283. Memorandum of a Conversation, Department of State, Washington, December 17, 19571
SUBJECT
- Middle East Oil Concessions and Profit Sharing Formula
PARTICIPANTS
- William M. Rountree, Assistant Secretary, NEA
- Roy R. Rubottom, Jr., Assistant Secretary, ARA
- Thomas C. Mann, Assistant Secretary, E
- Loftus E. Becker, Legal Adviser
- Nestor Ortiz, ARA
- Robert Rutherford, FSD
- William Van Dusen, FSD
- Stanley D. Metzger, L/E John F.Shaw, NE/E
Mr. Rountree reported the Conorado Oil Company had approached the Department to determine its views on an offer which it was considering making to the Sheikh of Kuwait for Kuwait’s undivided half–interest in the Neutral Zone off–shore area. This offer would include a 60–40 sharing of profits. Since first approaching the Department to ascertain its views on this offer, Conorado had called to state that certain of its participants (members of the group) have been cooling off and that the company might not now proceed to make a proposal. Among other things the participants (members) thought the Japanese negotiations were pretty far along and it might not be possible for an American group to successfully bid on this area.
By way of background, Mr. Rountree explained the 50–50 profit sharing arrangement had been established for the Middle East about seven years ago by the oil industry, based on commercial considerations, with the encouragement of the Department. George McGhee and others concerned with petroleum matters at that time thought the concept was a generous one. In addition, the concept has been one which could be defended and has had a stabilizing effect on petroleum matters in the Near East since its establishment. The decision of ARAMCO to base its operations on this principle, however, was resented by the British. At one time they alleged that this decision was responsible for the British interests being expelled from Iran.
The first big break in this principle, Mr. Rountree said, recently occurred when the Italian Group, ENI, entered into a 75–25 profit sharing arrangement with the Iranian Government and NIOC. This arrangement presents a new formula for profit sharing and it has resulted in considerable excitement. While it is still too early to predict whether commercially exploitable petroleum will be discovered and successfully marketed by this new group, should they succeed, there may be a general move to re–negotiate existing concessions. There is also the fear that ENI might make similar arrangements with others in the area. The recent Japanese–Saudi Arabian agreement on sharing profits on a 56–44 basis raises the possibility of the Saudis becoming partners in the production of Near Eastern petroleum. This concession arrangement gives the Saudis rights with respect to producing, refining, transporting and marketing. The Japanese agreement appears to be a more serious development, inasmuch as the prospects of the Japanese finding oil appear to be good. It was generally recognized, [Page 672] however, that the cost of producing off–shore oil will be more expensive than land–based production; also the Japanese do not have proven capability in the field of off–shore operations.
These departures from the 50–50 profit sharing principle, Mr. Rountree explained, place the U.S. Government in a very difficult position. Many problems are raised. To the extent that representation is made against these new formulas, local authorities consider the U.S. is uninterested in them and their national aspirations, but only in the rights and privileges of American companies. The concept of the 50–50 arrangement, he said, arose out of a desire to stabilize the terms under which petroleum is developed and marketed. If the companies involved in this business wish to upset this principle, it was Mr. Rountree’s opinion that we cannot very well take the position that it is not in their interest to make more favorable arrangements. In his opinion decisions regarding the terms and conditions under which companies are prepared to engage in the production and marketing of petroleum involve issues which can be resolved only on the basis of commercial considerations. The U.S. Government, he thought, should avoid the implication of protecting and furthering American economic imperialism.
In the discussion which followed Mr. Mann noted that the 50–50 profit sharing formula had developed some years back and had been applicable to concession arrangements involving exploitation of new and unproven areas. For some time he thought there has been a departure from this principle in Venezuela where, for example, the concession was being offered to land which adjoined proven deposits. For this reason he did not think that the Japanese offer represented a radical departure from established Venezuelan practices. To the extent that the Japanese are prepared to establish an integrated company and accept the Saudi Arabians as partners a departure from established practice is occurring. He, however, could see no way of controlling the terms which the U.S. and foreign interests are prepared to offer for petroleum concessions.
Mr. Rubottom observed that the profit sharing arrangements are very complex. He did not think that the Japanese arrangement would create any particular problems in Latin America. He noted that the Japanese would probably need technical help, but that this was probably obtainable. An offer by an American group departing from the 50–50 principle might be more upsetting on the petroleum picture in Latin America, but, he too, was unable to see what could be done to dissuade private commercial interests from what they believe to be in their interests.
[Page 673]The Legal Adviser noted that the participation of American companies in an “integrated” operation might be illegal under U.S. laws. Mr. Rutherford suggested that rather than departing from the 50–50 principle, Conorado might be encouraged to provide larger bonuses, a device which he noted was not unusual.
It was the consensus of opinion that there has been in the past some departure from a straight 50–50 sharing of profits in regard to concession arrangements adjacent to proven resources. While the Department might hope that companies would try to maintain the 50–50 principle, and was concerned about the consequences of any departure from it, the Department could not control what American and foreign companies might be prepared to offer for oil properties. Furthermore, it would be difficult for the Department to persuade American oil companies that it was not in their interest to propose arrangements more favorable than the 50–50 concept.
- Source: Department of State, Central Files, 880.2553/12–1757. Confidential. Drafted by Shaw.↩