Papers Relating to the Foreign Relations of the United States, 1924, Volume II

890g.6363 T 84/167

Memorandum Prepared by Mr. Teagle and Mr. Thompson of the Standard Oil Company and Mr. Wadsworth of the Division of Near Eastern Affairs, Department of State

[Washington,] September 18, 1924.

Under what is known as the Foreign Office Agreement, dated March 19, 1914, Mr. G. S. Gulbenkian, a naturalized British citizen, is accorded in the Turkish Petroleum Company, Ltd. a beneficial 5% interest, without voting rights, all upon terms and conditions as covered by Section 9 of this agreement.

The interests of the American Group in the development of a possible oil production in Iraq have been with the sole object that, should a large production be developed there, the American interests would be able to use their proportionate part of this production in the carrying on of their business either at home or abroad. They are interested in Crude Oil as such, as distinct from a financial investment in a company organized under the laws of a foreign country and the control of which, owing to their preponderant stock interest, would be with foreigners.

With this object in view, the American Group proposed to the other three partners, a proposal accepted in principal by them, that the activities of the Turkish Petroleum Company should be limited to the production of the Crude Oil and its delivery to a seaboard terminal where it would be offered for sale as “Crude” to the four Groups, in proportion to their respective stock interests, at a price which should not exceed 7s. per ton above the actual cost of production and delivery at such seaboard terminal.

The practical carrying into effect of this plan is now blocked by Mr. Gulbenkian, the owner of the 5% interest, who takes the position that he is not an oil trader, doesn’t want oil, is not interested from the international viewpoint but simply from that of his own personal business interest and profit, and that, in the protection of his own interest, he now insists that the Company should be operated as a complete unit, i. e. engaged, in addition to the production and transporting of the oil to seaboard, in the refining and sale of the products wherever markets could be found for them. This would mean that the American Group would obtain merely a share interest in a foreign company and, as such, entitled merely to participate in profits. The American Group would obtain no Crude Oil direct from such arrangement.

For the past two years the British partners in the Turkish Petroleum Company have been endeavoring to negotiate with Mr. Gulbenkian in the hopes of reaching a basis of settlement with him which would be acceptable to all. Up to July, last, no settlement with him had been reached, and the representatives of the American Group then in London were asked by the other three partners to take up, on behalf of the Turkish Petroleum Company, negotiations direct with Mr. Gulbenkian. The discussions by the American Group’s representative with Mr. Gulbenkian have been unsuccessful. The position which the representative of the American Group has taken is that the American Group had been invited to participate in the Turkish Petroleum Company by the other international groups who had advised the American Group that Mr. Gulbenkian had a 5% non voting share interest in the Company, that the American Group had not been advised that he had any other claims against the Company of any shape or form other than his 5% share interest, and that in so far as this 5% share interest was concerned the American Group were entirely willing that it should be placed on an absolute parity with the share interest of the four Groups. This being the case, the American Group were quite willing to fairly compensate him for his consent to limiting the operations of the Turkish Petroleum Company to production and transportation, that this was absolutely as far as the American Group could go, that it was impossible for us to compensate him for moral claims which he felt he had against the two English partners.

Under date of September 13 the American Group’s representative in London cables that if the original plan of the American Group to receive Crude Oil instead of merely making an investment in an oil company is to be carried out, Mr. Gulbenkian demands

(1) that he be carried by the other four groups for 5% share interest, with an option on his part to take up this interest at any time that he might so elect and dispose of it in any way that he might consider advantageous,

(2) that he have at all times one director on the Board (making nine (9) instead of eight (8) Directors, thus giving him the controlling vote in the event of an equal division),

(3) that he receive on all oil produced a royalty of 1s. per ton, this royalty to be paid him not only from the areas operated by the Turkish Petroleum Company itself but on all oil produced from the (a) areas covered by the concession and sublet in accordance with the terms of the concession to other producing companies and (b) any oil produced elsewhere by the Company or its sub-lessees in Turkey in Asia.

All of the partners in the Turkish Petroleum Company, including the American Group, considered Mr. Gulbenkian’s proposals so unreasonable and burdensome as to preclude their acceptance.

In summary of the foregoing the American Group is faced with two alternative proposals

(1) to accept an investment in a producing, transporting, refining and marketing, foreign oil company or

(2) to accept a thoroughly unbusinesslike arrangement for the obtaining of a share of the Crude Oil to be produced in Mesopotamia.

The first of these alternatives is unacceptable because the American Group thereby would be unable to obtain Crude Oil, its sole object in desiring to participate in the development of the potential oil resources of Iraq being to secure Crude Oil and to dispose thereof as it might see fit.

The second alternative is as a business proposition unacceptable because what Mr. Gulbenkian demands is entirely out of proportion to what he is entitled to from the standpoint of his 5% non-voting share interest.

On the assumption that the American Group refuses both of these alternatives it is probable that the three foreign groups would continue the negotiations with Iraq and unless the State Department intervenes obtain the concession. The American Group has been told by the British partners that the Articles of Incorporation of the Company which would exploit this concession would include the Open Door (Subleasing) formula⁶⁰ which would enable an American Group or company to sub-lease from the exploiting company possible oil producing territories in those portions of Iraq covered by the concession other than the 24 areas reserved to the exploiting company.

The American Group’s position is that in the event of its withdrawal under the circumstances above outlined, the mere inclusion of the Open Door (Subleasing) formula in the Articles of Incorporation of the exploiting company would not guarantee to American interests equal participation in the development of the natural resources of Iraq. As already pointed out, the reason for the formation of the American Group and its continued object throughout the negotiations has been to obtain a proportionate share of such Oil as might be produced in Iraq. The Group was not formed with any idea of becoming merely an investor in a foreign oil company. Its sole object was to obtain actual Crude petroleum. The realization of this object, it holds, is the sole condition which would have as its effect fair participation of American interests in the development of the natural resources of Iraq. The State Department has stood for such participation. It is therefore the desire of the Group that the State Department facilitate the realization of its object. This realization, it suggests, can be obtained by the addressing to the Ambassador at London of an instruction directing him to make the necessary representations to the British Foreign Office to this end. This apparently cannot be brought about unless Mr. Gulbenkian, a naturalized British subject, accept on a reasonable basis the principle that the oil produced in Iraq shall be divided amongst the partner companies or groups, rather than that the profits of any joint enterprise entered into should be so divided.

60. Foreign Relations, 1923, vol. ii, p. 243.