THE IRANIAN OIL DISPUTE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79R00904A001400030014-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 8
• Document Creation Date: December 20, 2016
• Document Release Date: June 7, 2006
• Sequence Number: 14
• Publication Date: April 3, 1969
• Content Type: MF

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C E N T R A L I N T E L L I G E N C E A G E N C Y
OFFICE OF NATIONAL ESTIMATES
3 April 1969
M94ORANDUM FOR THE DIRECTOR
SUBJECT: The Iranian Oil Dispute
The Shah and the Consortium of Western oil companies*
are et a new crisis in their continuing controversy over
oil revenues. The immediate dispute concerns the amount
of Payments for the Iranian year 1348
20 March 1970). The Shah wants (21 March 1969 -
figure is $900 million. $1 billion; the Consortium's
compromised, though ill feeling difference can probably be
the two sides
between makes this less than certain. In anevent
will arise again, perhaps in less tractable Iform.larhssues
Paper examines the sources of dispute This
.? as well as Possible
future developments and their implications for US Interests.
British Petroleum
Am
i
er
can companies 40% (7% each for the 5 majors and 5%
Royal Dutch/Shell 14% divided among 8 smaller companies)
Co;npanie Francaise
des Petroles 6%
GROUP 1
Exclu a;d from automatic
downgrading and
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Background
1. In recent years, the Shah and the Consortium have
had increasingly bitter differences about the oil revenues
that Iran should receive. In March 1968, the companies
agreed to provide $865 million for the Iranian year 1347
(21 March 1968 - 20 March 1969), the first year of Iran's
Fourth Five-Year Plan. The Shah accepted this compromise
figure but insisted that he would look to the companies for
a total of $5.9 billion for the entire Plan period. This
would mean an average increase of about 16 percent annually.
`;he Consortium is operating on the premise that business
conditions will permit them to provide a total of some $5.0
billion over this period, representing a revenue increase of
about 8 percent per year. Talks during the past year have
failed to budge either side significantly. The negotiations
are now in recess until 10 May 1969 while the two parties
_reconsider their positions.
2. While the Consortium finds production in Iran
profitable, Iranian oil is at a geographical disadvantage
in comparison with North African and Nigerian crude for
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the lucrative European market and its moderately high sulphur
content diminishes its attractiveness in pollution-conscious
Japan. Moreover, the oil companies believe that to meet the
Shah's demands would give Iran a heavily disproportionate
share of the yearly increase in total Persian Gulf oil output.*
This would threaten their interests in other oil-producing
states of the area and would hinder further efforts to develop
new sources of supply in some of the smaller states of the
Persian Gulf. The oil companies are also convinced that if
the Shah broke with them he could not find other outlets for
his oil in anything like the quantities needed to provide the
revenues he seeks. Hence they feel in a strong bargaining
position.
3. For his part, the Shah considers that rapid economic
development is essential to Iran's continuing stability and
to the preservation of the monarchy. He is looking to petroleum
revenues for about 80 percent of the public sector funds
committed to the Development Plan. Since the cost of major
Iran currently produces about 25 percent of the oil
shipped from the Persian Gulf. The Shah's demands would
amount to over 75 percent of the increase now projected
by the companies for future years.
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development projects is rising well beyond Plan estimates,
the Shah is especially insistent that the Consortium meet
his demands. He contends that Iran deserves preferential
treatment with respect to oil revenues. He argues that his
country is not only stable itself but is a force for stability
in the area, that it has proved its competence in the efficient
use of income for economic and social development, and that
Iran has been a reliable friend both to the US and to the
Consortium in times of crisis (as when it provided increased
quantities of oil when Arab producers shut down during the
June 1967 War). The Shah urges that considerations like these
should persuade the US Government to see that his views prevail
in his dispute with the Consortium.
The Current Crisis
4. The immediate dispute concerns the amount of revenue
for the Iranian year 1348 (21 March 1969 - 20 March 1970). The
Shah wants $1 billion in revenue; the Consortium is willing to
offer only $900 million. If this were the only issue, one
could be reasonably confident of a compromise. Consortium
members have already hinted to the US that they would come
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part way, and the Shah has no possible alternative outlet
that would get him anything close to his asking price. More-
over, Iran has a profitable arrangement for the sale of
natural gas to the USSR, and this gas is produced only as
oil continues to flow.
5. But the situation is complicated by a number of
I This will further embitter the
climate of negotiations. Moreover, both parties are concerned
about the implications of any present agreement for bargaining
in future years. The companies are particularly reluctant to
give in for fear of leading to an unbridgeable gap between
the Shah's demands and what they are willing to provide in the
last years of the Development Plan.
6. In this situation, there is always the possibility
that irrationality will prevail. The Shah's prestige is engaged
in the bargaining process, and both sides may overestimate their
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alternatives. The companies are confident of their ability to
meet the needs of their consumers even without Iranian oil,
but they have consistently been conservative in estimating
the growth of consumer demand. For his part,the Shah is
probably overoptimistic about his ability to find new outlets
if he were to break with the Consortium; certainly the USSR
and Eastern Europe could not soon fill the gap. Nevertheless,
we believe that for the present, the two parties recognize
their interdependence sufficiently that they will make a
deal covering this year.
Possible Developments
7. But the dispute over revenues will be a continuing
one. As time goes on, each side is likely to see more
opportunities to get on without the other. New oil discoveries
will increase the diversity of the companies' sources and make
them considerably less dependent on Persian Gulf oil. In this
situation, the rate of increase in production in the Middle
East may be far lower than at present, compounding the difficulties
of bargaining with the Shah.
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*MW
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8. The Shah too will no doubt be able to expand his
alternatives to the Consortium. The National Iranian Oil
Company (NIOC), which last year produced about $22 million
in revenue, may in a few years be able to increase this
substantially. The newly formed German oil combination is
interested in purchasing oil for about 25 percent of the West
German market; the Germans have already begun preliminary
talks with NIOC about supplying part of this. Iran probably
will also be able to step up its sales somewhat to Rumania and
other East European countries; the Shah has already concluded
deals to commence in the early 1970s that will be worth some-
where in the neighborhood of $200 million over several years.
9. Should he desire, there are also several more or less
punitive measures the Shah could take against the Consortium.
For example, he could repossess some of the undeveloped portions
of the concession to offer to other oil concerns. Inasmuch as
there is probably oil in some of these areas, he would not have
great difficulty in attracting bids. Another possible measure
would be to force the companies to let him purchase a share in
the Consortium. It would of course be difficult to set an agreed
price, and this procedure
like repossession of parts of the
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concession area -- would generate great friction in relations with
the companies, and would probably discourage them from increasing
their investment in Iran. Yet the stakes on both sides are
high enough that they would probably find it expedient to
continue present operations for some years to come.
10. An outright break with the Consortium would seriously
affect US relations with Iran. The Shah would hold the US
to some degree responsible. He would probably seek economic
aid from the US Government to make up any serious shortfall
and would also sharply step up his demands for concessional
terms in acquiring US military equipment. He might use US
installations as a bargaining lever to this end. Nevertheless,
we believe that the Shah would seek to maintain a balance in
his relations between the US and the USSR, and this would keep
him from anything approaching a complete break with the US.
FOR THE BOARD OF NATIONAL ESTIMATES:
ABBOT SMITH
Chairman
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