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

886D.2553/8–2054: Telegram

No. 363
The Secretary of State to the Embassy in the United Kingdom¹

confidential

Washington, August 20, 1954—8:23 p.m.

1029. Following discussions with Swensrud (reported Deptel 809)² and Whiteford of Gulf who called at Dept August 18 we have been giving further thought Kuwait problem. Essential elements seem to be:

1. Gulf can use only small proportion Kuwait crude for its own markets and considers it must therefore be in position adjust its sale prices to competitive conditions in order obtain and keep crude outlets. At present it has long term contract with Shell providing outlet for 275,000 barrels per day (about two-thirds its total share Kuwait production) and other lesser contracts with American and foreign companies. If forced raise prices on these contracts company claims it would, in view over supply oil and high sulphur content Kuwait crude, lose them and be unable find other customers. On other hand it contends that to maintain contracts at present price levels while paying tax to Kuwait on posted price basis would not only cause serious financial loss but would be radical departure from 50–50 principle and expose it and all other companies to further similar demands. Precedent would also be set for other concessionary countries such as Venezuela where realization basis still exists.

2. Loss of Gulf’s outlets for Kuwait crude would of course seriously reduce revenues to Shaikh. Company fears he would then be tempted terminate concession in hope finding another company which would promise greater production and greater revenues.

3. In light discussions here and in view adjustments being made other Persian Gulf concessions such as Iran and Saudi Arabia Gulf appears realize it cannot maintain rigid position that 1951 concession agreement cannot be changed in any respect. At same time it anxious have opportunity make best case possible with Shaikh and demonstrate to him his own financial interests would be harmed by forcing Gulf into position where it could not sell present large volume crude. Company considers friendly intervention by British Foreign Office essential to secure this opportunity. Points out Gulf not able contact Shaikh direct in view agreement with British.

4. AIOC appears to be in quite different commercial position. We understand almost all its Kuwait production goes to its own affiliates and is distributed in its own established markets. It does not have problem selling crude in competitive market and is not restricted by existing long term contracts. According Whiteford, Sir William Fraser has said AIOC is prepared pay Kuwait tax on posted price basis with idea reducing posted price somewhat after present crisis over. Because of tax adjustments it would lose relatively little money. AIOC is not therefore prepared urge Foreign Office take stand in present controversy. AIOC anticipates later difficulties with Shaikh when Iranian oil begins flow again in quantity and necessitates substantial cutback its production in Kuwait. (Whiteford estimates this cutback at 200,000 barrels per day (or more).) AIOC assertedly wants save its ammunition for that time and may be trying shift onus from itself to Gulf for any later unpleasantness.

5. Shell position this picture somewhat unclear but obviously important. It benefits along with Gulf from existing contract for Kuwait crude. In fact we think some aspects contract make it almost partnership arrangement. It seems reasonable suppose AIOC would not be unhappy to see both Gulf and Shell deprived this source cheap crude.

6. An arrangement such as suggested by Swensrud whereby Shell would pay Kuwait tax on profits earned through its purchase Kuwait crude might satisfy Shaikh’s desire for increased revenue and cost Shell little if it could obtain tax credit in UK while at same time relieving Gulf of demand that it pay taxes on income not earned.

7. Gulf fears Shaikh will soon issue some form ultimatum which company will be forced reject and that this will freeze Shaikh’s position because of prestige factors involved. Company believes Foreign Office intervention could prevent this but we understand Gulf representatives London unwilling approach Foreign Office without some assurance US Govt support. They report that in light AIOC position Foreign Office is undisposed act unless there is evidence US Govt considers it desirable. Company also asserts that even in absence ultimatum it unable have satisfactory discussions with Shaikh unless British pave way.

8. Department inclined think that in view unusual situation Kuwait where British in effect control access to Shaikh and because of complicated AIOC-Gulf-Shell relationships with Gulf caught in middle there may be grounds for informal US Govt intervention with British to make it possible for Gulf attempt work out solution. Embassy accordingly requested and authorized to:

a) Submit any comments or additional information it may have re foregoing;

b) Discuss whole picture with Gulf representatives informing them substance this wire;

c) Discuss as much of foregoing as it thinks desirable with appropriate British authorities;

d) Unless it sees objection, request British to advise Shaikh against precipitate action against companies and in due course take such steps as may be necessary to enable Gulf to enter into discussions with responsible Kuwait authorities for purpose of seeking equitable solution safeguarding interest of all parties. Embassy should make clear that for present we not entering into substance but only wishing ensure that Gulf has time and fair opportunity work out its problem.

Dulles

1. Drafted by Jernegan and cleared in draft by NE, S, PED, and OMP.
2. Document 359.