886A.2553/11–2250
Memorandum of Conversation, by Mr. Richard Funkhouser of the Office of Near Eastern Affairs
Subject: SAG Demands for Renegotiation of Aramco Contract
| Participants: | NEA—Assistant Secretary McGhee |
| Mr. Fred Davies, Aramco Executive Vice President | |
| Mr. J. T. Duce, Aramco Vice President | |
| Mr. Spurlock, Aramco Legal Counsel | |
| Colonel Eddy, Aramco Adviser | |
| NEA—Ambassador Childs | |
| NEA—Mr. Loftus | |
| NE—Mr. Funkhouser | |
| NE—Mr. Kopper2 | |
| PED—Mr. Moline3 |
Problem: To inform Aramco of Government’s position regarding Saudi Arabian demands for changes in the concession contract.
Assistant Secretary McGhee initiated the discussion with a detailed exposition of the Department’s thinking with regard to latest Saudi Arab demands on Aramco, the nature and legal aspects of concession contracts in the Near East and the political and economic forces involved in adjusting the Aramco contract to the situation in Saudi Arabia. In essence, he stated (a) that, while true as a basic proposition, that the United States Government must be concerned with the non-impairment of valid contracts, the government must recognize that long-duration contracts by their nature result in inequities which cannot be approved by the Government and which should be removed by adjustments to changing circumstances and (b) that such adjustments must not be allowed to destroy basic principles and that if a situation developed which threatened the ability of the company to [Page 107] operate or concession cancellation, the United States Government would be forced to take strong preventive action. It was conceded that the Aramco case was in the (a) rather than (b) category or stage at this time.
Aramco officials appeared to be in complete agreement with Assistant Secretary McGhee’s development of the problem and together with him arrived at the following conclusions: (a) increased benefits were necessary, (b) Aramco could afford to pay more, (c) the Department could not oppose substantive change in the concession contract at this stage, (d) the Department would endeavor to prepare as favorable a stage for the negotiations as possible by pointing out to SAG the extraordinary performance of Aramco in developing Saudi Arabian oil resources, (e) the Department would continue to urge financial reforms, (f) the Department would be prepared to consider strong action should Saudi Arabian demands threaten the continuance of company operations.
Other points developed included:
(1) Re an income tax, Assistant Secretary McGhee stated that the Department could not take a position on this matter and that the problem was a legal one which could only be handled by the Treasury Department. Mr. Duce stated that the company had spoken to Treasury officials who did not seem “particularly concerned” with any difficulties in this problem but that the Bureau of Internal Revenue would not take a position on a theoretical case. It was evident that Aramco officials preferred retreating in this direction since it might involve no additional expense to the company. Department officials expressed some concern over what in effect would amount to a subsidy of Aramco’s position in Saudi Arabia by U.S. taxpayers. Aramco officials expressed the point of view that Saudi Arabia was justified in their continued objections to a situation in which the United States Government and Saudi Arabian Government received equal benefits from Saudi Arabian resources. Ambassador Childs in response to a question stated that this view had never been conveyed to him by Saudi Arabs, although admittedly the subject more properly belonged in company-Saudi Arabian Government channels. Aramco officials were unable to answer at this time how their parent companies, with concessions in other parts of the Near East, would view payment of income tax in Saudi Arabia. Mr. Davies confirmed that Aramco’s U.S. tax amounted to approximately 25¢ a barrel.
Mr. Funkhouser confirmed that Pacific Western had in their concession contract a clause allowing SAG to levy additional taxes for which the company could receive tax relief in the United States, but in answer to a further question stated that this contract was, as in [Page 108] the case of the Aramco contract, given to the Department without request for approval of its contents. (Not mentioned to Aramco was the fact that this Pacific Western clause was brought to the attention of the Treasury Representative in Cairo who expressed concern and apparently referred the problem to Treasury in Washington where the matter died.) Aramco officials were unable to report on any conclusions reached by the U.S. Tax Specialist recently in Saudi Arabia in the employ of the Saudi Arabian Government. Aramco officials responded affirmatively to the assumption that the company might still find itself subjected to an income tax even if Aramco were to agree to an increase in basic royalties, a share of profits, etc.
(2) Assistant Secretary McGhee stressed the desirability of meeting SAG demands for additional benefits within the present contract, for example, by promising increased development and production, by increased expenditures for public works, wages, social amenities, education, health, etc. and by acceleration of Aramco’s relinquishment program. “Rolling with the punch” in this way could result in the attainment of U.S. Commercial Policy objectives, satisfaction of SAG demands for increased benefits, increased benefits for the people of Saudi Arabia, minimization of the impact of the concession contract revision on Iraq and Iran, and minimization of the opportunities for SAG financial mismanagement. However, it was the emphatic view of Aramco representatives that although Saudi Arabian demands included such issues, the situation demanded much more drastic and direct financial concessions. It was thoroughly impressed upon the Department that the SAG was determined to obtain large increases in cash payments immediately. Colonel Eddy stated his view that the situation was so serious that the United States Government should be prepared to protect U.S. citizens in Saudi Arabia, claiming Sulaiman might shut down company operations on the Persian Gulf if his demands were not met. In view of this situation Department officials were inclined to agree that changes in the Saudi Arabian contract, would be of a scale which would remove possibility of preventing strong reverberations throughout Near East concessionary countries.
(3) There was lengthy discussion on what concessions would satisfy the SAG and how long such satisfaction would continue. Mr. Spurlock stated that Saudi Arabs in his experience had always basically favored some sort of “partnership” relationship with Aramco and that any agreement would have to take this principle into consideration if it were to last. It was stated that increasing production under fixed royalties only whet Saudi appetites for more money whereas a sharing in the profits or income might give the Saudis a [Page 109] feeling of participation which would better withstand the test of time, particularly bad times. The consensus was that it would also be fairer from a company point of view that further financial benefits should be based on income rather than a basic royalty increase.
Mr. Spurlock indicated that by partnership Saudis would not demand stock partnership or participation in management but partnership in profits. Mr. Funkhouser agreed that partnership, particularly the Venezuelan concept of 50–50 sharing of profits, had, thanks principally to a visiting Venezuelan Diplomatic group, strong appeal for all Near Eastern officialdom. Aramco officials agreed with Assistant Secretary McGhee’s observation that it would be wise to discuss settlement at less than 50–50 at this time. Re the end point of Saudi demands, the point of view was expressed that only when oil companies lost business and ability to pay might oil producing states relax demands for increased financial payments.
(4) Re means of bringing order out of financial chaos, Aramco officials felt that it was impossible to bring the King to make needed changes, such as reducing the authority of Abdullah Sulaiman. It was stated that the King was quite cognizant of the extra-curricular actions of his family and officials. Aramco officials felt the King fully supported Sulaiman in his demands for earliest renegotiations. Mr. Oligher had just been summoned to Jidda and impressed with the King’s impatience with the delay in negotiations. Aramco officials were particularly perturbed because Prince Feisal would head the Saudi Arab negotiating committee.
Assistant Secretary McGhee reiterated that the Department would endeavor to set as favorable a stage for these discussions as possible by making it clear that the U.S. Government believed Aramco had done an extraordinary job in developing Saudi Arabian oil resources. The Department would also continue to press for optimum use of the considerable funds currently paid by Aramco. Ambassador Childs stated that this had been his line with the Saudis. He stressed, however, that it would greatly help Ambassador Hare to have something in writing from the Department to hand SAG in order that these points be more fully impressed on the Foreign Office and the King. It was decided that an informal memorandum would be prepared for delivery by Ambassador Hare before the negotiations began. Assistant Secretary McGhee stated that the memorandum should not be too strong, since it might be necessary to deliver a further note if the company got into serious trouble. It was the consensus that the mere delivery of a memorandum on this subject should make an adequate impression on the Saudis at this time. Aramco officials expressed their satisfaction with this support and warmest appreciation for the Assistant Secretary’s frank and helpful discussion of these issues.