2. During [the] ensuing discussions [the] Prime Minister said [that] any solution which would put Iran on [a] 50–50 basis [was] sure [to] create difficulties for [the] government. [The] Iranian people had been led [to] believe [that] such [a] formula [was] unfair to Iran. Iran [is] in [a] different position from other Middle Eastern oil countries. Foreign capital investment in [the] Iranian oil industry had been repaid many times by exorbitant profits realized by AIOC. [Anglo-Iranian Oil Company] [The] Iranian oil industry should be considered as [a] going concern already paid for from these profits. Such great profits over [a] long period [of] time had not been made from oil [in] other Middle Eastern countries. Hoover pointed out [that] Iranian oil could find its way again to world markets only on [a] commercial basis. Potential distributors [of] this oil could not consider [the] history [of this] concession in determining how much they could pay for oil. No matter how much profits AIOC might have realized in [the] past these distributors could not as business enterprises pay more for Iranian oil than for that available in other Middle Eastern countries. It might be possible in drafting [an] agreement [to] avoid spelling out any 50–50 formula. In place [of] such [a] formula there might be [a] proposition to [the] effect that Iran must receive no less income per ton for its oil than [the] most favored nation in this respect of [the] Middle East. After further conversation [the] Prime Minister appeared [to] reluctantly and unhappily acquiesce in our expressed views that Iranian oil could not re-enter world markets in substantial quantities unless distributors could obtain it as cheaply as they could oil from other Middle Eastern countries.

3. [The] Prime Minister said difficult though it would be for [the] Iranian Government [to] satisfy [the] public with [a] solution involving [a] 50–50 formula it would be still more difficult to satisfy it with [a] settlement which would place control [of] extracting and refining in [the] hands [of] foreigners. Hoover agreed this would be one of [the] most difficult areas [of the] negotiation. He thought, however, that with goodwill on both sides [a] solution could be found through study and negotiation whereby distributors would have sufficient control within [the] framework [of the] nine-point law of extraction and refining processes to give them [the] necessary assurance that they would receive [a] steady flow [of] oil and products of volume, variety, and quality needed to meet [the] fluctuating demands [of] their customers. [The] Prime Minister made several suggestions among which was one to [the] effect that NIOC [National Iranian Oil Company] would contract to sell [a] specific amount [of] oil and oil products to distributors over [a] term [of] years, [with] distributors to be authorized to enter Iran for [the] purpose of extracting and refining. Hoover said there [are a] variety [of] ways [of] bridging [the] problem of control. They might, however, more appropriately be discussed during [the] course [of] negotiations. Iran should understand in advance, however, that distributors must have sufficient control [of] production, refining and delivery to enable them [to] rely upon [a] steady flow from Iran [for] such oil and products as they may contract to distribute.

4. [The] Prime Minister repeated [that] it would be difficult enough for any government [to] face [the] Iranian public with [a] solution involving [a] 50–50 treatment regarding price and relinquishment to [the] extent at least by Iran of its control over its oil industry; it would be too much however for his or any other government to enter into [an] agreement which would involve [an] open or disguised return to Iran of AIOC. It would serve no purpose therefore for Iran [to] enter in negotiations looking forward to [the] return [of] AIOC in any form. [The] Iranian Government might agree to sell its oil and products to [a] group [of] distributing companies, including AIOC, and might even be able to give certain operating privileges in Iran to such [a] group. AIOC however must not be more than [a] minority member in such [a] group and must not be in [a] position [to] dominate it. During [the] discussion which followed [the] Prime Minister said this statement should not be interpreted as [an] indication [that] he [is] anti-British or that [the] Iranian Government or people were inherently anti-British. His government desired friendly relations in [the] future with [the] UK and he was sure that although [the] Iranian people were still in [a] somewhat emotional state regarding [the] British as [a] result [of] Mosadeq propaganda of [the] last two years, this emotion would gradually subside. Any attempt [to] bring AIOC back to Iran even with restricted rights would not be in [the] interest of present or future relations between [the] UK and Iran. Hoover said this particular point could more appropriately be considered during negotiations. In his opinion however it would not only be difficult but might be unwise from [the] point [of] view [of] Iranian interests for Iran to object to participation by UK companies to [the] extent [of] at least 50 percent in any distributing group that might be formed. [The] Prime Minister thought that it might be possible for AIOC and other British companies together to represent 50 percent of [the] new company but he indicated [that] this was [a] matter which he would like to consider and discuss later, perhaps during or in advance of negotiations. He wished [to] make clear however that AIOC should have at most only minority interests in any international group of distributors and should not be placed in [the] position to dominate such [a] group. Such [a] group in his opinion should include as many as possible of [the] major distributing companies now operating in [the] Middle East.

5. [The] Prime Minister referred to [the] vexatious problem of compensation. He did not see why if Iran should agree [to] sell oil on [a] 50–50 basis it should also be compelled [to] pay compensation, particularly if Iranian counterclaims against AIOC should be extinguished. We obtained [the] impression from remarks made by both Ministers [that] it [is] their thinking that [a] distributing group should absorb any compensation which its members might agree with AIOC to be due. They expressed [the] view that if AIOC was to be [a] participant in this group and Iranian counterclaims against AIOC should be taken into consideration, [the] amount [of] compensation should not be very great. Hoover said this matter also seemed [to] be one for discussion either between interested companies or during negotiations. [The] Prime Minister however continued [to] show interest in [the] matter [of] compensation. During [our] conversation on this subject [the] question developed as to [the] manner in which negotiations might be approached and as to who should participate. Both [the] Prime Minister and Foreign Minister seemed be of [the] opinion that, in case Iran should decide that it [was] prepared [to] deal with [an] international group of distributing companies, [the] best procedure might be for these companies to work out [an] agreement among themselves as to [the] kind of proposals to be made to Iran, and then for their representatives to approach [the] Government [of] Iran or NIOC with these proposals. If negotiations could take place between Iran or NIOC on [the] one hand and representatives of the international group [of] distributors on [the] other, [the] British Government would not be involved except as [the] protector of [the] interests [of] AIOC [—] other British companies and Iranian negotiators would not be compelled [to] face negotiators [from] AIOC. They seemed [to] think that negotiation [of] this kind would serve [to] remove [the] dispute from [the] field [of] Anglo-Iranian relations and reduce it to [the] status [of a] commercial negotiation with [an] international group [of] distributors. [The] Compensation problem which had so seriously disturbed relations between [the] UK and Iran would thus be disposed of privately by agreement between members [of a] group of distributors.

6. In view of [the] repeated concern expressed by [the] Prime Minister at [the] public reaction to [an] agreement giving foreign companies rights to operate in Iran, Hoover asked [the] Prime Minister if in his opinion it would be easier for [the] government as [a] matter [of] public relations to negotiate with [a] group [of] distributors through intermediation [of the] International Bank. Would public reaction [in] Iran be less unfavorable to [a] solution involving [the] conclusion [of an] agreement with [the] International Bank which would make [a] parallel agreement with [a] group [of] distributors? Hoover stressed in asking [the] question he did not know whether [the] charter Bank would permit it to act as [a] screen between Iran and [a] group of distributors; whether [the] Bank would be willing to act in this capacity; and whether intermediation of [the] Bank would be agreeable to Government US, Government UK, AIOC or potential members [of a] distribution group. Prime Minister said he thought it would be much easier for [the] Iranian Government if negotiations could be conducted through [the] International Bank instead of direct[ly] with [a] group [of] companies. [The] Iranian public in his opinion would find it less difficult to reconcile itself to [an] agreement in which [the] International Bank acted as [the] middleman rather than to one involving [the] granting by Iran of certain operating rights in Iran direct[ly] to companies [of] foreign nationality.

7. [The] Foreign Minister after private discussion with [the] Prime Minister said that within [the] next day or two he would prepare [a] brief informal unsigned statement containing [an] outline of current Iranian thinking regarding oil. If [the] Shah and [the] Prime Minister would approve he would give it to Hoover who would be at liberty [to] show it to [the] Secretary of State or, if considered advisable, to [the] British. It should be understood however that such [a] statement was to be treated as confidential; it was not to be considered as [a] commitment on [the] part [of the] Iranian Government since it would be subject to change until such time as [a] basis could be laid for negotiations. His purpose in giving it to Hoover would be merely to aid him in describing [the] present atmosphere regarding oil in Iran. [The] Statement would be only general [in] character; it would omit many details which had been touched upon orally. [The] Prime Minister and Foreign Minister stressed [that] all conversations with Hoover and myself had been of exploratory character. No commitments sought or given by either side. Hoover agreed, reiterating he had no authority [to] intermediate or seek solution [to the] problem. His mission [was] one of factfinding for [the] Secretary [of] State. [John Foster Dulles] He intended however while in London to describe to [the] British privately and frankly [the] situation regarding oil as he had found it in Iran. If it should appear he might be of further service he [was] prepared [to] return [to] Iran. His tentative intention [was to] depart for [a] London KLM plane leaving Tehran [the] morning [of] November 1. [KLM Royal Dutch Airlines]

8. It was agreed that if [the] press should inquire regarding [the] discussions which had taken place during [the] course [of] dinner [our] reply would be that Hoover and I had continued our discussions with [the] Prime Minister and Foreign Minister and that Hoover would probably complete this stage [of] his fact-finding mission during [the] next few days and would leave for [the] US to report to [the] Secretary [of] State, stopping in London en route for fact- finding purposes.