CIA ASSESSMENT OF RECENT BILATERAL OIL AGREEMENTS

• Document Type: CREST
• Collection: Library of Congress
• Document Number (FOIA) /ESDN (CREST): LOC-HAK-45-5-12-3
• Release Decision: RIPLIM
• Original Classification: S
• Document Page Count: 6
• Document Creation Date: January 11, 2017
• Document Release Date: March 25, 2010
• Sequence Number: 12
• Publication Date: April 11, 1974
• Content Type: MEMO

No Objection to Declassification in Part 2010/03/25: LOC-HAK-45-5-12-3
MEMORANDUM
NATIONAL SECURITY COUNCIL
.SECRET
INFORMATION
April 11, 1974
MEMORANDUM FOR SECRETARY KISSINGER
FROM: CHARLES A CbOF
SUBJECT: CIA Assessment of Recent Bilateral
Oil Agreements
At your meeting with oil company executives there was considerable dis-
cussion of "bilateral deals" and their effect on oil prices. I am, skeptical
that at the moment this problem is very serious.
The CIA has recently completed a short review (attached) of the bilateral
oil deals arranged among major consumers and producers. The CIA study
confirms what was becoming more obvious:
-- Fewer bilateral oil deals are being sought by major cons ming
nations. Japan, Germany, the UK, and even France do not seem, any
longer, to be in the market for bilateral oil.
-- Some of the previous "agreements" have been cancelled, in certain
cases negotiations have been suspended, and only in two or three cases
have deals been finalized. Even in these cases, only 300, 000 b/d is involved.
-- Some LDCs facing large oil debts (e.g., India) are still seeking
bilateral agreements, but their efforts have met with limited success. In
fact, not many of the OPEC producers appear interested in bilateral arrange-
ments, Iran and Libya being the salient exceptions.
The reasons for increasing consumer reluctance to enter bilaterals is clear:
now that the initial shocks of supply cutbacks and high spot prices have been
absorbed, consumers have begun to take harder looks at the costs of bilateral
deals and have apparently realized that bilateral oil may be no more secure
from disruption than oil derived from major oil firms.
In sum, the prospect of a dizzying rush towards bilateral oil deals has faded,
and the international oil market is settling down into many of its older patterns.
MORI/CDF per C05096952
SECRET
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BILATERAL OIL DEALS FIZZLE
With few exceptions, the major oil consumers' negotiations with the
producers have stalled or fallen apart. The consumer governments, having
scored their political points, now realize that the scramble for bilateral
arrangements will tend to keep oil prices high without really guaranteeing
that supplies will always be available. They also have found the producing
countries' other demands excessive. Among the producers, Saudi Arabia no
longer is interested in bilateral oil-for-goods deals, preferring instead to make
cash sales. Indonesia, Nigeria, and some of the smaller OPEC members have
never been interested in bilateral arrangments. Iran and Libya continue to
pursue negotiations, but are having difficulty coming to terms with the
consumers. Even most of the supposedly firm barter arrangements
reportedly do not include agreed prices.
The Japanese, the first to take to the bilateral circuit in a big way,
have been the first to back off. Tokyo's long-pending economic and
technical cooperation agreement with Saudi Arabia, which was scheduled
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25X1
for signature in mid-February, is still up in the air. Follow-up discussions
reportedly now are slated for late April, but Tokyo wants to avoid any
related talks on a long-term oil purchase agreement that would commit
Japan to high prices:
Japanese negotiations to build a 500,000 b/d oil refinery have stalled
over Tehran's insistence on an associated petrochemical plant. Japan wants
to buy the naphtha produced at the refinery, but the Iranians want it for
the petrochemical plant
Despite all the ballyhoo accompanying Paris' many offers to the oil
producers, very little has come from them. it is not even clear that i..aiks
still are under way for the various industrial projects proposed for Kuwait,
and negotiations with Abu Dhabi for a petrochemical plant are at a very
early stage. The French deal with Iran will entail considerable negotiation
simply because of its size and complexity. It calls for France to build several
nuclear powerplants, a petrochemical complex, a steel plant, and several
other industrial projects as well as joint construction of a gas liquefaction
plant and a fleet of LNG tankers. France's most recent bilateral oil deal --
with Libya - also is complex, and negotiations on details are just getting
under way. Even if the agreement can be firmed up, Paris cannot be sure
that Qadhafi will honor any commitment. French hopes of expanding their
deal with the Saudis to 800,000 b/d for a 20-year period have almost no
chance for success in view of Saudi reluctance to enter additional bilateral
arrangements. France will be paying through the nose for its 200,000 b/d,
three-year agreement with the Saudis, even though Riyadh recently cut the
price by almost a dollar - to 93% of the posted price.
Although they initially were reluctant to accept Tehran's conditions,
the West Germans expect to sign a final agreement late this month for
a refinery-petrochemical plant project similar to the one the Japanese have
all but rejected. The Germans are to get two-thirds of the refinery's output,
and the remainder will be used as feedstock for petrochemical plants in
S
SECRET
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of the major bilateral proposals follows.
in bilateral deals and are not likely to support oil development projects
in the producer countries unless they promise supplies more cheaply than
those offered by the majors or the consumers' own oil companies. A listing
both West Germany and Iran. Bonn's triangular natural gas deal with Tehran
and Moscow, however, is given little chance for success in the near future
because of the complexity of the issues to be resolved. The United Kingdom,
which signed an oil-for-goods agreement with Iran earlier this year, seems
to have dropped out of the bilateral, oil race. The Labor government is
not actively pursuing bilateral deals and apparently does not intend to.
To date, only about 300,000 b/d of oil have been firmly committed
under bilateral arrangements between the major consumers and producers.
All the consumer governments are taking a harder look at the costs involved
Recent Bilateral Oil Proposals
Consumer Producer
Japan Iran Agreement in principle in January to provide a
$1 billion loan for a 500,000 b/d refinery in
Iran in return for bulk of output. Project has
stalled. however, over Tokyo's reluctance to
accede to Tehran's demands for an associated
$1 billion petrochemical plant.
Iraq Agreement initialed in January providing $1
billion loan for an Iraqi refinery, LPG plant,
petrochemical plant, and other industrial
projects in return for 180,000-200,000 b/d of
crude and, products for 10 years, natural gas,
and other products. Negotiations unsuccessful as
of 1 April.
Saudi Arabia Economic cooperation agreement still pending.
At current prices Tokyo is not interested in
signing long-term oil supply agreement.
Algeria Japan negotiating credits since January for
industrial projects in return for direct deal crude
and LNG. Status unknown.
West Germany Iran
cost of about $2 billion. Final agreement to be
signed in late April.
The West German government, negotiating on
behalf of a German oil consortium, has agreed
in principle to construct a 500,000 b/d refinery
and a petrochemical plant in Iran at a combined
SECRET
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Recent Bilateral Oil Proposals
(Continued)
Details
Negotiations in progress since October 1973 for
delivery of 10 billion cubic meters of natural
gas annually for unspecified period. The deal
involves Iranian deliveries to the USSR in
exchange for Soviet deliveries to Germany.
Libya Agreement in principle to provide capital goods
and technical assistance - in exchange for oil.
Status of negotiations unknown.
United Kingdom Iran Deal confirmed in January. The United
Kingdom is to get 100,000 b/d of crude in the
coming year in return for textile fibers, steel,
paper, petrochemicals, and other industrial
products.
Saudi Arabia Negotiations suspended in February for 200,000
b/d for an unspecified period. Payment was to
fo_ ,
be through l:Olti111iiiiici~t8 au~ u dewv~elavpa+,ent
contracts.
France Saudi Arabia Agreement signed in January for about 200,000
b/d of oil for 3 years. France is to build a
50,000 b/d refinery with Saudi ownership.
Abu Dhabi The French government is to supply 35 Mirage
aircraft for crude oil to cover the value of the
transactions. The agreement reportedly was
concluded in January.
Abu Dhabi The French, wishing to buy participation crude,
have offered to build petrochemical plant in
return. Status unknown.
Kuwait France offered arms and large industrial
investment in exchange for long-term oil
deliveries. The size of the deal is subject to
future negotiations and Kuwait approval in
principle. Status unknown.
i SECR1.T
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 No Objection to Declassification in Part 2010/03/25: LOC-HAK-45-5-12-3 ?
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SECRET
Recent Bilateral Oil Proposals
(Continued)
Iran Agreement in principle signed in February for
Libya
$5 billion in industrial projects. In return,
France is to get natural gas.and oil exploration
rights. Negotiations under way.
Agreement in principle signed in February to
exchange oil for industrial equipment, including
nuclear powerplants, and technical assistance.
Negotiations under way. ^
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