Foreign Relations of the United States, 1964–1968, Volume XXXIV, Energy Diplomacy and Global Issues

186. Circular Airgram From the Department of State to Certain Posts¹

CA–6447

Washington, December 22, 1965, 8:45 a.m.

SUBJECT

• US/UK Oil Talks

Informal discussions with the U.K. were held in Washington November 15 and 16 on international oil matters. The British delegation, headed by Mr. Angus Beckett, Under Secretary, Ministry of Power, consisted of Mr. John T. Fearnley, Oil Adviser, Oil Department, Foreign Office, Mr. Noel E. Martin, Petroleum Counselor, British Embassy, and other members of the British Embassy Staff. On the U.S. side, the meetings were chaired by Mr. Edward A. Fried, Deputy Assistant Secretary of State for Economic Affairs. Participants included Mr. J. Cordell Moore, Assistant Secretary of the Interior-Mineral Resources, Mr. John F. O’Leary, Deputy Assistant Secretary of the Interior-Mineral Resources, Mr. Howard R. Cottam, American Ambassador to Kuwait, Mr. Andrew F. Ensor, Director, Office of Fuels and Energy, Department of State, Mr. Rodger P. Davies, Deputy Assistant Secretary of State (NEA), Department of State and Mr. Edgar L. McGinnis, First Secretary, American Embassy London. The Department of Commerce was represented by Mr. Alexander B. Trowbridge, Assistant Secretary for Domestic and International Business, and the Department of Defense by Mr. Joseph J. Muir, Deputy Director, Office of Petroleum Logistics.

The mutuality of U.S. oil policy objectives shared with the U.K. provides the basis of these talks, which are held roughly every two years, and permits detailed exchange of information and evaluation of specific problems. Because of the brevity of the discussions and their function as a part of a continuing interchange on oil problems, the talks tended to concentrate upon changes in the oil scene—less time was devoted to historical analysis and relatively stable situations.

The items discussed included a review of supplies up to 1970, security of supplies, contingency planning, and long-term hedges such as shale oil, tar sands, and liquid hydrocarbons from coal. Relations with producer countries were discussed with emphasis upon Arab oil policy, and OPEC developments. Individual country problems were reviewed with stress being given to the major producing countries of the Middle East and Africa with Latin American and also Indonesian developments also noted. The situation in the EEC as it affects oil, and the work of the OECD in oil and energy generally were subject of exchanges of views, as were the developments in the consuming countries of Europe. There was brief discussion on the problems of oil in India and Pakistan. The discussions concluded with the subject of the financial problems of the industry arising from balance of payments programs, and reduced self-financing capacity of the companies.

The highlights of the meetings included the following items:

Supplies to 1970

Projections of supplies to 1970 worked out by the Ministry of Power and the Department of Interior in advance of the meetings were quite useful in pointing out differing production and consumption growth rates which will be at the heart of many future problems. Excluding a major disruption, supply will be adequate during this period and in fact problems may arise stemming from conditions of increasing over-supply.

North Sea

The U.K. is distinctly optimistic about the prospects for North Sea gas production. Gas so far discovered is of high quality (98% methane) and the BP discovery is confidently expected to be a commercial producer. Two other gas shows, as yet unpublicized, indicate at least the possibility of commercial gas production.

U.K. White Paper

The recent white paper on U.K. fuel policy is the first such document published by HMG. Mr. Beckett regarded as significant the statements in the White Paper that undue curtailment of the use of oil could affect the health of the economy generally and that reduced reliance on imports for security or B/P reasons had its limits. The Paper reflects the position that no discrimination would be practical in relation to the Free World sources of crude imports, and while the same policy is to be applied to refined product imports, it would be kept under review. This latter point, Mr. Beckett stated, was aimed at the Six.²

Nigeria

The U.K. anticipates Nigerian production of its highly desirable crude will reach 1 million b/d by 1970. This is a strong upward revision of previous estimates. Nigerian associated gas production will be high and preliminary studies indicate its landed price in the U.K. may be lower than Algerian gas. Development of Nigerian gas may therefore pose serious policy problems for HMG.

U.K. Posted Prices

Mr. Beckett indicated that the U.K. may well be about to take a critical view of the posted prices paid by U.K. importers of crude. Under the present price structure these prices were high, reflecting the traditional pattern of the integrated companies to shift profits to their production accounts.

OECD

The OECD Oil Committee Small Group (also called the High Level Working Party) was fathered by the British. Angus Beckett is the chairman. As one function, the Small Group is to prepare studies centered around the question of the security of Western Europe’s imported oil supplies. To date the Small Group has considered a paper prepared by the British outlining the demand-supply outlook for oil and gas from 1965 to 1970–75. It will next examine a British prepared survey of various emergency contingencies, i.e. peacetime situations where oil from one or several major supplying countries is cut off. The Small Group has under revision a tanker transport outlook covering the same period prepared by the U.S. and the Netherlands.

The U.K.’s reasons for establishing the Small Group included the objective of influencing the form of common energy policy the EEC would eventually adopt. This objective was reviewed in light of events. While the EEC crisis deprives the Small Group of some of its urgency, both delegations agreed that in view of the greater uncertainty as future Community energy policy it is if anything more important now to continue its work as a means of influencing EEC attitudes. Mr. Beckett emphasized the need to keep representation in the Group at an “appropriate” level and urged that the U.S. and U.K. set an example in this regard.

The OECD Oil Committee reorganization proposed by Molkenboer seemed of questionable utility to the U.S. The proposal did not right what was wrong—primarily that the Committee lacked something important to do (with the exception of the Small Group). The proposal would seemingly confuse procedure with substance.

The U.K., in contrast, regarded the Oil Committee as having importance apart from any studies it might make. It is a Committee in being which could deal with a supply crisis. The U.K. agreed that there should not be a search for work for the Committee, but feels Molkenboer’s proposals deserve some sympathy, partly because it eliminates the redundancy of having both GWP and Plenary sessions. The proposal would bring other members into more active participation, giving them specific jobs to perform, and thus relieve the U.S. and U.K. of making all the running. Mr. Beckett also noted that with the abolition of the Gas Committee its work would be assumed by the Oil Committee. Mr. Beckett indicated he had spoken with Molkenboer recently and the latter will develop a modified proposal.

OPEC

Both sides agreed OPEC has gained in international status through obtaining objectives on royalty expensing, obtaining recognition by the UN, and in the competence of some of its staff. No change in current U.S. and U.K. policy toward OPEC should now be made. It was thought that the premises of the “neutrality” policy should be reexamined even though this might well produce no change. There was agreement that the OPEC prorationing scheme is not likely to succeed, but its failure may lead to much “bad blood” and the plan is based on dangerous principles. There was also the thought that negotiations regarding allowable discounts off posted prices after 1966 for the expensing of royalties could present very serious difficulties.

Concession Trends

Both sides agreed the current situation is characterized by a combination of sizable bonus payments and new kinds of terms. This trend is likely to continue. The British said they were pleased to note that the countries continued ready to let new concessions and no real enthusiasm appears to exist for contracting for oil operations. We noted, however, the trend in the evolution of government oil entities toward integrated export operations. Iran has crude of its own now and Kuwait may soon be in a similar position with refined products. It is hard to foresee how all of this will develop, but it appears downstream operations could prove unprofitable and difficult for them.

Labor in the Persian Gulf

We expressed concern that labor issues could become one of the most serious problems in the Persian Gulf area. Reluctance of the governments to face this issue and company convictions that the Persian Gulf labor movement is politically motivated per se must be overcome. Otherwise the field would be open to radical politically oriented groups such as the UAR-dominated Arab Federation of Petroleum Workers. Already this appears to have taken place in Kuwait. The British agreed that this was a matter of increasing importance that should be looked at closely. They suggested that it might be well for both sides to discuss it again soon.

Nasser and Arab Nationalism

There was general agreement about the UAR’s role, present and future, in oil matters. We pointed out the conflict of interests that exists between the UAR and the Arab oil producing states. There is a limit to which the UAR can squeeze or force these countries, even Iraq. Nasser has gone about as far as he can in this respect. The discovery of oil in the Gulf of Suez by Pan American (eventually production may reach 100,000 b/d) could even lead to more responsible UAR attitudes on oil.

We mentioned Syria as being perhaps more vociferous than the UAR in hewing to the radical line on oil.

We also pointed up our concern over reports that the ideas of Abdullah Tariki still have considerable popular appeal in the Arab world. His influence should not be discounted. In addition, there are others, like Faisal Mazidi in Kuwait, who, while not in favor of immediate nationalization, still advocate eventual government control of the oil industry. In short, we thought we should not be over-confident that these dangers were not real.

The British agreed that we should not be overly confident even though there is evidence of growing responsibility in the area on oil matters.

Informational Activity

The British said the informational efforts of the U.S. and U.K. Governments and the oil companies in the Middle East should not necessarily be directed against the more sophisticated approach of OPEC. What requires countering are the wilder, radical Arab views. This is a long-term operation requiring time to prepare and execute.

Mr. Beckett indicated that extremist propaganda was being countered through a program developed in quarterly HMG-U.K. company liaison group consultations. The U.S. expressed interest in the outcome of the discussions. Although the form did not seem applicable here because of the multiplicity of interests and companies, there was perhaps real value in the idea of working on the problem in concert with industry. No formal consultation between the U.S. and U.K. seems necessary. We do feel the U.S. companies are doing a good job and we have encouraged them to prepare papers and distribute them in both European and Arab oil circles.

Iraq

The British expressed pessimism about Iraq Government ratification of the agreement with the Iraq Petroleum Company. They mentioned the efforts of Prime Minister Bazzaz to link the agreement with the Kurdish problem in recent discussions in London. We agreed that prospects for ratification are not bright. A solution of the Kurdish question, however, might pave the way for a settlement.

Iran

The British said the production growth rate remained a problem for the consortium with the Shah. There had been some improvement in the situation recently, however.

The British discussed the problem that had arisen regarding a median line between Abu Dhabi and Iran. Atlantic³ has a strike in an area that could be on either side of the line depending upon which principles are applied in drawing it. The Iranians must now decide one way or another on this. While one set of principles would give Iran the Atlantic strike area, their application would confer upon Abu Dhabi advantages in other parts of the Gulf.

Kuwait

We expressed concern about events in Kuwait, especially political developments affecting the prospects for ratification of the supplemental agreement. We pointed out that unilateral action against KOC by the National Assembly was a potential possibility. The British, while agreeing that early ratification is unlikely, were somewhat surprised by the possibility of unilateral action. They listened attentively to a description by the U.S. side of political changes in Kuwait (reduced role of the Amir, increased political activity, etc.) which had greatly altered the premises of successfully dealing with the Government). The U.K. tended to agree that changes had indeed occurred and said they would closely examine this question.

Abu Dhabi

The British said prospects for larger increases in Abu Dhabi were very good particularly offshore where output could easily reach approximately 1,400,000 b/d in the not too distant future. Abu Dhabi offshore could well become one of the largest fields in the Middle East. A 50/50 agreement between the Shaikh of Abu Dhabi and Abu Dhabi Marine Areas Ltd. will probably be concluded in due course.

Algeria

Though the Franco-Algerian Oil Agreement strengthens the French dirigiste oil policy, it is regarded as sui generis because of the special relationships between Algeria and France. It was agreed that the Agreement could raise problems for U.S. and U.K. companies and these could ultimately require official intervention. The RAP-Saudi Arabian deal and French attempts to buy their way out of the IPC negotiations this year, suggest that the French may be getting away from arrangements based on economic grounds and moving toward a political orientation of their oil policies. Although these factors and increased French takings of Soviet oil seemingly bear this out, the British suggest that the emergence of Abu Dhabi as an important producer might dull the French appetite for uneconomic oil deals.

Libya

The U.S. representatives outlined the serious effect adoption by the GOL of the OPEC settlement formula would have for the U.S. “independents” producing in Libya. The U.S. concern in respect to the pricing problem in Libya is that the GOL give the independents a full opportunity to be heard so that a mutually agreeable solution can be attempted rather than a new tax regime be imposed on those companies unilaterally by GOL decree.

The British made no specific response to the U.S. presentation but implied some surprise that the USG supported the independents in Libya. They did point out that the large discounts offered by the independents on sales of Libyan crude oil have a very marked effect on the returns obtained by the majors on their sales, especially on sales to non-affiliated companies. The British representatives recognized that the majors in urging Libya to adopt a posted price system are encouraging the GOL unilaterally to breach concession agreements, a development not in the long term interest of the international oil industry.

Oil Industry Finance

It was mutually recognized that a problem existed in the enormous capital requirements of the international oil industry on the one hand and its inability to generate sufficient self-financing for its requirements. Capital needs are increasing as world economic growth requires fairly rapid expansion in the supply of oil products. The trend has been towards more borrowing by the companies.

The sums needed are too vast to be supplied by the capital market, access to which is limited by balance of payments programs and the thinness of the European capital market. The required self-financing is restricted by low prices and producing country measures to increase taxation.

The widespread exploration activities of the companies will strain capital resources even more, but it appears that the companies have not so far been deterred from this by the prospect of lower profitability.

Rusk

1. Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1964–66, PET 1 UK-US. Confidential. Drafted by R. Shuler (E) and cleared by Adams (NEA), Eurchamp (EUR/BNA), Sober (NEA/SOA), Starkey (EUR/BNA), Post (AF/AFN), Enders (EUR/RPE), Crowley (ARA/CV), O’Leary (INT), and Ensor (FSE). Sent to Algiers, Baghdad, Beirut, Benghazi, Bonn, Brussels, Cairo, Caracas, Damascus, Djakarta, Karachi, Kuwait, Jidda, Lagos, London, Ottawa, New Delhi, Paris, Madrid, Rome, Tehran, The Hague, Tripoli, Vienna, USEC Brussels, USEC Luxembourg, Paris OCED, and the Consulate in Dhahran.
2. Reference is to the European Community.
3. An American independent oil company.