Foreign Relations of the United States, 1946, The Near East and Africa, Volume VII

890G.6363/8–2746

Memorandum of Conversation, by Mr. George C. McGhee, Special Assistant to the Under Secretary of State for Economic Affairs (Clayton)

[Washington,] August 27, 1946.

Participants:	Standard Oil Company of New Jersey	—Mr. Hardin
	Socony-Vacuum Oil Company	—Mr. Sheets
	UE	—Mr. Clayton & Mr. McGhee
	AP	—Mr. Rayner23

Problem:

Representatives of Standard Oil Company of New Jersey and Socony-Vacuum Oil Company called to advise the Department that British Counsel had rendered to them the opinion that the so-called “Red Line Agreement”²⁴ entered into in connection with the formation of the Iraq Petroleum Company, Ltd., was no longer valid, and to request advice from the Department as to policy to pursue jointly in renegotiating a new agreement with their foreign partners.

Discussion:

Mr. Hardin and Mr. Sheets, representing the two United States oil companies participating in Iraq Petroleum Company, first gave a brief history of the formation of the IPC, after the first World War, to operate in the area of the old Turkish Empire. They reviewed the part played by the Department of State in securing participation of United States oil companies in this joint venture and described events which finally resulted in the Near-East Development Company, which is owned equally by Standard Oil of New Jersey and Socony-Vacuum Oil Company, owning 23.75% of Iraq Petroleum Company. Remainder of the interest in IPC is French government 23.75%, the Anglo-Iranian Oil Company 23.75%, Shell Oil Company 23.75%, and Mr. Gulbenkian, a naturalized UK citizen of Armenian origin, 5%.

The oil companies’ representatives stated that a basic condition of the original agreement was that each of the participating companies received its share of the oil produced at cost. In the Agreement, each of the companies, in addition, surrendered all operating rights in the area surrounded by the “Red Line”, which included the old Turkish Empire. This part of the Agreement can be construed as excluding purchasing of concessions of crude petroleum from other producers in this area, although Standard of New Jersey counsel has interpreted it as not excluding purchase of products from petroleum produced in this area.

During the War a number of the participating companies, including the American and French companies, were not in position to take delivery of their production. All except the French, however, will be allowed to make up their production.

The oil companies’ representatives stated that their present problem arose from their having been advised by three independent British Counsels, all of whom reached identical conclusions without knowledge of the others investigating the problem, that the Red Line Agreement, under the British law, ceased to be in effect in June 1940 when France became a technical enemy of Great Britain, wherein the IPC is domiciled. The three barristers are the leading English authorities on this subject, one being Sir Ballantine Holmes. The British Counsel held that the rights of the participating companies, in the absence of a new Agreement, will revert to their rights pursuant to the articles of incorporation of the IPC. This would entitle the companies only to a share of the profits of the British company. Under British law there is no provision whereby the original Agreement can be resumed, now that the condition causing its dissolution has been overcome. A new agreement must be negotiated from scratch. Each of the four major groups participating in the original agreement have two directors on the IPC Board, Mr. Gulbenkian has one. A unanimous vote of all directors is required for a new Agreement, which means that any one country or Mr. Gulbenkian could block the new Agreement.

The oil companies’ representatives stated that they are faced with two problems:

1. Negotiating a new Agreement which would reaffirm their right to their share of the oil produced by IPC at cost.

2. Avoiding, at the same time, restrictions as to their activities which they had accepted in the original “Red Line Agreement” and for which they have been criticized by the U.S. Department of Justice.

With regard to the first problem, both companies affirm their desire to obtain their share of the oil in kind at cost and asked whether or not the Department would support them if they encountered any difficulty in reaching such an agreement with their other partners. It was brought out that profits which they might receive from the British company would be subject to British taxes.

The Department representatives replied that the original participation of the American companies was at the intercession of the United States Government, and it was clearly the original intent and in the interest of this Government for the US companies to control their share of the crude oil produced, rather than to receive profits to be derived from the sale of oil under control of a British company. It was pointed out that the French government should have the same interest as the United States in seeking to obtain their share of the oil in kind. Mr. Clayton stated that if the companies encountered difficulty in securing Agreement to receipt of their share of the oil produced by the IPC, the Department would support them.

With respect to the restrictions to which the companies had subjected themselves in the “Red Line Agreement”, Mr. Hardin stated that the Standard Oil Company of New Jersey would like complete freedom of action; in fact their Counsel did not believe that they could subject themselves to any limitations in a new Agreement. Mr. Sheets said that Socony-Vacuum was willing, if necessary, to agree not to take any additional concessions in the original area of the Agreement, particularly in the light of advice by their geologists that all of the good concessions were taken. They would, however, like complete freedom of action in other matters, such as buying interests on existing concessions, purchasing oil from other producers, refining, marketing, etc.

Mr. Rayner stated that although there was agreement that most if not all of the good concessions were taken, he did not believe the Department of Justice would agree to any limitation on the companies’ activities in a new agreement.

It was pointed out that the French would probably press for this limitation, since they were not in a good position to take new concessions for themselves independently and would feel that the other companies would be competing with IPC to their advantage. It was brought out that the recent increase in production from the IPC fields should help to alleviate the French fears. It was also observed that the British might profit more from freedom of action than the American companies, since they were in a good strategic position to obtain valuable concessions, particularly that south of Kuwait.

Action:

If necessary the Department will support the position of the US oil companies participating in IPC, in seeking a new Agreement, that they receive their share of the production in kind. The companies in turn will not agree to limitation of their activities in the area of the old “Red Line Agreement”.

23. Charles B. Rayner, Adviser on Petroleum Policy.
24. For text of the Group (Red Line) Agreement entered into by private American and European oil interests on July 31, 1928, see Current Antitrust Problems: Hearings before the Antitrust Subcommittee of the House Committee on the Judiciary, 84th Cong., 1st sess., pt. 2, pp. 1004 ff.; for information on the agreement, and events leading to the agreement, see Foreign Relations, 1943, vol. iv, p. 944, footnote 42.