Foreign Relations of the United States, 1946, The Far East: China, Volume X

893.6363/7–1046

Memorandum of Conversation, by the Assistant Secretary of State (Clayton)

[Washington,] July 10, 1946.

Participants:	Mr. Parker, Shultz and Seitz of Standard Vacuum Oil Company
	Mr. Clayton, Vincent,1 C. Rayner,2 Loftus,3 Gay,4 Pigott,5 McGhee6—State Dept

Problem:

Representatives of the Standard Vacuum Oil Company called to obtain views of the Department as to future of U. S. oil companies in China, as a result of the establishment of the wholly Chinese government-owned China Petroleum Corporation.

Discussion:

Mr. Clayton stated that he had studied the file submitted by Standard Vacuum Oil Company, and that he had great sympathy for the position in which the U. S. oil companies find themselves in China. Mr. Clayton observed that a similar pattern of events is occurring in Poland, Czechoslovakia and other countries which have nationalized or are in the process of nationalizing their industry. In the case of these nations, American properties have been included in the Nationalization Program, and in each case the government concerned has been pressed to provide timely and adequate compensation to the owner. In the case of China the situation seems slightly different, in that the Chinese propose to nationalize the oil business in China without offering to take over the properties of the existing companies, leaving them “high and dry”. Mr. Clayton inquired whether the Standard Vacuum Oil Company attached more significance to the creation of a government-owned petroleum company, or to the granting of government administrative functions affecting petroleum to this company.

Mr. Parker replied that these questions were really different aspects of the same problem, and that if China is nationalizing her oil industry free competition is definitely out. Mr. Parker stated that private U. S. enterprise could under no circumstances compete with a Chinese government petroleum company. Mr. Parker speculated as to whether U. S. assistance to China had not made possible her nationalization program.

Mr. Clayton replied that the basic policy of this country with respect to China was to help her “get back on her feet”. He stated that China was forced into war before any other Allied power and had made great sacrifices. Mr. Parker observed that in order to be strong China must have petroleum, and that in his opinion the Chinese did not have the ability to run their own petroleum industry.

Mr. Vincent stated that the Department had repeatedly urged the Chinese government against the establishment of monopolies, whether by the Chinese government or by business interests. Mr. Vincent added that the Department felt that the Chinese government should retain its own administrative functions and should not grant them to a government corporation. The Department acknowledges that the Chinese government has a right to establish a petroleum company if it chooses, but in the absence of total nationalization of petroleum industry, there should be no discrimination as between the government company and private companies.

Mr. Clayton and Mr. Vincent described the movement toward nationalization of industry which is taking place all over the world. The U. S. is one of the few countries not affected. It was pointed out that there was little this country could do in checking this movement. Mr. Vincent stated that nationalization in China was not inspired by a few individuals; but was deeply rooted in the political life of the Chinese people. Mr. Vincent offered as an explanation for the fact that the Chinese were acting quickly with respect to oil, that they considered that there was great profit in the oil business.

Mr. Parker suggested that the result of Chinese nationalization of industry would be to cut off the flow of U. S. private capital to China, and offered the opinion that this would be more disadvantageous to China than any advantages arising out of nationalization.

Mr. Clayton stated that Standard Vacuum Oil Co. representatives must realize the realities of the situation in China and asked them what minimum assurances they needed from the Chinese government before they could feel justified in continuing in business in China and proceeding with the rehabilitation of their marketing and transportation facilities.

Mr. Parker outlined the minimum requirements of U. S. oil companies to be as follows:

(a) The group of U. S. oil companies operating in China wish to create a joint Chinese-U. S. company for the development of Chinese indigenous oil resources, providing the U. S. companies are given 51% ownership in this enterprise. The companies are willing to invest up to 80 million dollars in this joint company for exploration, production, transportation and refining of indigenous oil. The companies are even willing to include in this operation the Takao refinery in Formosa which the Chinese have taken over from the Japanese, even tho they do not consider the operation of this refinery economic.

(b) The companies expect the Chinese government to agree not to enter the petroleum marketing field with a government-owned company.

If these two conditions are met, Standard Vacuum will spend an estimated 30 to 50 million dollars in rehabilitating its pre-war distribution facilities. Other companies will spend similar amounts, the total of which, including that spent by Standard Vacuum, will be approximately 100 million dollars.

At this point Mr. Parker agreed that if it were necessary to fight for—

(a) participation in Sino-foreign production refining company or

(b) preservation distribution position U. S. companies they would choose (b) but felt they also had right to (a).

Mr. Parker assured Mr. Clayton that the U. S. companies would have no objection to private Chinese companies operating in the Chinese marketing field.

Action:

Mr. Clayton stated that on the basis of these minimum requirements, it might be possible to obtain some assurance from the Chinese government that would be satisfactory to the U. S. oil companies. He stated that the Department would give further consideration to the matter and take whatever steps it could.

1. John Carter Vincent, Director of the Office of Far Eastern Affairs.
2. Charles B. Rayner, of the Petroleum Division.
3. John A. Loftus, Chief of the Petroleum Division.
4. Merrill C. Gay, of the Division of Commercial Policy.
5. C. Montagu Pigott, of the Petroleum Division.
6. George C. McGhee, Special Assistant to Mr. Clayton.