Foreign Relations of the United States, 1952–1954, Iran, 1951–1954, Volume X

888.2553/9–2153: Telegram

No. 369
The Secretary of State to the Embassy in Iran¹

secret
niact

Washington, September 23, 1953—7:27 p.m.

853. In partial answer urtels 718 and 719² following represents trend present thinking here.

Informal talks with British start September 24 or 25. Our preliminary information is that British are in cooperative frame of mind and expect our full partnership in oil matter.

Our position and that of British appear identical regarding repercussions on our respective oil operations elsewhere in Middle East and rest of world. Whatever solution is found for Iranian problem will soon be forced on both of us by all other countries if in any way more advantageous to them than those now in operation. Extreme nationalization is greatest problem and becomes focal point for communist agitation.

Notwithstanding suggestion in British memorandum September 11 that discussions with Iran should be predicated on February 20 proposals, we are of opinion that conditions have changed so much during last eighteen months that this approach may no longer be feasible.

Implementing any settlement along lines of February 20 proposals presupposes willingness of petroleum industry to take substantial amount of Iranian oil. At that time alternate sources of supply were not fully developed nor refinery programs worked out. Today there is ample supply of cheap oil available to Middle East companies. In fact they are faced with oversupply. Refinery commitments have also been completed and when construction now underway is finished next year there will be adequate capacity available. Alternate solution must therefore be found.

Distribution of appreciable quantity of Iran’s oil into world markets requires complete cooperation of entire petroleum industry. In early stages oil can be handled only by those companies now operating in Middle East. Highly doubtful that industry cooperation can be obtained if premium is placed upon nationalization and consequent loss of existing sources of supply in that and other strategic regions.

The partial negation of Iranian nationalization program inherent in following or similar proposal we believe represents limit to which private industry will go even under pressure. If solution similar to one outlined below can be made palatable to Iran, then entire compensation issue can be avoided and existing danger to our strategic sources of supply elsewhere minimized.

Following type proposal suggested from several quarters and indications are that it might be acceptable to various American, Dutch and British interests involved. Your comments earnestly requested whether something along this line might be acceptable to Iranian Government. If so it could be put to British if they appear disposed discuss concrete suggestions.

A. A new operating company would be formed owned half by American companies and balance by Dutch Shell and AIOC with latter interest not over 25%.

B. To compensate AIOC for reduced participation, American and Dutch companies would in effect purchase 75% of AIOC claim against Iran at price agreed upon by direct negotiation between them, thereby obviating necessity of any compensation payments between Iran and AIOC.

C. Above transaction would be contingent upon contract being executed between Iran (or NIOC as Iran’s effective agent) and new company substantially as follows:

1. Recognition of nationalization of subsoil resources of Iran.

2. Iran would receive 50% of income after deducting operating expenses and depreciation. This is same formula now used elsewhere in Middle East and South America. Approval by Majlis unquestionably required before full scale operations commence.

3. Almost immediate crude oil off-take of 400,000 barrels per day could be arranged, providing participating income approximately $100,000,000 per year to Iran, plus additional expenditure of about $25,000,000 per year within country for local wages and materials.

4. Guaranteed minimum crude oil off-take of 300,000 barrels per day, with proportionate payments as in (3) above.

5. Probable increase in off-take as world markets increase.

6. Excellent probability that upon formal approval of such contract World Bank would make immediate and substantial loan to Iran upon commercial basis against future oil revenues. Bank might properly insist upon supervision of expenditures under loan.

7. Company would supply all working capital for operations and new capital for renewed or expanded facilities.

8. Operation of refinery will probably take some time and then at reduced thru-put due enlarged modern facilities closer to markets and obsolescence of old plant.

9. Under such proposal company would have title to or lease of all producing and refining facilities for life of contract in view of effective purchase by company from AIOC of these same facilities and obviating compensation issue between Iran and AIOC of amount variously estimated between half-billion to one billion dollars. Drawn-out proceedings with attendant recriminations would thereby be avoided.

10. Life of contract would extend for at least 40 years, in order to allow amortization of payments to AIOC. Geographic area would be same as old AIOC concession.

11. Contractor would have effective management of field and refining operations under American or Dutch supervision but using maximum number of Iranian nationals in responsible positions.

12. Large number of American marketing companies would participate to insure stable and diversified markets from Iranian viewpoint and to satisfy requirements of equity and public opinion in U.S. This also necessary in order to raise large amount of capital required and to handle such substantial amounts of oil.

One possibility for immediate but limited resumption of operations would be for NIOC to execute such contract with company once, subject to approval by Majlis later. Whether NIOC has such power not known here. But if possible limited amount of income to NIOC would be forthcoming within relatively short time. Full scale operations and extension of bank financing would await ratification.³

Dulles

1. Repeated to London on Sept. 26. (888.2553/9–2153) Drafted by Hoover and signed by Byroade.

2. In telegram 718, Sept. 21, Ambassador Henderson warned that the United States and United Kingdom had to work together on a common basis of trust and cooperation, or else the West would lose Iran to the Communist bloc, and that, therefore, the two countries had to approach an oil settlement on the basis that this was a dynamic political and psychological problem rather than a technical or commercial problem. (641.88/9–2153)

   In telegram 719, Sept. 21, Ambassador Henderson outlined the type of oil settlement he envisaged would offer the best chance for a successful resolution of the controversy. (888.2553/9–2153)

3. Henderson responded in telegram 749 from Tehran, Sept. 25, stating in the strongest terms “that it would be fatal to Western interests to offer present Iranian Government proposals less advantageous from point of view of principle than those made to Mosadeq on February 20.” He felt it “not unlikely Zahedi Government would resign at once and Shah in despair would abdicate.” (888.2553/9–2553)

   On Sept. 26 the Department informed Ambassador Henderson that the talks with Butler, which began on Sept. 25, had thus far been informal and exploratory, and that it would not be possible for decisions to be made within the U.S. Government during Butler’s stay in Washington. Moreover, the British were given orally and only generally the line of thought presented in telegram 853. (Telegram 879; 888.2553/9–2653)