be kept near maximum possible levels. The Iranians have raised the subject with the Consortium, with the British in London/2/ and with our Embassy in Tehran although Prime Minister Hoveyda said he realized there was little the United States could do to influence the American companies' policy (Tehran's 1534 attached)./3/ Ambassador Ansary seems to be putting in a few licks on the same subject. /2/The British Minister of State told the Iranians that "Iranian demands are unrealistic; that companies' plans are reasonable in current commercial context; and that companies could not give Iran preference on political response grounds without provoking undesirable political response in Iran's Arab neighbors." (Telegram 2851 from London, October 11; ibid., PET 6 IRAN) The British submitted a memorandum to the Department on October 12 regarding their concern. (Ibid.) /3/Not found attached. Dated October 5. (Ibid.) Résumé on Differences Between Consortium Plans and GOI Desires
*11-12 percent increase in 1967 and 1968; same percentages have been projected in this table for 1969 and 1970. Recommendations: We suggest that you tell Ambassador Ansary: 1. We cannot of course dictate policy to the American member companies of the Consortium. 2. The American companies of the Consortium have always taken their commitments to the GOI seriously and we have every reason to believe that they will do all possible to see that Iran gets its fair share of the Middle East increase in production. It appears that the Consortium will substantially exceed its commitment for 1967. But it is difficult and probably impossible for any oil companies to make absolute commitments as far in the future as 1970. 3. Although it is unlikely that production ratios will ever be precisely what they would have been had there been no Middle East crisis this summer, it is inevitable that some of the pre-crisis purchasing patterns have been restored as a result of the lifting of the boycott on oil shipments and it would be unrealistic for Iran to expect to retain all the additional production which has accrued to it as a result of the crisis. 4. We understand that the current talks in London between the Consortium and the Iranian team ended amicably, although we do not have detailed information on the decisions. (London's 2768 included for your information.)/4/ /4/Not found attached. Dated October 9. (Ibid.) 5. Kuwait will have almost no increase in oil income this year and Saudi Arabia will have less than it had counted on. It is in the interests of the U.S. as well as Iran to maintain and support the moderate governments of these two countries.
213. Telegram From the Embassy in Iran to the Department of State/1/ Tehran, October 31, 1967, 0755Z. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1967-69, PET 6 IRAN. Confidential. Repeated to London, Beirut, Paris, Jidda, and Kuwait. 1911. Iran Oil. 1. During intermission at Los Angeles symphony concert, Shah said he had just received report from PriMin Hoveyda to effect Consortium would fall $100 million dollars short of GOI expectations this year. He acknowledged expectations had soared during June Mideast crisis. 2. I suggested more valid viewpoint is that Iran will in fact receive this year $50 million more than Consortium had promised in agreement reached year ago. Shah acknowledged this is so. 3. I went on to point out that one cannot assume that other oil producing countries may not repeat foolish tactics against oil companies. I noted how poorly Iraq been doing as result of its excessive pressures and that situation there or in certain other countries could easily get worse. 4. Shah said Iraq Govt is totally irrational. It is taking poor Iraqi people, he said, down same catastrophic road as Mossadeq took Iran. 5. With reference to destruction of Suez refinery, Shah complained Western oil companies will increase their offtakes from Saudi Arabia and Kuwait which countries will then pay off UAR sums equivalent to amount of destruction. 6. Emphasizing Iran has been doing very well indeed, I urged Shah to continue to profit from policy of reasonableness. Meyer
214. Memorandum of Conversation/1/ Washington, November 1, 1967. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1967-69, PET 6 IRAN. Confidential. Drafted by Akins on November 3. SUBJECT PARTICIPANTS After greetings Mr. Solomon opened by saying our long-standing friendship with Iran made it possible to discuss problems which arise between us in a completely frank manner (the Ambassador concurred) and frankly, the Iranian requests to the U.S. Government both here and in Tehran to insure greatly increased petroleum exports from Iran had caused us considerable difficulty. The Department and the U.S. Government had considerable sympathy for Iran's aspirations and great admiration for its plans for development but this did not mean we were able to translate this sympathy and admiration into pressures on the American companies in the Consortium to comply with the Iranian wishes. Mr. Solomon said that there should be no confusion about the relationship between American companies operating abroad and the Department of State. We give advice to companies before they go into a country, if they ask for it; we especially want our views known in cases where the companies ask for U.S. Government assistance. But once a company is in a country it is on its own. There are certainly some disadvantages to this but on balance we believe that they are far outweighed by the advantages in our free system where companies act according to their commercial interests rather than in following instruction from the U.S. Government. The host countries can therefore look on local branches of American firms as good citizens, not as tools of U.S. foreign policy. It is very important to recognize both the very limited nature of U.S. influence over private firms and the reluctance, or even inability of the US Government to set commercial policies of these firms abroad. Venezuela for example has tried for eight years to get special consideration for its oil exports. While the case is not comparable to the Iranian requests there are some similarities. Venezuela is one of our best friends in the Hemisphere and we have a common problem with Castro but nonetheless, we have consistently refused to permit these important political factors to influence our purely commercial policy toward Venezuelan oil. If the State Department should try to influence companies to favor Iran or any other country, the reaction from companies operating elsewhere and from Congress would be immediate and hostile. We can tell the American companies in the Consortium of the Iranian approaches to us and we can give them our views on the importance of Iran, as we have done repeatedly, but in spite of our warm friendship for Iran we cannot do more and Iran should not think that these mild interventions will outweigh the companies' own purely commercial interests. There are many complex factors which the companies have to consider. The comparative cost of oil in Iran and elsewhere is extremely important. And all of the American companies have interests in other oil producing countries which must be protected. (Incidentally it seems to us that it is in the interest of both Iran and the United States for such moderate Arab nations in the area as Kuwait and Saudi Arabia to be strengthened.) We are very interested in the Consortium activities and note with pleasure that it has shown its willingness to see that Iran gets its fair share of the Middle East offtake, but given the vagaries of the oil industry, it is impossible to make long term commitments for offtake from Iran for the next five years or even through 1970. We can also understand why the companies in the Consortium are disturbed by the Iranian desire to revise or even discard the 1966 offtake agreement only ten months after it had been concluded to the apparent satisfaction of all parties. As the Ambassador himself has noted, the continuing Iranian pressure on the Consortium to use all production facilities to their capacity has caused it to be reluctant to enlarge facilities until they are actually needed. This does not seem in the interest of anyone, as surplus capacity in Iran is necessary if Iran is to increase production rapidly during any future oil crisis. Finally, the Consortium has a vast marketing network which is extremely important to Iran especially during times of a surplus of world oil production. We would hope that the amicable relationship between the Consortium and the Government of Iran which has proven so profitable to Iran will continue uninterrupted. The Ambassador said the points were well made but he feared that the companies were ignoring other important considerations. Iran believes that its special position warrants special treatment; Iran has a development program which increases the wealth and the stability of Iran and thereby benefits the West and the Western oil companies. Iran is particularly disturbed at the increase in production of certain small Arab countries who are given far more money than they can use and who then give or lend this surplus capital to men like Nasser. The Iranians consider it ironic that the Western oil companies are willing to increase production and therefore royalties and taxes to these small countries which are, quite directly, financing a man who is committed to their destruction and to wiping out all Western influence in the Middle East. Such a policy can only aggravate the instability of the area. Iran believes that there is more than short-term economic profit to be considered and the oil companies should look once again at what Iran is doing with its income and compare it with actions of the small Arab countries. Mr. Solomon said U.S. has investments abroad valued at about $71 billion. The world-wide investment in oil is of course important but it is only a minority of the total. American companies operating abroad act according to their own economic interests as they see them and none serves as a tool of the U.S. Government. Mr. Solomon then said that the American oil companies have important investments in the small Arab countries the Ambassador referred to and if any of the local rulers thought that the American parent companies were shifting their emphasis from the Arab world to Iran--particularly if they suspected it was at U.S. Government instigation--they would certainly retaliate against the American firms. We must also be aware of the danger that general, undiscriminating pressure frequently results in a reaction quite the opposite from that which is intended. The Ambassador concluded by saying that it was clear that the Consortium could not make firm commitments for the next five years; Iran had not asked for this but only for an agreement in principle to increase production. The next development plan, starting in March of 1968, is based on a large income from the exploitation of oil and Iran must have this money. The problems might start even before the new development plan; the Ambassador had just been informed that because the increase in oil earnings was less than expected, Iran would probably have deficit of $110 million this year. A short discussion of Iran's economic development followed. The Ambassador said Iran had a 9.5 percent growth in GNP last year and expected to have 11 percent this year--and all with a price inflation of only 0.5%. Mr. Solomon commented that oil had made all this possible. The Ambassador agreed, said that income from oil now runs about $700 million per year and provides about 70-75% of Iran's foreign exchange earnings. But this does not mean that more money is not needed. After leaving Mr. Solomon's office, Ambassador Ansary commented on Mr. Solomon's lucid presentation of the U.S. position and said it was important that it be understood in Tehran. While it is possible to explain some things in letters or telegrams some of the more subtle points may be lost. He said he thought he should return to Tehran to explain the U.S. position directly to his government before the Iranian position hardens to the point where retreat might be impossible.
215. Telegram From the Embassy in Iran to the Department of State/1/ Tehran, November 22, 1967, 1530Z. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1967-69, PET 6 IRAN. Secret. Repeated to London, Paris, and CINCSTRIKE/USCINCMEAFSA. 2249. Iranian Oil. 1. In discussion with Harriman 22d,/2/ Shah rehearsed his usual theme that Consortium should accord Iran preferential treatment. He referred to Iran's good behavior this past summer, its stabilizing role in this region now and in future, and importance of executing Iran's extensive Fourth Plan (which he admitted had been based on false statistics re projected oil revenues)./3/ /2/The Consortium prepared a paper to brief Harriman before his meeting with the Shah. The paper, a comprehensive analysis of the status of the oil negotiations, is in a memorandum from McClelland to Akins, November 23. (Department of State, E Files: Lot 71 D 84, PET--Petroleum Iran (2) 1967) /3/Dr. Eqbal, managing director of NIOC, had explained the error to Consortium members in October: "Dr. Eqbal stated that an error had occurred in calculations within the GOI in that capacity figures given to NIOC by the Consortium had been taken by NIOC as production and offtake levels to be achieved by the end of 1967. These were notably 3.1 million bpd production and 2.9 million bpd offtake, both of which are projected capacity figures, not actual production of offtake. (In fact, 1967 offtake is expected by the members to average about 2.3 million bpd.) Dr. Eqbal said that he had informed Finance Minister Amuzegar of offtake levels based on the above and that Mr. Amuzegar had used these figures as a basis for the computation of revenue from oil not only for the balance of 1967, but also for projections for future years....According to Mr. Amuzegar, assumptions about financing incorporated in the Fourth Plan were based on revenue figures derived from the above mentioned offtake figures. He repeated, as Dr. Eqbal had stated in London, that the GOI required $6 billion in oil revenue during the five-year Fourth Plan, which begins in March 1968." The effects of the miscalculation were far-reaching: "Mr. Amuzegar informed the member representatives that revenue based on a level of 2.9 million bpd for the next quarter of 1967 had already been spent and beseeched the members to help resolve the GOI's dilemma (though admitting it was founded on inaccurate information) by revising their offtake estimates for 1968." (Airgram A-242 from Tehran, November 6; National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, PET 6 IRAN) 2. Shah said it is simply question of "money," implying he not particular how increased revenue is achieved. He suggested four possibilities: A) as transportation rates come down following last summer's crisis companies should let Iran share in benefits from increased prices now prevailing in Europe; B) 6-1/2 per cent OPEC discount now being given companies be eliminated; C) Consortium internal regulations should be changed to become like those at Aramco so that those who wish to overlift are not penalized; and D) oil companies should encourage expansion of petrochemical industry in Iran. 3. Re natural gas, Shah said estimates for building pipeline (with L-60 steel) to Trieste range around $800 million but he suspects cost more likely to be in $1 billion to $1.2 billion range. He disclosed new idea, apparently being developed by French, whereby Soviets would deliver to France quantities of natural gas equivalent to those delivered by Iran to USSR border (via second pipeline) and French would pay Iranians in free foreign exchange. Shah said this proposal is agreeable to Iranians because it means foreign exchange rather than bartered Soviet goods. He acknowledged, however, that French have yet to negotiate such deal with Soviets. 3. Comment: Shah's discussion of oil was dispassionate. He said he hopes points mentioned in para two can be worked out when Consortium team comes to Iran for discussions Nov. 29. Meyer
216. Telegram From the Embassy in Iran to the Department of State/1/ Tehran, December 29, 1967, 0824Z. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1967-69, PET 6 IRAN. Secret. Repeated to London. 2702. Ref: Tehran 2701./2/ Iranian Oil. /2/Not printed. (Ibid.) 1. My audience with Shah 28th turned out to be one of most unpleasant of my tour here. He was obviously smouldering over devaluation shortfall issue with which he had been preoccupied earlier in day/3/ (see reftel). /3/Since Iran's contract with the Consortium was based on payments in sterling and the international oil market was based on dollars, depreciation meant that Iran would be getting proportionately less for its oil than would Arab producers like Saudi Arabia with contracts payable in dollars. 2. Using terms such as "robbery," "thieves" and some unprintable epithets, Shah professed to be completely disgusted with Consortium's behavior. At one point in discussion, Shah said if companies wanted war they could have it. This time it would not be with a Mosadeq but with a united Iran behind Shah himself. 3. When I noted Consortium believes it has legal basis for its position and perhaps arbitration might be one possibility for solving devaluation problem, Shah said arbitration is totally unacceptable. As for matter being legal issue, Shah said GOI would take care of that once and for all by immediate passage of legislation which would insure GOI undepreciable payments. Comment: Since this is critical point, I later sounded out Shah again and received distinct impression that as of now unilateral legislation which Shah has in mind for dealing with devaluation issue will be limited to insuring value of payments. Question is, of course, re wisdom of having any precedent set for unilateral legislation against Consortium. 4. In justification of righteousness his cause, Shah cited fact that both British Ambassador and Consortium Chief O'Brien had registered disapproval of Consortium's action in reducing December 15 payments./4/ /4/The British Foreign Secretary moved quickly to "dissuade the Shah from taking any rash action" and asked the United States to make a "similar demarche," which the Americans agreed to do at the Ambassador's discretion. (Telegram 92281, January 3, 1968; National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1967-69, PET 6 IRAN) 5. Shah's bitterness splashed over whole oil picture. Re OPEC discount problem, Shah contended companies give with one hand, i.e. agree to phase-out of discount, but then take back with other, i.e. gravity allowance. He said he had doubted wisdom of Amuzegar's going to 52 cents on gravity allowance figure but had gone along with it. Comment: [garble] Amuzegar indicated (Tehran 2633)/5/ that he had only gone to 45 cents in recent Tehran discussions, Shah's use of 52 cents figure, which he repeated twice, may mean that Amuzegar is prepared to move to that figure in attempt to reach compromise. /5/Not printed. (Ibid.) 6. Shah went on to berate Consortium for its continual maltreatment of Iran, despite Iran's exemplary behavior in comparison with other countries./6/ My efforts to point out that Iran has in fact been treated very well fell on deaf ears. Shah once again contended that Consortium is sitting astride Iran's vast reserves and he cannot permit such restraining influences on Iran's welfare. /6/The Consortium notified the Finance Minister the next day that they had agreed to make additional payments to make up the devaluation shortfall. (Telegram 2767 from Tehran, January 4; ibid.) 7. I pointed out problem is one of marketing. In this connection, I suggested Iran may be trying to carry water on both shoulders, i.e. pushing Consortium to find greater markets while at same time stealing some of Consortium's markets, e.g. recent IPAC deal for providing 18,000 bpd to Philippines which previously been almost exclusively market for American majors in Consortium. Shah argued such competition is infinitesimal compared with bonanzas greedy oil companies are throwing to countries like Libya. When I pointed out geographic factor which places Libya in favorable situation with Suez closed, Shah said what really infuriates him is companies' lifting large quantities from Sheikhdoms like Kuwait and Abu Dhabi when Iran with its 26,000,000 people needs funds to maintain its progress and play its role in Mideast security. Shah also asserted that Saudi Arabia's production will soon move up to 4,000,000 barrels per day. Since geographic factor a la Libya cannot be applied vis-à-vis Saudi Arabia, this further demonstrates he said, how companies discriminate against INOC. 8. Shah once again mentioned possibility of legislation which would enable GOI to have oil at well-head for clients which GOI may develop not in competition with Consortium. He noted Iraq had long since found companies submissive to such measures. My natural response was to point to Iraq's sorry plight today and how much better off Iran is. I urged Shah "with every bone in my body" not to go down Iraqi road. 9. When subject of Iraq first arose, Shah said derisively, "congratulations." He contended that unhappy developments in Iraq, leading to influx of Soviets into Iraq's oil fields, are primarily due to faulty Western policy over past ten years. Since there was little likelihood of rational discussion, I did not pursue this point further to ascertain what Shah had specifically in mind. 10. I told Shah Washington would be appreciative his views re Soviet intrusion in Iraqi oil industry. Shah said much depends on nature of Soviet involvement. However, danger is real, he said, that perhaps with pipeline through Syria, Soviets can get both Iraq and Syria in their clutches, thus leapfrogging over Turkey and Iran. This would place them in dominating position in Mideast, particularly since they already doing so well in what Shah has often mentioned as triangle (it is somewhat linear) of Cairo, Aden-Yemen, and Djibouti. 11. This provided occasion to pass some of interesting analysis contained in Beirut 5181,/7/ particularly ambition of Soviets to become international major. I noted in this connection recent PIW statistics that Soviets last year exported 56 percent of their production, which was 14.6 percent increase from previous year. /7/Dated December 26. (Ibid., PET 6) Here follows a brief general discussion of the oil industry. Meyer
217. Telegram From the Embassy in Iran to the Department of State/1/ Tehran, February 23, 1968, 0940Z. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1967-69, PET 6 IRAN. Confidential; Priority. Repeated to Paris and London. 3441. Subj: Iran Oil. Ref: London 6620,/2/ 6655./3/ /2/Dated February 21. (Ibid.) /3/Dated February 22. (Ibid.) 1. Alam says Shah hopes for significant increase in Abadan refinery uplift which when coupled with other indicated increases will net Iran an additional $280 million this year. However, this is still $100 million short of Shah's primary objective, which remains "money."/4/ Alam Nohzd Reza Fallah currently in States exclusively to discuss these matters with American members of Consortium. /4/See Document 215. 2. When I noted unlikelihood of Consortium's being able to reach 2.8 million bpd level demanded by Shah or to provide shortfall in "cost oil," Alam recognized Consortium's inveterate opposition to providing oil which would be competitive. He also acknowledged GOI would have no ready markets if cost oil were made available. 3. According to Alam, Shah hopeful inter-participants agreement, as revised or revisable, will increase total Iranian offtake. 4. Comment: As Department knows, Embassy has consistently taken position that inter-participants agreement per se not as politically explosive as British and Walter Levy been insisting. Our point has been Shah could not care less re formula provided production makes gains he desires. Now, however, issue seems increasingly to be focusing on what appears to be deliberate effort by certain Aramco companies to prevent other Consortium members, some quite oil hungry, from taking oil they might otherwise wish to tap./5/ French in particular are attacking this vulnerable point, and CFP apparently has made clear to Iranians it prepared to lift sizable additional quantities of crude, were it not for penalties re which certain Aramco companies remain insistent. /5/Before leaving for Tehran, the Consortium's shareholders met in London to discuss revisions to their overlift arrangements. As the Embassy reported, "Jersey Standard Oil softening, but Socal still resisting and Texaco adamant (under Consortium voting procedures any two of these three can prevent agreement)." Representatives from BP told the Americans that if agreement could not be reached, the American companies could travel to Tehran alone to explain the situation to the Shah. (Telegram 5913 from London, January 26; National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1967-69, PET 6 IRAN) After further consultation, the Americans backed a Jersey proposal which the other companies considered inadequate: "FonOff Oil regards Jersey as equally villains of this piece along with Socal and Texaco, and apparently some shareholders have similarly sour reaction as result this past week's negotiations. One shareholder put it to EmbOff only half jokingly 'facade of unity only precariously preserved.'" (Telegram 6051 from London, January 30; ibid.) 5. If our impression is correct, certain Aramco companies are manifesting "restraint of trade" which would cause Teddy Roosevelt to turn over in his grave and which more pertinently is contrary to spirit if not letter of American law. While we hold no brief for Shah's unrealistic demands, and while we believe in friendly informal cooperation between companies and USG, we wonder whether time may not have come for USG to caution companies against such "restraint of trade". Unless CFP and other oil-hungry companies (probably including Shell, Mobil and Iricon) are permitted to lift Iranian crude beyond their quotas without prohibitive restrictions, we see real trouble ahead. Thus we share concerns expressed by British in reftels. Meyer
218. Telegram From the Department of State to the Embassy in Iran/1/ Washington, February 29, 1968, 0025Z. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1967-69, PET 6 IRAN. Confidential; Limdis. Drafted by Akins (E/FSE); cleared by Neuman (NEA), Oliver (E/FSE), Eliot (NEA/IRN), and Malmborg (L/E); and approved by S. Rockwell. Also sent to London and Paris. 122201. Subject: Iranian Oil. Ref: Tehran's 3441./2/ /2/Document 217. 1. Dept increasingly disturbed by reports from Tehran, London and Paris that Aramco parents are being blamed for frustrating Shah's wishes for increased off-take and income and by implication that all others would be pleased or at least willing to give Iran favorable treatment./3/ /3/In a March 18 letter to Robert Dowell, Jr., Petroleum Attaché in Tehran, Akins noted that despite the fact that the oil companies felt a change in the overlift arrangement would make no difference to Iran, they were reluctant to make a change. He wrote: "John Oliver and I called company vice-presidents March 14, told them of our views of the seriousness of the situation and the impression we got from them was, 'Tough; but a clash has become inevitable and we might as well have it now and get it over with.' Mr. Rostow will probably call the presidents or executive vice-presidents to Washington next week to go over the same material. I doubt if he will be effective in persuading them of anything unless they are frightened. Maybe they will be. The Shah is an oriental despot and the oil executives are dinosaurs. If they come to blows it could be the battle of the century." (National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1967-69, PET 6 IRAN) 2. Our understanding is that there is no major disagreement among shareholders on the two essential points: 1) the Shah's demands for 20 percent annual increase in off-take cannot be met, in fact, 8-9 percent growth is all that can be assured in 1968, and 2) NIOC cannot be given cost oil. We understand there is also essential agreement now on new quarter-price arrangements on over-liftings. Although some companies might well wish to be allowed to take, at cost, more than their equity share, this opposed by BP as well as all American majors and we doubt that other companies seriously believe refusal to permit this could be called constraint of trade./4/ /4/In his letter to Dowell, Akins wrote: "Your references to 'restraint of trade' were a bit disturbing. We were surprised to see the accusation put into a telegram which was given fairly wide distribution in the Government. But fortunately the strong anti-oil company voices in Treasury and Commerce do not seem to have picked up the matter. They couldn't get very far, in any case, given the fact that the American companies were given specific exemption from anti-trust legislation when they entered the Consortium." 3. Rules on programming production give Iran advantages over Aramco system and new agreement, we understand, gives companies option of applying Aramco over-lift agreements if they find them to their advantage. 4. We fear that high visibility of Aramco may lead Iranians to concentrate their irritation on its parent companies. But we also fear that French and British (Fearnley) may be encouraging this tendency by trying to shift blame to Americans when there is none to shift. 5. We hope addressees will be able to counter suggestion of American intransigence if it arises again. 6. It is interesting to note that greatest percentage increase among major Gulf producers in 1968 will not be Aramco but Abu Dhabi off-shore where only British Petroleum and CFP are involved. In addition CFP was one of two companies (other was Texaco) which opposed increase in Abadan refinery throughput. Rusk
219. Memorandum of Conversation/1/ Washington, March 6, 1968. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1967-69, PET 6 IRAN. Confidential. Drafted by McClelland and Rostow and approved in M on March 14. SUBJECT PARTICIPANTS Mr. Rostow began by reviewing the general situation in the Persian Gulf, in the light of the proposed British withdrawal,/2/ his VOA press conference, and the violent Russian attack on US policy there. Mr. Rostow's message in his press conference had been a) for the US public, that the US does not have to fill every military vacuum left by a British or French withdrawal, and b) for the Russians, that the US is interested in seeing vacuums filled, and security assured. Our hope is that security can be provided by the cooperation of the states in the area. He believed that much of the current Russian propaganda was in preparation for Kosygin's forthcoming visit to Iran. /2/Due to its continuing fiscal crisis and subsequent budgetary constraints, the United Kingdom had announced its decision to withdraw its military presence from "east of Suez" by 1971. Mr. Rostow noted that the two strong countries in the Persian Gulf are Iran and Saudi Arabia. Both are our friends and we are neutral in any controversy between them. We encourage their close cooperation. The Shah wants good relations with Saudi Arabia, but there are conflicting claims and sensitivities. With respect to Bahrain, the Shah has no intention of using force, but Iran has a national-minded government and he cannot abandon national claims lightly. In such problems the USG tries to stay out, be neutral and help the cause of peace from the side lines. The USG has no plan for the Gulf, but it does not intend to let the Russians take over. Mr. Rostow went on to say that we are now in a peculiar situation vis-à-vis Iran, with the Shah unhappy and suspicious that the USG has favored Saudi Arabia over Iran in the Median Line issue./3/ The arms issue is also involved with special reference to Iran's responsibilities in the Gulf after the British departure. /3/Reference is to an ongoing dispute over division of the waters in the Persian Gulf and the search to determine a "fair" median line. Because Gulf waters are so shallow, there is no differentiation between a Continental Shelf and a seabed, leading to ownership problems over the oil resources of the seabed. The issue was further complicated by the question of sovereignty over the large number of islands in Gulf. After thorough consideration of why the Shah feels as strongly as he does on the oil issue with the Consortium, Mr. Rostow remarked that while the government did not wish to take responsibility or to become involved in a commercial negotiation, we did have a national interest in successful and harmonious resolution of the oil negotiations, to the mutual satisfaction of the parties. We had important long term political interests in good relations both with Iran and with Saudi Arabia. Mr. Rostow wondered whether what the Shah really wants is the same level of production of oil as Saudi Arabia has. The Shah's present unsettled mood is probably due to many other factors too. Russia is one, but the Shah knows the Russians are his enemies and wants his arms from the US. Mr. Rostow commented that if current oil negotiations work out, he was hopeful that agreement on the Median Line could also be reached. He had raised the thought of arbitration, but there are many problems, including conflicting claims for various islands. Mr. Cash said that the Shah's demands are so far from reality that they could not be met. Mr. Rostow said that the Shah is also concerned with the internal rules of the Consortium. He believes that some companies are short of oil and would be very glad to take more if the internal rules of the Consortium permitted./4/ /4/See Document 217. Mr. Parkhurst said the French certainly want more, but they have only made a small investment and he questioned whether it was fair to other members of the Consortium to allow them to take more. Mr. Piercy pointed out that the demand for Middle East oil is limited and more offtake by some companies would reduce sales by others. In response to Mr. Rostow's reiteration of the possibility that the psychological and political key to the Shah's problem is equality with Saudi Arabia in production and growth, Mr. Parkhurst said he had never heard of this suggestion before, but, in any case, the companies involved had no cartel and could not arrange matters that way. In the first place, there was no way to divide up the "pie" and secondly, although the companies can explain how (as a result of the Arab-Israeli war and aftermath) Iran's offtake grew 22% in 1967 as compared to about 8% in Saudi Arabia, they will be hard-pressed this year by the Saudis who will be anxious to catch up. Mr. Cash agreed that whatever the Shah gets, Saudi Arabia will also demand. If the Shah gets cost oil, then Saudi Arabia--and Kuwait--will also demand it. Mr. Piercy said there had been some confusion in the GOI demands on the Consortium. The GOI demand for $5.9 million over five years apparently covered all GOI oil revenue. However, income from the various joint ventures in the Gulf would mean only about $14 million a year, from a production of 150,000 bpd. The "gap" in 1968 is about 250,000 bpd and this will be worse in future years. Mr. Rostow voiced his hope that the matter could be resolved. Mr. Cash said that in his opinion the Consortium was heading for a head-on collision with the Shah. Mr. Parkhurst said that the only hope for working out a solution was in confidential discussions and now the Prime Minister has brought charges in the open. Mr. Folmar commented that the Consortium had done the best it could. Mr. Rostow said that all he could add, from the point of view of the United States, is that Iran is the strongest country in the Gulf, is moving ahead, and is interested in maintaining its momentum. The USG must rely on Iran, not in any way at the expense of Saudi Arabia, but a cooperative relation between Iran and Saudi Arabia was necessarily the keystone of United States plans and hopes for the area. Mr. Parkhurst commented that although Iran may be number one, Saudi Arabia and Kuwait were the next two in importance. Mr. Rostow agreed and said that only if all worked together could serious problems in the South of the Gulf be forestalled. Several representatives pointed out foreseeable problems for Middle East oil in the coming year. Mr. Piercy said 1968 was considered a low growth rate year--or "Crunch Year"--with increasing competition with Libya and continued closure of the Suez Canal likely. Mr. Parkhurst mentioned that the sulphur problem was becoming more severe, with more emphasis on quality. African producers had a location advantage, even if the canal were open, and he could see low Persian Gulf growth down the road. Mr. Rostow then mentioned the stir caused in Germany when it appeared that some foreign buyer, through a Swiss bank, was trying to take over the (German) Gelsenberg Oil Company. Although the offering buyer had not been identified, there had been deep concern that Americans were trying to take over the company, and the Germans showed marked political sensitivity on the subject. This sensitivity to American ownership, even in Germany, pointed out a field in which American companies operating abroad should carefully consider their policy in the long run. Companies should consider bringing in foreign partners and spreading the venture over a wider range of people. The troubles we had had in Mexico and Canada were not unique. It would be prudent to establish as broad a base as possible for American investment abroad. [Continue with the next documents]
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