Foreign Relations of the United States, 1964–1968, Volume XXII, Iran

252. Action Memorandum From the Assistant Secretary of State for Economic Affairs (Solomon) to the Under Secretary of State for Political Affairs (Rostow)¹

Washington, December 11, 1967.

SUBJECT

• Status of Iranian-Consortium Negotiations

The Consortium maintains that the “negotiations” with Iran ended in agreement among all parties in December, 1966, i.e., there would be an 11 percent increase in offtake in 1967 and 1968. Because of the Middle East crisis, Iranian production in 1967 will actually be over 20 percent above 1966 levels. Although the Consortium emphasizes it is not obligated by the agreement to give any further increase in 1968, it has just assured Iran of an increase in offtake of almost 9 percent over the high 1967 levels.

The Iranians have told the Consortium that this proposal for 1968 is not satisfactory. They say Iran must have $6 billion from oil from now through the end of the fourth development plan in March 1973. (Current production plans and steady growth of about 10 percent per year would give Iran only about $4.5 billion during this period.) The obvious way to get this income would be through increased production but increased payments per barrel of oil or company investment in Iran might also be satisfactory to the GOI.

The Iranians are particularly disturbed by the Consortium over-lift provisions and believe that if they were changed the total offtake from Iran would increase substantially. Last year I recommended to the American participants, through Mr. Henry Moses of Mobil Oil, that they should agree to a liberalization of the Consortium’s over-lift arrangements. The Consortium did alter those arrangements. Consortium companies may now over-lift up to 15 percent of their Annual Programmed Quantity—APQ—share at a price halfway between cost and posted price. Previously any volume above the APQ was to be over-lifted at full posted price. But it is clear from our traffic on this problem that the Iranians since last year have become fully informed as to the terms of the over-lift in both Iran and Saudi Arabia and they have demanded specifically that the Consortium adopt a system at least as favorable as the Aramco system. Aramco companies can over-lift as much as they want above the amount their shareholding in Aramco would entitle them to have at a price equal to cost plus one quarter the difference between cost and posted price.

The companies have explained to us that the Consortium as a whole usually takes only about 93 percent of the APQ—the agreed total offtake for the year—and that the crude short companies (Shell, Mobil, CFP and the Iricon group) are thus able to take 7 percent above their “rightful” share at cost—a more favorable arrangement than in Aramco. It is when they exceed this amount that they pay the halfway price. (N.B.: It is in this case when the comparison with Aramco becomes pertinent.) The Consortium companies say they have been unable to explain this adequately to the Iranians without exposing the method of setting APQ and other Consortium rules and regulations; and this cannot be done without causing great trouble for Consortium. However, the companies have consistently told us and the Iranians that the Aramco system would result in lower offtake for the Consortium as a whole.

The Iranians have also demanded specifically that the 6.5 percent OPEC discount be eliminated. If it were, Iran would get about $0.10 per barrel of oil, and if the discount were completely eliminated by January 1968, Iran would get about $200 million extra in the next five years. Negotiations between Aramco and the Saudi Arabian Government are continuing on this subject; Iran and other OPEC members will get whatever Saudi Arabia succeeds in getting from Aramco.

The Consortium members say they cannot increase offtake from Iran without cutting back production in the Arab world and this cannot be done without provoking a reaction from the Arabs. They have not yet been willing to discuss large scale investment in Iran. However, the final Consortium positions have not been established. Its members are now meeting in London to discuss new proposals to Iran and the Iranians have said they can wait at least until January to hear them.

Proposed Action

1. I would recommend that we tell the American companies in the Consortium that we understand their reluctance to discuss internal Consortium arrangements with the Iranians but point out that the GOI already has the essential details of the over-lift arrangements in Aramco and the Consortium. We could tell the companies our view that this has become an important issue with the Iranians and we believe the Consortium would be well-advised to consider adopting something they could call a “quarter-price” for over-liftings. Even if Iran profited little, a troublesome issue would have been eliminated and the Iranians would no longer be able to claim they were being discriminated against.

2. I would recommend that we urge the companies to be as generous as they can in making their next offer to the Iranians. However, we should avoid making any further specific recommendations at this time.

If it becomes clear that the next Consortium offer will not be acceptable to the Iranians we might have to take a more active role in the talks than we have; but we hope GOI-Consortium relations do not deteriorate to this point. While we probably can never get involved in making specific offtake proposals, we might have to tell the companies sometime that we believe there will be serious problems in Iran if, by 1973, it does not reach the same level of exports as Saudi Arabia or, as a minimum, does not enjoy the same absolute annual increase as that country.²

3. I would recommend that for the time being we do nothing more with the Iranians than repeating our hopes that the talks will continue and that neither side will take rash steps which might be regretted later.³

1. Source: Department of State, Central Files, PET 6 IRAN. Confidential. Drafted by Akins on December 8 and cleared by Eliot and the Economic Bureau’s Director of the Office of Fuels and Energy John G. Oliver.
2. A handwritten notation in the margin of this paragraph reads: “Please double check the facts.”
3. Approved by Rostow on December 13.