Foreign Relations of the United States, 1969–1976, Volume XXXVI, Energy Crisis, 1969–1974

148. Memorandum of Conversation¹

Washington, December 29, 1972.

• SUBJECT
  • Oil Company Negotiations on Participation

• PARTICIPANTS
  • Mr. Charles Hedlund, Exxon Middle East, Vice President
  • Mr. Laurance Folmar, Texaco, Vice President
  • Mr. James Akins, Director, Office of Fuels and Energy, Dept. of State
  • Mr. George Bennsky, Office of Fuels and Energy
  • Mr. Gordon S. Brown, Office of Fuels and Energy

Mr. Hedlund and Mr. Folmar gave us a briefing on the general agreement on participation, just concluded between the companies and the Saudi and Abu Dhabi Governments. They ran over the history of the concept, the previous negotiations, and the final sessions in Riyadh at which Saudi oil minister Yamani demanded, and at least partially obtained, substantial increases in the prices of oil to be sold by the governments to the companies. Saying that the companies had been disappointed by Yamani’s “back-off” from the October agreement with the companies,² Mr. Hedlund admitted that Yamani’s insistence on higher prices was at least in part supported by recent higher market prices for oil, even though some of the increase was due to anticipation of the higher prices which participation would bring. He noted that the companies, under pressure from Yamani who had threatened to make the agreements retroactive to 1 January 1973 no matter when they signed, had also had to yield to an accelerated escalation table with 30 percent participation now to come in 1978, and 51 percent on 1 January 1982 rather than 1983. He and Mr. Folmar said that Yamani had been a very strong and forceful negotiator throughout the negotiations, on more than several occasions making fairly direct threats of nationalization.

Mr. Hedlund pointed out that only Saudi Arabia and Abu Dhabi had as yet signed the agreement; discussions were still underway in Qatar, which wanted its crude prices to be closer to those for Abu Dhabi, but might be brought along. Gulf Oil had not signed the general agreement yet and was looking to see how the situation would develop in Kuwait, where Oil Minister Ateegi “was in a jam” trying to sell the agreement to the government and parliament. Mr. Hedlund gave us a copy of the General Agreement, which he noted had already appeared in the oil trade press, though with some slight variations. He and Mr. Folmar briefed us on the terms of the agreement as follows:

—The agreement, which will have to be supplemented by specific implementing agreements in each country, covers only the oil producing facilities—the disposition of other installations such as refineries, Tapline etc, will have to be worked out separately.

—The companies had negotiated long and hard for a compensation settlement better than OPEC’s net book value formula, and had finally gained (with some USG help) a settlement which approximated twice net book value on an average—although the exact figure will be left to the implementing agreement in each country. The calculations for “book value” compensation agreed upon provide that past investments can be recalculated in present dollars by use of a construction cost index, and that past depreciation which had not been used to reduce taxes can be recapitalized. Under this computation, Mr. Hedlund said, the figure for 25 percent of Aramco will be about $525 million when finally worked out in the implementing agreement. Mr. Hedlund’s notes showed the following tentative evaluations for other concessions:

Kuwait Oil Company	$150	million
Abu Dhabi Petroleum Company	81
Abu Dhabi Marine Areas	81
Qatar Petroleum Company	28
Qatar Shell	43
Basra Petroleum Company	103
Iraq Petroleum Company	68

These amounts are payable in cash, either immediately or in three payments over two years.

—Mr. Hedlund and Mr. Folmar stressed the efforts the companies had made in order to negotiate terms on the buy-back oil which would assure stable supplies and lowest possible cost to the consumer. The result has been to create four categories of oil for future trading, the prices for which are set through 1975 in private side letters. The categories are:

Bridging oil—this is oil which will be sold by the governments to the companies during the first three years of the participation agreements, in order to allow the companies to meet existing marketing commitments. It will amount to 75 percent of the government’s 25 percent share in the first year, 50 percent the second year, and 25 percent the third year. The price was negotiated at close to the market price: for the benchmark Arabian light crude oil it will be at quarterway price plus 19 cents, or $2.05—as opposed to OPEC’s original demand for the half-way price of $2.11. (Although Mr. Hedlund did not give us prices other than for Arab Light, he said that the highest price negotiated is for Abu Dhabi Murban, which will be $2.25 in this category.)

Phase-in oil—this is oil which will be in excess of the governments’ needs while they are entering the crude marketing arena, and which will be sold by them on long-term contracts and at a lower price than “bridging” oil. A ten-year schedule was worked out with the quantities to be sold fixed for the first three years; if the governments decide not to renew specific contracts, there will be long phase-out periods. The price set for Arabian light in this category is at tax paid cost plus 35 cents, or $1.97.

Forward avails—this is oil which will come from increases in production capacity beyond the government’s ability to market. Quantities will be set three years in advance when the partners table their future oil requirements and plan for capacity increases. Like “phase-in” oil, the sales will be for long terms and with long-term phase-out provisions in case the government wishes to cancel the sale. Prices will be still lower: for Arabian light, at tax paid cost plus 26 cents, or $1.88 in 1973.

Overlift oil—this is oil which will be traded between partners on a short-term basis to meet commercial contingencies; the prices will be quarterway price as is standard in most Middle East consortia.

—All barter oil agreements will be cancelled for governments accepting participation. At the same time those governments will contribute their equity share of oil to meet local consumption requirements.

—The form of Aramco’s relationship with Petromin is still being worked out. The companies prefer to be represented as a single party with an undivided interest, but the Saudis want to enter the existing corporation. If the latter becomes necessary, the companies will still be protected from having to pay the Saudis their equity share of profits by the company practice of apportioning profits in proportion to each member’s contribution, i.e. sales volume. Messrs Hedlund and Folmar were unclear as to how the parent companies would treat their potential loss of U.S. tax credits on the 25 percent of production.

1. Source: National Archives, RG 59, Central Files 1970–73, PET 17 US–SAUD. Limited Official Use. Drafted by Brown. The meeting was held in the Executive Office Building.
2. See Document 141.