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190. Memorandum From the Director of the Office of Fuels and Energy (Oliver) to the Assistant Secretary of State for Economic Affairs (Solomon)/1/ Washington, June 10, 1966. /1/Source: Department of State, E Files: Lot 70 D 54, PET 3 Organizations and Conferences 1966. OPEC. Limited Official Use. SUBJECT The Eleventh Session of the OPEC adopted two resolutions indicating new moves by the member countries to increase their revenues from oil and ultimately to raise prices at which crude oil is sold by concessionnaire companies. Resolution 71 recommends that each member country take steps toward the complete elimination of the tax free discount off of posted prices permitted the companies. The discount was granted in the OPEC settlement of 1964 as a quid pro quo to the companies for their agreeing to treat royalty payments to governments as an operating expense instead of as a part of the total tax liability to governments as was the case under the original 50-50 profit sharing formula. The net effect of the tax free discount under the 1964 settlement was to offset in part the amount governments would receive by treating the standard 12.5 percent royalty payment as an operating expense. By the terms of the 1964 agreement, negotiations are to take place this year on the amount of the tax free discount for 1967 and future years. The companies are committed to reduce the discount if market conditions justify a reduction below the 6.5 percent rate in effect for 1966. If the OPEC membership were to succeed in forcing an immediate elimination of the discount beginning in 1967, total payments to governments would be increased significantly. For Kuwait for example, discontinuance of the discount would result in an increase in payments to the GOK of about $0.05 per barrel of production, or $40 million per year. The producing companies are certain to resist any move by governments to terminate the discount, and the probability is that the best the governments will obtain will be agreement to eliminate the discount gradually over a period of years, at a rate of decrease of perhaps 1 percent per year over five years. The important point in respect of this resolution is that altering the percentage discount will require protracted negotiations with the companies. Therefore Resolution 71 should not have an immediate impact upon either government revenues or the cost of crude oil to the companies. Resolution 72 recommends that member countries apply posted or "reference" prices for the purpose of determining the tax liabilities of the oil companies operating in their territories; and that no petroleum rights be granted or contracts entered into concerning exploration or exploitation of new areas unless royalty payments and income tax liabilities are calculated on the basis of posted or reference prices, or unless the share to be obtained by the government is not less favorable than that obtained under existing arrangements based on posted or reference prices. This resolution derives from a resolution taken at the Tenth OPEC conference in December 1965 directing the Economic Commission of the OPEC to study the "implications" of applying posted prices for tax purposes. Of significance is the fact that the December 1965 resolution was taken "in pursuance of" a September 1960 resolution which said member countries would require oil companies to maintain stable prices, try to reestablish posted prices at levels prevailing before these were cut (in 1958-1959), and assure that oil companies enter into consultations with governments to explain any circumstances they felt required any future price modifications. A posted price system does not now apply in all OPEC member countries. Venezuela and Indonesia compute income liabilities on prices realized on crude sales. In Saudi Arabia, ARAMCO sales to non-affiliated companies are taxed at realized prices. The OPEC countries have apparently concluded that so long as crude production in some countries is taxed on actual sales realizations the way is open for some companies to grant "excessive" sales discounts off of posted prices which depress the price of crude oil on world markets. If posted prices were the uniform rule in the OPEC membership this would have the desirable effect of steadying and stabilizing world crude oil prices. We believe that this resolution will not prove too difficult for the OPEC countries to bring into effect. Venezuela is already considering an offer by the oil companies to compute future taxes on a "reference price" basis. Saudi Arabia has raised with ARAMCO the idea of calculating income from third party sales on posted prices applying to transfers to affiliated companies. Our assessment is influenced by the conviction that most "major" international companies are accustomed to a posted price system and can see some advantage in placing Venezuela and Indonesia on the same basis in that tax disputes and claims for additional tax payments by those countries might be avoided in the future. There is a further attraction to the old line majors to posted prices; it could affect the capability of the "newcomers" internationally to compete with them in major markets. The latter companies do not have anything like the integrated marketing structure of the major companies. The newcomer's ability to sell at discounted prices and be taxed on those prices has assisted their effort to find markets for their production. To the extent that the range of discounts those companies can offer is narrowed by having to compute taxes on posted prices, particularly when posted prices are out of line with market realities, the newcomers will be able to compete less favorably with the majors in the principal international markets. Once a posted price system is in effect throughout OPEC, a logical subsequent move by the OPEC countries would be to demand some increase in actual prices posted. Such a move would support the objective stated in the 1960 resolution to obtain a return of posted prices to 1958-1959 levels. Resolutions 71 and 72 have implications for consumer countries. Each amounts to an increase in real costs of crude oil to the companies which will be reflected in prices offered consumers. The range of discounts off of posted prices companies are willing to absorb as a cost of doing business is narrowed in either case, and increases of the real costs of crude to the producer will be passed on to the buyer. The Eleventh Conference also adopted a non-specific resolution on future production programming within the OPEC membership, although at a prior meeting this year OPEC had announced that a decision had been made to "go into the second period of the joint production program." The resolution refers to "unsatisfactory" rate of production increase in "certain" member countries, and attributes this condition to "manipulation" of production by companies. It warns that all members will give full support of efforts by those countries "to safeguard their legitimate natural national interests" should their "rates of growth not be improved to satisfactory levels during the year 1966." This last resolution probably is another case of producer countries using the OPEC as the "bogey man" so to speak in pressuring companies to meet their demands. Nevertheless it is an indication of the concern some members have with the levels of production, and is an important resolution to keep in mind when discussing proposals such as DOD's to return a substantial part of foreign procurement of products to the United States.
191. Telegram From the Embassy in Iran to the Department of State/1/ Tehran, October 25, 1966, 1445Z. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1964-66, PET 6 IRAN. Confidential; Priority. Repeated to London. 1860. Iran Oil. 1. Shah 25th presented Iran's case vis-à-vis Consortium in same terms as Hoveyda (para 2 Tehran 1817),/2/ i.e. unresponsiveness of Consortium to Shah's appeals and GOI's proposals. Shah said at London yesterday Consortium had "asked" for month to give matter further study. Shah readily agreed but he hoped by end of month GOI would receive forthcoming response. /2/Dated October 22. (Ibid.) 2. Shah stressed usual theme that Western oil companies and govts fail to appreciate role Iran can and must play in this region. While companies deny Iran 17 percent increase, Saudi liftings were up 26 percent last year and will be so again this year. Shah added that he does not object to high Saudi increase since Faisal is investing money wisely in economic development and also is required to build up military security. What is irritating, Shah said, is large offtake from places like Kuwait and Abu Dhabi with small populations and even Libya with its 2,000,000. 3. I assured Shah oil companies been very sympathetic to Iran's problems, and been trying to do their best. They have, however, problems and commitments elsewhere which cannot be ignored, and their markets are limited. An annual influx to Iran nearing $600,000,000 from the Consortium convinces me, I said, that Consortium treating Iran very well. Saying it not necessary to make speeches re what happened in 1951,/3/ I noted Iran would probably be even better off today had it not on that occasion fomented confrontation with oil companies. While implying he expected no similar impasse this time, Shah quickly, though bit lamely, said Consortium should know that if companies suspend production this time other Mideast producing countries would stand by Iran. In any case, he said, such calamity here would affect stability of whole Gulf area, a result which would harm oil companies as well as Iran. /3/Prime Minister Mohammad Mosadeq nationalized Iranian oil production in 1951, resulting in an embargo on Iranian oil. Mosadeq's government fell in 1953. 4. I expressed gratification for his intention to avoid disastrous show-down. Making clear I not spokesman for companies, I said it behooves reasonable men in situations of this kind to sit down and determine what is possible and realistic. Shah emphatically agreed. I went on to express view that a main consideration is to avoid setting precedent which other Mideast countries will follow. Such "escalation" I said can in end only harm achievement of Shah's objectives. Shah agreed with this thesis also. 5. First step, I told Shah, is definition of problem. In this connection we been a bit confused by impression gleaned in London talks of immediate financial need and by Hoveyda's indicating this not true. Shah said chief problem is financing Iran's upcoming five-year plan. GOI realizes, he said, that 12 percent growth rate of last year cannot be maintained. However, 8-10 percent growth rate is necessary to achieve level of investment needed to reach 8-10 percent rate Iran's economists have determined annual 17 percent increase in income from Consortium is required. Since Consortium keeps saying that 12 percent is highest figure possible, way must be found to fill 5 percent gap. Thus GOI has successively proposed: a) advance payments by Consortium to be repaid after 1970 (he did not specify formula for repayment); b) equivalent amount of crude which Iran Govt can provide to noncompetitive East Europe markets (he did not specify formula under which crude would be provided); and c) relinquishment of some of agreement area so that Iran can arrange production of crude for East Europe (he gave no indication re extent of relinquishment). 6. Re East Europe, Shah said Soviets are very annoyed by Romanian-Iranian cooperation both re tractors and oil. Just yesterday, he said, Soviets made approach to Iran (he declined to be specific when I asked how serious was the approach) to purchase oil from Iran. Shah speculates that Soviets want Iranian oil so that they can maintain their monopoly on Romanian oil imports. Shah said Soviets been selling oil at $3.00 per barrel to satellites, whereas highest price at which NIOC been able to sell is $1.35 except NIOC's transactions with Consortium which are at $1.84. When I speculated that both Soviets and Romanians might have in mind importing Iranian crude and exporting at least some refined products to markets now served by Consortium, Shah expressed skepticism but agreed it is worth looking into. I tried to pin Shah down whether Iran already has specific deal with Romanians or other East Bloc countries. Shah gave no affirmative indication. We did, however, do some arithmetic which showed that 5 percent of present Consortium production would mean 100,000 barrels per day. Shah wanted this translated to tons per year which came out to nearly 6,000,000 tons. Shah gave distinct impression this more than Iran needs for East Bloc, at least for foreseeable future. He mentioned only Romania and Poland as prospective buyers. (Incidentally, PriMin Hoveyda leaves 27th for Romania where Romanian-Iran oil transactions may receive further consideration. It may have been Hoveyda's trip which prompted NIOC's deadlines last few days.) 7. At end of one and one-half hour discussion of number of subjects, Shah returned to oil question. We reviewed Iran's position as giving Consortium any one of three options: a) advance payments; b) cost oil for East Europe; c) some relinquishment. 8. Comment. Obviously moratorium arranged in London yesterday took pressure off this discussion. Shah was cordial and seemingly reasonable. Apparent lack of specifics re any of three options is hopeful sign. Also there is some hope that third course may not be necessary if adequate response forthcoming on either of first two courses. Our impression is that first course is unacceptable to companies for precedent and other reasons. While we cannot guarantee that question of relinquishment will not arise, it appears companies are on right track if they can come up with something along lines of Warder's "loan oil" proposal (Tehran 1842) or Embassy's suggestion (Tehran 1818)/4/ re utilizing "royalty oil" provided for in Consortium agreement. /4/Telegrams 1818 and 1842 from Tehran, both dated October 25, are in the National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1964-66, PET 6 IRAN. Meyer
192. Telegram From the Department of State to the Embassy in Iran/1/ Washington, October 28, 1966, 9:22 p.m. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1964-66, PET 6 IRAN. Confidential. Drafted by T. Eliot (NEA/IRN), cleared in draft by Oliver (E/FSE) and S. Rockwell (NEA), cleared by Solomon (E) and Shaver (S/S), and approved by Hare (NEA). Also sent to London. 75441. Iran Oil. 1. Following summary FYI only and Noforn. It is uncleared and subject to amendment upon review of memcon. 2. British Ambassador called on Under Secretary Rostow 27th to make following points which also incorporated in paper which he left and which being pouched addressees:/2/ /2/A copy is attached to an October 28 memorandum from Fried to Solomon. (Department of State, E Files: Lot 70 D 54, PET--Petroleum (Iran) 1966) An October 27 background memorandum prepared by Hare for Rostow sums up the U.S. understanding of the Iranian oil situation. (National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1964-66, PET 6 IRAN) a. Motives for Iranian demands on Consortium are mix of need for money, desire to establish a position in marketing of oil, belief that Iran should be able utilize her own oil assets, and Shah's views that Iran deserves more than its neighboring oil countries, that East-West détente makes him less dependent on West and that Iran should do more to assert independence. b. Demands on Consortium come from Shah and there is real risk of unilateral Iranian action which would not only be contrary Iran's best interests but would also cause "irrevocable damage" to UK and US political, commercial and strategic interests. c. It is vital that Consortium should agree on position which would be "negotiable" with Iranians if latter also prepared show some give. HMG stressing this to British companies and hopes USG will do same with US companies. d. Both governments should use influence with companies to persuade them "take as forthcoming an attitude as possible." In this connection companies should be aware that issues involved are far wider than commercial. Warder's recommendations seem worthy of serious consideration. e. HMG proposes team of FonOff officials (Morris of Eastern Dept and Fearnley, petroleum expert) come Washington next week to discuss "factual oil questions" and political issues. f. HMG believes two aspects of problem should be raised with companies. First they should be encouraged liberalize currently rigid overlifting arrangements, a move which would have dramatic short-term effect on offtake. Secondly some US companies, particularly Jersey, SOCAL, Texaco and Gulf, "do not take as high a proportion of their maximum offtake entitlement as other member companies" and hopefully USG can persuade them to "come closer to their maximum entitlement." 3. British also said they have report of Shah's speech 26th which particularly rough on Consortium. 4. Rostow replied we would be happy have discussions next week; we are also concerned and wish continue keep in close touch. He said that we have been asked by our companies only to express hope to Iranians that they work for a reasonable solution and that we have indicated to US companies similar hope./3/ Before agreeing to talk with US companies again we would wish study British proposals and have the suggested talks next week. We would hope get by without becoming too much involved. One aspect of matter is Iranian concern about British withdrawal from Aden and South Arabia. /3/Telegram 71891 to Tehran, October 24, informed Ambassador Meyer: "While expressing hope you would continue help keep lid on, companies agreed USG should not become involved in substantive questions." (Ibid.) 5. British Ambassador responded by indicating HMG awareness of Iranian concerns about British withdrawal is one reason for suggesting political aspects be discussed next week. He stressed HMG thinks there is real risk of unilateral Iranian action against Consortium and Shah is capable of upsetting applecart. 6. Talks are now scheduled take place in Washington November 2 and 3./4/ We do not intend mention these meetings to companies before they take place. We are also asking British not to tell Iranians about UK-US talks next week because we do not wish to raise Iranian hopes that US Government will intervene with US oil company Consortium members since this would make it more difficult for GOI and Consortium reach compromise agreement. For same reason we do not wish give talks any publicity. Septel follows. /4/See Document 193. 7. Embassies London and Tehran should transmit soonest their comments on British position to assist Dept prepare for talks. In particular would appreciate Tehran's views on what Iranians hope achieve from current confrontation with Consortium and extent of risk of unilateral Iranian action against Consortium./5/ /5/Ambassador Meyer reported in telegram 1927 from Tehran, October 31, that while he generally agreed with the British analysis, he did not think that the Shah was preparing for a confrontation: "While some dangerous brinkmanship involved in present exercise, fact we are dealing with Persians who have behind them 2500 years of bargaining experience leads us conclude they have sensed there still some give in Consortium position." (National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1964-66, PET 6 IRAN) Katzenbach
193. Memorandum of Conversation/1/ Washington, November 3, 1966. /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.) SUBJECT PARTICIPANTS US 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/ /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.)
194. Telegram From the Department of State to the Embassy in Iran/1/ Washington, November 4, 1966, 6:06 p.m. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1964-66, PET 6 IRAN. Confidential; Limdis. Drafted by Eliot (NEA/IRN); cleared by Rockwell (NEA), Fried (E), Oliver (E/FSE), Solomon (E); and Hare (NEA). Also sent to London. 79406. Iran Oil 1. Senior officers five major American member companies Iranian Oil Consortium and Chairman of IRICON Board called November 4 on Assistant Secretaries Hare and Solomon to discuss Iranian oil situation. Following summarizes highlights of two-hour conversation. Memcon being pouched addressees./2/ /2/Company representatives in attendance included George Piercy (Standard Oil of New Jersey and Director of Aramco), James Royds (Chairman of the Board, IRICON Agency Ltd.), William Tavoulareas (Mobil Oil), George V. Parkhurst (Standard Oil of California), Harvey Cash (Texaco and Director of Aramco), G.J. Davis (Gulf Oil), and Nestor Ortiz (Gulf Oil). A complete record is ibid. 2. Companies agreed situation very critical, with GOI and Consortium on collision course. Problem compounded by Shah and Prime Minister referring to possible unilateral Iranian action. 3. Companies cannot agree to provide oil to Iran at cost because such action would establish "disastrous" precedent with respect other oil-producing countries. Companies can also not agree relinquish proven oil fields as matter of principle and are prepared demonstrate to Iranians that Consortium has no excess reserves. They also reject idea of loaning oil to NIOC which they believe would have same effect as selling it at cost. In short, all Iranian demands unacceptable. Companies' memorandum summarizing their views on Iranian demands being pouched. 4. Companies reported that all member companies meeting almost daily in London in effort come up with counterproposals to put to Iranians. No agreement yet reached among them but seems clear that any counterproposals will be far short of meeting Iranian demands. Current thought is to send high-level Consortium delegation to Tehran before November 22 deadline. 5. Among possible proposals being considered are closer achievement of top of 10-11 percent growth range for 1966, maximum possible growth target for 1967, keen price for royalty oil for sale to NIOC and relinquishment some non-producing and unexplored parts of concession area such as Fars and Lurestan. US companies reported they have no substantial disagreements with BP although BP may be running a little more scared and may still be considering proposal to loan oil to NIOC. 6. Companies were briefed on USG talks with British (State 78491)./3/ Dept officers stressed points of agreement with British on Iranian motives, Iranian economic situation, US and UK interests in Iran and likely consequences of drastic unilateral Iranian action. While mentioning HMG has asked British companies be forthcoming, Dept did not mention divergence of US-UK view on risk of unilateral Iranian action. Dept stressed we hope keep govt-to-govt talks confidential in companies' own interest. /3/Telegram 78491 to London and Tehran, November 3. (Ibid.) 7. Dept also made it clear that there no room for additional USG assistance to Iran in context current oil problem./4/ Ambassador Hare informed companies of Ambassador Meyer's and Governor Harriman's discussions with Shah counseling restraint and reminding him of 1951. He also noted recent embargo of news on oil dispute in Tehran press. /4/According to a November 3 memorandum from Fried to Solomon, the United States was disinclined to consider additional resources for Iran in light of the U.S. 5-year $470 million cash and credit military equipment commitment, agreement to provide F-4 Phantom fighters, and more than $200 million in Export-Import Bank aid. (Department of State, E Files: Lot 70 D 54, PET--Petroleum Iran (2) 1966) 8. Companies displayed concern that collision would occur following presentation their counterproposals which would fall so far short of Iran's demands. They agree that they would prefer a collision to making concessions which would create unacceptable problems for them in other oil-producing countries. If GOI should take unilateral action, simplest type of which would be expropriation part of concession area, Consortium would go to arbitration. 9. Companies expressed view it essential for them obtain more time beyond November 22 to permit Iranians to back away from their extreme position. At same time, in requesting more time, companies would not want give GOI false hopes that Consortium would come close to meeting Iranian demands. In fact some concern expressed that GOI may have been given such false hopes when month's grace obtained in London. Companies asked if USG could help them obtain more time. 10. Companies stated they would not welcome "intimate involvement" of USG but hope that USG will make clear to Shah what consequences any rash Iranian action likely have and help convince Shah present Iranian demands are unacceptable because their acceptance would prejudice companies' position elsewhere. 11. In response Solomon stated that in our contacts with the Iranians we would give them our view that we feel what they demanding is not feasible and that to pursue such demands would be self-defeating. If asked by Iranians for suggestions we would tell them they should negotiate specifics with the Consortium, allowing sufficient time to determine what a feasible solution would be. We would make certain this message reaches Shah. 12. Instructions based on preceding para will be sent septel within few days. 13. Dept is informing British Embassy (a) US companies have told us they still working on counterproposals to be presented to Iranians in Tehran and hope keep door open to further discussions with Iranians, and (b) we considering what further we might do assist companies keep door open. Rusk
195. Telegram From the Embassy in the United Kingdom to the Department of State/1/ London, November 22, 1966, 1825Z. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1964-66, PET 6 IRAN. Secret. Repeated to Tehran and Jidda. 4274. Subject: Iranian Oil. During conversations in London yesterday, Under Secretary Rostow stressed importance our parallel efforts to ensure success of oil talks this week in Iran./2/ While we did not get as far as British Government did with oil companies, we had made clear both to GOI and to American oil companies our sense of the sensitivity of situation and our hope they would reach a reasonable compromise acknowledging the rightful interests of both sides. FonMin Brown urged separate American approach to Aramco with respect both to present negotiations and possible future Aramco transactions with Saudi Arabia. /2/On November 26 Ambassador Meyer reported in telegram 2298 from Tehran that the Consortium team had tentatively completed its negotiations with the Iranians. (Ibid., PET 6 IRAN) Bruce
196. Telegram From the Embassy in the United Arab Republic to the Department of State/1/ Cairo, December 16, 1966. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1964-66, PET 15-2 SYR. Confidential. Repeated to Amman, Baghdad, Beirut, Damascus, Dhahran, London, Moscow, Tel Aviv, Tripoli, and Tehran. There is no time of transmission on the source text; the telegram was received at 11:11 a.m. 3385. Subject: IPC Dispute. Ref: Jidda 2307 and Kuwait 638./2/ /2/Both dated December 15. (Ibid.) 1. Cairo line on IPC dispute with Syrians predictably supports Syrian position./3/ Ahram on Dec 15 compares situation with 1956 ANC claims powers which exploit Arab oil have forgotten lesson of Suez. Recalls that solidarity of Iraq and Syria with Egypt during tripartite aggression contributed to victory and thus solidarity between Syria and Iraq in confronting IPC will lead to victory. Less cautious Akhbar same day characterizes dispute as similar to Suez dispute which Egypt won by nationalization. Nationalist wave in Near East now irresistible and there strong possibility Iraq will nationalize IPC. /3/Syria had few oil resources of its own, but a pipeline of the Iraq Petroleum Company traversed Syrian territory, feeding Syrian refineries and carrying oil to the Mediterranean with an additional fee payable to the government. At this time, Syria was seeking an increase in the transit fees and a retroactive increase covering the past decade, which was unacceptable to the oil companies. Iraq, involved in its own protracted oil negotiations, wanted to support Syria, but a shutdown meant a significant loss of revenue since the pipeline carried two-thirds of Iraq's oil output. Syria broke off negotiations with the company on November 23, and on November 28 the Iraqi Deputy Prime Minister asked the oil company to "be generous with Syria." The company representative said that "IPC had been generous with Syria. Danner said that IPC had been as generous as possible. Could give no more: to do so would make it cheaper ship Kirkuk oil via Basra." (Telegram 1014 from Baghdad, November 28; ibid., PET 6 IRAQ) On December 9 Syria unilaterally doubled the transit fee and imposed a surcharge to recoup monies it claimed to have been owed for 10 years while seizing the company's in-country assets. (Telegram 4785 from London, December 9; ibid.) 2. Same line given to Embassy political counselor by Mustafa Abdul Aziz, Vice President Zakaria Muhieddin's Secretary, Dec 15. Abdul Aziz says Syrians are right for first time in their lives. IPC has been making enormous profits and refusing pay what it had already consented to under agreement. Western governments striking pose that this was simple dispute between IPC and Syrians when in effect it threatened to turn the whole oil economy of Middle East upside down. He hoped from bottom his heart Iraqis would nationalize IPC. This would lead to wave of nationalizations. Algerians had already moved against profiteering oil companies, Syrians were now moving and Iraqis were next. Other Arabs, including Libyans, would be forced to go along whether they like it or not. They might have some difficulty marketing their oil, but Soviets and Japanese would help and Arabs would find a way. Nationalizing Suez and building Aswan dam had not been easy but Arabs had done it and would find customers for their oil. We should not underestimate their solidarity in such matters. 3. After going on at some length in this vein, getting progressively shriller, Abdul Aziz suddenly relaxed and said for our information President Nasser had received Iraqi Chargé Dec 14 and latter had carried request from Baghdad that Nasser try ease situation and calm down Syrians. Abdul Aziz commented that Iraqis very irritated with Syrians and Nasser mad at both of them. Indicated Nasser would try reason with Syrians but not enthusiastic about it. 4. Comment: Solidarity forever seems to be theme, but Egyptians likely tread with some caution as long as they anticipating heavy American oil investment here. They may hope however that nationalized Arab oil companies would finance development Egyptian oil resources, in which event UAR would perhaps be prepared lose American investment, particularly now that initial prospecting done and oil actually found. 5. It seems evident from Abdul Aziz's remarks on LIL marketing, subject he has been following because of involvement in Pan American negotiations, that Egyptians have been studying possibilities marketing their own oil and not relying on foreign companies. His remark about Soviets helping dispose of Iraqi oil made in tone implying Soviets had given some undertaking this regard, but this may have been wishful thinking on Abdul Aziz's part. In this connection Abdul Aziz said it not true Soviets have excess of oil. Egyptians had asked them for LE 26 million worth in 1965 and Soviets had been unable supply. He admitted situation may be different this year or next. 6. It would be very useful to us have candid appraisal from Department, London, Damascus and Baghdad as to merits respective sides in this dispute. While we second to none in appreciating lunatic factor in Syrian policy, we have impression IPC may in fact be reneging on agreement, or interpreting it too narrowly. If views of Egyptians are relevant, current crisis threatens jeopardize Western oil interests throughout area. If IPC is being fair with Syrians a better case for it should be made in world press and in local contacts. Battle
197. Telegram From the Embassy in Iraq to the Department of State/1/ Baghdad, December 17, 1966, 1110Z. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, PET 6 IRAQ. Confidential; Limdis. Repeated to Beirut, Cairo, Damascus, Jidda, London, Kuwait, Moscow, Tehran, and Dhahran. 1135. Oil Crisis--consequences for Iraq of prolonged closedown of IPC. State 102651./2/ /2/Dated December 14. (Ibid., PET 15-2 SYR) 1. First should say we believe Syrians have moved against IPC after very careful calculations with perhaps four main objectives in mind: (1) to strike a telling blow against Eastern [Western ?] interests and to encourage other extremists in same direction; (2) to take Syrian claim to leading role in Arab causes; (3) to try to bring Iraq into radical camp; and (4) to get more money./3/ We wonder whether current Syrian regime will back down unless, perhaps, Iraq pays an acceptable political price and Communist countries prove unable buy and market large amounts oil. Successor regime may have trouble disencumbering itself of current SARG commitment even if so inclined (which is imponderable). Thus we think there is good possibility of extended shutdown of Kirkuk-in Zala production. /3/According to telegram 2307 from Jidda, December 15, Saudi Oil Minister Yamani felt Iraq had been surprised by the Syrian action. "Yamani noted that during OPEC meeting in Kuwait, when Syrian takeover of IPC pipeline announced, Iraqi delegate to OPEC expressed surprise and dismay. Iraqi delegate allegedly told him GOI thought it had agreement with SARG that Iraqis would support SARG's claims against IPC on understanding SARG would do nothing block IPC pipeline throughput from Iraq. Iraqi delegate had expressed concern that SARG double crossed Iraqis on this one. ... He believes SARG, apart from its attempt extract more from IPC, is also seeking indirectly put pressure on Iraq to nationalize oil industry there. He noted OIG virtually bankrupt and heavily dependent on IPC revenues." (Ibid.) 2. Economic consequences for Iraq more readily identifiable than are political. Two-thirds of GOI revenues come from Kirkuk-in Zala oil. While IPC apparently increasing Basra liftings to 30 million on rate without further investment, GOI at best will still receive less than half as much as heretofore. Impact would be severe on development plan, on payment of salaries, on employment and on essential ports. Payments to numerous contractors would be postponed and efforts would be made to postpone payments to external creditors. Internal tax and customs receipts would decline. All private investment would stop. Nothing would be done to reconstruct north. GOI has been facing real financial limitations for past six months as result of Kurdish war and has limited margin to work on at best. Despite presumed adoption of drastic measures, we would have to assume that in four to six months GOI would be scraping bottom of barrel and its credit abroad would be nil. This of course would have major impact on US exports and on US firms working in Iraq or seeking contracts here. 3. Foregoing assumes GOI will fail ratify draft IPC agreements which would bring cash benefits and an improved credit rating. We must assume non-ratification since possibility of ratification seems limited. We assume IPC will refuse make any new investment without ratification. We also assume IPC willingness increase liftings of Basra oil to maximum possible with existing facilities in absence of any further GOI measures against IPC. If extremists eventually take over or if PriMin Talib pursues current threat to give North Umaila to INOC, another situation will exist. 4. Political consequences both external and internal are difficult envisage. They are dependent on decisions taken by Iraqis on basis of relative power of different elements, something that is unlikely to be stable. If the present Cabinet remains in office, results will be unremitting and hope for effective resistance can be maintained only if sufficient resources found elsewhere, or perhaps not even then. 5. Moderate trend in Iraq has been strong for three years. Efforts by extremists have been increasing in recent months and moderates have been getting more and more worried. Yet moderates have shown little inclination or ability organize and make weight felt. Many of moderates lack courage and are fearful that as individuals they may in future have to face peoples court if they stand openly against extremists. Also, moderate Sunni Arabs unable draw upon Kurds and Shias for support. 6. We cannot rule out possibility that moderates will prove able to hold their own, but given nature of country and its history we justified in fearing worst. As we see it there is real possibility that as economic bind becomes felt increasingly, radicals will be able to obscure real issues and arouse emotions of people on basis of anti-Western, anti-IPC appeal to point of serious "street" action in form of mass student strikes and mob demonstrations which moderate authorities unable deal with short of serious bloodletting. Extremists then would be able to take over by default. This might then lead to takeover of IPC or even control of Iraqi oil production by Communist countries; complete socialization of Iraqi economy; reversal of present policy of improving relations with Turkey, Iran and Kuwait; a renewed threat to security of Kuwait; serious prosecution of "Arab causes"; hostility to foreigners in Iraq; and drastic increase in the strength of Commies with a concomitant rise in role of Soviets in Iraq. Moderates in Iraq would be persecuted and prosecuted vigorously. While economic situation in Iraq would become very bad, extremists likely remain in power for some time until revulsion plus normal fragmentation of power elements would permit reversion to something saner. 7. If moderates are able to hang on, they are going to need good deal of help if IPC crisis continues more than a month or two and they will expect to receive help from West and its friends. Saudi Arabia and Kuwait are unlikely to want to help much. IPC is unlikely to extend loan if its issues with GOI remain unsettled. We doubt Western governments or banks will wish assist financially. International Monetary Fund can be tapped but this source inadequate for prolonged crisis. Yet failure to provide support will probably be fatal. 8. Another imponderable is Kurdish question. If GOI gets into deep financial trouble, its ability to prosecute a war will decline. Would Kurds decide take advantage of GOI situation to start rebellion again? If moderates in office Soviets would be likely support Kurds, but if extremists in office would Soviets assist them against Kurds? In any event Kurdish problem could become even more serious than in past. Israelis and Iranians would probably try to stir up Kurds against radical regime. 9. Foregoing is unhappy picture. We trust Department will not discount it. Whether it comes true or partially true depends on myriad of decisions and events in coming months over which USG will have limited influence in some instances and none in others. At same time we should state we advocate that IPC stand its ground with Syria on transit issue and with Iraq on draft agreement; while doing so it should be of maximum helpfulness otherwise to Iraq unless and until Iraq takes measures against IPC. If a successor to Talib Cabinet ratifies IPC agreements, IPC should be willing to provide supplementary benefits such as construction of new pipeline from K-2 to loading terminal in Gulf if GOI so requests. This might be held out to a moderate GOI as a reward to encourage ratification. 10. Situation will have to be played by ear, note by note, without advance knowledge of what tune is. Objective should remain constant: prevent crisis from deepening and prevent Iraq from sliding into extremism. Strong
198.Telegram From the Consulate in Dhahran, Saudi Arabia, to the Department of State/1/ Dhahran, December 19, 1966, 0945Z. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1964-66, PET 6 IRAN. Confidential. Repeated to Jidda, Kuwait, and Tehran. 397. Iran Oil. 1. December 17 Min Pet Yamani told Brougham of Aramco he disturbed and embarrassed by reports of Consortium-NIOC settlement./2/ Says others in SAG already asking if Iran being helped at SAG's expense and what he proposes do about it. /2/On December 10 Ambassador Meyer reported in telegram 2473 from Tehran that Iran had reached agreement with the Consortium and the deal would be announced in the Majlis the following day. "As Addison [the Consortium's representative] believes, and so do we, that as some of my Beirut oil friends phrased it, 'Oil's well that ends well.'" (Ibid.) 2. Using backgrounder sent him by parents,/3/ Brougham reminded him OPEC programming gave Iran strong arguing point. /3/Reference is to parent oil companies. 3. Pointed out that in 1965 Saudi Arabia has been preferred source crude to meet fluctuating increased needs and with late winter in Europe early December liftings had dropped. In effect SAG not losing, merely not gaining as much as had been hoped. 4. Iran had made arrangements barter oil in Eastern Europe in expectation greater success in district one than has been case. Royalty oil will replace this and not affect markets Consortium now has. 5. Relinquishment merely brings Iran to point SAG reached in 1963. 6. Effect IPC troubles not yet predictable but might result in higher liftings here as well as elsewhere. 7. Yamani said he and others should keep close eye on liftings and if they discovered Iran being helped at SAG expense they would learn a lesson. 8. Comment: For the moment Yamani would appear to be pacified. Allen
199. Telegram From the Embassy in Kuwait to the Department of State/1/ Kuwait City, December 24, 1966, 0615Z. /1/Source: National Archives and Records Administration, RG 59, Records of the Department of State, Central Files, 1964-66, PET 6 KUW. Confidential; Limdis. Repeated to London and Tehran. 662. Ref: Kuwait A-170, Dec 8, 1966; Tehran 2619, Dec 21./2/ Protect source and limit use of substance: /2/Neither printed. (Ibid., PET 2 KUW and PET 6 IRAN, respectively) To assuage GOK fears that Iran's publicized "victory" over the Consortium/3/ would become hardship for Kuwait KOC Director permitted Oil-Finance Undersecretary Abdul Wahab to read the agreement. Undersecretary promised not to use info against companies or Iran and to deny having had access through KOC. /3/See footnote 2, Document 198. Cottam [Continue with the next documents]
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