DEPARTMENT OF STATE OFFICE OF THE SECRETARY
December 30, 1952
The following representatives of US oil companies - Messrs. Jennings, Letches, Holman, Sheppard, Proctor, Drake, and Long
and
Messrs. Acheson, Bruce, Byroade, Fisher, Nitze, Henderson, Linder and Kitchen from the Department
attended this meeting of December 4, memorandum of which is attached hereto.
JCK
December 4, 1952
MEMORANDUM OF MEETING WITH OIL COMPANY REPRESENTATIVES
Secretary Acheson opened the meeting by stating that he was grateful for the oil company representatives coming to Washington to discuss this serious problem. The Iranian oil question was a very serious one; one on which the Department had expended a great deal of time. It was hoped that we could work toward a solution before the end of the present Administration in order to avoid passing on a burden to the new Administration. He remarked that no publicity was to be given to the meeting, although our British friends had been fully informed and he hoped that those present would assist in every way possible in keeping this meeting unpublicized. An innocuous press statement would be prepared and released if speculation should develop in the press regarding the meeting.
Mr. Acheson said that Iran had been a matter of great concern to this Government over the past two years. One aspect of our concern related to the security of American investments in the Middle Eastern area and in other parts of the world. Our second concern related to the military security of the US and the effect that the loss of Iran would have on that security. For the past 18 months the US had sought to be an honest broker and to work between the two opposing groups in an effort to reconcile their point of view and bring them together. This program had not been successful and the situation was growing steadily worse. Both sides in the controversy had been unreasonable. The Iranians, because they were not subjecting their reactions to reason but were being guided by their emotions. The foment of nationalism was causing them to act in a way which was not in their own best long-term interest. As for the British, they were not being reasonable because they were not using their brains and did not see the clear implications in what was going on. They maintained their point of view that the application of economic pressure would bring
- 2 -
the Iranians to heel and that the passage of time tended to reinforce the possibility of an Iranian capitulation to the British point of view.
The US Government saw a steady deterioration in the situation which we thought could lead shortly to a disintegration. The British maintain that in the past we had misjudged when the crisis point would be reached and that therefore they could not accept our projection that the point of no return would be reached in the near future. We had argued that because we had misjudged the exact dates or points of crises in the past, this was no guarantee that we were wrong regarding the future. What we do stand on is that the situation is deteriorating and that this deterioration continues at an accelerated rate. A real revolution is going on in Iran. The nationalist group is the revolution and is forcing the continuation of the revolution. There is no conflict between various segments of the Iranian leadership as to what the consequences of the revolution will be. Within the US Government the Defense Department agrees with us and this includes not only the Service secretaries but the Joint Chiefs of Staff. They have told us that something must be done although they have no particular advice as to method. However, they feel that it is so necessary for us to act that they urge we do so even to a point where this may impair our relations with the British. They point out that the loss of Iran, which would constitute a Soviet threat to our line of communication between the East and West, will result in such a bitter feeling against the British for having allowed this to come about that the net impairment of our relations with the British will be greater if we don't act than if we do.
In addition to the line of communications aspect of the military point of view, there is also included among their reasons for concern, (1) the accession of strength which would accrue to the Soviets should Iranian oil be made available to their military and economic machine which is now deficient in petroleum products; (2) the diffusion of targets which would result from adding vital installations in Iran to the total target pattern with which the strategic air force would have to concern itself; and (3) the time in which the Allies could prepare a defense of the Middle East would be cut by one third if the Communists were in control of Iran at the outset.
- 3 -
We have discussed this problem with Eden in New York and feel that the British simply must be brought to accommodate themselves in some way to our point of view. We have been working with them in discussing the two main problems which seem to prevent a settlement. The first of these is the matter of compensation for the nationalized properties, and the second is the matter of the continuing arrangement which should follow. In the first of these problems there is a deadlock primarily on political grounds. The British desire to present the matter to an International Court so that each disputant can submit all claims for consideration, including the matter of settlement for future profits. The Iranians do not, as yet, recognize the right to future profits and feel that any discussion of this would cause violent repercussions within Iran. So, in reality, discussion of this point is political talk with both sides unwilling to back down publicly. The British basically want arbitration because they know they are going to get less than they want and desire that the onus for making this decision fall on some third party rather than on the British Cabinet which might have to accept it on a bilateral basis. Mossadeq won't agree to arbitration because he is afraid that the amount to be awarded to the British might reach the large figures about which the British have talked.
The Secretary said that in sizing up the situation as to how a figure for compensation might be reached, even taking into account the uncertainties of dealing with Middle Easterners and recognizing that the situation of a willing purchaser and a willing seller do not hold in this situation, we feel that the people sitting at this table could reach a figure which would be a reasonably equitable settlement. We have been seeking a way to get Mossadeq to come forward with a figure which we could get the British, under pressure, to accept. If we could accomplish this it would be the most productive way of going about it, since a lot of irritating questions would be buried in the lump-sum settlement.
Our second line of approach was that if we could get a lump-sum settlement or an agreement on arbitration, the British should be urged to arrange for the export of sufficient oil to keep Iran on her feet and to provide a way whereby funds which could be used in a settlement could accrue. This would call for at least a
- 4 -
limited British operation. Our feeling was that the situation warranted our taking the position that, if the British would not exploit the resources, they should get out of the way and let someone else do it. A further point in this situation was that production and refining of a limited amount of products would not provide enough income to run the country and that through some arrangement there must be enough production to provide the necessary budgetary aid to the Iranian Government. The Secretary had told Mr. Eden that if the AIOC couldn't move along this line soon, or if it felt it could not move sufficient volume under present conditions, we would try to establish an organization which could. We had told Mr. Eden that we intended to talk to the majors in the US industry to see if we could not arrange to take in an amount great enough to save the country. The Secretary said that at this juncture, he wished to reemphasize the seriousness with which we viewed the situation and the shortness of time we believed we had to work out an arrangement. Ambassador Henderson who was present had just returned from Iran and it was essential that he go back there before Christmas and that he have something in hand which could hold down the Iranian situation. Although the Ambassador estimated that Iran had sufficient resources to keep the Government running without oil revenue for another 10 months or so, he felt strongly that the Iranians would not use their heads in the situation and there would be an acceleration of the decline through irrational acts and later panic. It was essential that the British understand clearly that we do not intend to throw in the sponge and see Iran go under. We were prepared to be very forceful in making this position clear to them and in speaking frankly about the consequences to Anglo - American harmony. The British had to realize that we intended to take action even though this meant a rather sharp break in our approach to problems in the area. Mr. Acheson then invited any comment or questions by the oil company representatives present.
Mr. Holman said that, speaking for all the oil companies represented, he wished to emphasize that any settlement in Iran would have a vital effect on the companies' position in the Middle East and also on the oil trade throughout the world. He said that any variance from our principles (presumably he was referring here to the 50-50 formula as the most liberal in concession arrangements)
- 5 -
would be fatal to the structure of the industry and to huge American investments overseas. The Secretary said that we had the same idea and that we desired to take this point fully into account in discussing any proposed solutions to the Iranian problem.
Mr. Drake inquired whether he was correct in understanding that the US Government intends to go ahead regardless of the British reaction. The Secretary said that it was desirable to have British cooperation; that such cooperation simply was "in the cards" in any workable long-term solution to this problem since they were so heavily involved in distribution and marketing. But, he said, the essential point was that we must take some action soon in this matter or otherwise there was a good chance of uncontrollable civil disturbance within the country, followed by a take- over by the Tudeh party. We could not lose Iran without making every real effort. To do so would be handing General Eisenhower an almost intolerable situation since it would uncover the Turkish right flank and in turn the entire right flank of the entire NATO command area. The stakes were too large for us not to force the situation. With our British friends we would have to employ reason and firmness and convince them of their stake in the larger collective security situation. Mr. Drake said he was concerned about protecting the 50-50 formula. If any arrangement with the Iranians resulted in an accrual to them of an amount above the income now earned by other countries under that formula, this would open a Pandora's box. The Secretary reiterated that we had that point very much in mind.
Mr. Fisher then informed the group that the Department had obtained the authority of the President under the National Production Act to hold this meeting so that those present did not need to fear the cartel implications of their meeting together. The President had directed that such a meeting be held in order that a plan might be drawn up and forwarded to him which he in turn would present for implementation.
Mr. Linder then distributed letters signed by the Acting Secretary, Mr. Bruce, asking the company representatives to meet in accordance with the wishes of the President.
- 6 -
Mr. Nitze then said he thought it would be useful for him to review our discussions to date with the British. As mentioned by the Secretary, we had discussed this along the lines of compensation to the AIOC and, secondly, the terms of possible commercial arrangements. The AIOC had indicated that it could handle only about 10 million tons a year at present, of which 7 1/2 million tons would be refined products and 2 1/2 million tons crude oil. AIOC was thinking about a price discount of 30 to 40% which would result in a figure of between $1.05 and $1.21 a barrel. The length of the initial contract between the AIOC purchasing subsidiary and the National Iranian Oil Company would depend upon the method and rate of compensation. If the matter were submitted to arbitration the British had been thinking of a short-term contract of possibly 18 months to cover the period of the arbitral proceedings, to be followed by a longer term contract covering purchase arrangements over a period of years. If there were a lumpsum settlement, then a longer term contract could be entered into immediately. One plan included paying into an escrow account a percentage of earning to cover compensation. This meant that compensation would be paid out of current earnings.
In reply to a question, Mr. Nitze said that in our judgment, production in the order of magnitude of 20 million tons per year would be required to meet the economic needs of the country. This was approximately 400,000 barrels per day as contrasted with a figure of approximately 600,000 barrels per day at the peak of the Abadan refineries operation under the AIOC. Approximately 30,000 persons were employed by the National Iranian Oil Company and it was highly desirable to keep as large a number as possible employed, otherwise their discontent and unrest would make them easy prey to communist intrigue. Mr. Nitze also indicated in reply to a question that the Shell Oil Company was not yet included in the tentative plans which had been discussed with the British Government and the AIOC. However, it was our belief that if the US companies were asked to participate, that the British should also ask the Shell Company to do likewise unless the US companies had some other point of view on the matter. Mr. Nitze replied affirmatively to a question as to whether the matter had been discussed by the Foreign Office with the AIOC and said that the plan included the formation of a subsidiary to the AIOC as the purchasing company. Mr. Nitze
- 7 -
said that that was one of the questions on which we wished to have the views of the American oil companies as to whether they thought it best to work through the AIOC subsidiary or through another vehicle.
Mr. Jennings said that before the oil companies could really contribute to the discussion, he thought they really ought to have the answers to several fundamental problems. One of these was the development of a "set of numbers". He wondered how a price structure could be arrived at without changing the present price structure throughout the industry and without giving the Persians an income in excess of the 50-50 formula which was now operative in most major production areas. He thought that to upset either of these fundamental conditions would have a cataclysmic result. He remarked that if the Department had other numbers he would like to hear them. Mr. Nitze replied that our figures resulted in a price of from $1.05 to $1.21 and that our objective certainly was a price which would not over- compensate the Iranians.
Mr. Jennings said he felt the only way the price could be held within the formula would be if one entered into abnormally long-term purchase contracts or into abnormally large-volume purchase contracts. It was very difficult to envisage that a low price could be maintained on a contract as short as 18 months or on as small a volume as say 30,000 barrels per day.
Mr. Holman said that in his view it was essential to solve the compensation aspect before any oil could move. Mr. Nitze indicated that it was the view of the Department that the problems involved in a commercial agreement must be solved simultaneously with any arrangement for compensation. The Secretary interjected that we felt the matters must be handled simultaneously. When one talked with Mossadeq one had to be in the position to show him where the matter started and ended and this required us to be ready to lay out the entire package. Mr. Holman said then there also remained the question of operating the property and Mr. Nitze stated that it was our view that a firm of engineers such as Stone and Webster or Kellogg would assist the Iranians in operating the property.
- 8 -
Mr. Long said that ARAMCO was already in trouble in Saudi Arabia-that they were in a very delicate situation with the Saudi Government. He said he could appreciate the national security viewpoint but that basically they felt that this was a British problem. ARAMCO was cutting back its production now and any further cutbacks in order to assist in moving Iranian oil would create extremely difficult political relations with the Saudi Government. The Saudis would inquire exactly whose interest ARAMCO had at heart if it, in effect, cut royalties available to the Saudis in order to assist Iran.
Mr. Holman said that any settlement must be carefully weighed because the possibility it "would get us out of step" if it did not protect the existing structure of the industry. In addition, whoever operated the Iranian industry and sold to a designated purchaser must be a competent, able unit-one that could guarantee the quality of its products. He said that it should be understood that it was hard to find a home for oil today. The industry was operating in a buyers market and long-term commitments under the present situation were difficult because companies had to foresee considerable fluctuation in the market price. Mr. Jennings said that from his point of view, how the compensation figure was to be handled was the major question because this, coupled with the current price, would determine the actual percentage income to Iran. The Secretary said that he did not think this was an insurmountable obstacle because, from the point of view of the other producing countries, he doubted that it would be attractive for them to duplicate what had happened in Iran since the Iranians were coming out with only two thirds of their former production and the net take would be less than it had been under the previous agreement offered by AIOC. In addition, a figure of approximately 25% of their current income would be going out as compensation.
There followed an extended discussion of the difficulties involved in devising a workable program. The representatives of the companies said they desired to be helpful but were in no position to take a commitment of any kind at that time. It was agreed that the group would reconvene on Tuesday, December 9th, at 3:30 p.m.
JCKitchen
S:JCKitchen:mlm