880.2553/8–2653
No. 307
Memorandum of Conversation, by David Robertson of the Office of
Near Eastern Affairs
Subject:
- Consultation with Aramco Preliminary to U.S.–U.K. Middle East Talks.
Participants:
- NEA—Mr. Byroade
- Mr. Terry Duce, Vice President of Aramco
- Mr. Alec Chapman, Washington Representative of Aramco
- NE—Mr. Hart
- NE—Mr. Robertson
- L/E—Mr. Metzger
- PED—Mr. Eakens
Mr. Duce called at Mr. Byroade’s office at the Department’s request to discuss Middle East oil.
In reply to a question by Mr. Byroade, Mr. Duce described his impression of the Iranian situation in the following terms: If as a consequence of the Shah’s return to power Anglo-Iranian recovers her property in Iran, AIOC is not likely to shut back its production in Kuwait and Aramco will, therefore, have a problem in Saudi Arabia concerning the level of oil production. However, from what Prime Minister Zehadi has said, it does not appear likely that Iran will make a deal with the British. Mr. Byroade observed that if we are unable to work out a solution for the Iranian situation this time, there may be no next time. In reply to a question by Mr. Duce, he stated that it was a little premature to consult with industry on the situation as we are awaiting advice from our Ambassador at Tehran. He added that there seemed to be two alternatives, one of moving promptly to find a solution while the Shah is enjoying a wave of popularity, or, alternatively, awaiting developments when things were a little more settled. If we move prematurely, it might embarrass the new Government and jeopardize an opportunity of stabilizing their position.
[Page 710]Turning to the general picture in the Middle East, Mr. Duce stated that the individual problems in the area should be viewed in the general context of the enormity of the resources of the area. Within two or three generations it may be found that this area contains 200,000,000,000 barrels of oil and as a consequence constitute a major source of energy for the future. Its proven resources were already beyond 75,000,000,000 barrels.
Mr. Byroade then mentioned that the British Government had recently made known its urgent desire to have talks with us concerning Middle East oil. They desired to explore the possibilities of coordinating their policies and actions with ours. The urgency underlying their request was the Aramco negotiations with the Saudi Arabian Government. Mr. Duce was informed in general of the points made by the British in their recent note.
Mr. Duce observed that the problem for Aramco was one of price under the 50–50 contract. At the time of negotiating the original contract in 1950 he had informed his people that they would have trouble concerning the special arrangements for a discount as regards the parent companies. However, the parent companies had persisted that this was justified by the extraordinarily large investment entailed in developing the facilities. At that time he felt that it was inherent in the situation that inevitably his company would have to adopt a posted price arrangement for all purchases. Now the expansion program has been carried out and the company must face the problem of price adjustment. Mr. Davies has been authorized to do just this in the forthcoming negotiations with the Saudi Arabian Government scheduled to begin on September 5. It is hoped that in the course of these negotiations the border prices previously offered by Aramco would be eliminated. However, he indicated that agreement on a posted price arrangement will not resolve all the problems.
In addition, there are the pipeline problems, particularly in Lebanon and Syria. The parent companies are studying this problem at the present time in New York. It is hoped that a plan may be worked out whereby the pipeline operation (Tapline) will be completely separated from Aramco with an established tariff for the line and payment under transit agreements made on the basis of such an independent operation. It is also possible that some of the pipeline stock may be sold locally and tariffs established therefor taking into account that it is a carrier competing against other carriers such as tankers. This kind of arrangement would be easy to explain, whereas under the existing arrangements it is difficult to explain anything.
In reply to a question, Mr. Duce stated that Mr. Davies had talked with General Manager Gibson of IPC and Mr. Loudon of [Page 711] Shell in London. He was expecting a letter from Davies detailing these conversations. A cable from Davies stated, “Gibson fully informed our approach.” Presumably Gibson has informed the Foreign Office of these talks. According to the Davies cable, Gibson was content with the plan whereunder sales would be based on posted prices. Gass and Loudon of Shell, however, had some reservations on the posted price proposal, thus indicating a division of opinion among the British participants in IPC.
Mr. Duce was of the opinion that IPC was disturbed primarily by the retroactive readjustment which Aramco will have to make with SAG. He recalled that Aramco had been asked by SAG to make payments retroactive to 1950. Davies has been authorized to make retroactive payments for 1952 and 1953 and the parent companies would probably yield on 1951 if this became a sticking point in the negotiations. He estimated that the sum involved would be in the neighborhood of $100,000,000.
Mr. Byroade stated that we desired to avoid a position in the forthcoming talks of doing little or nothing to meet the British request for consultations at a time when Aramco would be moving ahead rapidly in its negotiations which in turn would create certain problems for the IPC and other British companies. Mr. Duce replied that he appreciated our position and he felt that Aramco and the U.S. Government could keep each other informed in addition to which Aramco had, as mentioned, already conveyed certain information to IPC. He felt, however, that a constructive approach to these problems would best be achieved by working out some formal arrangement in the Middle East whereunder there would be a means for consulting with the Arab Governments concerned before arriving at any formal agreement with the United Kingdom. In a sense, the individual countries were more competitive with one another as regards the level of oil produced than the companies concerned. If Aramco were to proceed with the type of cooperation with British companies contemplated by the U.K. Government, it would be accused of “ganging up” against the Saudi Arabian Government. It seems imperative that some arrangement be worked out whereby the Arabs could be brought into the picture. It seems preferable initially that coordination take place at the Government level. The Governments could then confer with the companies individually or severally. However, any publicity should be avoided at all costs.
In reply to a question, Mr. Duce opined that the Iraqi Government talks at Riyadh were the reason for the desire of the Foreign Office to hold discussions with the United States Government at this time rather than any needling on the part of IPC. However, it may be a combination of both. Mr. Duce indicated that he had [Page 712] talked to Counselor Beeley only in general terms concerning Aramco plans as the latter had been primarily interested in the Buraimi situation. He had informed Beeley that Aramco would have to respect the wishes of the Saudi Arabian Government insofar as it was possible.
In reply to a question, Mr. Duce saw no objection to the Department holding the proposed talks with the United Kingdom nor to the Department informing the British representative in general terms of Aramco plans. He then pointed out that what happened in the Middle East in respect to the oil situation could have a bearing on West Texas crude price and, therefore, the independent producers of this country were concerned with developments in this area. At this point, he referred to the main problem down the road internationally for the American companies concerned with foreign operations. They may have to give up some freedom for safety or take increasing risks. In this respect, the scalpel should be utilized instead of the axe. Formal Government arrangements involving some control of industry may be necessary.
The essence of the current negotiations, according to Mr. Duce, was that Aramco work out its problems with the Saudi Arabian Government. It would be unfortunate if others dealt with SAG behind Aramco’s back utilizing information imparted by Aramco.
Mr. Duce then turned to pipeline arrangements. Ambassador Malik had initiated talks here which were followed by discussions undertaken by Lebanese officials at Beirut. Aramco officials in Beirut then approached President Chamoun and were informed that Malik had no authority to negotiate but had been requested to obtain information. When the Lebanese officials in Beirut expressed the desire to renegotiate the pipeline agreement, Aramco officials there said they had no authority. They were instructed by the parent companies to wait until the new Government came into power. Meanwhile, IPC had undertaken negotiations. The parent companies of Aramco in New York are studying the complexities of the pipeline situation. Mr. Duce stated that he wished to ascertain the progress being made in New York and would inform us as soon as this was forthcoming. There was the problem of establishing a tariff on the entire operation of the line and then of dividing it somehow among the states. The tariff would have to be competitive in relation to other barriers. The division of the total tariff among states could either be on the basis of giving the same amount or making payments according to mileage. The present arrangements provide for cash payments on the basis of volume transitted. Aramco had agreed to border prices with SAG after IPC had agreed to a similar arrangement in Iraq. He reiterated a hope of eliminating border prices in forthcoming negotiations.
[Page 713]Mr. Duce concluded his remarks by stating that some formal arrangement must be worked out whereby the United States, United Kingdom, France and the producing Arab states [would?] consult with representatives of industry participating in an observer or advisory status. Countries transitted might also be included but he had some reservations about including consumer countries because of the resulting size of such [a group?] This group need only have an advisory role as advice on the part of the participating Governments on agreed positions would have a very large influence on the decisions of the companies concerned.