886D.2553/8–2054
No. 362
The Petroleum Attaché in the United
Kingdom (Moline)
to the Chief of the Petroleum Policy Staff (Eakens)
official-informal
Dear Bob: To say that I am somewhat confused by the coming and going on the Gulf–Kuwait payments problem is to put the matter mildly. I had first heard from Gulf here about the support promised by the Department for the Gulf position. Not having received any indication of a desire to give that support, I queried the Department, as you may remember, and got back an answer saying not only that we were not giving official support but seeming to acknowledge that Mr. Proctor had been led to expect it. Subsequently, I received copies of Memoranda of Conversation involving only the political officers, which even in our statement of the case seemed to indicate a willingness to support Gulf in the position it is determined to take.
[Page 848]That brings me up to your letter of August 11 and a brief report on my recent soundings here, including discussions with Proctor. The nub of the question seems to me to be whether we should try to withstand the demands of the Sheikh of Kuwait for a division of profits on a posted price basis minus a nominal sales discount, and secondly, whether there is a chance of success if we do. These are two entirely distinct matters which seem to me to involve a question of principle in the first instance, which we should try very hard to protect, and a matter of money in the second place, in which I think we are wise to avoid becoming entangled if possible. If I had more time, I could express this more clearly than I shall probably succeed in doing, but let me try to express my serious misgiving regarding the Department’s official position, which seems to me to be quite at variance with our action in support of commercial interests in many other instances which could be cited and quite contrary to our best interests in connection with oil in the Middle East.
We are faced, it is true, with a difficult situation when Aramco has apparently conceded a posted price less 2 per cent basis for dividing profits, and when the new Iranian agreement for all practical purposes has conceded the same thing at least for three years, and when Iraq may rightly demand that its agreement be brought in line with the Arabian agreement. None the less, if we do not stand up in support of the principle that 50–50 means a true partnership and that profits be divided on true realization, and furthermore, if we do not protect a system similar to that on which Gulf has been conducting its business, we will find ourselves confronted with a rigid price structure having little possibility of lower prices in the future and no room for competitive bidding for large-scale oil outlets. It will, in short, it seems to me, create a situation which will be similar to, but worse than, any cartel-like arrangements which have hitherto bothered some of our people. Moreover, it is not in Kuwait’s best interests, I am sure, to seek a profit division on other than a realized price basis properly defined.
Kuwait has reached the place it has in world production because Gulf was able to market large quantities of oil through Shell. This was done with the full knowledge of the Kuwait authorities who had the price aspects of that agreement explained to them in infinite detail only three years ago. This has been achieved notwithstanding the poorer quality of Kuwait oil. It has led to a development of facilities in Kuwait which promise even greater output if Kuwait is content to settle for large-volume, low-profit (or at least lower than other countries profit per unit) operations. If Kuwait can be developed in this fashion, Gulf is prepared, I believe, to market more aggressively than others on the long-term, lower-price [Page 849] basis and eventually to seek to establish itself in the Eastern Hemisphere through similar aggressive market tactics. Moreover, if we can retain Kuwait as this kind of a freer entity in international oil, we will, I think, forestall Venezuela taking the same route as the other Middle East countries are trying to do, and we might be able to re-capture Iran at the end of the three-year period when the matter of price will be reconsidered.
There are some essentials, obviously, if we are to argue that 50–50 means sharing the good and the bad, and if we are to take the position, as I think we should, that the oil producing countries should trust to the business judgment of the business half of the combination, i.e., the oil company, in matters requiring market decision. These essentials are that the companies must be beyond reproach. I think that means they must sell to affiliates at posted prices, as Gulf in fact does. It means that the large-scale, long-term or special contract which deviates significantly from posted prices must be known to, and the reasons for it understood by, the concessionary government. This again is in line with Gulf practice. It means in the specific case of Kuwait that AIOC must be prepared to justify its realization on an actual basis rather than on the assumed basis that it is identical with the Gulf realization. I cannot believe that oil companies which are prepared, apparently, to price everything at posted prices can be adverse to doing so on that part of the business which they do with themselves or affiliates. I should think they should wish to protect the possibility of special prices in special circumstances even though it may mean some explanation to governments and do this on the crude oil part of their business on which profits are shared with the governments rather than through the medium of rebates and discounts which fall only on their own profits. This latter case is true today and seems to me to be entirely contrary to the concept of a true partnership in Middle East crude oil production.
Proctor is not making a great deal of headway here at the present time but is a long way from abandoning the fight. The Ministry of Fuel and Power supports him in principle, I believe, but doubts whether his proposition can be sold to Kuwait given the situation in neighboring countries. The Foreign Office has not declared itself particularly except to say that Gulf makes a persuasive case and that the British Government will not use its position to force the Sheikh to do something his neighbors will not do. Proctor will return home on the 26th. He is planning, I believe, to try to talk to the Economic side of the Department, making the case with facts and figures which I have tried to hint at here. I believe most sincerely that our official position is wrong, and I hope on reconsideration you can be influential, perhaps with Roger Dixon’s [Page 850] help, in getting official support for the view that we should support profit division on an honest realization basis rather than on a fictitious basis, whether this results from underpricing or assumed realizations which are not attained.
Sincerely,
P.S. I have just heard that the British are inclined to support Gulf in not making retroactive payments. They are inclined to believe also that if Iraq gets an increase in payments as a result of renegotiation soon that Kuwait should do likewise, though not necessarily to the same extent. They also think the company might wish to consider whether there was value in making additional per unit payments now if they are going to have to cut back the volume to make way for Iranian oil. I believe they could be persuaded to support the view I am advocating in the above letter on true realizations honestly achieved and fully explained.