Foreign Relations of the United States, 1952–1954, The Near and Middle East, Volume IX, Part 1

880.2553/4–1052

No. 249
Memorandum of Conversation, by David Longanecker of the Office of African Affairs

confidential

[Washington,] April 10, 1952.¹

Subject:

• Discussions between Aramco and Governments of Lebanon and Syria re revision of Tapline transit agreements.

Participants:

• NE–Mr. Kopper
• NE–Mr. Funkhouser
• PED–Mr. Eakens
• PED–Mr. McMaster
• AF–Mr. Longanecker
• Messrs. Duce, Britton, Spiegel—Arabian American Oil Company.

The Aramco officials called at the Department to report on the status of the Syrian, Lebanese and Trans-Jordan Government’s requests for revision of certain provisions of the Tapline transit agreements.

Mr. Duce stated that Tapline is satisfied with the existing arrangement under which the Syrian, Lebanese and Trans-Jordan Governments each have the option to buy, at the world market price, 200,000 tons of crude oil annually from the company. The company is agreeable to extending this arrangement to include the obligation to pay these Governments $1 per ton for all or any portion of the 200,000 tons not taken each year. As a matter of fact, the company is willing to agree to furnish at the world market price half of the crude oil—the IPC should be required to furnish the other half—within a ceiling of 500,000 tons a year, required to meet the domestic requirements of each of these three countries, and with respect to the first 200,000 tons to pay each government $1 a ton for all or any portion thereof which it does not elect to purchase. With regard to the latter, the company is of the opinion it probably will be necessary to agree to a payment of from $2 to $3 a ton. With respect to Syria, the company is tying the above proposal to the Government permitting it to purchase its local currency requirements at the free market rate, as explained in the next paragraph.

The major issue with Syria is the arrangement which the company accepted at the time the pipeline was under construction, to purchase local currency to cover local cost on the basis that 80 percent would be purchased at the official exchange rate and 20 percent at the free rate. Tapline intended that this arrangement be limited only to the time the pipeline was under construction and now wishes to purchase all of its local currency needs at the free market rate. On the 80–20 percent basis, the company is paying approximately 13 cents per Syrian pound more than on the 100 percent free market rate. This costs the company about $1,500,000 a year (13 cents times the 12 million Syrian pounds it requires annually to meet local costs). The Syrian Government, however, is insisting on retention of the 80–20 percent basis.

As has been reported, the Government of Syria is contemplating the construction of a refinery at Homs. Tapline would be agreeable to furnish the needs of this refinery from the 500,000 tons of crude oil previously mentioned and within the limitation of 50 percent of the country’s crude oil requirements, but would hope to make an exchange agreement with IPC whose pipeline goes by Homs, Tapline delivering a corresponding quantity of Arabian crude to IPC at Sidon. Syria has asked Tapline for assistance in designing and building the refinery but Tapline is agreeable only to suggesting one or more reputable American petroleum engineering firms.

The Lebanese and Syrian Governments are demanding an increase in loading fees which they have agreed to share equally. The company is agreeable to an increase in the loading fee from approximately $0.02 to $0.0329 per ton which is the rate IPC pays.

With reference to Lebanon, the government is requesting that the company now pay municipal taxes. While the company appreciates the fact that the municipalities in which it has substantial office and other space are losing tax revenue, it does not wish to agree to the payment of any taxes, as this would represent modification and lead to eventual elimination of the tax exemption clause in its present transit agreement. The company is willing to make lump sum payments in order to compensate the municipalities partially or wholly for their tax losses.

The Lebanese Government is also requesting permission to use Tapline’s port facilities, to which the company is opposed on the basis that the Government is likely to use the facilities for other commodities than oil.

The company is considering lump sum payments to cover various miscellaneous items included in the Lebanese requests, e.g., payments for road maintenance and the use of radio, postal and other facilities. The company is agreeable to the request to maintain the buoys in the harbor.

By and large, Tapline is faced with much the same requests in both Syria and Lebanon but anticipates much less difficulty in reaching a mutually satisfactory agreement with the Lebanese Government. Messrs. Noble and Swiger left yesterday to resume discussions of the unsettled issues with these two Governments.

Mr. Eakens asked whether the lump sum payments to compensate the municipalities for tax losses would be as large or larger than the actual taxes if the company would acquiesce to taxation. Mr. Duce stated that he believed that the lump sum payments would be as large. Mr. Duce repeated that maintaining the tax exemption provision of the present agreement and not the relative size of the lump sum payment is the major consideration. He mentioned the fact that tax exemption in many countries is very important because of the tendency in some countries to levy taxes which, while appearing to be generally applicable, actually apply only to one or more foreign businesses located within the countries. Mr. Eakens questioned, however, whether the tax exemption clause in foreign concession arrangements would not invite local criticism of and opposition to the concessionaire. Mr. Duce recognized this as a vulnerable point but replied that the tax exemption feature is an important inducement to foreign investment capital, especially in countries where the foreign enterprise may be singularly subject to the burden of taxation as previously mentioned. He mentioned that some governments compensate from federal funds, municipalities and states for tax revenue losses resulting from federal arrangements.

The outstanding problems between the company and Jordan are not serious at this time. Talks with the Jordan Government will take place later on.

With respect to the demands of all three countries for their own refineries, Mr. Duce pointed out that the proposed expansion of the Tripoli refinery will more than take care of their petroleum requirements.

Mr. McMaster inquired about the provision in the Tapline agreement with Jordan granting the company the right to build one or more refineries in Jordan. Mr. Duce replied that he did not think the Board of Directors of the company would seriously consider the construction of a refinery in Jordan at this time. Mr. McMaster stated that it is his understanding that the Jordan Government has specifically requested that this portion of the agreement be cancelled or that it be converted into an obligation. Mr. Britton said that he could not possibly justify on economic grounds a refinery in any of these countries. He stated there is sufficient capacity at Tripoli and adequate transportation facilities to service all three countries. He mentioned counting as many as fifty petroleum trucks at a time on the road between Damascus and Beirut enroute to Jordan and, according to his observations, most of the cargo carried was avgas.

Mr. Funkhouser inquired concerning the attitude of the government officials of Syria and Lebanon participating in the discussions with Tapline. Mr. Britton said the officials have proven to be the usual sharp traders, but have been extremely friendly. He believes that it will be possible to negotiate mutually agreeable settlements on all points. The settlements will last until these governments think they can negotiate better arrangements. He mentioned that the company had taken the Lebanese press down to Aramco’s operations in Saudi Arabia in order to show them the benefits which have resulted from the company’s operations there. The reactions of the Lebanese press to the trip were extremely favorable as were the press articles written after returning to Lebanon. This was a wise public relations job on the part of the company, and it is planned to extend the same courtesy to the Syrian press at the earliest opportunity.

Mr. Funkhouser asked whether there is anything more which the U.S. Government can do appropriately to help the company in its negotiations. Mr. Britton replied that he has been away from the Middle East too long to have any immediate opinions on this point.

With repect to the refinery situation, Mr. Duce said that the major problem facing Caltex or any other company in constructing a refinery in the area is the U.S. anti-trust laws which have been extended increasingly during recent years to the overseas operations of U.S. companies. This development is having a depressing influence on the foreign investment activities of U.S. corporations.

1. This memorandum of conversation was prepared on Apr. 16.