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

880.2553/8–2753

No. 308
United States Record of the First Session of the United States–United Kingdom Talks on Middle East Oil¹

secret

Washington, August 27, 1953.

Subject:

• First Session—U.S./U.K. Talks on Middle East Oil

Participants:

• British Embassy Team—
• Mr. Harold Beeley, Counselor
• Mr. R.W. Bailey, Political Officer, Near East
• Mr. J.A. Beckett, Petroleum Attaché
• U.S. Team—
• NE—Mr. Hart
• NE—Mr. Robertson
• OMP—Mr. Willis Armstrong
• PED—Mr. Robert Eakens
• L/E—Mr. Stanley Metzger

Mr. Hart opened the meeting by expressing the regrets of Mr. Byroade that he was unable to attend the opening session because of pressure of work, and by indicating that the Department welcomed the opportunity of holding these talks. He then invited the British to set forth their views.

Mr. Beeley expressed his appreciation for the opportunity of holding these talks, referred to the memorandum which the British Minister had left with the Under Secretary² and described the British views in the following terms: The security of Middle East oil is becoming increasingly important to Western Europe, including the United Kingdom. While at the present time the Middle East is providing Europe with about seventy per cent of its total requirements, it is contemplated in the future that this dependency would increase to some ninety per cent. Accordingly, the strategy of the Free World in the event of hostilities would be dependent on some resolution of the problems in the area. These problems are, therefore, highly strategic and political, not just economic in nature and scope. In addition, Middle East oil is of specific importance to the U.K. because it is a large factor in the U.K. balance of payments. For this reason the U.K. wished to exchange views on these problems for the purpose of insuring continued flow of Middle East oil.

At a time when Middle East oil is becoming increasingly important, as noted, the position of the companies concerned is being subjected to increasing threats of rising nationalism such as had been evidenced in the case of the Anglo-Iranian Oil Company in Iran. AIOC had developed a very substantial production reaching 30,000,000 tons in 1950 going to zero in consequence of the nationalization. While this gap had been rapidly filled by the increase of production in other countries, particularly Kuwait and Iraq, there is no assurance that a similar gap could again be filled if this type of thing happened in one of the other major producing countries. The self-consciousness inherent in increasing nationalism in Iraq and Saudi Arabia had resulted in increasing pressures respectively on IPC and Aramco. These pressures enjoyed a measure of success due primarily to a lack of coordination between the American and British Governments and companies. While it is not disputed that the Aramco 50–50 agreement negotiated in 1950 was a wise departure, IPC was forced to come in line in 1951 as a result of pressures generated from these negotiations.³ In turn, IPC’s concessions to Iraq’s demands went a little farther than the Aramco agreement and resulted in new Saudi pressures on Aramco. As a consequence of new Aramco-Saudi negotiations about to begin, IPC is likely to be further pressed. This process could continue until it arrived at a point where the companies might be forced out of business. It must, therefore, be watched and somehow brought under control.

There are also the transit problems in Syria and Lebanon. These countries were seeking additional revenues. Tapline is in a stronger position since its agreements have been ratified. Lebanon has signed but not ratified its agreement with IPC, and Syria may have not as yet signed its agreement. IPC and Aramco should be able to agree on a demonstrably reasonable principle for transit payments, thereby bettering their respective positions to resist exaggerated demands currently being made. This principle should be a fair one, which can justify itself to the people of the transit countries.

There is also the problem of the passage of oil through the Suez Canal. On a tonnage basis in 1953, seventy-five percent of the north bound traffic through the Canal was oil.

There is also the problem of a possible return of Persian oil to world markets as a result of measures undertaken by the new Government in Iran. It may be necessary to cut production in other states in the Middle East to make room for Persian oil. If this happens, it would be bound to give rise to recriminations among the Arab governments concerned. The U.S. and U.K. should, therefore, work out some equitable principle upon which any necessary cutbacks would be made.

Mr. Beeley emphasized that the U.K. considered these talks were not being held for the purpose of finding specific solutions for the problems at hand. The U.K. believes that the objective should be to reach agreement on the principles involved and the means of approaching the problems. It was hoped that the two governments might agree, as the result of these talks, to:

1. Facilitate consultations among the British and American companies concerned regarding concession and transit problems at hand;

2. Consult periodically (at least once every six months) for the purpose of reviewing the situation in the Middle East;

3. Undertake diplomatic representations as necessary to the countries concerned, in order to support previously agreed positions; and,

4. Join with the British and American companies in an effort to encourage better understanding among the Arabs of Western enterprise and a more constructive use of the large oil revenues accruing to Near Eastern Governments. Such revenues could be the basis of a rapid increase in the standards of living in the oil producing states. Somehow the Arab Governments should be made to feel a real sense of partnership with us.

Mr. Hart responded that we generally agreed with the oil picture as presented. He suggested that the discussions first focus their attention on the question: “How does the U.K. envisage that the Governments and the companies would get together?” He alluded to the fact that the principle of 50–50 had been accepted by Aramco in 1950 and by IPC in 1951 and that the question of price had now arisen under these agreements. What would be the basis for inter-government or inter-company consultations on price, for example?

Mr. Beeley accepted this suggestion and turned to certain problems concerning prices for the sale of oil. He stated that IPC sales and accounting to the Government of Iraq were based on posted prices. A ten per cent discount was allowed to parent companies on the basis of long term contracts. If in the forthcoming negotiations Aramco eliminates the discount practice in respect to its parent companies, IPC would have to do so and would be well advised to take the initiative before being called on by the Iraqi Government. However, if Aramco simply reduced its discount, the question of making retroactive payments might be avoided. The Saudi Arabian and Iraqi Governments were exchanging views and it seemed likely that Iraq would demand concessions similar to any made to Saudi Arabia. The effect of Aramco negotiations on Kuwait was not known since Kuwait revenues were based on profits from actual sales with no particular tie to posted prices. At this point Mr. Beckett observed that there was a slightly different situation as between the companies in that KOC sold primarily to non-parent concerns, while IPC and Aramco sold primarily to their parent organizations. He added that while there had been agreement, as indicated, on the 50–50 principle, these discussions could usefully explore what was meant by the 50–50 principle. While not greatly concerned about going to the 50–50 principle on a current basis, IPC is opposed to retroactive adjustments.

Mr. Armstrong then pointed to the fact that there were certain ties among the companies in that two American companies, Socony and Jersey, participated both in Aramco and IPC and a single British Company, AIOC, participated in both KOC and IPC. Mr. Robertson suggested that developments on Middle East problems may be related to developments in other areas. The 50–50 principle had, for instance, earlier been adopted both in the Far East and in Venezuela. The specific problems of the Near East might, therefore, be considered in light of similar developments in other areas.

Mr. Beeley stated that once production began to fall, there seemed little question that the producing countries would endeavor to maintain their revenues at peak levels, driving, if necessary, beyond the 50–50 principle.

Mr. Eakens then mentioned some of the differences in the problems of the respective producing countries. Revenues derived from the 50–50 principle would not be identical in that the grades of oil produced were of differing quality, selling at varying prices. The costs of production differed. Kuwait oil, for instance, was at a transportation disadvantage in that it had to be shipped farther at greater cost to points of consumption. IPC had conceded the principle of a guaranteed minimum which was not the case of the other companies. Accounting of revenues to the respective countries differed in that Kuwait revenues were based on actual sales, while Saudi Arabian and Iraqi were based on prices having relationship to posted prices. Company payments to the Government in Venezuela, which are the pattern for existing Saudi Arabia and Iraq concession agreements are based on posted prices. The establishment of such a pattern should be helpful in that it enables the price question to be self-adjusting.

Mr. Beeley then mentioned that he wished to assure the group that the U.K. was not primarily concerned in protecting the profit position of the British companies. The U.K. Government was more interested in improving its relations with and stabilizing conditions in the countries concerned in order to ensure the smoother flow of oil. The IPC had greatly improved its relations with the Government of Iraq as a result of the 1951 agreement. Its concern now was about the future and the repercussions of the Aramco negotiations. He reiterated that if Aramco eliminated the parent company discount and made retroactive payments, similar demands would be made on IPC. He added that IPC had during his residence in Baghdad been the subject of continuing pressure to increase its production commensurate with that in Kuwait. At that time there was some question about the single company operation of the very large concession held by IPC.

He then observed that he felt his side had not answered the question raised by Mr. Hart, “How does the U.K. envisage that the governments and companies concerned would get together?” He suggested that Mr. Beckett address a few remarks in reply to this question. Mr. Beckett stated that there seemed to be no consultations among the operating companies through their parent holding companies. He admitted that competitive forces and the anti-trust laws might be limiting factors. He mentioned ancillary activities by companies additional to the obligations under the 50–50 principle. He observed that IPC had performed its obligations according to contract but had not been pressed as Aramco had been in this respect. Mr. Armstrong questioned whether our bargaining is improved by the U.S. and U.K. Governments and oil companies getting together. Mr. Hart observed that Aramco’s position had in the past been fairly strong with the Saudi Arabian Government because it had stood on its own feet and maintained its position separate and apart from the U.S. Government. Certain advantages had flowed from this separation of identity, particularly during the early days of the development of the Israel State.

Mr. Beeley interjected that he desired to focus interest on the need for consultations between the companies concerned, particularly Aramco and IPC concerning specific problems. We should discuss the manner of Government consultation and how to bring about better understanding with the Arab States in later sessions. This observation gave Mr. Armstrong the opportunity to suggest that the U.S. Government check the status of transit and concession arrangements and American company views on closer consultation with British companies. We could then discuss the matter further at the next session. Mr. Beeley responded that this suggestion was excellent and meanwhile his people could look into similar matters with AIOC and IPC.

Mr. Metzger stated that, with respect to American companies exchanging information with British companies, the American companies needed to take into account the anti-trust laws of the United States in connection with the degree to which they could lawfully exchange information. In addition, of course, they had the responsibility for determining the extent to which they deemed it wise to exchange information, within the area which they considered to be permitted by the anti-trust laws. He added that the antitrust laws were a matter of serious concern generally in relation to the exchange of information problem. The U.K. representatives indicated that they understood this.

As regards the pipeline operations, Mr. Eakens observed that there were certain differences between Tapline and IPC. Tapline moved oil from one body of water to another and was, therefore, in direct competition with tankers. In contrast, IPC pipelines were the only means of moving oil which would otherwise have little value at the point of production. It may be difficult, therefore, to apply a common denominator of principles to transit arrangements. Mr. Beeley added that there was also a difference in the politics of the countries concerned. While the respective pipelines transitted Syria and Lebanon in common, IPC was accountable in addition to Iraq and Tapline to Saudi Arabia.

Mr. Hart then referred to the fact that the Arab League in its Petroleum Committee had recently given consideration to certain aspects of Middle East oil. He mentioned particularly the possibility of the “have nots” badgering the “haves” for some equitable sharing of the enormous revenues involved. When Mr. Beeley observed that the “haves” were not likely to share with the “have nots” on any voluntary basis, it was pointed out that the countries transitted by pipelines might be in a position to bargain in this respect. It was agreed that both governments should endeavor to ascertain the extent to which oil matters had been considered by the Arab League and the nature of any decisions made. All were aware that the Arab League Petroleum Committee had adopted some very general resolution concerning the oil boycott as applied to Israel.

In summary, it was also agreed that both sides would consult with their companies in order to identify the specific problems relating to basis of prices and transit payments and that these matters would be discussed at the next meeting scheduled for Tuesday, September 31 [1] at 3:00 p.m., in the NEA Conference Room.

After the meeting Mr. Hart briefed Mr. Byroade on the highlights of the discussions. Mr. Byroade agreed that we should contact the American partners in IPC (Socony and Standard of New Jersey) for the purposes indicated above. Consultation had already taken place with Mr. Duce of Aramco on August 26, 1953.

1. Drafted by Robertson.
2. Attached to Document 306.
3. For documentation, see Foreign Relations, 1951, vol. V, pp. 268 ff.