BACKGROUND ON THE DISPUTE WITH PERU

• Document Type: CREST
• Collection: Library of Congress
• Document Number (FOIA) /ESDN (CREST): LOC-HAK-286-2-5-7
• Release Decision: RIFLIM
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: January 11, 2017
• Document Release Date: May 3, 2011
• Sequence Number: 5
• Publication Date: June 18, 1969
• Content Type: MEMO

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INFQ~'LM:ATIQI~
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N~CEIa~Q$A.~~Uh~ FC~Tt THT PR,'~SII~]~l+fiT
FRCS Henry A. Kissinger
SU}3T~CT: Background on the i.7ispute va~ith Fero
Attached is a nrx+sxx~rat~dxuaa sketching some of tie backgro~xaad to the
current IFC is~rxa~e i~ Feru. You, may :~'iaxd this of intexcst.
'T'he xxxexxiorax~d~. states that the diispvte betweem the United Staten
and Ferax stenos fxa~xs the converge~.ce of three historically distixact
phencaxxa:e~aa: I) the waique status and history of IT'C in Fero; ~) grc~..
ing Peruvian naticxnalisx~x and 3) the legislative reat~'ictiana placed
on U5 ecantarxaic axad xrailitary assista~tace. The arxaernorax~dum's thesis
is that away axe of these three fa-ctt-r* would ixidepexadently have eacacer-
bated our relaticarxs w~.th Fero, s.xad each has vn a number oaf occasicans
iaa rec+~~rt years. Tn cornbix~a.ticxn, the three have xx~ade for the preserc-t
serfdus impasse. T'he paper discttss~es oxaly the first two.
The peculiar status of IFC as the only foreign, caax~.par~y operatixag ~
T'eru Ta~rith a claiara. to eav!vnerehip of subsoil wealth, the long history of
xxationalistic effc-rts to correct this azw~-.ly, the public relatica~a.s
pasture and. labor policy of the company thrr~ugh its history, which
left something to be desired ~ ea.rly years--all cbx~bissed to ~aensitize
the Peruvii.a.n pulalic to the corrs.paxzy. The zr~emorandurn traces the
hi~ntvey of the di,sgute frcaxn. the puxchase csf the concession by the
iaatexx~:atioreal P'etralevrm Caxxxpar~y to the present.
Growixag z~atianalisxn has since the end ~ W~arld 1i~ar Il caused a gara-du-
ally evolvia~g ac~c-venr~.ex~t away fraua wacrit3:cal i?l~.a~rri~ag US l,eadershfg.
U5 ecoroxxAic pawex is sc- a*isible amd preprandere~at in Fero that it has
beccaxrxe a. target for x~a-ti?a~;alisxxs, aiad a cxeatoz of zesentme~at aver
the years.
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~ ~
'X'ha xxu~x~ua~nxae~ concludes t~-t t~ae+r~ ~ ~~tc~re ~~ crrurrerged
tee the ~a#xa-t t#~t x~eos~t ca# ~e~u'~ ~.litex~y aa~.d gr~ese~ak tsmmder~s a~r+~
"detarxara$~txRd try xrxave ~~ ca~~xtry out ~'~~ ur~r the L~~ rhadavv. "
.A.ttaeh~xxt:
Tsb A.. - hieas~-~ur~z c+~~ai~g bsckgrowud oa IPC-Pexu
V~'Vaky:jrr 6/16/6
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CENTRAL INTELLIGENCE AGENGY
WASHINGTON, D.C. 2U505
~ uu~ ~~~~
MEMORANDUM FOR: Dr. Henry A. Kissinger'
Assistant to the President for
National Security 'Affairs
SUBJECT Background on the Dispute with
Peru
Attached is a memorandum on the dispute
with Peru which you requested from Mr. Smith
on 22 May. As you know, this dispute stems
from three distinct phenomena---the unique status
of the international Petroleum Company; growing
Peruvian nationalism; and the legislative
restrictions placed on US assistance. The paper
we have prepared addresses itself to the f irsir
two of these problem areas.
EDWARD W, PROCTOR
Acting Deputy Director for intelligence
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No. 1571/69
4 June 1969
Background of th'e `Current Dispute with Peru
The dispute. between the United States and Peru
stems from the convergence of three historically dis--
tinct phenonema. (T) the unique status of the In-
ternational Petroleum Company (IPC); (2~ growing
Peruvian nationalism; and (3) the .legislative re~
strictians placed on US economic and military as-
sistance. Any one of these would independently
have .irritated US-Peruvian relations. In fact, each
of them has done just that on a number of occasions
a.n recent years.. In combination the. three have made
for the present serious impasse. This paper discusses
the 'first two.
SEGRE~I'
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The "Intexriatio'nal Pe'troleuin Company (IPC)
The IPC has been the only foreign company
operating in. Peru--or, for that matter, in any major
Latin American country--to claim actual. ownership of
subsoil wealth. Rights to subsoil deposits. in Latin
America have traditionally been reserved for the
nation.
The IPC appears to have acted in good faith
when it acquired title to the subsoil deposits in
the La Brea y Parings oilfields. The rights were
originally acquired by a Peruvian in 1826, .transferred
to a British company in 1889, and sold by that com-
pany to the TPC in 1924. Two years earlier--in 1922--
an international arbitration award had settled a -
dispute between the British and Feruvian governments
.over taxes to be applied to the oilfield exploitation.
The award confirmed that the property included the
subsoil deposits. Even in 1922, however, private
ownership of subsoil deposits was an anomaly in Peru.
Very recently, ,and with the advantage of hindsight,
a Sritish oil company official commented: "we sold
the IPC a ti.mebomb in 1924, ,and they never learned
how to defuse it."
As long ago as 1943 there were political Ares-
surer in Peru to nationalize new fields being de-
veloped by IPC in the La :Brea y Parings area, but
successive Peruvian governments. did not officially
cliallerrge TPC's title to the subsoil deposits until
1963. In that year the Peruvian Congress, at the
urging of newly inaugurated President Belaunde, uni-
later-ally abrogated the international award of 1922.
Then, in 1967, the Congress passed more legislation
.declaring that state ownership of the La Brea y
Parinas~deposits had been "recovered" by the 1963
legislation and authora.aing expropriation of re-
lated above-ground installations. IPC's operations
were not immediately affected. Political leaders,,.
however, used nullification of the titles to claim
that IPC had been guilty over the years of "unjust,
enrichment" and that its "illegal" operations in
~.a Brea y Parings had resulted in a debt to the
Peruvian nation.
Negotiations between the company, and the Be-
laundergovernment ensued and, after many fits and
starts, .a comprehensive settlement was reached in
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August 1968. Key provisions of this "Act of Talara"
were recognition by the IPC of the state's ownership
of the La Brea y Parinas subsoil rights in return
for release of TPC from any debts to the state for
its prior operations in La Brea y Parinas. T~.is
settlement might have been made tv stick in 1963,
or perhaps even in 1967, but August 1.968 was too
late. Belaunde's "sell-out" to the TPC grew into
?~ a major political controversy and promised to be a
hot issue in the developing campaign for the presi-
dential election, ,then scheduled for June 1969. Eden
Belaunde's own political party split ,over the issue.
"The Act of Talara," and the political crisis it
produced, became the pretext for the military coup
of 3 October 1968.
On 4 October, the new military government de-
creed the nullification of the "Act of Talara,"
and on 9 October, .in another decree-law, it announced
the expropriation of the IPC's Talara refinery and
related i.nstallati?ns. These acts were greeted with
widespread popular support ?rom all segments of
Peruvian society.
When. it took these actions, the military gov-
ernment recognized the principle of compensation
for the expropriated refinery and related a,nstalla-
bons, but n,ot for the subsoil rights at. La Brea y
Patinas, It stated that the government would evalu-
ate the expropriated surface assets and offset ahem
by the'"debt" which TPC had incurred by "illegally"
operating the oilfields for the past years. ~ In
February 1969 the.'"debt" was formally declared to
be~$690 million. Meanwhile, a special government
commission evaluated IPC's refinery and related
above.-ground facilities at $54.7 million.
For mare than three months after the Octo-
ber decrees, the TPC continued its marketing and
distributing operations in Peru by ad hoc arrange-
manta with the state petroleum agency.. This arrange-~
merit came ao an end on 28 January 1969 when the
state: took over full operational management of the
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c?mpany. The company's assets that had not been in-
cluded in the October expropriation were seized and
are to be auctioned off to satisfy an alleged $l4
million debt incurred by the company for the products
drawn since October from the Talara refinery for dis-
tributivn through its marketing facilities.
.During its ~4 years in Peru, the IPC has had'
a variety of other difficulties with the Peruvian
Government.: One of the most troublesome related
to the tax system that was to apply to exploitation
of the oil and gas deposits. In 1951 the company`s
status for tax purposes was altered so that it became
one of the country's biggest taxpayers.
The IPC's public relations posture, its labor
policies, and its tactics a.n dealing with government
were probably neither better nor. worse than those of
other comparable foreign companies operating in Latin
America. These compan~r policies apparently left much
to be desired in the' 1930s and l9~Os, when the company's
Talara complex is reputed to have been something akin
to a foreign enclave on Peruvian soil. Peruvians stall
tell stories about prominent government officials
or military officers being denied entry to the com-~
plea by overzealous IPC officials. It is pertinent.
to:nate that President Velasco was born and raised
near Talara. It is likely that his current attitude
toward the TPG was shaped in part by his early im-
pressions of company practices.
During the 1950s, the IPG launched an effort
to improve its local image and to bring more
Peruvian nationals inta company operations. Its
public relations effort was evidently not the most
effective, but its policy of training Peruvians in
technical and managerial positions in the company
dues seem to have been successful,' One high company
official remarked: recently: "We trained them too
we~:1; now they can run the business without us."
Another official testified that at the tame of the
sea;zure "we had'4480 employees, ,of which only 45
were North Americans."
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The attitude toward IPC among other American
businessmen in Peru is revealing. The US Embassy
found very little sympathy for~zPC when it canvassed
the American business community in Lima early this
year. Most businessmen were critical of the ZPG's
handling of its problems with the government over
the years and some were even skeptical. of the com-
pany's good faith in seeking negotiations., ~t has.
been reported that many American companies in Peru
feel they will be hurt by the effort of the US Gov-
ernment to protect one.
'Growi'ng Peruvian Nationalism
The history of Peruvian foreign relations since
the erid of World War r2 reveals a~gradually evoly-
ing movement away from the former pattern of
uncritically following th;e US lead in world affairs.
Geographic proximity to the US and US economic power
had argued for a close alliance with the US. But
most Peruvians--at least those in the upper echelons
of government and society--had traditiona~.ly felt
a much greater affinity for the Latin countries of
Western Europe than for the Anglo-Saxon society in
the US, Tn a period of expanding international hori-
zons after World War II many Peruvians came to feel
that their country's national interests were not
necessarily identical; in all instances with those
of the United States, ,and that if Peru were to play.
a role in the United Nations and elsewhere on the
world scene it should make and pursue its own poli-
ties.
The first official reflection of the trend to--
ward a more independent foreign policy came during
the second administration of President Manuel~Prado
(1956-1962). Whereas some Latin American countries
had begun to look to the Afro--Asian "third world"
or to~the Soviet bloc in pursuit of a more indepen-
dent policy, Peru under Prado looked to Western Eu-
rope. The Belaunde administration (1963-1968), ,though
it was forced to concentrate on domestic issues mos t
of the time, moved further along the road toward an
independent policy. It was cautiously approaching
diplomatic and commercial ties with the Soviet Union
prior to its overthrow last October.
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In this period of widening. international in-
terests, Peruvian policymakers have felt them-
se7:ves hemmed in and their options limited by the
dependence of the Peruvian economy on US economic
power. US firms dominate many of the country's ex--.
port industries and have been increasing their in-
fluence in domestic trade. In 1968, the US pur-
chased~39 percent of Peru's exports and supplied
38 percent of its imports.. Prom fiscal years 1962
through 1968, the US authorized Peru a total of
$354 million in economic aid and Export-Import Bank
loans and $$2 million in mi7.itary assfstance. Actual
disbursements have been below these figures. In
addition, international lending agencies in which
the US is influential have authorized some $250
million in loans, .and Peru has also received large
= loans from private US banks,
US economic power is so gxeat in Peru that
what may seem to be a relatively minor decision in
Washington can have. very serious repercussions there,
A dramatic example of this took place in 2958 when
Washington decided to cut Peru's quota for Zead and
zinc exports to the US--~a move that would have had
a serious impact on the Peruvian economy. An angry
President Prado authorized a protest demonstrata.on.
The Peruvian Congress passed a resolution censuring
the US action and instructing the Peruvian Govern-~
merit to se1:Z the country's Lead and zinc to any mar-
ket it could find, including Communist countries..
The US subsequently decided to ignore the quota sys-
terri and to buy Peru's entire 1958 production of these
minerals. The incident did, however, strengthen the
argument of thcise Peruv~.ans who had been maintaining
that Peru must, in its own self-interest, reduce its
dependence on the US market by expanding commercial
ties elsewhere 'in the world.
Peruvian resentment over US economic power
has been latent most of 'the time in recent years,..
but it peaks suddenly whenever the United States
consciously or unconsciously uses economic pressures
to influence Peruvian policy. There have been a
number of occasions in recent .years when the US has
-6-
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threatened or actually used economic pressure in
response to actions taken by the government in Lima.
a. Immediately after World War II the Busta-
mante administration bucked strong domestic
opposition and reversed a wartirn~ decision
to nationalize new oilfields developed by
IPC~--because it feared a cutoff of US aid.
b. In 1962, .the US broke diplomatic relations
with Peru and suspended economic assistance
until the Peruvian military, which had
seized the government, gave ?assurances
that it would restore democratic processes.
~~e. In late 1965 and early 1966, a large por-
tion of the US developmental assistance
that Peru was expecting was held up when
it appeared that the Belaunde government.
was' moving toward expropriation of the IPC.
~-d. In 1967, US econmic aid was suspended after
the Peruvian Government, against US wishes,
purchased French-built Mirage supersonic
jet fighters.
e.~ Periodically since 1947 attempts by Peru
to enforce its claimed 200 mile territorial
waters limit have resulted in seizures of
privately owned US tuna boats operating with-
out the required Peruvian licenses. US pro-
tests have often been regarded as threaten-
ing in Peru, and, on l8 February 1969, .the
US suspended foreign military sales to Peru
because of the seizure by Peru of two US
boats four days earlier.
To a Peruvian nationalist, .these US "threats"
and "reprisals" are unacceptable infringements of
sovere~:gnty. The Peruvian military men who. came
to power in October 1968 are all fervent national-
ists,,and many of them harbor particularly strong
resentments over US actions during the Mirage epi-
sode. Moreover, the IPC issue---which has now di-
rectly involved the. US Government--provided. the mil-
itary regime with its raison d'etre,,and no member.
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of that regime can reasonably be expected to, back
down in the face of threatened US sanctions. The'.
Peruvian military are not a monolith, ,and there
are some officers who are privately critical of
the~pres~nt government's course. On the whole,.
h?wever, it~must }ae presumed that many Peruvian
officers feel a special sense of gratification
over their courage in standing up to the United
States and over~the high degree of public approval
their actions have generated. The indications are
that Peru's present leaders remain determined to
.move the country out from under the U5 shadow.
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S~Gfi.ET
.~C'I`i?N
~,bf?R.A.P~f~U~ FC~& 1'~$.. ~S~IG;i~t
June 16, 19~ 9
FRfl~a Vxra~ra P. Vary
S1JBJ~CT: ~~rmar~~-duxx~ aan 73ack~rc~~d tea fPC Gaye
Ir- ~ la~tt ~e~v3aar~r Group a+eati~g a~ the Per~- paper, yv~ re~ttivd
th~.t yorx vrvsexe apt tore if the Preeide~at rve.s avra~.re of the himry iesstd
iee~xes v:~ the IPC case. GIA v~lvmtasera~d tv prepare a bx'ia~f nr~.exaacr
marl h~.r xu~-+a~ due ~v. 'the rne~raad ie very brief axed v~hat ie ire
it bad bae~+ ir~cltxdaad ix~ greater detail ~ the a~-rlg IG papers v~ Peru.
The Prceit z~y fiud thfe ~ahatirter ~^ereioa ?f ~Ctereet, hoerev~r, if
has han n~rt eaeu t3ae cari~,er ~tudiea~.
~~ C1b.~3~A TIGI+t a
That gvu ~i the ~-ttrfihed, smexxxc~rand tv the Presfda~nt.
Tab ~ w l~emvra~v~zra. frr~x~ra ~iA.K trs the 'reeida~nt
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