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

886D.2553/11–1954

No. 373
Memorandum Prepared in the Department of State¹

official use only

[Washington,] November 19, 1954.

Subject:

• Progress Report re Kuwait Oil Problem

The problem was fully discussed with the British during the Petroleum talks of mid-October and two follow-up sessions, the last on November 12.² Prior to the meetings Messrs. Whitefield and Rhodes of Gulf explained Gulf’s position fully, and on November 9, Messrs. Rhodes, Hamilton and Proctor gave representatives of the two Bureaus a two-hour briefing.

The British position as set forth by them is that: 1) no retroactive payments are called for; 2) Gulf and AIOC are obligated under the 1951 contract to discuss pricing and tax problems with the Sheikh; 3) the companies themselves should handle the problem with the Sheikh; and 4) Gulf should not be too “inflexible”. The British have continued to emphasize the last point. They are anxious that the ruler’s income in Kuwait where they have responsibility is no less favorable than that of other rulers in the area. We agreed to first three positions; the implications of the fourth were fully discussed and the British view passed on to Gulf.

Throughout the discussions the soundness of Gulf’s arrangement with the Sheikh and the fact that it incorporates true fifty-fifty profit sharing were stressed; doubt was expressed that AIOC was sharing on the same basis. We emphasized also our concern that Gulf have full opportunity to defend its position which it is confident it can do.

One possibility discussed for increasing the income of the Sheikh was, since Shell under long term contract with Gulf enjoys a large purchase discount that Shell set up in Kuwait a trading company which could be taxed 50% of its discount. The UK Treasury would of course lose the tax base; the plan would however be similar in principle to that existing in Iran, which has been accepted by the UK Government. The British group later reported a highly negative reaction on the part of the British Treasury to this proposal. They had no argument to show any difference between our proposal and the Iranian case.

In the subsequent meeting with Rhodes, Hamilton and Proctor, we learned that Kemp (the Sheikh’s representative in London) has requested AIOC for its net realization figures (Gulf’s books are open to the Sheikh). It seems likely that AIOC may refuse. Since AIOC uses Gulf realization figures in calculating its division of profit with the Ruler, it is impossible to know the true respective shares. Also, since Gulf and AIOC are required to negotiate with the Sheikh jointly through the agency of KOC, an agreed position between them in advance is essential. Obviously, if AIOC is unwilling to disclose net realization figures an atmosphere of suspicion is created and Gulf put in an untenable negotiating position.

This information was candidly purveyed to the British group and our concern expressed. They appeared to have had no information or instructions on this matter and had no comment to make. We also stressed our hope that the Sheikh would not be encouraged to expect or demand more income and that Gulf would be permitted to defend its present arrangement without prejudice. They undertook to transmit our views to London, felt certain nothing would be done to prejudice the case and that Gulf would have full opportunity to present its case. They continued to hope Gulf would be “flexible” No response from London has been reported to us.

Gulf officials are informed of and appear satisfied with the action that has been taken. They suggest that it may be necessary for Ambassador Aldrich to carry through.

We believe no further action is needed pending a reasonable period for response by the British to our discussions of last Friday.

1. This memorandum was drafted by Gay and sent by Kalijarvi and Byroade to the Under Secretary of State. Another copy was attached to a memorandum by Dorsey to Murphy, dated Dec. 8, which reported that there was no further information at that date on any developments mentioned in the Nov. 19 memorandum. (886D.2553/11–1954)
2. Memoranda of these follow-up conversations not found in Department of State files.