This memorandum is in reference to the OPEC meeting in which the oil companies offer of "royalties" was rejected.
At an OPEC meeting in Beirut December 4, offers of the oil companies to an OPEC demand on "expensing" of royalties were rejected (see attached)./3/ A further OPEC meeting is scheduled for December 24 in Riyadh and there is grave danger that resolutions calling for arbitrary member government action against the companies will be passed. The refusal of the companies' offer has already become public knowledge. Some representatives in the OPEC organization, notably the delegate of Iraq, have taken an extreme position. Mainly because Venezuela seeks to up the price of Middle East oil so that that of Venezuela will become more competitive, the Venezuelan delegate has sided with the extreme faction.
Prime Minister Alam of Iran is gravely concerned by the developing situation and has dispatched an Iranian Government emissary, Reza Falla, to meet with the Iranian Consortium in London on December 17. He is taking with him a number of proposals described by Alam as reasonable and flexible. Alam states that if an understanding is reached between Falla and the Consortium, this will give Iran strength to oppose extremist Arabs at Riyadh. The Iranian Ambassadors in Saudi Arabia and Kuwait have been instructed to approach the respective governments in order to obtain a common front for moderation.
Thus far the steps we have taken are as follows:
With the Oil Companies--At a meeting with senior oil company executives on December 6, without reference to the merits of the companies' offer, I urged that means be found to keep discussions going with the governments and avoid an impasse.
In Iran--Our Charge has informed Prime Minister Alam that the USG shares Iranian Government concern over the situation. He commended the sending of Falla to meet with the Consortium.
In Saudi Arabia--Ambassador Hart had dinner with Petroleum Minister Yamani December 15 at the latter's request. Yamani said he had begun to see a ray of light in a previously hopelessly bad situation. Ambassador Hart said Aramco and the SAG were a partnership which should work together. Yamani agreed but was unwilling to go further in the discussion. Yamani may be willing to accept an Aramco proposal for a secret meeting with Consortium representatives, Aramco officials and Rouhani (OPEC Secretary General) this week, perhaps in Rome. Ambassador Hart recommends against formal representations to Crown Prince Faisal or Yamani pending the results of the Rome meeting.
If an impasse is to be avoided, it now seems evident that the companies must alter their offer. It appears that the amount of the offer (3-1/2 cents per barrel in the case of Iran) could be accepted by Iran and Saudi Arabia and probably Kuwait. The governments, however, object vigorously to the discounting mechanism of achieving this sum since it would, in effect, mean recognition of further posted price reductions, which is anathema to them. The governments also object strongly to some of the conditions particularly that relating to a quit claim against any future government demands. It therefore appears that if an impasse is to be avoided, the companies will have to make some modification in the mechanism of the offer and in some of its conditions. The Kuwait OPEC delegate has suggested that depletion allowances or a change in depreciation could be the means to this end.
We have the impression that some of the companies are now thinking of the possibility of modifying their offer even though all had previously stated that the offer was final.
The British are very greatly concerned by this situation and we are exchanging information regularly.
Mr. Talbot and Mr. Jernegan of NEA, Mr. Davies and Mr. Blackiston of NE, and Mr. Ensor of FSE will attend your meeting.
We propose the following course of action.
1. That we take no further action with the companies or with the governments pending the results of the Consortium meeting now taking place in London and the subsequent meetings with Reza Falla, Yamani and Rouhani. (We have now learned that a meeting of the Consortium with Falla took place today, but we have no details.)
2. If no progress is apparent, we call in the American companies, certainly not later than Friday, December 20, to state that national policy as well as the companies' own interests require sufficient modifications in their proposal to permit a useful resumption of the dialogue with the governments.
3. If the companies agree to (2) above, we consider instructing Ambassador Hart to intervene with Crown Prince Faisal urging moderation so that talks with the companies have a chance of success.
4. In the event that our intervention with the companies and the governments is required, we urge the British to take similar steps with their companies and suggest an approach by the British Ambassador to the Ruler of Kuwait.
/1/Source: Department of State, Central Files, PET 3 OPEC. Confidential. Drafted by Blackiston and cleared by Ensor (FSE).
/2/At the Secretary's staff meeting on December 16, according to the minutes, Talbot reported: "The OPEC oil situation is reaching a crisis with European meetings today and tomorrow. Mr. Ball asked to meet Mr. Talbot and Mr. Chayes on this in the afternoon." No record of the meeting has been found.
/3/The attachment, "OPEC Royalty Expense Resolution and Companies' Offer," is not printed.