IRAN OIL

• Document Type: CREST
• Collection: Library of Congress
• Document Number (FOIA) /ESDN (CREST): LOC-HAK-30-6-23-6
• Release Decision: RIPLIM
• Original Classification: S
• Document Page Count: 15
• Document Creation Date: January 11, 2017
• Document Release Date: November 9, 2012
• Sequence Number: 23
• Publication Date: February 9, 1973
• Content Type: MEMO

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MEMORANDUM FOR: GENERAL scowcR,OFT
FROM:
SUBJECT: Iran Oil
HAROLD IL SAUNDERS
INFOR:h4A
650-X
February 9, 1973
1. The attached memo is probably the beet account you will
see on the Shah's attitude toward the oil negotiations. It is also useful
because it gives a picture of exactly what an emissary would face if he
approached the Shah on behalf of the President.
Z. The second owner attached is a draft paper that I will be discussing
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with on Monday. It is the paper that you asked for
at the meeting of your working group just before you left. I hesitate to
give you this draft because it iU be a much more finished product after
25X1 I have contributions. You can ignore it until I
send you a finished draft Tuesday, but I thought you might want a chance
to comment on the general approach before then. Unless I hoar from
you I shall just push ahead with the objective of having a finished draft
to you Tuesday. That one will be turned into a vehicle for decision.
MORI
C03320405
State Dept.
review completed
isigREagmi
1-IHSau.nders:tmt 2/9/73
ON-FILE NSC
RELEASE
INSTRUCTIONS
APPLY
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February 9, 1973
U.S. INTERESTS IN IRANIAN OIL,
On January 23, the Shah announced that the consortium of oil
companies operating in Ir-an facestwo choices for the future:
1. It can continue present operations until 1979, with some
tax adjustments, after which it will enjoy no special privileges
and receive no compensation.
2. It can turn over operations now to the Iranian national oil
company, in return for which the companies will, receive long-
term purchasing contracts at discounted prices. The terms of
compensation were not specified, but would presumably approxi-
mate those used in the Saudi participation agreement.
By making this announcement, the Shah has apparently foreclosed
the option of continued operations of the consortium through 1994, with
financial adjustments to match the terms reached in the Arab participation
agreements. The USG and the companies will have to reach an early
decision on whether to try to get the Shah to withdraw from his present
position and return to negotiations on a financial package to meet Iran's
demands within the framework of the consortium, or whether to press
for modifications of the Shah's two options to make them less disruptive
to US interests.
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A case can be made for confrontation with the Shah over his
unilateral actions of January 23, whereby he threatened to break the
contract with the consortium op flimsy pretexts. The consuming countries,
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after all, have substantial potential influence in Iran, and it is at least
worth considering whether it might be possible through concerted action to
force the Shah to back down. On balance, however, it would seem that the
Shah will be adamant in sticking with his two alternatives. This is an
important judgment to make before considering which of the two options
is better in terms of US interests.
The analysis of US interests below is intended first to shed light on
whether it is important for the US to try to persuade the Shah to back down and
then.) assuming that effort may not be worthwhile, to deal with the question
of how the Shah's two options affect US *interests. If we are not to try to
force the Shah to retreat, the next question is whether the US should press
for one of his two options. The Shah has made it clear that he prefers a
long-term sales contract and will be quite angry if the companies refuse
this alternative., The US companies have wavered, but some believe that
continuing the status quo through 1979 will be more advantageous.
The key issues for the US are the following:
1. What is the US national interest in the operations of American
oil companies as producers in Iran? This question is basic for
two reasons: (1) 11 there were a way to modify the Shah's formula,
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how much should the US Government invest in supporting it?
If there is no way to modify the Shah's formula, does an analysis
? . of?onr.ix4erests suggest: that . . one of the Shah's options would.:erve
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our interests better than the other?
Z. ,How do the Shah's two options each affect those interests and
other oil interests in the region?
3. Should the USG take a position on which option should be
accepted by the companies?
4. What action, if any, is required of the USG?
Our Interest in US Oil Company Operations as Producers in Iran
In their heyday, US oil companies were seen as guarantors of oil
supply to the Western world, as well as profitable business investments
abroad. Today, since the producer countries have increasingly gained
power and sophistication, it is assumed that the companies have lost
their role as independent counterweights to the governments in producing
countries and have more and more been reduced to a technical role in
production'exploration and distribution--principally the last two. It is
increasingly felt that if the interests of consuming countries in reasonable
prices and security of supply are to be protected the responsibility will
fall on the governments in consuming countries and not on the companies.
The remaining interests of the USG in the operations of US companies in
Iran can be reduced to four:
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1. a general interest in protecting US enterprises abroad
against confiscatory nationalization. In the case of oil companies,
, the principle of .compensation at updated book.yalue,. recently
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worked out with Saudi Arabia, is at stake. The Saudis have
served notice that accession to the Shah's demands could cause
them to re-open their negotiations.
Z. an interest in the repatriation of US profits from companies
operating abroad, since this positively contributes to the balance
of payments. From Iran, the positive contribution to the US
balance of payments ledger in 1971 amounted to about $450 million.
Some portion of this could be lost under either of the Shah's options.
3. the "echo-effect" that any actions against US companies in
Iran might have in Saudi Arabia and elsewhere. The major issue
is the effect on the participation agreements with the Arab states
in the Gulf.
4, an interest in the technical contribution the companies can
make through investment and management to efficiency in production
and, more important, to aggressive exploration. This may be less
a factor in Iran and Saudi Arabia than in other areas, but an interest
in these activities generally would encourage support for the
companies' rights.
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The Effects of the Shahs Options on US Interests
The consequences of the Shah's two alternatives are discussed in
relation to the major US interests identified above.
. Option 1:- 'Continue operations to 1979, then end special status.'
Interest 1: Precedent of Confiscatory Nationalization
?No necessary short-term impact, provided
that attention not focus on post-1979 arrangements.
Time is gained to work on compensation formula
after 1979.
--But Shah has announced that in 1979 he will
take over without any compensation. Unless this
can be modified precedent could be very
damaging elsewhere.
Interest 2: Balance of Payments and the Repatriation of Profits
[CIA is preparing detailed study that will be
available February 13.]
?Company profits through 1979 will continue on
present basis. No short-term balance of
payments loss anticipated.
--But, after 1979, if US companies lose favored
position in Iran, balance of payments contribution
from Iran oil operations NNW decline.
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--In view of .uncertainties over future prices,
however, it will be difficult to estimate
. . b. 0.p. effects precisely. ,
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Interest 3: Effect in Saudi Arabia
--Little short term impact, provided post-1979
arrangements not stressed.
--But after .1979, if no modifications prospects
of disrupting participation agreements.
however, participation agreements are proceeding
normally in 1979 Saudis may wish to cultivate
reputation for responsibility, in contrast to
unreliable 1r an.
Interest 4: Technical Contribution of US companies
--Reduced US company role in Iran and little
new investment as 1979 takeover approaches.
--But possibility of working into agreement a
formula for amortizing any new investment
between now and 1979.
Option 2: Lona-term Sales Contract at Discounted Prices,
Interest 1: Precedent of Confiscatory Nationalization
--Serious problem if terms are bad.
--But Shah has indicated he will follow same
formula as used in Saudi Arabia,
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Interest 2: Balance of PaLyments and Repatriation of Profits
-7.1rVill depend on price advantage under long-term
contracts. May be less favorable in short run
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and better?in long run.
--Major b. o.p, effect will come from world price
of oil. Some argue that national oil companies
will find it difficult to drive prices up, and may
in fact lower them. If true, net advantage insofar
as US is importer of oil.
Interest 3: Effect in Saudi Arabia
--Possibly disruptive to participation agreements
If presented by Shah as victory for his leadership
and wave of future.
--But Saudis less able to take over now; interested
? in reputation for reliability; and more likely to
renegotiate for earnings increases than for
entirely new agreement.
Interest 4: Technical Contribution of US Companies
--Less involvement in Iran, with possible effects
elsewhere.
--But prospects for contract work with Iranian
national oil coJnp,ny and in other producing countries
if companies retain capabilities and incentives.
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Comment: With respect to each of these four interests, US companies
will be seriously weighing pros .and cons in their responses
? tattle Shah.- US national interests do .not diverge signi-
ficantly from those of the companies and thus we will
want to include their judgment of costs and benefits in
reaching our own conclusions.
The US Position on the Shah's Two Options
If the US can do nothing to get the Shah to back down from his
January 23 ultimatum, we have several choices. We can take no action
apart from general support of the companies in whatever choice they make.
Or we can try to influence the companies and subsequently our European
allies to accept one or the other of the options. Finally, and perhaps most
usefully, we can press for modifications in the options which will make
any choice minimally disruptive of our oil interests elsewhere. A basic
question is whether the USG has any interest in which option is chosen
a 0 n the preferences of the US companies. The companies themselves
will be assessing the impact of the options on future earnings and will want
to avoid upsetting the participation agreements in Saudi Arabia. To this
extent company and US interests coincide. A choice will ultimately rest
on the comparative advantages of the two options.
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Advantages of Option 1 (Status quo to 1979)
--Less disruptive in short-run.
-:-Buys time:to work for modifications after ?19.79, so that
final option might include both compensation and future
sales contract.
--Participation agreements less likely to be affected.
Advantages of Option 2 (Sales Contract now)
--Shah, Europeans and some US companies may prefer this
option. If so, US can avoid confrontations by supporting this choice.
--If sales contract respected, some prospects for long-run
stable supply and somewhat lower prices.
?Compensation likely to be paid on updated book value.
yy.-jaa_LLus Actions Are Appropriate?
We are already in close touch with the US companies. The range of
actions open to us falls into two broad categories--approaches to the
governments of the other major consuming countries (British, Dutch,
French--perhaps Japanese, Italians, Germans) and approaches to the Shah.
The possible elements of approach are outlined below.
Approaches to Consumers. The following are the kinds of approaches
that could be made to the governments of the consuming countries:
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--The minimum approach would be to talk with the UK,
Netherlands and French governments once we have decided on
position towards the Shah's proposals. The purpose would be
to gain support for a concerted approach on the next round in the
negotiations.
--In addition, an argument has been made for forming a closer
association among the governments of the consuming countries.
Not enough time is available now to do this in any elaborate way.
The proposal at this stage would be to approach the main DAC
governments (UK, Dutch, French, Italians, Germans, Japanese)
urging them to take the following line with the Shah: "It is
essential to the orderly flow of investments in the world that
there be stability in agreements reached. 11 agreements are
reached and then unilaterally abrogated, this will have a serious
effect on the flow of future investment. " The implication would
be left that the substantial credits Iran will be seeking in these
countries will be in jeopardy. This line would, of course be a
step toward confrontation between the consuming and the producing
governments, although the objective would be to handle the approach
so as to leave the Shah an honorable course. Those who make
this proposal feel the approach would have to be from the President.
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Approaches to the Shah. It is possible to think of approaches to the
Shah on two, planes:
--There could be a broad discussion .of US-Iranian relations
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interests and strategies. The range of topics to be discussed
would include Soviet objectives in the Middle East; the threats
to stability in the Persian Gulf and Indian Ocean regions; the
potential for intra-regional cooperation (Iran, Saudi Arabia,
Jordan, Egypt, even Israel); the degree of Saudi-Iranian cooperation
possible; the role of the US in Saudi Arabia, the Gulf, Iran, the
Indian Ocean; the importance of reciprocity in US-Iranian
relations. The discussion could lead toward but stop short of?
the consequences for the US position in the Gulf if the participation
agreements collapse.
--Although the Shah will not regard oil as an appropriate subject
for the USG to address, there is the possibility of a USG approach
related to whatever response the companies make to the Shah's
proposals. The choice is among these elements:
--Specific backing for the companies' proposal.
--General expression of preference for one of the Shah's
two options or some modifications of them.
? --A more generalized discussion of the general principles
that need to be preserved.
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