281. Memorandum of Conversation0
SUBJECT
- Italian Imports of Soviet Crude
PARTICIPANTS
- Mr. W. A. Wright, Executive Vice President, Standard Oil Company of New Jersey
- Mr. William Carlisle, Government Relations Counsel, Standard Oil Company of New Jersey
- Mr. Wolf Greeven, Regional Coordinator for Europe, Standard Oil Company of New Jersey
- Mr. Merchant, Under Secretary of State for Political Affairs
- Mr. Davis—EUR
- Mr. Fluker—U/CEA
- Mr. Long—M
- Mr. Phelan—WE
After the usual amenities, Mr. Carlisle opened the conversation by explaining that the Standard Oil Company of New Jersey had been worried for some time over the various implications of the developing Soviet “oil offensive.” The company felt that Soviet operations in this field presented the company with a number of problems, most of which fell into two categories. The first were those which related to commercial competition which the company could and would deal with in the normal course of business operations. There were, however, other problems which appeared to the company to be of a purely political nature. The Board of Directors had asked the management to call on Mr. Merchant and to acquaint the Department with Jersey’s views of the political aspect of the Soviet oil offensive and particularly of Italy’s involvement therein through the operations of the State-owned petroleum company, Ente Nazionale Idrocarburi (ENI). Mr. Carlisle then asked Mr. Greeven if he would outline the Italian situation as seen by Jersey Standard.
Mr. Greeven said that Italy’s imports of Russian crude have increased from 24,000 b/d in 1958, representing 7.8% of total consumption, to 70,000 b/d in 1960, representing 16.5% of total consumption. AGIP’s1 participation in these purchases has grown even more rapidly. In 1958, AGIP purchased 5,000 b/d of Russian crude and products, representing [Page 621] 8.3% of their sales in Italy, and in 1960 purchased 46,000 b/d, representing 54% of their Italian sales. As of this year, therefore, the Italian state-owned oil company relies on Russia for more than half of its supplies.
The ties between AGIP, Russia and other Iron Curtain countries and Red China are steadily becoming closer. Under the leadership of Enrico Mattei, AGIP and some of its sister state-owned companies are exporting sizable quantities of synthetic rubber to the Iron Curtain and Red China; are providing engineering service for the construction of the new crude pipeline system behind the Iron Curtain aimed at Western Europe; are instrumental in negotiating sizable supplies of pipe; and, lastly, are beginning to discuss tanker construction in Italy for Russia. These closer ties bring with them a continual exchange of visits of members of the AGIP staff to Russia and Red China, as well as return visits of Russian and Chinese delegations to AGIP, ENI, the San Donato research center and other ENI entities.
Enrico Mattei has just negotiated a five-year deal with Russia involving $100 million of bilateral trade. AGIP will deliver, or cause to be delivered, to the Iron Curtain, over a five year period, the following:
| 50,000 tons of synthetic rubber | $27,000,000 |
| 240,000 tons of pipe (40" diameter, good for 1,100 miles) | 50,000,000 |
| Pumps and other pipeline equipment | 19,000,000 |
| Diesel engines | 4,000,000 |
| Total: | $100,000,000 |
In exchange, Russia will deliver to AGIP:
| 11,000,000 tons of crude | $80,000,000 |
| 1,500,000 tons of low-sulphur fuel oil | 21,000,000 |
| Total: | $101,000,000 |
The crude price of $1. fob Black Sea Spot, negotiated by AGIP represents an all-time low. Worked back to the Persian Gulf at spot freight rates, the Russian quotation would correspond to a price per bbl. for Kuwait of $0.69 per bbl., compared to today’s posted price for Kuwait of $1.59.
The contract AGIP has negotiated places them in the position of realizing a profit at price levels which are ruinous for the importers of Mid-East crude. AGIP is using this situation to the fullest, with the objective of forcing American, British, French, Belgian and Italian independent oil companies into a strong loss position in Italy, and of further [Page 622] complicating the relationship of these companies with Middle East governments. If the Italian Government continues to favor product price levels geared to the cost of Russian crude with all the long term dangers this implies, the companies relying on Middle East supplies will either be forced out of business or to further reduce price postings in the Middle East with all the consequences this entails.
An Italian trade mission will leave for Russia in mid-November in order to renew the Italo-Russian trade agreement which expires at the end of this year. This mission is to negotiate new terms with Russia, and it is to be expected that this mission will not only include the quantities negotiated unilaterally with AGIP, equivalent to 50,000 b/d, but will also take care of the independent Italian refiners today running 13,000 b/d of Russian crude and who would be forced out of business at today’s prices if deprived of it, and is more than likely to accede to Russian pressure for accepting another 40,000 b/d of Russian fuel oil per year.
Adding together the deal AGIP has concluded with Russia, the requirements of independent Italian refiners and the Russian offer of increased fuel oil deliveries, Italy would import over a five-year period some 100,000 b/d of Russian crude and products, representing an increase for 1961 of 38% over 1960 and 21% of the country’s total requirements.
The ambition of Enrico Mattei to use Russia as a means of harassing and forcing out foreign oil interests in Italy; of developing exports of Italian services and goods to Russia; and of using Russian low-cost supplies as a spring-board for entering Western European markets, coupled with the desire of Italy to increase her foreign commerce, threaten to bring Italy into a dangerous position of subservience to the Iron Curtain block.
We know that the Russians have offered AGIP a further 40 million tons of crude for delivery over an unspecified period and for sale world wide without any restrictions as to destination. So far, AGIP has not accepted this offer. It virtually implies the appointment of AGIP as a world-wide sales agent for Russia. This offer ties in with recent statements of Enrico Mattei listing the advantages of Russian supplies:
- (1)
- He has highlighted the low cost of Russian supplies, brought about largely by the fact that Russia does not collect a royalty as do the Middle East Governments.
- (2)
- The advantages of the use of pipelines, obviously referring to the four-pronged Russian pipeline system aiming at the Baltic, East Germany, Czechoslovakia and Hungary, which will afford Russia a cheap gateway to continued European markets.
It is conceivable that the planning of Mattei involves the lifting of sizable quantities of Russian crude ex the Russian pipeline system for penetrating the contiguous Western European markets. We understand [Page 623] that this latter deal is linked to the construction in Italian yards of ten 35,000 ton tankers and the delivery of increased quantities of Italian motor vehicles, tractors, tubular goods, et cetera. Consequently, added to AGIP’s five-year contract with Russia the probability of a five-year trade agreement which will ratify the AGIP contract and sizably increase the over-all liftings of Russian crude and products for a five-year period, we stand in danger of a still much greater deal in line with which Italy would become a prime instrument for Russia for the penetration of European markets with Russian oil.
Mr. Greeven continued by observing that even though the current price structure of petroleum products on the Italian domestic market are essentially “political” prices, this problem is a commercial one which Jersey can deal with for the time being. On the other hand, the Soviet offer of 40 million tons of crude with freedom to sell anywhere was a most sinister development. Moreover, Mattei is also reported as looking forward toward pipeline transportation of Soviet crude with the apparent intent of completing the destruction of the existing price structure in the international oil market.
According to Mr. Greeven, the first step in a solution to the problem of Soviet oil would be to find some method of controlling Mr. Mattei. He said that he was informed that both the French and Netherlands Governments had formally expressed their alarm over ENI’s relations with the Soviets to the Italian Government. Personally, he was not sanguine that the Italian Government, without strong external pressures, either could or would make an effective attempt to “control” Mattel’s activities. He observed that, aside from Mattel’s impressive political strength in Italy, most Italians would be glad to get cheaper petroleum products.
Mr. Merchant asked if other countries were taking Soviet crude. Mr. Greeven replied that most Western European countries were taking some Soviet crude, but that Italy was far and away the largest importer. In response to a question by Mr. Davis regarding the situation in Scandinavia, Mr. Greeven replied that Denmark and Norway were keeping Soviet crude imports under control. However, since the Swedes were always looking for bargains, Soviet crude was pouring into that country. Finland, or course, was a special case; the Soviets being the principal supplier. Mr. Carlisle observed that the Soviets now had about 40% of the total Scandinavian market.
Mr. Fluker asked whether the Jersey representatives had heard rumors of Mattel’s interest in chemical industries in Eastern Europe. Mr. Greeven replied that he had not heard of any specific interest. He did know, however, that there were a large number of “international” students working at ENI’s laboratories (petrochemical) at San Donato Milanese [Page 624] and that delegations of Soviet and other Bloc technicians visited ENI installations from time to time.
Mr. Carlisle expressed his hope that the Department would see fit to convey to the Italian Government the view that the Italians had already gone as far as they should with the Soviets. He also hoped that the Department could say something in this connection which would be convincing to the Italians, adding that anything Jersey representatives might say to Italian officials, for obvious reasons, would be suspect and, therefore, without effect.
Mr. Merchant told the Jersey representatives that we were most appreciative of the information they had given us. We were, of course, disturbed over the Soviet oil drive and we would need the benefit of the experience and ideas of our international oil companies in deciding what actions we, as a government, might properly take. As we continued with our examination of the problem we would no doubt be in touch with the Jersey representatives at a later date.