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

193. Memorandum of Conversation¹

Washington, November 3, 1966.

SUBJECT

• Political Aspects of the Iranian Oil Consortium Problem

PARTICIPANTS

• UK
  • Mr. Willie Morris, Foreign Office, London
  • Mr. John Fearnley, Foreign Office, London
  • Mr. Nigel Trench, Counselor, Embassy Washington
  • Mr. Christopher Everett, First Secretary, Embassy Washington
  • Mr. Noel Martin, Counselor (Petroleum), Embassy Washington
  • Mr. Derek Eagers, Mr. Martin’s newly arrived replacement
  • Mr. Robert Alston, Foreign Office, London
• US
  • Mr. Stuart W. Rockwell, Deputy Assistant Secretary, NEA
  • Mr. Edward Fried, Deputy Assistant Secretary, E
  • Mr. James W. Swihart,EUR/BMI
  • Mr. Theodore L. Eliot, Jr., NEA/IRN
  • Mr. John Oliver, E/FSE
  • Mr. Daniel O. Newberry, NEA/IRN

Mr. Rockwell, expressing the hope that our two governments could present a united front, stressed that the Iranians are always quick to perceive differences in our points of view. Mr. Morris replied that HMG would see the problems in the same way as the USG insofar as possible and he looked upon the day’s task as of finding how and where our two governments differ. He recalled that the importance of Iran to HMG came out strongly in the Defense Review. It had been clear that Britain could not give up its obligations in the area of Iran and the Gulf despite economic pressures to do so. Mr. Morris thought that the job of keeping Iran on its promising course as long as possible was worth quite a lot of effort. In commercial terms the Consortium companies were now in a strong position. In the longer term, he thought, we both could only be the losers in the event of a confrontation, apart from the ill effects that Iran itself might suffer. He did not question the doctrine of leaving the companies to settle their affairs with the GOI but he saw the present situation as one in which the companies would appreciate and would need advice from their governments. Mr. Rockwell remarked that while we in the USG consult regularly with the U.S. companies, the companies at this time were showing no more disposition than usual to ask our advice.

Mr. Morris’ analysis of Iranian motives centered around the role of the Shah himself who was master-minding the Iranian effort. While there was a certain logic in the shifting economic arguments put forward by Iran, essentially what they want is more money. Mr. Morris cited an additional psychological factor influencing the Shah, namely that Mossadeq was still figuratively pointing a finger at the Shah and HIM felt an urgent need to display “independence.”

Mr. Rockwell agreed that the Shah was calling the turns for Iran and added that the aim of getting a marketing role for the NIOC figured in Iranian calculations. He also mentioned the Iranian feeling that the Consortium agreement somehow deprived Iran of its sovereignty. There was also a feeling of envy at the disproportionate income from oil enjoyed by neighboring states. The American companies, he believed, seemed to regard the present problem as a continuation of a general dilemma faced by oil companies in other areas as well.

Mr. Fearnley added that the companies seemed to take the problem seriously for its own sake. The British companies were looking for a formula to control the eventual erosion of their position in Iran rather than accept “an imposed erosion.”

Mr. Morris called attention to the draft minute on the Iranian economic situation which had been given to the Department on a rush basis. Mr. Rockwell distributed a companion U.S. memorandum on the Iranian economic position. Mr. Morris noted that Iran does have a foreign exchange problem which will be especially acute next year. He recalled that the US and UK Ambassadors in Tehran were trying to persuade the GOI to get an expert to identify the problem; he suggested that we continue to put this idea to the GOI, apart from the Consortium problem. Mr. Rockwell agreed that there was a foreign exchange problem but noted that Iran does have considerable capacity to incur medium and long-term debts. He added that the improved economic management performance by such agencies as the Ministry of Economy and the Central Bank made us more optimistic about the GOI’s ability to control inflation and otherwise to manage its economic planning. Mr. Eliot called attention to the annual IMF consultation in December which should also be helpful.

Mr. Morris, in considering US and UK strategic interests in Iran, saw no persuasive alternative to the present regime. He felt that if the Shah could be dissuaded from taking suicidal action in the Consortium affair, Iran showed great promise. Britain, he emphasized, continued to depend heavily on over-flight privileges in Turkey and Iran.

Mr. Rockwell responded that the USG attached equal if not more importance to Iran than the UK. In an area beset by nationalist irritations, the Shah’s conduct was one element that could be counted on and we find that we have to put up with a great deal to keep the Shah in a reasonably reasonable mood. Mr. Rockwell went on to cite the Iranian apprehensions over the prospect of British withdrawal from the Persian Gulf area.

Mr. Morris related that Foreign Secretary Brown had discussed this subject with Mr. Aram in New York recently, at which time Mr. Brown reiterated UK intentions to maintain military dispositions in the area for the foreseeable future. Mr. Morris recalled that the Foreign Secretary had written a personal letter of reassurance to the Shah while the latter was in Austria, noting that the Shah’s initial reaction to the letter had been good but that later on HIM had displayed some disquiet. Mr. Morris predicted that the Shah must reconcile himself to not getting sovereignty over the other shore of the Gulf. The Shah could, however, take some satisfaction in having the biggest “fleet” in the area.

The remainder of the conversation was focused on the risk of unilateral action by the Shah. Mr. Morris dismissed the thesis that the Shah might be bluffing and predicted that even if Iran had to retreat altogether from its present position vis-à-vis the Consortium, the Shah would harbor so much rancor that he would be very difficult to deal with in the future. Mr. Morris thought the most likely form that unilateral action might take would be legislation designed to take away part of the concessions, perhaps one or more of the producing areas. The Shah seemed to think that the Consortium would go on producing even while accepting a fait accompli.

Mr. Rockwell agreed that if Iran decided to take over any of the producing areas, the crisis would take on really serious proportions. It was not our impression however that the Shah was ready to wreck the 1954 Agreement. Mr. Morris thought that, although such was not the Shah’s intention, the danger lay in the possibility that the Shah might set in motion a course of events that he could not stop. Mr. Morris agreed that the Shah was unlikely to pursue such a course knowingly, but HMG felt that we must take seriously the possibility that the Shah might try to out-Mossadeq Mossadeq. Mr. Morris wondered what were the less drastic possibilities of unilateral action. Mr. Rockwell thought that it depended on how much the Consortium could absorb. He added that the companies must be the judges of what would be considered drastic and they obviously must make some proposal which the Iranians would not feel that they had to reject out of hand. The companies’ proposal would need to offer some meaningful financial result for the Shah in order to register other than a negative impact. Mr. Rockwell added that the USG took no position on what the companies’ proposals should be.

Mr. Fearnley and Mr. Morris felt that the British companies did not want a showdown. They had a public relations problem, not wanting to appear to be “grinding the faces of the poor.” British Petroleum was seeking to find a formulation that would appear to the layman as just, reasonable and fair. Mr. Morris expressed the hope that the USG would point out to the US companies the probable consequences of provoking unilateral action by Iran.

Mr. Rockwell noted that we had already spoken in general terms with the companies and would do so again; he was confident that the US companies were aware of the seriousness of the situation. The Department had told the American companies that we did not want to be involved in the substance of negotiations. We were satisfied that the companies were mindful of USG interest in the problem and that the companies were resolved to seek a way out of the impasse that would not damage their basic interests.

Mr. Rockwell recapitulated the following points of view held by the USG:

1. The USG does not wish to become involved in the discussions within the Consortium on possible counterproposals to the Iranians and does not wish to pressure the American companies to make any particular proposals.

2. We do not believe that the Shah will go so far as to risk destruction of the 1954 Oil Agreement.

3. The USG has pushed its military and economic aid programs for Iran to the maximum, and we do not propose to offer any more in the context of the Consortium impasse.

4. The USG nevertheless regards the current Iranian demands on the Consortium as a serious matter. We will continue to attempt to restrain the Iranians from any rash action and to persuade them to keep the door open for discussions. We will keep in touch with the American member companies. We also want to stay in close consultation with HMG and, if there is any way in which HMG believes we might be helpful, we would be happy to have further discussions.

Mr. Morris agreed that the situation does not call for consideration of additional US or UK economic or military assistance to the GOI and noted that the companies understood this. He observed that the difference between the evaluations of HMG and USG had to do with the probability rather than the consequences of unilateral action by the Shah. Mr. Fearnley asked whether, if the negotiations were to bog down, the USG would exclude the possibility of speaking in general terms about the seriousness of the situation and urge the companies to get their heads together. Mr. Rockwell responded that we did not exclude anything; if the companies were to ask our advice we would give it and they could accept or reject it.

At the conclusion of the talks, it was agreed that the two governments would inform the companies of the fact that the talks had taken place in the State Department and would ask the companies to regard this as privileged information.²

1. Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1964–66, PET 6 IRAN. Secret. Drafted by Newberry. The briefing memorandum for the meeting is in a memorandum from Oliver to Fried, November 1. (Ibid.)
2. The two governments were also concerned that the French would find out about the extent of the consultation between them: “British Emb indicated earlier on 1st that FonOff expecting French approach and wanted to coordinate line we take with the French… . [British Emb] indicated he would stress to FonOff the desirability of not informing French of Nov. 2–3 UK-US talks in Washington and of merely telling French they are being told same thing as HMG is telling USG.” (Telegram 76782, November 1; ibid.)