JOINT CONTROL TIIROUGII PURCHASE AND SALE OF OIL IN THE MIDDLE EAST
Throughout the world the Big Seven oil companies transfer large quantities of crude oil and refined products among themselves, through contracts to purchase and sell. When these purchase agreements are discussed publicly by representatives of the petroleum companies, emphasis is usually placed on the ordinary commercial purchase and sale aspect which they share with all other sales contracts. However, since the companies participating in them often are already bound together through joint-ownership arrangements and participate in various production and marketing agreements, purchase and sale contracts among them often lack many of the arm's-length features that characterize ordinary commercial agreements among mutually ndependent buyers and sellers. Under these circumstances, the sales of oil covered by the contracts can often be utilized as an instrument to divide production, restrain competition in marketing, and protect the market positions both of the buyer and the seller. They determine who may or may not buy crude oil from particular producing properties. They tend to funnel the production from more or less diversified ownerships into the centralized marketing organizations of the large companies. They tend to keep surplus supplies of crude oil out of the hands of independent oil companies. The existence of these contracts in an atmosphere of joint ownership of production and marketing, the long periods for which they run, 1 the manner in which prices are determined under them, and the marketing restrictions often written into them. indicate that they are something more than ordinary commercial purchase and sale contracts.
The present chapter and chapter VII discuss respectively long-term contracts for the purchase of Middle East oil, and long-term contracts for the purchase of Venezuelan oil. The first agreement to be examined is between Gulf and a subsidiary of Royal Dutch-Shell, involving oil produced by Kuwait Oil Co., Ltd., which in turn is jointly owned by Gulf and Anglo-iranian, as described in the preceding chapter.
GULF-SHELL AGREEMENT, 1947
Source and nature of material discussed.--As has been noted in chapter V, Gulf Exploration Co., a subsidiary of Gulf Oil Corp., on May 28, 1947, entered into a long-term agreememit with the Shell Petroleum Co., Ltd., of London, England, a subsidiary of Royal Dutch-Shell. This agreement covers the sale by Gulf Exploration Co. of oil produced by Kuwait Oil Co., a producing company organized in 1933 on a 50-50 basis by Gulf Oil Corp. and Anglo-Persian Oil Co Ltd. (now Anglo-Iranian Oil Co., Ltd.). The Gulf-Shell agreement, therefore, relates to Gulf's share of the joint production of the Kuwait Co. At the time it was made it appears to have covered all of Gulf's share. 2
Nature and effects of the Gulf-S/tell agreejnent of 1947.--Gulf began selling Kuwait oil to Shell as soon as Kuwait Oil Co. began producing at about the middle of 1946. The arrangement under which these sales were made appears to have been temporary, and to have covered only relatively small quantities of oil. However, under a long term contract, dated May 27, 1947, between Gulf Exploration Co. and the Shell Petroleum Co., Ltd., Shell agreed to buy increasing quantities of oil out of Gulf's share of crude produced by Kuwait Oil Co. during the period from February 1, 1947, to December 31, 1956;. Subsequently, this agreement was extended definitely to December 31, 1969, and indefinitely beyond that date through a provision that either party, by giving notice five calendar years in advance, may terminate the contract on December 31, 1969, or at the end of any succeeding calendar year.
The quantities of oil covered by this contract range upward from 15,000 barrels
daily, in 1947, to a maximum of 175,000 barrels daily in later years of the
contract period. The total quantity for the entire period covers about 15 billion
barrels of oil, or about one-fourth of Gulf's share of the already-proven Kuwait
reserve. If Gulf and Anglo-Iranian share equally any quantity of oil that they
jointly order out of Kuwait, the fact that Gulf has agreed to deliver a minimum
of 175,000 barrels daily to Shell implies a production of a minimum of 350,000
barrels daily out of Kuwait. 3 The ability of Kuwait Oil Co. to meet such a
joint requirement already has been demonstrated; daily production has increased
since shipments began on a commercial basis from 30,000 barrels, upon which
Gulf's delivery of 15,000 barrels to Shell for 1947 was based, to an average
of 242,000 barrels for the yea.r 1949; to 345,000 barrels for 1950; and to 380,000
barrels for the first quarter of
1951. When as a result of trouble in Iran, Anglo-Iranian needed more oil from Kuwait as a substitute for shrinking Iranian production, Kuwait's daily production was increased sharply to about 500,000 barrels in both April and May 1951, 5 and by the middle of July to a reported 650,000 barrels. 6
It will be remembered that in 1951 Anglo-Iranian still had the option, with Gulf's consent, of controlling Kuwait production by substituting oil from Iran or Iraq for delivery by Gulf to Shell. 7 This option of Anglo-Iranian to substitute oil from other sources was in no way modified by the fact that substitution was working in reverse during the unforeseen emergency in 1951 when Kuwait oil was being substituted for Iranian oil to meet Anglo-Iranian's needs.
Considered merely as a commercial contract for the purchase and sale of oil, the agreement between Gulf and Shell, in and of itself, would not appear to have impaired either Shell's right to dispose of the oil in any way it sees fit or Gulf's right to dispose of additional Kuwait oil as it sees fit. Actually, however, this apparent freedom is limited in at least three respects: (1) if Gulf, using Kuwait oil or any other oil, should cut prices or cause price cutting in any attempt to increase its business in any Eastern hemisphere market, Gulf would thereby not only receive less for its own sales of oil, but also, under the terms of the agreement, would receive a lower price on its sales to Shell; (2) under the agreement, Gulf's deliveries to Shell would be reduced, should Gulf, through the use of Kuwait oil, increase its business at Shell's expense; and (3) Shell's marketing activities were already restricted because of certain other relationships among Shell, Anglo-Iranian, and other international oil companies.
Under the pricing terms of the Gulf-Shell contract, Gulf became mutually interested with Shell in the profitable marketing by Shell of large quantities of Kuwait oil over a 22-year period. These terms provided for the sharing of profits between Gulf and Shell under an intricate formula for calculating the amount of profits realized on the production, transportation, refining, and marketing of the oil sold to Shell. 8 For the purposes of the contract, the parties assumed that a representative proportion of the volume of Shell's sales in each of the "listed territories" named in the contract would he derived from Kuwait oil. It was stated in the contract that Shell was not bound, in fact, to market the indicated amounts of Kuwait oil in each of these "listed" marketing territories which includes practically all petroleum markets in the Eastern Hemisphere. 9 In assuming that Shell would distribute its Kuwait oil in each of these markets, it was also assumed that Shell would incur certain costs of transportation, refining, and marketing, and that Shell's total receipts from the sale of the oil would likewise reflect this pattern of distribution. By subtracting Shell's assumed costs and the actual costs of production and delivery incurred by Gulf from Shell's assumed receipts, an annual profit, or loss, figure .would be determined. It was agreed that this profit would be shared equally by Gulf and Shell.
Thus, Gulf did not receive a stated price for its oil, 10 but instead received a 50-percent financial interest in Shell's disposition of that oil. Shell's price was contingent upon the prices received by Shell in its marketing territories described above. Gulf, therefore, received through this contract a direct interest in Shell's marketing activities in the Eastern Hemisphere and in the maintenance of the prices received by Shell marketing subsidiaries and joint marketing organizations. If Gulf were to invade those markets and establish marketing position at the expense of companies other than Shell and were to thus depress prices, it would receive a lowered price not only on its own sales, but also on its sales to Shell, since Shell's profits would be thereby also lowered.
In addition to this general restriction on Gulf, flowing from its acquired interests in successful marketing by Shell of its Kuwait oil. the Gulf-Shell contract specifically provided penalties on Gulf should Gulf take any business away from Shell in any Eastern Hemisphere market. Clause 6, paragraph (6) (a) of the Gulf-Shell contract states:
If any Gulf company should in any year of the delivery period except the last year of that period through its utilization of Kuwait crude oil increase its proportion of the sales of any petroleum product in any of the listed territories at the expense of any Shell company, then Shell shall have the right, by notice in writing to Gulf, to reduce in the following year the quantity for that year by an amount which shall not exceed (i) 70 percent of the crude oil equivalent (as hereinafter defined) of the quantity of such increase or (ii) the quantity of the oil attributable for that year, whichever is the smaller. 11
In this paragraph, delivery period means the period running from 1947 to 1969 or thereafter until the contraet is canceled. The "listed territories" are marketing territories listed in the agreement covering all of Europe and Asia not under Russian control, the islands of the Atlantic as far west as Iceland, the Canary and Cape Verde Islands, all of Africa, Australia and most of the islands of the Pacific. 12 "The crude oil equivalent" refers to an agreed upon method for converting Gulf's increased sales of refined products into an equivalent number of barrels of crude oil. "The quantity of oil attributable for that year" refers to the quantity of Kuwait. oil which the parties assume, for purposes of the agreement, will be used by Shell in marketing in the marketing territories in question.
Under this provision, therefore, Gulf's sales of Kuwait oil to Shell would be restricted if its use of Kuwait oil in any marketing territory of the Eastern Hemisphere resulted in an increase in Gulf's business at the expense of Shell. The restriction would be a reduction in Gulf's sales to Shell equivalent to the smaller of either (a) 70 percent of the amount of Gulf's increase in sales or (b) the whole amount of Kuwait oil deliverable to Shell in the following year and allocable, under the contract to the marketing territory. These provisions, moreover, are so worded as to provide protection for all of Shell's business, whether based on Kuwait oil or on oil from other sources, in each of Shell's Eastern Hemisphere markets. Thus, Gulf was effectively proscribed from using additional Kuwait oil so as to encroach upon any of Shell's markets in the Eastern Hemisphere. 13
The expression, "proportion of the sales of any petroleum product" is nowhere defined in the agreement, nor is any method set up for determining that proportion or for determining whether any increase in that proportion is "at the expense of Shell." To give effect to this language, however, the following information regarding such petroleum product in each "listed territory", i. e., all markets in the Eastern Hemisphere, would have to be known for the year preceding the effective date of the contract, i. e., 1946, and for each succeeding year: (a) the total of Gulf's sales; (b) the total of Shell's sales; (c) the total sales of all marketers; (d) the proportion that Gulf's sales and Shell's sales, respectively, bear to the total sales of all marketers; and (e) the fact as to whether any increase in Gulf's proportion of business is made at the expense of Shell. 14
The effect of this provision, therefore, is to discourage, and thus tend to prevent, any increases over Gulf's established position in any petroleum product in any market in the Eastern Hemisphere where such increases are at Shell's expense. This restriction was not in conflict with the provisions in the agreement of December 14, 1933, under which, with respect to the utilization of Kuwait oil, Gulf was obliged to confer with Anglo-Iranian to prevent encroachment on the latter's marketing position at any time or place. This is evidenced by the fact that the restrictions of the 1933 agreement were included by reference in the Gulf-Shell contract and by Gulf's statement that, while Gulf had advised Anglo-Iranian in 1946 of Gulf's sales to Shell, which began as soon as Kuwait Oil Co., Ltd., started producing commercially about the middle of 1946, Anglo-Iranian had made no objection to such early sales. 15 Furthermore, as will presently appear, the long-standing intimate relationships of Anglo-Iranian and Shell are such that the long-term commitments to Shell entered into by Gulf in 1947 effectively supersede and render unnecessary the earlier restrictions on Gulf of the 1933 agreement.
The above-mentioned restrictions are consistent with the principles and procedures governing "as is" relationships among cartel members under the international agreements described in chapter VIII of this report. Under the cartel agreements, restrictions on producing and marketing petroleum products were accepted not only by the principal "as is" partners, Shell, Anglo-Iranian, and Standard Oil Co. (New Jersey), but also by many other Petroleum companies as well. 16 The general application of the ''as is" principle in the Far East, for example, was made known by Sir John T. Cargill of Burmah Oil Co., Ltd., who stated in 1934:
We have agreements with our most powerful geographical and other competitors which respectively accept that principle in whole or in part. 17
Gulf's entry into the Gulf-Shell contract of 1947 apparently was a solution to the problems raised by the beginning of large-scale commercial production in Kuwait in the middle of 1946. Gulf had to have an outlet for its oil, but was bound not to upset or injure Anglo-Persian's trade or market position at any time or place. This restriction on Gulf was a serious one, since Anglo-Iranian was an important marketer in many of the areas most accessible to Kuwait production. Finally, these accessible markets were strongly cartelized, and Gulf would have had heavy expenses in building the necesssry facilities and in forcing its way into these markets against the opposition of the established companies. The way in which the Gulf-Shell contract, solves these problems becomes apparent in considering Shell's circumstances at the time it entered into the contract and the terms as to price that have been discussed above.
As has been indicated, Shell was for many years a principal participant in the "as is" cartel arrangements, and thus was interested in preventing the entry of large amounts of uncontrolled oil into controlled markets. Shell's interest in the Gulf-Shell contract was dictated also by its long-standing intimate relationship with Anglo-Iranian, particularly in marketing arrangements, and by its unfavorable situation with regard to crude oil supplies for most Eastern Hemisphere markets.
Shell's and Anglo-Iranian's marketing interests reach into practically every market, large and small, in the Eastern Hemisphere. 18 While the two companies maintain separate organizations in many markets, they operate joint marketing organizations in many other markets. 19 This fact and the fact of long-term intimate cooperation of Shell and Anglo-Iranian, together with other companies, in the formulation and application of "as is" cartel principles tended to produce a solidarity of interests in the two companies.
However, Shell had not participated to the same extent as other companies in the joint development of the oil fields of the Middle East, which were advantageously located with reference to many markets of Europe, Africa, and Asia. Except for its interests in Iraq, Shell had played a small role, compared with other international oil companies, in the Middle East. In fact, its sources of production were, and still are, located mainly in the Western Hemisphere and the Far East, both areas being far away from Eastern Hemisphere markets important to Shell. 20 In contrast, Anglo-Iranian controlled the production of Iran, shared Iraq production with Shell and other international oil companies, and shared the production of Kuwait with Gulf.
It was into this structure of controlled production and marketing that both Anglo-Iranian's and Gulf's Kuwait oil was being fitted in 1947. The Gull-Shell contract became the means of carrying over into the postwar period the observance of the cartel's prewar "as is" principle of preserving marketing positions. 21 Gulf, with a large volume of production newly developed at Kuwait, was hemmed in by the restrictions in its 1933 agreement with Anglo-Iranian and by the fact that the natural markets for that oil were strongly cartelized. Under the Gulf-Shell agreement, Gulf obtained an outlet for about out-quarter [sic] of its share of Kuwait's proven reserves, with deliveries spread over more than 20 years. Thus Gulf was able to dispose of this oil without competitively entering markets in which it did not already have a recognized marketing position. Anglo-Iranian recognized Gulf's need for a market and apparently regarded the sale to Shell as giving relief to Gulf while at the same time placing the control of the marketing of this important part of Gulf's share of Kuwait oil in strong hands where it would be marketed in such a manner as not to upset or injure existing market positions of either Anglo-Iranian or Shell. Thus, Shell at one stroke gained control of a potential disturbing element in its and Anglo-Iranian's markets and secured a substantial source of supply more advantageously located with respect to many of its markets than its owned sources of supply.
In summary, Gulf, at the time that Kuwuit production began on a commercial scale in 1946, was restricted under the December 14, 1933, agreement with respect to any market in which Anglo-Iranian had distributing interests. Gulf, moreover, had neither an established marketing position nor a distribution organization and facilities in many Eastern Hemisphere markets. At the same time, Shell was operating with established positions vis-à-vis Anglo-Iranian under cartel agreements of long standing in markets throughout the Eastern Hemisphere. In many such markets, Shell and Anglo-Iranian distributed through a single company under joint marketing arrangements.
By entering into a long-term marketing arrangement with Shell, Gulf found an outlet for at least 1 1/4 billion barrels of its share of Kuwait oil, with deliveries spread over a minimum period of 22 years while Shell obtained crude oil which it needed to supply its estabished position in markets which it shared with Anglo-Iranian and others. Moreover, Gulf is restricted during this minimum 22-year period so that it can compete with Shell only to its own disadvantage. This arises because of the profit-sharing provisiotis of the 1947 contract and because of the limitations stated therein, which apply if Gulf should, by the use of Kuwait oil, encroach on Shell's business anywhere in the Eastern hemisphere.
The new 1947 Gulf-Shell contract incorporated, by reference, the restrictions on Gulf of the 1933 Anglo-Iranian-Gulf agreement. Actually, the restrictions on Gulf in both agreements apply to much the same marketing areas. Insofar as Anglo-Iranian and Shell have joint marketing organizations in many of these territories, and market cooperatively in many others, the 1947 contract merely transfers to Shell the ultimate responsibility of controlling the distribution of Gulf's share of Kuwait production so as to protect the trading positions of both Shell and Anglo-Iranian. 22
Thus, it appears probable that Gulf's opportunity to market additional oil out of Kuwait is limited quite largely, though possibly not exclusively, to those markets in which it already has an established marketing position accepted by the British-Dutch interests. Under these circumstances, the most important unrestricted markets of the world left open to Gulf for Kuwait oil appear to be those of the Western Hemisphere, and especially the United States. 23 Respecting such movement of oil, counsel for Gulf stated, in 1946:
In the light of present transportation costs, it is likely that it would not be profitable to market Kuwait oil in the Western Hemisphere. However, the registrant [Gulf) believes, it is the opinion of the oil industry in general that in a few years it can be made profitable to bring the oil into the United States.* * * Thus, while admittedly the marketing provisions are restrictive and objectionable they probably will not have a material adverse effect upon the total enterprise represented by the registrant and its subsidiaries. 24
Shortly after this statement was made, postwar price controls in the United States were removed in November 1946, whereupon the price of crude oil advanced at Gulf ports, with the result that Kuwait oil began to be imported into the United States in 1947. 25 Gulf Oil Corp. was among the importers. It imported at an average rate of 4,232 barrels daily in 1948, 29,745 barrels daily in 1949, and by the middle of 1950 at an estimated rate of 40,000 barrels daily. Two other American companies, Socony-Vacuum Oil Co. and Atlantic Refining Co., also imported Kuwait oil in increasing quantities during this period. 26 In December 1950, Atlantic Refining Co. announced that it had entered into a contract with Gulf to buy approximately 12,000 barrels daily of Kuwait oil for a period of 5 years beginning in 1951. 27 This apparently about doubled Atlantic's daily average rate of purchases of Kuwait oil. Thus it appears that as soon as the price of crude oil in the United States advanced sufficiently to make it profitable to sell crude oil for importation into the United States, Gulf found outlets for Kuwait crude in the United Sttites. Such sales were, of course, completely in accordance with its 1933 agreement not to use oil from that source to upset Anglo-Iranian's trade or marketing position directly or indirectly at any time or place.
ANGLO-IRANIAN AGREEMENTS WITH JERSEY STANDARD AND SOCONY-VACUUM FOR THE SALE OF CRUDE OIL
Soon after the Gulf-Shell sale of oil agreement was concluded, three other major international oil companies--Anglo-Iranian, Jersey Standard, and Socony-Vacuum--entered into similar long-term arrangements providing for the sale of Middle East oil owned by Anglo-Iranian to the two American companies. As in the case of the Gulf-Shell agreement, the sale of large quantities of oil over a long period of time, the unusual provisions with regard to price, the insertion of provisions governing the marketing of the oil, and the close relations otherwise existing between the three parties indicate that these agreements were not in the nature of an ordinary business transaction, but rather represented a mutual sharing of oil production on terms that harmoniously effected still another merging of interests in Middle East oil.
A large volume of oil was involved in the contracts. Jersey Standrd agreed to purchase 800,000,000 barrels of crude oil over a 20-year period; and Socony, under two purchase contracts, agreed to take 500,000,000 barrels--or a rate of 110,000 barrels daily for Jersey Standard and 70,000 barrels daily for Socony. In 1949, Anglo-Iranian's average daily crude oil production in Iran and Kuwait, by way of comparison, was about 715,000 barrels daily. 28 It would seem evident, therefore, that for a long time to come, Jersey Standard and Socony would take a substantial proportion of Anglo-Iranian's production. The two American companies, in fact, acquired such a substantial interest in Anglo-Iranian's crude-oil production over a 20-year period, with special terms as to price and other matters, that they became, in effect, junior partners in Anglo-Iranian's crude-oil. producing enterprises in Iran and Kuwait. The creation of the joint enterprise, Middle East Pipelines, Ltd., was a logical way to solidify and to continue this merging of interests.
The stated purpose of the crude oil sales contracts was to provido "an assured and continuing market" for Anglo-Iranian's crude-oil production and to "provide for a part of the large oil requirements" of the "affiliated companies" of Jersey Standard and Socony. The decision of the three parties to build a Middle East pipeline to move their oil to the Mediterranean flowed from these twin purposes.
Anglo-Iranian was obviously interested in "an assured and continuing market" for its output, particularly in view of the increase in Middle East production as a whole. In the spring of 1947, Jersey Standard and Socony had reached a tentative agreement with Texas and Standard of California for their entry into Aramco and into Trans-Arabian Pipeline, and had signed the subscription agreements, off-take agreements, and other collateral papers. The negotiations with their IPC partners to permit the ultimate conclusion of these agreements and to settle other IPC matters had fairly well crystallized. At the same time the Gulf-Shell sale of oil agreement had been concluded and was in operation, and the building of new pipelines in Iraq was well advanced. 29 The effect of all these activities was to increase crude oil production in Saudi Arabia, Iraq, and Kuwait. With Middle East production thus on the rise, Anglo-Iranian would naturally wish to keep pace with the growth of Middle East production. To have fallen behind would not only have been undesirable from a purely commercial standpoint; it would also have weakened Anglo-Iranian's prestige in the Middle East. 30 Another factor in the bargain with American companies was the desire of Anglo-Iranian to build a pipeline from the vicinity of the Persian Gulf to the Mediterranean; American participation in this project would undoubtedly facilitate the procurement of both American steel and dollars which were necessary but scarce.
On their part, Jersey Standard and Socony gained under favorable terms a long-term, substantial supply of crude to meet their anticipated requirements in foreign markets. Moreover, this oil would benefit from cheap transportation via the projected MEPL pipeline. And perhaps of most importance, Anglo-Iranian, Jersey Standard, and Socony would all benefit in that the increases in Iranian production, indicated by the 1946-47 events in the Middle East oil industry, would be funneled into the hands of companies interested in maintaining world prices and markets.
Thus the making of the long-term sale of crude oil agreements between Anglo-Iranian, Jersey Standard, and Socony added substantially to the interlacing and merging of oil interests that had developed in the Middle East over the course of 25 years. These developments tended to create common and identical interests among the major international oil companies in the Middle East through their joint arid interlocking enterprises. The crude oil sales agreements, therefore, emerged as the last of the long series of events tending toward a unified oil industry in the Middle East.
Jersey Standard-Anglo-Iranian crude oil sales contract.--The agreements for the sale of crude oil and for the establishment of Middle East Pipelines, Ltd. originated in conversations apparently held sometime in August or September 1946 between Orville Harden, vice president of Standard Oil Company (New Jersey) and Sir William Fraser, chairman of the board of directors of Anglo-Iranian Oil Co., Ltd. 31 An unsigned memorandum, dated October 4, 1946, in Jersey Standard's files set forth the outlines of the preliminary agreement, in which the sale of oil and the pipeline are tied together in one package. The crude oil contract was to provide for the sale by Anglo-Iranian over a 20-year period of 160 million long tons (1,200,000,000 barrels) to Jersey Standard. Other features of the preliminary agreement, such as those relating to price, to Anglo-Iranian's option of supplying the oil either from its Iran or Kuwait sources, and to Jersey Standard's rights of termination of the contract at earlier dates were substantially the same as those in the final agreement. The two parties were to jointly finance and operate a pipeline of 300,000 barrels per day capacity, i. e., 15 million long tons annually, which was to run from the Persian Gulf to the Mediterranean.
Socony-Vacuurn was brought into the agreement, apparently sometime in November, 32 being given 20 percent of Jersey Standard's crude oil purchase, (200 million barrels) 33 over a 20~year period, and a 10-percent interest in the pipeline, taken from Jersey Standard's share which was thus reduced to 40 percent. However, Socony's position was that of an adherent or lesser partner, and until late in the negotiations with Anglo-Iranian, Jersey acted on both its own and on Socony's behalf. 34
Although the guiding principles were agreed upon at an early stage, 35 the ensuing negotiations proved long and tedious. In late August 1947, it became apparent that the pipeline agreement could not be concluded for some time, although the crude oil contracts were in nearly final form.36 Accordingly, on September 23, 1947, Anglo-Iranian signed contracts for the sale of crude oil with Jersey Standard and Socony, the terms of the two documents being identical in most respects. The following statement of the main provisions of the Jersey Standard-Anglo-Iranian contract, therefore, will serve also as a statement of the contents of the Socony-Anglo-Iranian first purchase contract.
Jersey Standard agreed to purchase 106,400,000 long tons 37--about 800,000,000 barrels--of crude oil from Anglo-Iranian, the deliveries to commence with the completion of the pipeline to the Mediterranean and to continue over a 20-year period. The contract called for deliveries at the average rate of 90,000 barrels daily (nearly 33 million barrels annually) for the first 3 years, and at the average rate of 114,000 barrels daily (nearly 42,000,000 barrels annually) for the succeeding 7 years. The remaining part of the purchase, 410 million barrels, was to be delivered over a 10-year period, the annual quantities to be determined at a later time. 38 Jersey Standard could, at its option, cancel the contract at the end of its tenth or fifteenth year, a 5-year notice being required. 39 In the event that the then-current negotiations with Aramco failed, Anglo-Iranian agreed to negotiate with regard to the purchase of an increased volume of oil. 40
The contract for sale of oil was contingent upon the making of the pipeline agreement 41 and was to go into effect only when the pipeline was completed, the target date being January 1952. 42 It was contemplated that the purchased oil would be delivered into the jointly owned and operated pipeline at which point ownership of the oil would pass from Anglo-Iranian to Jersey Standard. The latter company, however, was given the right to lift up to 5 percent of its annual takings by tanker in the Persian Gulf. 43
Anglo-Iranian was given the option of making its deliveries either from Kuwait or Iran at its pleasure. This flexibility option was inserted to allow Anglo-Iranian to determine the source of supply as indicated by "political considerations"." Among the provisions to insure that the average quality of the oil delivered from either Iran or Kuwait was not less than the average quality of oil produced in either country, the following safeguard was included in the contract. Anglo-Iranian---
shall keep currently during the supply period [20 years] * * * adequate records of the quality of oil produced in each field in Kuwait and * * * in Iran. 45
These records were to be made available to Jersey Standard.
The price to be paid for this oil was determined by a cost-plus "principle" described in the contract as "a 'cost plus' basis independent of market fluctuations in the prices of crude oil or petroleum products."
The cost element of this formula included all costs of production and gathering per ton allocable to the oil delivered under the contract, 46 including the costs of delivering it into the eastern terminal of the Mediteranean pipeline or, in the case of the small quantities of oil to be lifted by tankship in the Persian Gulf, the costs of delivering the oil f. o. b. tankship. 47 The "plus' element of this formula consisted of a fixed money profit per ton, which was to apply throughout the 20-year supply period of the contract. This profit element paid to Anglo-Iranian was the factor that made the total price payable by .Jersey Standard "independent of market fluctuations" since it stabilized that price for a 20-year period, subject only to changes in the actual costs of production and gathering of the oil. 48
It would seem clear that extensive information would necessarily have to be made available to Jersey Standard so that it could determine whether the costs charged to it were properly determined. This is an essential characteristic of any cost-plus contract and distinguishes it from ordinary business transactions in which buyers and sellers "haggle" in arm's-length bargaining, independently of each other's conduct of their business affairs. Early in the negotiations for this contract, the principal negotiator of Jersey Standard referred to "our need for clearly knowing the definition of each cost factor and the proposed allocation of all items of expense, as well as having all documents and other factors that would affect the contract." 49 In a letter supplemental to the "Heads of Terms," dated December 20, 1946, initialed by officers of Jersey Standard, Socony, and Anglo-Iranian, the following appears:
3. We feel obliged to ask that Jersey be permitted from time to time to audit so much of the books of Kuwait Oil Co., Ltd. 50 as may be necessary to verify accounting statements relevant to the crude-oil contract.
We would prefer that this be done by Jersey employees, but if this is unsatisfactory to AIOC, we would probably be willing to agree that such audits would be made by independent accounting firms--such as Price, Waterhouse & Co--retained and paid for by Jersey.
The issue, was not settled this easily, however. Although the parties soon came to an agreement upon the accounting principles to be applied and the allocation of the elements of cost among capital and current charges, 51 the question of who would make audits emained in dispute. Jersey Standard oflicials were unyielding in their stand that the accounts be audited by their own or by independent auditors retained by them, insisting that such a review of the accounting books was necessary to fulfill their definite responsibilities to their stockholders. 52 Anglo-Iranian countered by stating that "we are not in a position to give them access to the Kuwait Co.'s books without previous reference (to) Kuwait partners." It proposed, "in conformity with usual practice on this side," that a "certificate given by Kuwait. Co.'s auditor * * * would be satisfactory safeguard by both parties." It insisted that the procedure proposed by Jersey Standard "might reflect on (the) reputation and professional status of auditors and involve ethics questions as between (Kuwait's) auditors and (Jersey Standard's) independent auditors." 54
Under the final compromise on this issue, as stated in the contract, the annuaI audit of the books and records of the Kuwait Oil Co. was to be made by the statutory auditors of that company, who were to be specially retained and paid for this work as "independent auditors" by Jersey Standard and Anglo-Iranian. The statutory auditors of Anglo-Iranian were to be siniilarly specially retained by the two parties to examine the relevant books and records of the Anglo-Iranian and render a certificate to the auditors of Kuwait.
It was further provided that Jersey Standard would be "entitled to receive" from Anglo-Iranian "any and all information which buyer (Jersey Standard) may reasonably request, from time to time, as to any of the matters enumerated" in the preceding parts of the article in the contract, namely, the books and records relating to all the elements of cost which entered into the price to be paid by Jersey Standard. The disclosure of such information would result, in effect, in opening up to Jersey Standard nearly all the details of the operations of Kuwait Oil Co., Ltd., and many details about Anglo-Iranian's business in Iran. 55
The crude-oil sales contract, therefore, implied a long-term close association between Jersey Standard and Anglo-Iranian. This conclusion is supported by the details given above on the quantities of oil to be supplied, the length of the supply period, the nature of the pricing principle (cost plus), the stipulations regarding the disclosure of information as to quality and as to costs, etc. Underscoring the fact of this contemplated long-term association was the joint participation of the parties in the financing and construction of the Mediterranean pipeline.
An understanding between the two parties defining the ultimate market. for which this oil was destined further emphasizes their close association. The contract for the sale of oil included the following provision:
Nothing in this agreement shall limit or restrict buyer (Jersey Standard) as to the sources from which it supplies any area or as to the areas to which it delivers supplies from any source. It is, however, buyer's intention in entering into this agreement to use oil receivable by buyer hereunder in supplying buyer's business in Europe (including the British Isles), North Africa (including the whole of Egypt), and West Africa, all of which areas are hereafter referred to as "the reference area". [Italics added.]
The meaning of this provision, i. e., limiting the areas within which the purchased oil is to be ultimately distributed, becomes clear on reviewing the discussions of the parties in its preparation. Early in the negotiations, a Jersey Standard official stated:
I told Basil (B. R. .Jackson of Anglo-Iranian) that so far as crude oil deliverable by pipeline was concerned, it was for the purpose of helping to supply the requirements of our total business in the European and North African countries along with IPC, Saudi Arabian, Venezuelan, and * * * other crudes. 56
The first draft of the contract which included a definition of "the reference area" read as follows: 57
Europe (including the British Isles), Africa, Asia Minor, and India.
This proved to be unacceptable to Anglo Iranian which objected to the specification of "particular countries", and was "unwilling to include areas east of Suez." 58 The wording that was finally settled on was substantially that proposed by Anglo-Iranian except for the specific mention of the British Isles and Egypt. 59
The restrictive nature of the above-quoted provision of the crude-oil contract is further revealed by the context in which it was placed. This provision introduced the "Force Majeure" article which provides for adjustment of the contract in the event of unforeseen events such as acts of God and of governments, insurrections, and the like. The intentions of Jersey Standard in negotiating the lengthy and complicated clauses in this article were succinctly stated by a Jersey Standard official: 60 "I said that in the event of a market being lost to us, say because of its being nationalized, I thought the fairest plan would be to reduce the takings under the contract in proportion to what our total business in such market represented to our total business in the remaining countries of Europe and North Africa." This intention appears to have been carried out in the "Force Majeure" provisions of the contract, for the effect of these provisions is that in the event of the. loss of part or all of any markets, the oil purchased by Jersey Standard was not to be diverted to any market outside the "reference area," but rather the amount of oil deliverable under the contract would be reduced.
Socony-Anglo-Iranian first purchase agreement.--The Socony-Vacuum Oil Co., inc., signed a sale of oil agreement, dated September 25, 1947, 61 substantially the same as that signed on the same day by Jersey Standard and Anglo-Iranian, This agreement, known among the parties as the first purchase agreement, differed from the one previously described only in the definition of the "reference area."
The total quantity of oil to be purchased by Socony over the 20-year period was 26,600,000 long tons (200,000,000 barrels). During the first 10 years of the contract, Socony was to take delivery of 10,000,000 barrels annually (28,000 barrels daily). The balance of the oil (10,000,000 barrels) was to be taken during the last 10 years in quantities to be specified by the same procedure as that provided in the contract between Jersey Standard and Anglo-Iranian. 62
Socony's "reference area" differed from that of Jersey Standard only by the. inclusion of "the countries bordering on the eastern Mediterranean (including any islands within or adjacent to this area)."
Socony-Anglo-Iranian second purchase agreement.--Sometime during the summer of 1947, 63 Socony and Anglo-Iranian agreed that a second agreement for the sale of oil would be arranged between them under substantially the same terms as the contracts that were then in the final stages of negotiation. Accordingly, on March 1, 1948, the two companies entered into an agreement, known as the second purchase agreement, whereby Anglo-Iranian agreed to sell to Socony over a 20-year period 40,000,000 long tons (300,000,000 barrels) of crude oil. Over the first 10 years of the contract, Socony was to accept deliveries into the pipeline 64 at the rate of 15,000,000 barrels annually, i. e., at the rate of 42,000 barrels daily. The balance of the oil (150,000,000 barrels) was to be delivered .during the last 10 years of the contract. in annual quantities nominated by Socony. 65 This contract was to go into effect and delivery of the oil to commence, as in the previous contracts, with the beginning of operations of the Mediterranean pipeline. 66
With regard to the markets for the crude oil purchased under this second contract, the intention of Socony and Anglo-Iranian was to direct the oil principally to the United States. The following appears in the contract:
It is, however, buyer's (Socony's) intention in entering the agreement that the oil receivable hereunder should be utilized to supplement buyer's available supplies for importation into the United States.
'l'his oil was not to enter the reference area stated in the first purchase contract, since the force majeure article in which the above sentence appears, was designed "to keep United States separate from [the] other reference area." 67 Nevertheless, the contract appears to give Socony some latitude in disposing of the oil, since the above language would permit, and other provisions of the contract make provision for, the export of products refined from this oil to foreign markets. 68
The second purchase agreement thus incorporates the same general principles as those in the Jersey Standard and first purchase agreements, differing from the two earlier agreements only in minor details. Thus the oil in all three cases is to be supplied at the option of Anglo-Iranian from its Kuwait or Iranian fields, and is to be directed to specified markets. The contracts are all contingent upon the building of the Mediterranean pipeline and are to be in effect for 20 years. All three contracts provide for cost-plus pricing principles, in each contract substantially identical provisions are inserted relating to cost accounting, auditing, and the obligation of Anglo-Iranian to supply "any and all information" which Socony or Standard might "reasonably" request relating to these matters. In short, except for some differences in details or in wording, the three agreements are substantially the same.69
Middle East Pipelines, Ltd.--In the first discussions between Jersey Standard and Anglo-Iranian regarding a long-term contract for the sale of crude oil, it was agreed that this contract would be continget upon the "commissioning" of a jointly owned pipeline from the vicinity of the Persian Gulf to the Mediterranean. This pipeline. project, therefore, was conceived of as an integral part of the total bargain between the parties. Accordingly, the three parties--Anglo-Iranian, Jersey Standard, and Socony--negotiated a pipeline agreement, signed on March 23, 1948, which set forth their detaihd agreements on the size, financing, and operation of the proposed pipeline. Although construction of the pipeline has been repeatedly delayed and is now postponed for several years at least, 70 a review of the provisions of this agreement throws additional light on the close association of the interests of the three parties that was contemplated under the contracts for the sale of oil.
The three parties created a joint enterprise, Middle East Pipelines, Ltd. (MEPL), to finance, construct, and operate the pipeline, the shares of ownership being: Anglo-Iranian, 60.9 percent; Jersey Standard, 24.7 percent; and Socony, 14.4 percent. 71 It was agreed that "none of the shares in the capital of the pipeline company" held by the three shareholding companies could be "sold, transferred, hypothecated, or otherwise disposed of," except to a subsidiary or to a successor company, during the life of the agreement. If, however, should any of the crude-oil supply contracts be terminated, 72 Anglo-Iranian was given the right to acquire the shares of the company terminating a contract by paying in sterling "the fair value" of the shares or a price equal to that of any bona fide offer of a third party.
The capacity of the proposed pipeline was fixed at 535,000 barrels daily, each of the owning parties to have the right to utilize the line, for its own requirements or on behalf of others, in the proportion represented by their share ownership in MEPL. This meant that there was no surplus capacity available to Jersey Standard and Socony. 73
The capacity available to Anglo-Iranian--326,000 barrels daily--was considerably in excess of its projected requirements, which Anglo Iranian had estimated would average 210,000 barrels daily in 1952 (the expected first year of operation of the pipeline), 250,000 barrels daily in 1960, and 275,000 barrels daily in 1965. 74 While not stated in the agreement, it is apparent that Anglo-Iranian's excess capacity was to be allotted to Gulf Oil Corp and to Royal Dutch-Shell, presumablv to move Kuwait oil, it was anticipated that Anglo-Iranian would come to a separate agreement with Gulf and Shell with regard to the amount of capacity that would be allotted to them, their share in financing Anglo-Iranian's share of the pipeline, and so on. 75 Thus, although the pipeline agreement provides for only three shareholders in the pipeline company, it was anticipated that five international oil companies, controlling a large share of Middle East oil, would share in the utilization of the capacity of the pipeline.
It was agreed that the pipeline project would be financed by the three oil companies in proportion to their stock ownership, each party providing its due share of the dollars and sterling that would be required. 76 To solve the problem of the companies in providing the currencies required, reciprocal loan agreements were signed together with the pipeline agreement, whereby the American companies agreed to lend dollars to Anglo-Iranian to supply part of their anticipated needs, and Anglo-Iranian agreed to lend equivalent amounts in sterling to the American companies. These loans were to be called by the parties and re-lent to MEPL to meet MEPL's money requirements from time to time. The loans were to be repaid during the 10 years following the commissioning of the pipeline or January 1, 1955, whichever was earlier. On its part, MEPL was to repay its loans from the parent companies "as soon as practicable" and in any event within 15 years from the date on which crude oil would be first delivered through the pipeline. The loans were further safeguarded by a provision that, as permitted by English income-tax laws, the "initial allowances", i.e., all capital costs incurred before the date of commissioning of the pipeline, would be "depreciated" or amortized over the first 10 years of operation. 77
The recitation of the provisions of this or of the related crude oil supply contracts, however, does not reveal the breadth and generality of the considerations that influenced the negotiations and shaped the final agreements. For example, one of the many issues that was discussed at considerable length was that of the "nationality" of the Pipeline company. 78
The importance of the pipeline project arises from the fact that it was conceived of as an integral part of the agreements for the sale of crude oil. The relations between the participating companies in all these agreements were well typified by the comment of an official of one of the companies made in the course of debate during the negotiations:
I underlined to the Anglo-Iranian gentlemen that we were not endeavoring to make a "trade" in the generally accepted sense of the word, but were trying to find a basis on which partners could cooperate.79
Supplementary agreements.--It had been originally anticipated that the pipeline project would be completed by the end of 1951 so that the first full year of operation of the pipeline and of the contracts for the sale of oil would be 1952. 80 Due to the slowness of negotiations for wayleave conventions with Syria and Iraq, across which the pipeline was to be built, and to expected delays in obtaining steel pipe, it soon became apparent that this target date could not he met. 81 Accordingly, supplementary agreements to the three contracts for the sale of oil and to the pipeline agreement were negotiated by the three parties and were signed on April 5, 1949. These supplementary agreements readjusted the rights and obligations of the three oil companies so that, the appropriate safeguards to their respective interests being made, the crude oil contracts would become effective as of January 1, 1952, the purchased oil being lifted by Jersey Standard and Socony by tanker at Persian Gulf ports. The pipeline project in the supplementary agreements was reduced from a settled matter to a tentative one, and due to the continued operation of the above-mentioned delaying factors, it was decided, in 1950, to postpone the project for at least 3 years. 82
On the same day that the pipeline agreement was signed, March 23, 1948, an "agreement in principle with details to be worked out, later" was reached between Jersey Standard and Anglo-Iranian which would permit Jersey Standard "to take crude by tanker in lieu of pipeline, such deliveries to he applied against crude contract and to begin July 1, 1951, and to continue until pipeline is completed and in operation." 83 This preliminary understanding was developed into a formal proposal by Jersey Standard, dated August 30, 1948, that was accepted as the basis of negotiations by Anglo-Iranian. 84 The principles of agreement set forth in this letter were substantially incorporated in the elaborate and complicated documents that were written to preserve the rights and obligations of the parties that had been agreed upon in the earlier agreements. It was agreed that, even though the Mediterranean pipeline were not constructed by that time, the "supply period"--the 20-year period during which the crude oil contracts were to be in effect--would begin on January 1, 1952. The crude oil was to be delivered into tankships in the annual quantities agreed upon in the basic contracts at Mashur, Iran, and was to be of the average quality of the total gross production in Iran. 85 These tankship deliveries were to he suspended when the Mediterranean pipeline was completed, and the provisions of the basic contracts would then come into effect.
The price to be payed for this oil was to be determined in accordance with the procedure described in the basic contracts, that is, it included all the costs of producing and gathering the oil, including the costs of deliverin it f.o.b. tankship at Persian Gulf ports, i. e., Mashur. 86 With regard to this last price element, a new formula for its determination was agreed upon for the oil purchased under Socony's second purchase agreement which preserved the principal that the "differential" would consist of one-third of the gross profit per ton, i. e., the difference between total costs and world market prices. 87 The provisions of the basic contracts relating to accounting, auditing, the furnishing of information about costs, and so on, were to apply under the supplemental agreements without change.
One of the features of the basic contracts was the definition of "reference areas," i. e., markets in which it was the stated intentions of Jersev Standard and Socony to sell the oil delivered through the pipeline. The contracts provided, however, that 5 percent of the annual quantities purchased could be lifted by tanker in the Persian Gulf; that provision presumably permitted the delivery of 5 percent of the oil in far-eastern markets. The intention of the parties in preparing the supplementary agreements was to preserve these marketing arrangenients, 88 and to this end the following provision was included in each supplementary agreement to the crude-oil contracts:
If in any year of the supply period during which f.o.b. tankship deliveries are made * * * more than 5 percent of the quantity deliverable in the year in question pursuant to the supply agrrement is shipped by buyer [i. e., Jersey Standard or Socony] to destinations east of Suez, then the price for each such cargo of such excess quantity shall he seller's [Anglo-Iranian's] established spot cargo price f.o.b. tankship for shipment to destinations east of Suez in effect at the Persian Gulf port at which the particular delivery was made at the time such delivery was made. 89
The effect of this provision is to penalize all oil, in excess of 5 percent of the quantities acquired annually under the contracts, which is shipped to destinations in the Middle East (except Turkey), all of Africa (except West Africa), India, and the Far East, and Australia and Oceania, and to direct up to 95 percent of the oil to the areas which Jersey Standard and Socony would "normally have supplied with such oil after transportation through the pipeline, were the pipeline completed." 90
The other provisions in the agreements supplementary to the three contracts for the sale of crude oil and the pipeline agreement were designed to provide a procedure for settling the future of the pipeline project and to safeguard and preserve the rights and interests of the parties under all contingencies. These provisions were summarized by Orville Harden as follows:
(2) The pipeline situation will he reviewed in 1956 and in 1961 and at either of these times the pipeline agreement may be terminated if construction is not substantially started. In the event of such termination the crude oil contract will terminate 5 years later.
(3) If the crude oil contract is not thus terminated, but Jersey terminates it at the end of the tenth or fifteenth year and Anglo-Iranian does not purchase Jersey pipeline shares, Jersey may continue the crude supply contract under contract terms up to a date fixed by it or until the end of the tenth year after completion of the line, whichever is earlier.
(4) If the pipeline has not been substantially started by 1966, the Pipeline agreetment terminates. 91
This summary equally applies to the Socony-Anglo-Iranian supplementary agreements as well. None of the supplementary agreements were intended, however, to affect in any way the agreement of the parties that they would "proceed with the construction of the pipeline as promptly as circumstances permit." 92
Postponement of the construction of the Mediterranean pipeline.-- The problems that had led to the delays in getting MEPL under way continued to hamper that project after the supplementary agreements were signed. The problem of the procurement of steel did not appear to be settled until sometime near January 1950, when arrangements were made for "steel pipe production to begin in the third quarter of 1951." This was thought to be the earliest date that construction of the pipeline could begin. 93 The most important factor in delaying the Mediterranean pipeline, however, was the difficulty in obtaining wayleaves from Syria and Iraq; and, in fact, it was the failure to obtain an acceptable wayleave convention from Iraq that led to the postponement of the pipeline project for a 3-year period, i. e., from 1951 to 1954. Thus the present status of the pipeline project is suspensive until 1954 or such later time as the parent companies decide that conditions are suitable for its implementation.
After protracted negotiations, a pipeline convention was signed with Syria on June 7, 1949. It proved to be impossible to make a wayleave convention with Iraq, however, because MEPL was a side issue, as far as the Iraq Government was concerned, the main issue being the volume of domestic production of crude oil. Iraq was particularly anxious to push the development of production by the Basrah Petroleum Co.. Ltd., an affiliate of IPC, because under the terms of this concession, they were to be paid as a royalty 20 percent of the oil produced. 95 The situation, therefore, was that--
from the outset the only attraction the MEP project has seemed to have for them was in connection with Basrah oil * * * In short, every Iraqui interest seems to be against the wayleave itself except insofar as it brings with it hope of increased Iraqui production.
Thus, the negotiations throughout consisted for the most part of discussions of this matter, the attitude of the Iraq negotiators being colored with the "fear that their aspirations for Iraqui production are still being ignored in certain quarters." 98
The various proposals of the Iraci negotiators, therefore, were designed to achieve this one main purpose. They vigorously pressed a proposal that MEPL commit itself to reserve space for the transportation of Basrah oil. The MEPL negotiators, however, were instructed in the summer of 1948 that since IPC and its associated companies in Iraq were planning to develop broad-scale discussions with the Iraq Government in the near future, it was probable that a full understanding would be developed satisfying the Government's desires to see a "continued active development of the oil resources of Iraq." In these circumstances it was hoped that MEPL would not have to make a commitment to transport the oil of outsiders. 97
While the negotiators held this matter in abeyance, it appears that the Iraq Government was not satisfied with the assurances given by IPC and was determined to press the point. The negotiations came to a halt after the following demands were made by the Iraq Minister of Economics:
Firstly, that a letter be written by Sir William Fraser (and no one else), safeguarding production of the IPC fields.
Sir William, chairman of Anglo-Iranian, was specified because "everyone in Iraq believed that it was he and he alone who had the final word with the (IPC) group." The second demand was that MEPL "would be requested to assume the role of a common carrier." This actually meant that MEPL was to obligate itself to carry 8 million toIls annually of Basrah oil, 98 i. e., 165,000 barrels daily.
Such a proposal was unacceptable to the parent companies of MEPL, since it would reserve nearly 30 percent of MEPL capacity for "outsiders." This would mean that each of them would have to surrender some part of their space for this purpose for an unknown period of time, since the Iraq negotiators had not mentioned any time limit. 99 It will be recalled that the owners of MEPL--Anglo-Iranian, Jersey Standard, and Socony--together owned 17.5 percent of Basrah Petroleum Co.1 Hence they would have recovered only about half of the capacity they surrendered in this way to Basrah. Furthermore, Jersey Standard and Socony were committed to long-term contracts for the purchase of oil with Anglo-Iranian which would require their full share of MEPL capacity. 2
The result of these proposals was to further delay the date of the beginning of the construction of MEPL. At a meeting of the board of Directors of MEPL on June 1, 1949, a decision had already been made that "the implementation of our construction program be deferred for the present and reviewed at the next board meeting." 3 At a meeting on October 19, 1949, it was resolved "that the project should be delayed for a minimum of one (1) year, except as to continuance of wayleave negotiations in Iraq." 4 As a result of the Iraq proposals, an informal meeting of MEPL was held on April 4, 1950, where it was agreed to "discontinue negotiations indefinitely" and to ''postpone MEPL for at. least 3 years," i. e., construction would commence at the end of 1954 instead of 1951, as had been planned. 5
The contracts for the sale of crude oil discussed in this chapter represent still another intermingling of the interests of the major international oil companies in Middle East oil. Joint ownerships in the Middle East, which have resulted in extensive controls and restrictions on production, have been described in chapters 1 and V. In addition to joint ownerships, the crude-oil supply contracts described in this chapter have provided another basis for joint control over oil production and marketing. These contracts have resulted in a sharing of oil production in Kuwait and Iran and a channeling of the oil to the market in the hands of firms able and interested in maintaining world prices and markets. These two instruments of control utilized in the Middle East, joint ownership and crude-oil supply contracts, have, in effect, served to complement each other in protecting the mutual interests of the international oil companies in the production and marketing of world oil.
The contracts provide for the sharing of large quantities of oil over a long period of time. Under the Gulf-Shell contract, Shell acquired control over 1 1/4 billion barrels of Kuwait oil owned by Gulf to he delivered over an open-end contract. period of at least 22 years. Under the Anglo-Iranian-Jersey Standard-Socony contracts, Anglo-Iranian agreed to turn over to the two American companies 1.3 billion barrels of Kuwait-Iran oil over a 20-year contract period. 6 Thus these contracts result in the division of the production of Kuwait and Iran between the buyers and the sellers and, in effect, give them mutual and continuing interests in that production over a period of many years.
These mutual interests are typified by the unusual terms as to price that were agreed upon by the parties. Under the Gulf-Shell contract, no price is stated, but elaborate provisions were written providing for the division of profits between the two parties. The profits are determined and shared for the entire integrated process of producing, transporting, refining, and marketing for a minimum period of 22 years. Thus, to all intents and purposes, Gulf and Shell are joined together in a long-term integrated oil enterprise.
A cost-plus pricing principle was adopted for the three contracts for the purchase of oil owned by Anglo-Iranian. The price under the Jersey Standard and Socony first purchase agreements was fixed at the actual cost of production plus a fixed sum of money per ton, and under the Socony second purchase agreement, at actual cost plus one-third of the gross profit per ton realized on the crude oil. Such a pricing principle gives the purchaser a direct and strong interest in the costs of the seller, since the purchaser will benefit from any economies achieved by the seller in his operations. This interest was evidenced by the extensive provisions in the contracts setting forth the method for determining and allocating costs and for the delivery by Anglo-Iranian of "any and all information" relating to the cost elements entering into the price which Jersey Standard and Socony might "reasonably" request.
The significance of the contracts as instruments for the control of Middle East oil is further evidenced by the provisions restricting and controlling the marketing of the oil. Under its 1933 joint-ownership agreement with Anglo-Iranian, Gulf was bound not to disturb Anglo-Iranian's marketing position at any time or place, a restriction which had particularly restrained Gulf from entering markets "east of Suez." The terms and nature of the Gulf-Shell contract of 1947, however, imposed new restrictions on Gulf which largely superseded the restrictions of the 1933 agreement. 7 Thus if Gulf should use Kuwait oil to increase its business in any Eastern Hemisphere market at the expense of Shell, it would be penalized by an equivalent reduction of its deliveries to Shell. Similarly, Gulf would share, under the profit-sharing principle, in the losses occasioned by any price cutting in any Eastern Hemisphere market. Such price cutting would be expected to result if Gulf, in the utilization of Kuwait or any other oil, tried to invade any new markets or to increase its share of business in any established market. The Gulf-Shell contract thus appears to limit Gulf to those markets in which it holds a historic marketing position but to allow it, through the profit-sharing arrangement, to participate in the marketing of oil in those territories in which Shell holds a marketing position. The extensive joint marketing arrangements of Shell and Anglo-Iranian assured the integrity of the marketing positions of both. Thus the effect of these arrangements is to carry forward into the postwar period, the ''as is'' principle, to be described in chapters VIII and IX, preserving the historic position of participants in each market.
The areas in which Jersey Standard and Socony could dispose of the large quantities of oil acquired from Anglo-Iranian were similarly specified in the contracts. Not more than 5 percent of this oil could be distributed "east of Suez," a provision penalizing any excess shipments to this area being inserted in each of the supplementary agreements to go into effect on January 1, 1952. Jersey Standard and Socony, under the first purchase agreement, were to distribute their oil in Europe and north and west Afiica. 8 Socony, under the second purchase agreement, was to import its oil into the United States. In short, under these agreements, the three parties agreed upon the markets into which this oil was to flow. 9
Thus the crude oil supply contracts, not only because of the large quantities
of oil and the long periods of time that were specified, but also because of
the unusual provisions as to price and marketing, constitute effective instruments
for the control of Middle East oil. As such, they complement and increase the
degree of joint control over Middle East oil resulting from the pattern of joint
ownership described in the preceding chapters. The operation of these two instruments
of control, in effect, brings the seven international oil companies, controlling
practically all of the Middle East oil resources, together into a mutual community
1. Because of the long periods for which they run, sales contracts may be substituted for joint ownership of reserves and production. Chapter VII below discusses such an instance in which the total production of important concessions in Venezuela, which are owned by Gulf Oil Corp., is divided exclusively among Gulf, Standard Oil Co. (New Jersey), and Royal Dutch-Shell interests for the full life of the concession.
2. In submitting a copy of the 1947 contract and two subsequent supplemental agreements in response to subpena, counsel for Gulf Oil Corp. declared that the agreement itself is not relevant to the announced purpose of the present investigation; that it is purely a purchase and sales agreement between the two parties; that the agreement does not restrict either Shell's or Gulf Exploration Co.'s right to dispose of Kuwait oil; that it throws no light on the allocation that over a long period of years American petroleum companies operating in foreign countries have entered into restrictive acreements among themselves and with petroleum companies of other nations; and that the disclosure of its terms would be detrimental to both Gulf Oil Corp. and Shell, which have hitherto carefully kept its terms secret. Counsel for Gulf, therefore, requested confidential treatment and prompt return of the documents without any of their contents having being included in any report.
The Federal Trade Commission has examined the Gulf-Shell agreement of May 28, 1947, obtained by subpena, with the Gulf Oil Corp.'s contention as to confidentiality in mind. After careful examination, the Commission has decided that a description of the general nature of this agreement is pertinent to the present investigation made pursuant to the Commission's resolution of December 2, 1949.
It is recognized, however, that full disclosure of the terms of the agreement of May 28, 1947, might be detrimental to the interests of one or both parties. Therefore, these terms are not disclosed. It is a fact, however, that, although its exact terms may not be known to the other international oil companies, the existence of the agreement and the nature of its economic effects are well known in the industry. The Commission finds, therefore, that a discussion of the general nature and economic effects of this particular agreement does not constitute a disclosure of trade secrets or names of customers as prohibited by the Federal Trade Commission Act.
3. In addition to oil jointly ordered out of Kuwait, both of the parties had the right to order for their separate accounts such additional oil as they desired; see pp. 359-360.
4. World Petroleum, May 1951, p. 47, and July 1951, p. 24.
5. Platt's Oilgram News Service, July 2, 1951, p. 3.
6. Journal of Commerce (New York), July 20, 1931, p. 1.
7. This Is further evidenced in the Gulf-Shell agreement by the statement that Gulf's obligations are subject to the agreement of December 14, 1931 between Anglo-Persian and Gulf.
8. More than half of the approximately 170 printed pages constituting the Gulf-Shell contract are devoted to "schedules" setting out the complicated statistical and accounting procedure by which the profits to be divided hetwcen Gulf and Shell are to be determined.
9. For further comment on this point, see p. 140. footnote 12.
10. The contract states that the price formula was agreed upon because there
was no published market price for crude oil in the Persian Gulf and the parties
could not agree upon a stated sum per barrel for the duration of the contract.
11. Quoted as amended by the Supplemental Agreement between Gulf and Shell, dated February 14, 1950, the only change from tho original text being to extent the application of this provision to the longer delivery period therein agreed upon, i. e., l947 to 1969 or until cancellation of the agreement at a later date.
12. The contract lists each Shell marketing subsidiary and joint marketing organization in the Eastern Hemisphere and lists the territories served by each. The contract states that thee listings were made in order to provide an agreed bisis for the price formula and that Shell is not, in fact, bound to market its Kuwait oil in accordance with the steps in the procedure for determining the price, but is free to market its Kuwait oil as it sees fit. Actually, the contract does not limit the use of the lists of marketing oragnizations and territories to the determination of price, but also uses the lists as a basis for reducing the quantity of oil which Shell would be required to take under the contract if Gulf should market Kuwait oil so as to reduce Shell's business in any of these "listed territories."
13. The limitations on Gulf applied to all the "listed territories' enumerated in the contract, and any business done by Shell in the Eastern Hemisphere in markets not included in the comprehensive list would be a negligible part of Shell's Eastern Hemisphere operations.
14. Clause 6, par. (6) (c) provides that, where this fact as to whether increases in Gulf's sales are at Shell's expense cannot be determined, then the above-mentioned penalties on Gulf do not apply.
15. Gulf's application to the Securities and Evchanre Commission, loc. cit.
16. For details on these restrictions and their application, see chs. VIII and IX.
17. The Petroleum Times,. June 9, 1934, p. 622, quoting remarks by Sir John
T. Cargill in reviewing the operations of Burmah Oil Co., Ltd. This statement
was made at the time the Anglo-Persian, Shell, and Standard (New Jersey) companies
were operating in European and Far Eastern markets under cartel agreements intended
to implement the "as is" principle. Burmah Oil Co. has been previously
mentioned on p.131 as a customer of Anglo-Persian and as a joint marketer in
India with Shell. The 1933 restriction on Gulf applied to the relationships
between Anglo-Persian and Burmah Oil. Burmah Oil was also a large stockholder
in Anglo-Persian and Shell.
18. Shell's marketing subsidiaries and the marketing organizations owned jointly by Shell and Anglo-Iranian are listed in the Gulf-Shell contract, pp. 132-139. These appear to include all Eastern Hemisphere markets outside of Russian-controlled territories except for such unimportant areas as Assam, Chittagong, and Borneo.
19 Gulf-Shell contract, May 28, 1947, pp. 132-139. The companies indicated as joint marketing organizations and the markets listed as served by them are as follows:
|1. Shell Mex. & B. P., Ltd||British Isles|
|2. The Shell Co. of Palestine, Ltd||Cyprus.|
|3. The Shell Co. of Aden, Ltd||Aden, including Perim, Kamarin, and Kuria Muria Islands.|
|4. The Shell Co. (Red Sea), Ltd||Eritrea, Somaliland (British, French. and Italian), Ethiopia, Hejaz, Asir, Yemen, Hadramaut, Soqotra, and Red Sea islands, except Egyptian territory.|
5. The Shell Co. of the Sudan, Ltd
|6. The Shell Co. of East Africa, Ltd||
Kenya, Tanganyika, Uganda, Zanzibar, and the Seychelles Islands and their dependencies
|7. Anglo-Iranian Oil Co. (East Africa), Ltd||Kenya, Tanganyika, Uganda, Zanzibar, and the Seychelles Islands and their dependencies|
|8. 'l'he Shell Co. of Portuguese East Africa, Ltd.||Portuguese East Africa (or Mozambique).|
|9. The Shell Co. of Rhodesia, Ltd||Northern and Southern Rhodesia and Nyasaland.|
10. The Shell Co of South Africa, Ltd
|Union of South Africa, Bechuanaland, Basutoland, Swaziland, Madagascar, and Mauritius|
|11. Anglo-Iranian Oil Co. (South Africa). Ltd||Union of South Africa, Bechuanaland, Basutoland, Swaziland, Madagascar, and Mauritius|
|12. The Shell Co. of South West Africa, Ltd||South West Africa and Walvis Bay.|
|13. The Shell Co. of Ceylon, Ltd||Ceylon, Maldive Archipelago, and Chagos Islands.|
|14. Burmah-Shell Oil Storage & Distributing Co. of India, Ltd.||India (including French and Portuguese India and the Laccadive, Andaman, and Nicobar Islands but excluding Assam and Chittagong), Afghanistan, Nepal, Bhutan.|
20. Shell had some production in the Middle East and Europe, but its supply from these areas was inadequate to meet its needs in those markets. As late is 1949 and 1950, the sources from which Shell drew its total supply, including purchases.from Gulf and others under long-term contracts, as reported in The Economist of June 9, 1951, p. 1389, were as follows:
|Millions of barrels||Percent||Millions of barrels||Percent|
|Purchased under long-term contract||60.1||15.7||87.7||19.3|
21. Anglo-Iranian also similarly contracted in 1947 to sell part of its Kuwait
production to Standard (New Jersey) and Socony-Vacuum, as described later in
22. About 21 months after the Federal Trade Commission served a subpena on Gulf Oil Corp., requesting the documents upon which the above discussion is based, Gulf and Anglo-Iranian, in a document dated November 30, 1951, agreed to cancel the Anglo-Persian-Gulf agreement of December 14, 1933. Gulf Oil Corp. has voluntarily submitted a copy of the agreement of November 30, 1951, to the Federal Trade Commission. However, the cancellation of the 1933 agreement does not alter substatitially the basic restrictions, discussed above, which hampered Gulf's marketing of Kuwait oil. Once Gulf was tied to Shell under the terms of the 1947 contract, the interests of Anglo-Iranian as well as those of Shell, were protected, since the restrictive provisions of the 1947 agreement will operate in lieu of the restrictive provisions of the 1933 agreemnent.
23. Anglo-Iranian does not market in the Western Hemisphere, and the Gulf-Shell contract does not apply to either Gulf's or Shell's business in the Western Hemisphere.
24. Gulf's application filed with the Securities and Exchange Comission, loc. cit., pp 9-10.
25. Minerals Industry Report No. 308, p. 13; International Petroleum Trade, September 30, 1948, pp. 178-179.
26. Effects of Foreign Oil Imports on Independent Domestic Producers, a report of the Subcommittee on Oil Imports to the Select Committee on Small Business, House of Representatives, 81st Cong., 2d sess., pursuant to H. Res. 22, H. Rept. No. 2344, June 27, 1950, pp. 18-23. According to the subcommittee, the American companies known to be importing Kuwait crude oil, and the daily average quantities imported during the years 1948 and 1949, and the last half of 1950 were:
|Company||1948 1||1949 1||1950 2|
|Atlantic Refining Co||1,235||1,211||6,665|
|Cities Service Co., Inc||646||--||--|
|Gulf Oil Corp||4,232||29,745||35,000-45,000|
|Socony-Vacuum Oil Co||3,230||19,748 3||31,000|
|Standard Oil Co. (New Jersey)||12,400||11,968||--|
|21,743||62, 672||72,665-82, 665|
1. Actual daily average imports for the year.
2. Estimated daily average imports for the last 6 months.
3. Kuwait and Iran oil combined.
27. National Petroleum News, December 6, 1950, pp. 30-31.
28. In 1949, Anglo-Iranian's total production in Iran and Kuwait, assuming that it took 50 percent of the production of the latter, was about 239,000.000 barrels, i.e., a daily average of 715, 000 barrels. By the end of 1949, Anglo-Iranian's average daily production at these two sources had been stepped up to about 733,000 barrels. Included in Anglo-Iranian's 1949 production was an unknown volume of crude oil delivered to Socony under the interim agreement described below.
29. 'I'he negotiations in each of these matters were conducted contemporaneously and by the same small group of men representing the companies involved.
30. E. g., Anglo-Iranian's insistence on MEPL being incorporated in the United Kingdom rather than in the United States. See p. 154.
31. In a cable, dated October 15, 1946, to D. A. Shepard, Mr. Harden makes it clear that he and Sir William had personally agreed upon these projects. The time of the discussions is suggested by the memorandum discussed above. During the period August-December 1946, extensive discussions were being carried on by officials of Jersey Standard, Anglo-Iranian, Royal Dutch-Shell, and Socony-Vacuum about proposals for the distribution of the red-line agreement, the development of a new IPC agreement, the entry of Jersey Standard and Socony into Aramco, and the building of the Trans-Arabia pipeline. At this time also an arrangement for sale of oil was already in effect between Gulf and Shell, although the agreement between Gulf and Shell was not signed until May 28, 1947.
32. The first mention of Socony iii Jersey Standard's files appears in a memorandum dated December 3, 1946, and signed by O. Harden.
33. Standard's purchase was previously reduced to 1 billion barrels according to a document Principles of Agreement, dated October 29, 1946,
34. This is clear from numerous references in Jersey Standard's files. With regard to the Heads of Terms and supplemental letters, signed by the three parties on December 20, 1946, the following comment appears in a letter from B. R. Jackson (Anglo-Iranian) to O. Harden, dated December 17, 1946: "I suggest that they are in sufficiently final form, however, to be handed to Socony." Another example is given below, p. 148, footnote 43.
35. The basic understandings between Jersey Standard and Anglo-Iranian were fully elaborated arid set forth in a document known among the parties as the Heads of Terms. This document, which was initialed by the parties on December 20, 1946, stated the principles of agreement between the two parties that would govern the writing of the crude-oil contracts and the creation of the joint pipeline enterprise. Since the basis of Socony's participation in these projects was included in a letter supplementary to the Heads of Terms, a representative of that company also initialed that document and its two supplementary letters.
36. See letter, T. E. Monaghan (Jersey Standard) to Joseph Addison (Anglo-Iranian), dated August 27, 1947.
37. Quantities are given in the contracts in long tons. Since the general practice in the United States is to state quantities in barrels, the barrel equivalents, as suggested by various correspondence in the files of Jersey Standard, will be given in this discussion in place of the figures in tons given in the contracts.
38. Jersey Standard was to state by the end of the fifth year the quantities it desired to take during the eleventh through the fifteenth year, the total for the 5 years to be between 100 and 230 million barrels (25 to 30 million tons). A similar notice was to be given by the end of the tenth year specifying the quantities of the balance of the contract to be taken during the sixteenth through the twentieth year. Provisions were included to insure that there should not be a great variation in the quantities nominated by Jersey Standard during any two successive years. Daily average deliveries for the 10 years were to be about 114,000 barrels.
39. No right of cancellation was given to Anglo-Iranian, because Jersey Standard required "definite assurance" of a "20-year commitment" on the part of Anglo-Iranian in order to justify its investnent in the pipeline. (In other words, while Anglo-Iranian would continue to have use for the pipeline which would run from its concessions to the Mediterranean, Jersey Standard would require it only during the period in which it purchased oil.) Jersey Standard required a right of cancellation on its part, however, to guard against "unforeseen conditions." (Cable from O. Harden to D. A. Shepard, dated October 15, 1946.) Provisions were later put into the pipeline contract that, in effect, depreciated the investment in the first 10 years of pipeline operation.
40. Sir William Fraser declined to put this offer in a formal letter, but agreed to make it verbally or in an informal letter. Letter from T. Monaghan to O. Harden, dated July 3, 1947. In a draft of a formal letter, attached to a letter from B. R. Jackson to O. Harden, dated December 9, 1946, it is provided that Jersey's purchase could be increased to 1.25 billion barrels (165 million tons) in the event negotiations with Aramco failed.
41. It was provided that either party could terminate the contract if a pipeline agreement were not concluded by December 31, 1948, or a later date mutually asreed upon.
42. Jersey Standard executive committee meetings, January 15, 1947.
43. The 5-percent figure was arrived at after much debate by the two parties.
Jersey Standard was anxious to insert a high figure to gain flexibility in the
late years of the contract when it might wait to make its annual takings considerably
in excess of its share of pipeline capacity. In a "second draft" of
the contract, probably drawn up in January 1947, it is provided that up to 25
percent of the purchased oil could be taken by tanker in the Persian Gulf. Anglo-Iranian,
on the other hand, wanted to insure pipeline operations at the "highest
possible point", i. e., at the most economic levels. Letter from L. C.
Stevens to O. Harden, dated January 27, 1947. The issue was settled at the 5-percent
level apparently without consultation with Socony, although an identical provision
was in its contract. Socony's subordinate position in the negotiations is again
shown in this regard by the following interoffice note from Orville Harden to
S. P. Coleman, dated February 4, 1947. "Dear Stewart: Before we definitely
agree with the Anglo-Iranian as to the percentage of oil that we have the right
to take delivery of in any one year in the Persian Gulf, I think we owe it to
Socony-Vacuum to confer with them. O. H."
44. Cable from D. A. Shepard to O. Harden, dated January 23, 1947.
45. Except for fields reserved for meeting domestic requirements in Iran.
46. The provisions relating to price and to accounting records and procedures occupied 37 of the 81 pages of the contract. The accounting schedules in the contract set forth in detail the principles to be applied a determining and allocating each element of the costs incurred by Anglo-Iranian which would enter into the price per ton for the oil sold under the contract.
47. The interests of Jersey Standard were safeguarded by the inclusion of various clauses in the contract which limited or shifted unusual or unfavorable cost burdens. The most interesting of these was a provision which stipulated that the royalty component in the costs to be paid by Jersey Standard on either Kuwait or Iran oil would never be higher than the concurrent royalty paid per ton, including payments for tax immunity, by IPC In Iraq or by NEDC as its share of the royalty per ton on any royalty oil deliverable to D'Arcy Exploration Co. (Anglo-Iranian). (This had reference to the Kirkuk field arrangements of IPC) These provisions gave Jersey Standard a "guaranteed royalty ceiling." Memorandum from E. L. Estabrook to L. F. McCollum, dated January 24, 1947 (files SONJ, part 14-B.)
48. Jersey Standard's interests were further safeguarded by a "most favored
nation" clause which stipulated that the total price paid by Jersey Standard
would in no case exceed the price charged by Anglo-Iranian or Kuwait Oil Co.,
Ltd., to any other long-term purchaser of Iran or Kuwait oil. Spot sale and
were excluded from this guaranty. Kuwait Oil Co. was included to guard against the possibility of sales by it being used as a subterfuge by Anglo-Iranian to escape this clause in the contract. Letter from L. C. Stevens to O. Harden dated January 27, 1947. If a lower "differential," i. e., fixed payrnent per ton over costs, were granted any other customer, then Jersey Standard would receive the benefit of each "differential." If the prices to another customer, as determined by any other "principle" than cost plus, were, in sum, lower than the price to Jersey Standard, its price was automatically lowered accordingly.
49. Letter from O. Harden to B. R. Jackson (Anglo-Iranian), dated November 7, 1946.
50. Kuwait Oil Co. was specified because the parties had agreed that the cost of production per ton of Kuwait oil should apply to all oil delivered under the contract regardless of whether it was produced in Kuwait or in Iran, although the costs of royalties, gathering, and so on were to be separately determined and appied for Kuwait and Iran oil. This use of Kuwait costs was feasible because the differences in the costs of production in Iran and Kuwait were, according to Sir William Fraser. "unknown but probably small." Cable from D. A. Shepard to O. Hardin, December 4, 1946. A preliminary review of "very approximate data" supplied by Anglo-Iranian indicated that producing costs in Kuwait, including gathering costs, would be about 27 cents per barrel for the purchase of crude . This estimate was based on estimated reserves of 4 billion barrels and production of 300,000 barrels per day. All estimates, however, were tentative, since commercial production in Kuwait had been started only in July 1946. Cable from L. C. Stevens to J. C. Anderson, November 20, 1946.
51. Such agreement was reported in a letter from L. C. Stevens to J. C. Anderson, November 20, 1946. A draft of the accounting schedules to the contract substantially in the form finally adopted was prepared and signed on December 13, 1946.
52. Memorandum of a telephone conversation on Febuary 21, 1947, between L. C. Stevens and T. Monaghan. Socony concurred with Jersey Standard in its demands for an independent audit. Cable from G. V. Holton to W. L. King, Jr.. dated March 3. 1947.
53. Cable from the chairman (Sir William Fraser) to B. R. Jackson, dated January 2, 1947.
54. Cable from T. Monaghan to L. C. Stevens, dated February 24, 1947.
55. This conclusion is put in these words, because, while the Kuwait costs of production, gathering, royalties and so on were all applicable to the price formula, the applicable elements of cost for Iranian oil included only the costs of royalties and gathering; see p. 150. footnote 50.
56. Letter from Orville Harden to D. A. Shepard, December 16, 1946. No mention was made in the letter about the oil to be lifted by tanker in the Persian Gulf. It may be presumed that this small part of the total purchase was destined for distribution in the Far Fast by Jersey Standard's affiliate, Standard-Vacuum.
57. "Second draft" of the crude-oil contract. undated.
58. Cable from P. Monaghan to E. Johnson, March 4, 1947. This sensitiveness to the inclusion of areas east of Suez reappeared in the supplementary agreement of April 5, 1949; see below, p. 157.
59. These were included because Jersey Standard thought it was necessary that they go in. Memorandum attached to letter from T. Monaghan to J. Addison (Anglo-Iranian), April 30, 1947.
60. Letter from Orville Harden to D. A. Shepard, December 16, 1946.
61. This is the date given on the contract. Actually, however, the definition of the 'reference area" appears to have been agreed on and the contract signed at a somewhat later date. Letter from C. L. Harding to B. H. Jackson, October 15, 1947.
62. See p.148, footnote 38
63. On September 5, 1947, Socony made a formal request that capacity be reserved for it in Middle Fast Pipelines Ltd.. to move the additional oil it expected to acquire under this second contract. Memorandum from T. E. Monaghan to B. B. Howard, September 6, 1947.
64. However, Socony could elect to take 5 percent of the annual quantities at Persian Gulf ports, a provision included in all three sale-of-oil contracts.
65. As in the Jersey Standard contract, the quantities nominated for any two successive years could not vary greatly. Socony could terminate the contract, after giving a 5-year notice, at the end of the tenth or fifteenth year.
66. The price to he paid for this oil was determined by a cost-plus principle that varied somewhat from the formula in the earlier contracts in that it incorporated a profit-sharing element. The "cost" element in this formula was the cost per ton determined in accordance with the procedure set forth in the Jersey Standard contract. The "plus" or "differential" element in the formula was one-third of the difference between the total average cost per ton of the oil delivered f.o.b. tankship at the Mediterranean terminal of the pipeline and the "average open market value" per ton of oil at that point. Since this "value" corresponded to the world market price as applied in eastern Mediterranean ports, this was, in effect, a plan for sharing the profits on the crude oil-one-third of the profit per ton, i. e., the differential, being payable by Socony to Anglo-Iranian, and two-thirds of the profit being retained by Socony.
Although Anglo-Iranian got only one-third of the profit per ton, it is probable that this formula gave Anglo-Iranian a better return than under the two earlier contracts. This is suggested by the statement of Anglo-Iranian that "they have no present contracts other than Jersey and Socony which are niore favorable and have no present intention of making more favorable contracts" (For this reason, Anglo-Iranian refused to grant Socony a "most-favored-nation clause", i. e., an agreement such as that in the Jersey contract guaranteeing to extend to Socony lower prices granted to any other buyer and also because such a clause "does not apply to profit-sharing arrangements".) Cable from Harding to Sheets, October 7, 1947. The "differential," 'however, was free to fluctuate only within maximum and minimum figures which were stated in the contract. The minimum figure put a floor under Anglo-Iranian's profit per ton and the maximum figure put a ceiling on the amount that Socony would have to pay to Anglo-Iranian per ton as profit. Thus the total price per ton paid by Socony under this contract was more subject to variation than the prices under the two earlier contracts, since both elements of the cost-plus formula were subject to fluctuation.
67. Cable from Harding to Sheets, October 7, 1947.
68. It is not clear just how broad this latitude was intended to he, The force majeure article of the contract indicates that products refined from this oil might he sold in foreign markets and even that some crude oil might be refined in foreign areas, the latter being regarded as improbable, however. It is provided that, in the event force majeure makes it impractical to import the oil into the United States, the quantities taken annually during the period such force is in operation will be reduced appropriately." However, in the event force majeure makes it impractical to deliver the products refined from the oil in a foreign market, the oil is to be utilized in the United States. The possibility of the oil or its products being utilized in foreign markets is also provided for in the terms of payment, the oil to be paid for in dollars when delivered to the United States, to countries having currency freely convertible into dollars, or to countries which will allot dollars for the purchase of the oil, and to be paid for in sterling in all other cases. The parties primarily intended that this oil be paid for in dollars, unlike the oil deliverable under the first purchase agreement which was to be paid for in sterling, and agreed that oil delivered under the first purchase agreement and sold in any such "dollar" areas would be substituted for any oil delivered under the second purchase agreement and sold in "sterling" areas. Letter from C. L. Harding to B. R. Jackson, October 17, 1947. Taking all these provisions into consideration, the primary intention of the parties seemed to be to restrict the market for oil deliverable under the second purchase agreement to the United States and possibly other "dollar" marketing areas. The marketing areas are not so specifically delimited, however, as in the Jersey Standard and first purchase contracts.
69. Socony entered into two other agreements with Anglo-Iranian in the spring of l948. One of these agreements was of a short-term nature providing for the purchase from Anglo-Iranian by Socony of 6,500 barrels of crude oil daily from June 15, 1948, to the end of the year. The other agreement, described variously as "interim purchase agreement" and the "interim crude supply contract," became effective on January 1, 1948 and is to "expire on the day that contract No. 2 (the second purchase aereement) becomes operative." The quantity of oil to be purchased and the terms and conditions of sale under this 3-year agreement are not known to the Commission.
Socony's imports from the Kuwait-Iran area into the United States in 1949-50
were apparently made under this contract. (Effectsof Foreign Oil Imports on
Independent Domestic Producers, hearings before the Select Comnmittee on Small
Business, House of Representatives, 91st Cong., 1st sess., pursuant to H. Res.
pt. II, 1949, p. 504.) These imports totaled about 7,440,000 barrels in 1949, and were estimated at 10,780,000 barrels in 1950. (Effects ef Foreign Oil Imports on Independent Domestic Producers, a report, op. cit.. p. 21) Jersey Standard also imported oil from the Kuwait-Iran area in 1948 and the first 7 months of 1949, but it is not known under what arrangements the oil was purchased. Its imports in l948 were about 7,300,000 barrels, and in 1949 about 5,250,000 barrels.
70. See pp. 155-160.
71. A two-thirds vote of the directors of shareholders was required to pass any resolution, i. e., Anglo-Iranian could not carry any resolution without the support of one of the American companies, but had a veto in that no action could be carried without its approval.
72. See p. 145
73. This followed from the fact that their share of the capacity of the line was roughly equivalent to the daily volumes of oil, that they were committed to take under the crude oil supply contracts, plus allowances for a 10~percent variation above average requirements and for contingencies. The pipeline capacity allotted to and the contract requirements for Jersey Standard were in each case 132,000 barrels daily, and for Socony, 77,000 barrels daily.
74. Memorandum from C. L. Lockett to H. W. Page, May 6, 1947.
75. The question of the amount of capacity to be offered to Gulf and Shell and their participation in the financing of the pipeline occurred frequently in the negotiations as to the size of the pipeline, Anglo-Iranian appeaaring as an advocate of a large capacity line. The final solution of this problem, as above stated, was proposed by the American companies and was reluctantly accepted by Anglo-Iranian. Cable from Monaghan to Howard, October 15, 1947. It was anticipated that Anglo-Iranian's arrangement with "outside shippers" i.e., Gulf and Shell, for disposition of their unused space "would probably be a reasonably long-term one."
76. The stated money requirements, including construction costs and working capital were £25,000,000 plus $l00,000,000, i. e., the equivalent of $200,000,000. Soon after the agreement was concluded, MEPL officers prepared a "project budget," i. e., a budget for construction of the line,dated April 20, 1948,estimating the cost at $232,000,000. MEPL Management Report No. 11, October 4, l948, p. 2.
77. Schedule to the pipeline agreement. This also protected the American companies in the event they elected to terminate the crude oil contracts at the end of the tenth or fifteenth year of the supply; see p. 148.
78. This was an important issue because it affected the tax liabilities of the owners of the company, important features of the control and operation of the pipeline, currency and procurement matters, and the problems of financing and disposing of the revenues of the company.
79. Letter from R. H. Porters to Leo D. Welch, February 18, 1948.
80. MEPL, Management Rept. No. 7, June 3, 1948, p. 6.
81. Idem. The slowness of negotiations for wayleaves up to the spring of 1945 was due in part to the fact that no direct approach to the Syrian or Iraq Governments could be made until after the incorporation and registration of MEPL were completed and power of attorney could be given the negotiators. MEPL, Management Rept. No. 1, December 3, 1947.
82. See below, p. 158.
83. Cable from Orville Harden to Abrafran (F. W. Abrams), March 23, 1948.
84. While Socony apparently did not submit a companion letter to this, its files show that it participated in its preparation and in the negotiations that were had on the basis of this letter.
85. In the event that oil of such quality could not be delivered at Mashur, it could be lifted at Abadan. It was anticipated that the oil delivered at Mashur would be introduced at the Agha Jahri field in Iran. This oil was of average Iranian quality and was produced in sufficient quantities to meet contract requirements. Cable from Coleman to D. A. Shepard, November 10, 1948. Production at the Agha Jahri field was nearly 67 million barrels in 1948 and more than 84 million barrels in 1949 (World Oil, July 15, 1950, p. 203).
86. The Iranian royalty, however, in accordance with the terms of the basic contracts, could apply only to 50 percent of the oil purchased annually, the Kuwait royalty applying to all Iranian oil in excess of 50 percent. This provision had originally been inserted in the contracts to protect Jersey Standard and Socony against the contingency that the higher Iranian royalty would apply on more than 50 percent of their annual purchases. The provision that the royalties would not exceed, in any event, that paid by IPC also applied under this contract.
87. The elements of this formula were necessarily rather arbitrary. The value element in the formula--"the average open market value of oil f.o.b, tank ship Mediterranean terminal" was to be determined in accordance with the procedure prescribed in the second purchase agreement except that the Mediterranean terminal would he ''assessed as for export delivery f.o.b. tankship Haifa, or Tripoli, or other representative subexport terminal." The cost element of the formula was to consist of the costs per ton of production, gathering and loading, and royalties, plus the difference between the cost per ton in sterling of transporting by tanker from Mashur to the United Kingdom and the corresponding cost per ton between Haifa to the United Kingdom. A "tanker freight differential'' schedule was appended to the supplementary agreement showing how this last cost factor was to be determined. The difference between the "value" and the "cost" the oil represented the "gross profit." One third of this sum was the "differential" which was to be paid to Anglo-Iranian, while two-thirds was retained by Socony. Maximum and minimum limits to the amount of this differential were included in the supplementary agreement.
88. Letter from Jersey Standard to Anglo-Iranian, August 30, 1948.
89. "Destinations east of Suez" was defined as meaning "destinations in the Eastern Hemisphere either east of longitude 60° east or (ii) both east of longitude 15° east and south of latitude 30° 30' north."
90. Letter from Jersey Standard to Anglo-Iranian, August 30, 1948. The restrictive
effect of this provision might be cited as evidence supplementary to that given
in ch. V. with regard to the Bahrein Petroleum Co.'s marketing problems prior
to 1948, suggesting that marketing cartels were in operation in these areas
east of Suez.
91. Executive committee minutes of Jersey Standard, April 28, 1949.
92. Provisions to this effect appear in each of the 4 supplementary agreements.
93. Letter from C. L. Lockett to C. Saunders, January 23, 1950.
94. See p. 95.
96. Letter from L. C. Rice to C. L. Lockett, July 2, 1948.
97. Letter from W. L. Butte to C. L. Lockett, July 20. 1948.
98. Letter from D. R. deL. Macpherson to C. Saunders, February 24, 1950.
99. Letter from C. L. Lockett to B. B. Howard, March 17, 1950.
1. See chart 20. following p. 84.
2. The situation was made more difficult by an additional Iraq proposal that "MEPL should transport at cost price the share of oil in kind allotted to the Government under the Basrah Convention," i. e., 20 percent of Basrah production. Since this oil could not be exported or sold for export by the Iraq Government but could be resold at the ''well head market value" to the Basrah company, it was supposed that the purpose of this proposal was to enhance this value of the royalty oil as against that of the remaining Basrah production. Letter from H. W. Page to F. O. Canfield, March 27, 1950.
3. Minutes of the meeting.
5. Letter by C. Saunders to C. L. Lockett, April 5, 1950. Despite these decisions, however, the negotiations apparently were not immediately broken off, for further negotiations were held with Iraq representatives in London in July 1950. Letter from H. W. Page to B. B. Howard, July 19, 1950. About this time the basis of an agreement with the Iraq Government on an MEPL convention was being laid in IPC group discussions, where a representative of Jersey Standard was proposing that Basrah Petroleum Co. should agree to produce a minimum of 2,500,000 tons of crude annually and that, on this basis, there was a "chance of satisfying the Iraq Government that by 1954 total production from Iraq sources will he up to about 26,000,000 tons per year (540,000 barrels per day) and therefore, comparable with production from the other large Middle East sources." Letter from H. W. Page to F. O. Canfield, March 27, 1950. In this letter Mr. Page also said: "Naturally the Iraq Government would like to have maximum output if the Kirkuk pipeline plus 8,000,000 barrels from Basrah. This cannot be guaranteed by IPC at present.* * * I agree with de Metz that we must actually produce minimum concession requirements from Basrah (and probably settle on 2,500,000 tons per year as a minimum) if we are to get anywhere with the negotiations." These comments were followed by the remark quoted above. (It is difficult to tell whether he is here referring to MEPL or IPC negotiations.)
Due to the construction of the IPC 30 inch pipeline, such production would he possible if MEPL agreed to carry 2,500,000 tons annually of Basrah oil. Such a proposal was then under consideration by the representatives of the three companies which owned MEPL. Letter from H. W. Page to B. B. Howard. July 19, 1950. This last matter would appear to he cleared up by the decision of IPC to build a pipeline front the Zubair oil field in Basrah to Fao on the Persian Gulf. See map following p. 60.
6. Anglo-Iranian thus acquired, through its contracts with Jersey Standard
and Socony and through its 1933 agreement with Gulf, a powerful voice in determining
the volume of production in Kuwait and Iran. Under its joint ownership agreement
with Gulf. Anglo-Iranian, with Gulf's consent, could substitute oil from Iran
or Iraq for the Kuwait oil ordered by Gulf for itself or for Shell. Under the
three contracts with Jersey Standard and Socony, Anglo-Iranian could supply
the amounts contracted for from Kuwait or Iran at its option. Thus Anglo-Iranian
could restrict or expand the production of Kuwait or Iran to meet the combined
requirements of the five oil companies, i. e ., Anglo-Iranian, Gulf, Shell,
Jersey Standard, and Socony, in accordance with such "political" or
other considerations as it judged to be important.
7. The Anglo-Iranian-Gulf agreement of 1933 was terminated on November 30, 1951.
8. Socony was also permitted to distribute its oil in "the countries bordering
on the eastern Mediterranean (including any islands within or adjacent to these
Insofar as Jersey Standard was concerned, it had an established marketing position in each market within the permitted areas. Socony's business was not so extensive, however, in Europe as that of Jersey Standard, and the agreement does not restrict Socony to areas in which it already had a marketing position. For details on marketing positions before World War IL, see ch. IX.
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