INTELLIGENCE MEMORANDUM NEW DEMANDS BY THE OIL PRODUCING STATES: PARTICIPATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700030008-9
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: January 18, 2011
• Sequence Number: 8
• Publication Date: January 1, 1972
• Content Type: IM

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Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
New Demands by the Oil Producing States: Participation
Confidential
ER IM 72-8
January 1972
Copy No. 72
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
January 1972
INTELLIGENCE MEMORANDUM
NEW DEMANDS BY THE OIL PRODUCING STATES: PARTICIPATION
Introduction
1. Representatives of the Organization of Petroleum Exporting
Countries (OPEC)(') and the international oil companies are scheduled to
meet in Geneva on 20 January 1972 to discuss the demand of OPEC
members to participate, as part owners, in the management of the companies
operating in their countries. The oil companies had hoped publicly that
the revenue agreements concluded with OPEC members in early 1971 would
provide a five-year period of stability. The demand for participation, coupled
with OPEC's demand for increased revenue to offset lost purchasing power
resulting from dollar devaluation, threatens that hope.
2. This memorandum reviews the current participation aims of
OPEC, discusses the possible effects of participation on both parties and
on world oil activities, and assesses the likely outcome of the Geneva
meeting.
Participation: Not a New Issue
3. Most of the current output of oil in the OPEC countries is
produced under concession agreements that do not provide for participation
by the host governments, but there are precedents that recognize this
concept. A concession granted by Iran (then Persia) in 1901 provided for
1. The members of OPEC ai_: Abu Dhabi, Iraq, Iran, Kuwait, Saudi Arabia, Qatar,
Algeria, Libya, Nigeria, Venezuela, and Indonesia.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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participation, but this provision was dropped in a later renegotiation of
the concession agreement. The agreement between the Iraq Petroleum
Company (IPC) and the government of Iraq permits the latter to purchase
up to 20% of any shares issued by IPC. This option was never exercised,
however, because no shares have been issued.
4. In recent years, most of the new agreements - covering areas
not under the old concessions - have departed from the concession
arrangement. Many have followed a pattern of joint ventures in which the
foreign company entered into some form of part:iership or participating
arrangement with a national oil company. These arrangements usually cede
production rights in a defined area to a company of which the national
oil company holds a portion of the shares (in most cases, 50%), the
remainder being held by a foreign company, or group of companies. The
foreign oil companies usually bear the capital risk during exploration and
are reimbursed only if oil is found. Participating-type agreements have been
achieved by Iran, Saudi Arabia, Kuwait, and Abu Dhabi. The "major" (2 )
oil companies have eschewed participating agreements except for Shell, a
UK/Dutch firm, which has a history of being short on crude oil supplies.
Smaller US companies (for example, Continental Oil, Atlantic-Richfield,
Union Oil, and Phillips Oil) have been active in. participating agreements
as well as Ente Nazionale Idrocarburi, the Italian state oil company, and
several state-backed Japanese oil firms.
5. In some cases, the agreements take the form of a service contract
between a company and a national o:1 company, which owns any oil found
as well as the facilities. Under most contract agreements, the foreign oil
companies take the exploration risk and, if oil is found, advance the money
required for development. The advance may be repaid in crude oil, while,
in return for taking the exploration risk, the contractor is granted the right
to purchase a portion of the crude oil at a low price. Contract arrangements
were pioneered during the mid-1960s by the French state-owned company
Entreprise des Recherches et d'Activities Petrolieres and the national oil
companies of Iran and Iraq. Since then, service contract agreements have
been signed in Indonesia, Libya, Algeria, Venezuela, and Nigeria. Most of
the contract agreements are with smaller oil companies, but Mobil, Shell,
and Gulf also have entered into this type of agreement in Venezuela and
Indonesia.
6. The first collective expression by the oil producing states of their
desire to modify older concession agreements was in a formal statement
of goals by OPEC in 1968. Participation was made a current item of
2. Standard Oil (New Jersey), British Petroleum, Royal Dutch Shell, Standard Oil
of California, Texaco, Gulf Oil, and Mobil Oil.
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bargaining by a resolution passed at an O EC ministerial conference in
Beirut in September 1971.
Participation: Different Views
7. OPEC members probably are unanimous in desiring working
interest in the management and operations of the concessionaires in their
countries but differ on the share of, or the method of achieving,
participation. The initial demands at the Geneva meeting probably will
reflect the desires of the Persian Gulf members and Nigeria. The other
members - Indonesia, Venezuela, Algeria, and Libya - have different
situations and are likely to be merely observers. Indonesia has effective
management control over all of the concessions issued in recent years, and
the agreement with its major producing concessionaire has been renegotiated
to provide for government control in the future. Venezuela now exercises
control over its oil industry through legislativ.'power and executive decree,
which authorize the government to set tax reference prices and tax rates
and to impose production controls. Moreover, most existing concession
agreements begin expiring in 1983, and full ownership is to pass to the
government at that time. In early 1971, the Algerian government took over,
through legislation, majority control of the foreign oil producing ii iterests
and complete control of its natural gas resources. The Algerian national
oil company, SONATRACH, now produces and markets 77% of Algerian
oil production. Algeria is the only major oil producing country that markets
a substantial portion of its own oil production. Libya is expected to push
for majority participation independent of any action of Ot"EC.
8. Among the Gulf States there are varying degrees of interest. Iran,
for example, has little enthusiasm for the issue of participation because
it expects to control its oil operations when the existing concession expires
in 1979.() However, Iran, along with the other moderates - Saudi Arabia
and Kuwait - sees participation as a way to an orderly transition of present
oil activities to its control withcut jeopardizing the existing international
oil marketing structure. These countries also agree that control over their
oil resources is vital to their national goals. Nigeria has indicated it plans
to seek a larger share of ownership than the Gulf States do.
OPEC's Aims for Participation
9. Although the ultimate goal of the oil producing states is complete
control over the exploitation of their petroleum resources, the near-term
goal is the establishment of a working interests or active participation in
3. Although companies contend that they have three five-year options available to
them, Iran has indicated that these options probably will not be honored.
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this exploitation. The initial demands of the Persian Gulf members probably
will follow the recommendations of an OPEC working group established
to study the issue. The working group does not recommend a specific
percentage participation, but press reports indicate that the Persian Gulf
countries will ask for 20%. The working group does recommend that the
cost of acquisition for the government's share of participation be calculated
on a net book value basis (depreciated capital investment) with payments
in cash over a period of years, as yet unspecified. This formula would result
in a relatively low valuation and would impose no serious hardship on the
governments. The working group also proposes, however, that the
governments finance their share of future operating and development costs.
10. The OPEC members are anxious to avoid disrupting world oil
prices and will propose that the oil companies market any oil their national
oil companies cannot. The price at which "participation oil" marketed by
the companies would be credited to the countries' account is expected to
be a contentious issue. OPEC probably will propose a formula by which
the price credited would provide the countries a profit per barrel
approximately equal to the profit that the companies now realize.
11. Although some moderate revenue increases would accrue to the
producing states through participation, their primary goal is to achieve a
greater say in the production and investment decisions made by the
companies and a better position from which to monitor the oil companies'
operations. The national oil companies of the producing states would gain
managerial experience and expand their technical competence.
Companies' Position
12. The oil companies through the London Advisory Group,
composed of representatives of 22 international oil companies, have
solidified their position. The companies have no intention of negotiating
this complex issue at the Geneva meeting; they probably will listen to
OPEC's demands and promise to give them careful consideration. It seems
likely that the Geneva meeting will be only the beginning of a series of
long, arduous negotiations taking place over many months.
13. The companies' 1eg?1 position is that the participation demands
are a violation of the revenue agreements of early 1971, which promised
financial stability through 1975. At future negotiations the companies
almost certainly will oppose the net book value concept of assessing the
cost of acquisition as being too low and not taking into account future
earning capacity (discounted cash flow). The companies also will try to
recoup some of their lost revenue by pushing for a lower price for the
participation oil they are obligated to market for the governments.
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Strengths and Weaknesses of Both Sides
14. The agreements for greater revenues imposed by OPEC in early
1971 clearly demonstrated the shift in the balance of bargaining; strength
from the companies to the OPEC member states, who account for 60%
of the world's proved oil reserves and about 90% of the world's oil exports.
No alternative sour;,es of oil or energy are likely to become available in
the rear term at reasonable cost. Even with the new oil discoveries in the
North Sea and Alaska, the oil importing countries will be heavily dependent
on oil from the OPEC members at least through this decade. Moreover,
the OPEC countries represent the sources of the lowest-cost oil and the
highest potential profits.
15. The OPEC solidarity that characterized the revenue negotiations,
however, may not be maintained at the Geneva meeting, because of
differences in interests and motivation. Moreover, the Arab states,
particularly Iraq, are antagonistic toward Iran - the leading force in the
1971 negotiations - because of the "Gulf Settlement ".0)
16. In some respects there is a mutuality of interests between the
companies and the producing countries. Control of oil resources is worthless
unless oil can be transported, refined, and marketed, which the oil
companies alone are equipped to do. Only the companies have the technical
ability and vast capital resources necessary for continued rapid growth of
world oil production. Moreover, the oil producers recognize that the
companies, working in concert, provide stability to the oil market and hold
up oil prices by informally rationing output. They are aware that mutual
cooperation on production policy - without the companies - would be
very difficult because of differences in the cost of oil and in the urgency
of need for increasing oil income. The OPEC countries have been able to
achieve a common position on price policy, but this accomplishment was
greatly facilitated by the companies' control over marketing.
Prospects for the Geneva Meeting and After
17. The Geneva meeting is unlikely to lead to a showdown between
the oil companies and the oil producing countries. It probably will serve
only for preliminary talks, which will be followed by long, arduous
negotiations on a country-by-country basis. Both sides probably will seek
a cooperative agreement; neither side wants either the flow of oil or the
4. On 30 November, Iranian forces occupied Abu Musa island and the two Tumbs
islands in the Persian Gulf as part of a settlement with the Ruler of Sharjah. Most
of the Arab countries issued statements deploring Iran's action. The most severe reaction
came from Iraq, which broke off diplomatic relations with Iran.
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marketing system to be disrupted. The oil companies will argue and resist
but ultimately will be forced to accept some degree of participation and
to settle for payment based on net book value of their assets.
1 S Participation is not expected to result in a major restructuring
of the world oil market. The governments have long been influencing the
production decisions of the companies. The Shah of Iran, for instance,
annually prods the Iranian consortium to raise production. Participation
w?ll undoubtedly enhance the governments' ability to influence production
and investment decisions, but the governments will be able to exert influence
only on the companies' indigenous operations, which are primarily extractive
in nature. The parent multinational company will continue to make the
major decisions, including those on refining and marketing. The oil
producing countrie will undoubtedly increase their revenues but at the same
time will be forced to share in operating costs and the costs of new
investment. Company earnings may decline but the impact on net cash
receipts (earnings less new investment) may be small. Moreover, participation
may provide the companies a degree of political insurance against arbitrary
advice by goven.ments. The potential for discriminatory treatment against
US companies, for instance, may be lessened by participation.
Conclusions
19. At the Geneva meeting, OPEC's participation demands will be
muted by the mutual interests that exist between the oil producing countries
and the oil companies. The OPEC members recognize their dependence on
the companies' technical ability, capital resources, and orderly control of
the world oil market. The oil companies, on the other hand, depend on
OPEC for most of their oil supplies. In the face of these realities, it is
unlikely that OPEC will be so demanding or the oil companies so adamant
that a disruption in oil production or marketing will result from the
participation issue.
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