Foreign relations of the united states 1969–1976 volume XXXVII energy crisis, 1974–1980 department of state washington
Summary of Conclusions of Special Coordinating Committee
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- 172. Telegram From the Department of State to the Embassies in Saudi Arabia, Iran, the United Arab Emirates, and Kuwait
- 173. Memorandum From Rutherford Poats of the National Security Council Staff to the President’s Deputy Assistant for National Security Affairs (Aaron)
- 174. Memorandum From Secretary of Energy Schlesinger to President Carter
171. Summary of Conclusions of Special Coordinating Committee
Washington, December 7, 1978, 3:30–5:30 p.m.
Strategic Petroleum Reserve
The Vice President
Julius Katz, Assistant Secretary for Economic and Business Affairs
Harold Rosen, Director, Office of Fuels and Energy
David McGiffert, Assistant Secretary for International Security
Ellen Frost, Deputy Assistant Secretary for International Economic Affairs
C. Fred Bergsten, Assistant Secretary for International Affairs
Philip Verleger, Special Assistant to the Assistant Secretary for Economic Policy
Alvin Alm, Assistant Secretary, Policy and Evaluation
Carlisle Hystad, Chairman, DOE Task Force on Strategic Plans for the SPR
Lt. Gen. William Smith, Assistant to the Chairman
Robert Bowie, Deputy Director, National Foreign Assessment Center
John Eckland, OER Analyst
Dr. John White, Deputy Director
Eliot Cutler, Associate Director for Natural Resources, Energy, and Science
William Nordhaus, Member
Source: Carter Library, National Security Affairs, Staff Material, International Eco-
nomics File, Box 44, Rutherford Poats Files, Chron: 12/5–13/78. Confidential. The
minutes of the meeting, which was held in the White House Situation Room, are ibid. The
meeting was held in response to the President’s request for a review of a December 2
OMB memorandum and a Department of Energy proposal concerning the Strategic Pe-
troleum Reserve. (Memorandum from Aaron to Carter, undated; ibid.)
552 Foreign Relations, 1969–1976, Volume XXXVII
SUMMARY OF CONCLUSIONS
An expanded NSC Special Coordinating Committee examined the
risks and costs of differing proposals of the Department of Energy and
OMB with regard to the fourth increment of the Strategic Petroleum
Reserve. OMB advocated restatement of the SPR goal as one billion bar-
rels worth of protection, including 750 million barrels (mmb) of USG
storage and 250 mmb worth of private endurance through use of pri-
vate stocks, fuel switching and reductions in use of oil in an emergency.
DOE advocated proceeding with investment in FY 1980 on the fourth
increment of 250 mmb of SPR storage, adhering to the announced goal
of 1,000 mmb of USG-held SPR oil by 1985 or soon thereafter.
The NSC/SCC review examined four issues:
1. Potential military or political threats of extreme and prolonged oil
Such threats, sufficient to give significant value to a
fourth 250 mmb of USG-held oil, were judged to be of very low proba-
bility but they could not be discounted entirely. No participant con-
tended that such supply interruptions would endanger US national se-
curity if the SPR were limited to 750 mmb of USG-held oil. In such
circumstances vital US military and economic requirements could be
met by allocation measures. Rather, the issue was judged to be eco-
nomic and political: how much popular inconvenience and lost pro-
duction could be avoided by the extra 250 mmb?
2. The potential costs of adapting to oil supply reductions beyond
In the extreme threat scenario, there is a
difference of 700,000 b/d in US oil supply between the DOE and OMB
proposals. Stringent allocation of gasoline would be required whether
the SPR were 1,000 mmb or 750 mmb, but general gasoline rationing
would be more likely with the smaller SPR. Further study of the best
means of distributing the marginal shortage should be undertaken by
DOE and OMB.
3. The costs in strategic and foreign relations terms of restating the SPR
The OMB option would not violate interna-
tional agreements nor would it be inconsistent with plans of other IEA
countries. It would, however, conflict with clearly declared US objec-
tives. Most participants believed such a change would be interpreted as
a weakening of US oil security. Its announcement at a time of height-
ened instability in the Middle East was particularly troubling to several
4. Costs and benefits of postponing budget action. No one argued that
national security will require completing the full SPR by 1985. Further
slippage of the schedule would cause nominal cost increases—possibly
real ones in oil fill in a tightening world market. If given a choice of an-
nouncing a change to a 750 mmb USG-held SPR in January or, alterna-
February 1977–January 1979 553
tively, to defer this decision and not commence spending on a fourth
increment until FY 1982, all participants except OMB preferred the
On December 7, Brzezinski sent the President a memorandum informing him of
the conclusions reached at the meeting. (Ibid.)
172. Telegram From the Department of State to the Embassies in
Saudi Arabia, Iran, the United Arab Emirates, and Kuwait
Washington, December 8, 1978, 2008Z.
310048. Subject: Follow-up to Secretary Blumenthal’s Middle East
Trip. Ref: State 304969.
1. Prior to departure of key officials for OPEC meeting in Abu
Dhabi, addressee posts should make high-level approach to key offi-
cials concerned with forthcoming OPEC price decisions to reiterate
highest level U.S. concern that decision fully reflect considerations pre-
sented by Secretary Blumenthal during his recent visit, as summarized
in reference cable. Objective should be to make sure officials clearly un-
derstand depth of U.S. concern on the issue. We believe approaches
should be made as soon as possible in order to have maximum impact
on pre-meeting manuevering and decision process.
2. In making approaches, posts should convey Secretary’s appreci-
ation for the courteous hearing and hospitality he received everywhere
and for the public statements by the Oil Ministers of Saudi Arabia and
the UAE that they would advocate continuation of the present price
Source: National Archives, RG 59, Central Foreign Policy Files, D780508–0153.
Confidential; Immediate. Drafted by Ernest Chase (Treasury Department), cleared by
Katz and in the Treasury Department, and approved by Cooper.
See Document 168 and footnote 5 thereto.
554 Foreign Relations, 1969–1976, Volume XXXVII
173. Memorandum From Rutherford Poats of the National
Security Council Staff to the President’s Deputy Assistant for
National Security Affairs (Aaron)
Washington, December 12, 1978.
Long-Term International Oil Price Strategy
On October 20, 1978, after submitting a summary report to the
President on a DOE-led interagency task force paper on this subject,
Zbig asked John Renner to identify key issues and options for a PRC
meeting based on this paper.
At the same time you asked Renner to consider the effects of con-
tinued use of the dollar in OPEC pricing, as opposed to a basket of cur-
rencies, on the costs of production and consequent industrial export
prices of Japan and Germany. This question arose from the paper’s rec-
ommendation, endorsed by the September 21 ad hoc NSC meeting,
that we should strongly encourage continued use of the dollar as the
denominator of OPEC prices. Treasury undertook an econometric
study of this question and now has reported that the declining relative
cost of imported oil in Germany and Japan (resulting from the appreci-
ation of the Deutsch Mark and yen against the dollar) has offset about
four percentage points of Germany’s 38% Deutsch Mark appreciation
and about 5–10 percentage points of the Japanese yen’s 55% apprecia-
countries as compared with competitive disadvantages of their curren-
cies’ appreciations. They also have realized competitive benefits from
dollar-denominated contracts for other imported industrial raw mate-
rials. The sum of these benefits would go a long way toward explaining
how Germany and Japan have remained competitive in industrial ex-
ports. However, the particular advantage that derives from dollar pric-
ing in oil is not so great as to outweigh the threat to our dollar-defense
program of OPEC’s abandoning the dollar at this time.
In response to Zbig’s request, I have reviewed the interagency
paper and found no issues that, in my judgment, require Presidential
decisions. The summary of conclusions, circulated after the ad hoc
Source: Carter Library, National Security Affairs, Staff Material, International Eco-
nomics File, Box 44, Rutherford Poats Files, Chron, 12/5–13/78. Secret. Sent for
See Document 162.
See Document 161.
The Treasury Department report was not found.
February 1977–January 1979 555
meeting of September 21, was focused on the immediate issues of how
to resist a large OPEC price increase for 1979 and how to persuade
OPEC not to switch to a basket of currencies. The other policy recom-
mendation made by the paper was that the US Government “establish
the longer term strategic goal of seeking to expand world (oil) produc-
tive capacity as a major foreign policy objective”. Bill Odom, in a mem-
orandum at that time,
pointed out that this policy formulation was
susceptible of various interpretations, including US support of expan-
sion of Soviet oil production without regard to other aspects of
US-Soviet relations. We are currently dealing with the application of
this general policy to Mexican oil production, and we occasionally re-
turn to this subject in considering US-Saudi Arabian relations. In the
IEA and the World Bank we are encouraging joint measures to stimu-
late greater oil and gas production in less developed countries. In short,
we are adapting the general policy suggested by the paper in specific
If you agree, the record will show that work has been completed
on the task force paper, “Long Term Oil Price Strategy”.
See footnote 4, Document 162.
174. Memorandum From Secretary of Energy Schlesinger to
Washington, December 14, 1978.
Mexican Gas—A U.S. Strategy
The purpose of this memorandum is to present a proposed
strategy and analysis regarding negotiations on the possible purchase
of Mexican natural gas.
Source: Carter Library, National Security Affairs, Staff Material, North/South
File, Box 29, Pastor Country Files, Mexico, 12/1–14/78. No classification marking. Copies
were sent to Vance and Brzezinski. At the top of the first page, the President wrote: “No
copies to be made except the 3.” He also wrote: “Jim—Good summary. Get State and NSC
comments to me.”
556 Foreign Relations, 1969–1976, Volume XXXVII
In August, 1977, Pemex signed a Memorandum of Intent with six
U.S. gas transmission companies for the sale of up to 2 billion cubic feet
per day (BCFD) of Mexican gas. At a time of perceived gas shortages,
these predominantly production-poor companies reached agreement
with the Mexicans on a price that was simply too high from a national
perspective. This price, for example, would have created serious politi-
cal difficulties with the Canadians from whom we currently import
about 1 tcf of gas annually.
The initial border price and subsequent escalation were tied to the
equivalent price of #2 fuel oil. President Lopez-Portillo has publicly
cited $2.60 as the Mexican asking price, but the actual formula price has
not been below $2.70 over the past year and is currently at approxi-
mately $2.90. The price and escalation clauses would have come into ef-
fect when the purchase contracts were signed—some 18 months before
we would have begun to receive significant quantities of gas.
The Mexicans and the U.S. companies were advised by the Admin-
istration before the memorandum was signed that the price/escalation
formula was unacceptable to us because (1) it was substantially higher
than the price we were proposing to pay for new U.S. gas; (2) it would
have threatened the $2.16 price we pay Canada for even larger volumes
of gas; and (3) it would have tied the price of the gas to OPEC oil pric-
In October, 1977, Senator Stevenson
introduced a resolution in
Congress blocking an Ex-Im Bank credit to Mexico for financing a gas
pipeline to the U.S. on the grounds that the Mexican price was too high.
The Mexicans reacted sharply to this, charging that the U.S. was trying
to blackmail them on the price issue.
In November, 1977, direct discussions were initiated with the Mex-
ican Government aimed at reaching policy agreement on the general
outlines of a gas transaction. The fact that the actual contracts would
still be subject to U.S. regulatory approval was stressed. During these
discussions, the Mexican negotiators accepted a U.S. proposal for a
$2.60 price, to begin when substantial volumes of gas begin flowing,
with escalation tied to a general price index (WPI) rather than No. 2 fuel
oil. However, this proposal was subsequently rejected by Lopez-
Portillo who had come under domestic political pressure over the pro-
posed export of Mexican gas to the U.S. In view of the continuing de-
bate on the National Energy Act, it was jointly agreed by both gov-
ernments to indefinitely suspend the gas discussions, allowing the
Memorandum of Intent to expire on December 31, 1977.
Senator Adlai Stevenson (D–IL).
February 1977–January 1979 557
In your letter to Lopez-Portillo in August (Tab A),
our continuing interest in importing Mexican gas, but indicated that
the matter should be deferred until Congress had completed action on
the energy bill. There have been no formal discussions with the Mex-
icans since the passage of the energy bill.
Lopez-Portillo has said publicly that because he was unable to
reach an acceptable agreement with the U.S., Mexico would complete
the pipeline from the Chiapas-Tabasco fields only to Monterrey and re-
structure its industry to expand domestic gas consumption. Natural
gas, which in fact is now being flared, would replace residual fuel oil
used in industry. Thus, the maximum value of this gas in Mexico, if it is
not flared, is equivalent to lower-priced residual fuel oil even though
the Mexicans propose to charge U.S. companies the btu equivalent of
higher-priced distillate oil.
The residual oil displaced by gas would be exported. Estimates in-
dicate they could expand domestic consumption by perhaps 1 BCFD,
although at some cost in terms of infrastructure investment and foreign
exchange losses arising from the lower export value of the residual fuel
oil they would free for export. The Mexicans could also reinject limited
quantities of associated gas in the Chiapas-Tabasco field and shut in the
non-associated gas fields in Northern Mexico. But our intelligence re-
porting and private remarks by other Mexican officials confirm that the
Government recognizes the substantial costs associated with a domes-
tic option. The Mexicans also appear to realize that as oil production
rises toward the 1982 target (2.0–2.5 mbd), they will have substantially
more associated gas available than they had earlier anticipated.
In view of the current surplus of domestic gas, the projected
surplus of Mexican gas, and the rising price of domestic gas supplies, it
is inevitable that sometime in the mid-1980’s Mexican gas will flow into
U.S. markets to the economic advantage of both countries. In view of
these realities, it is important that the United States not find itself in the
position of over-paying for this gas by being too anxious to conclude an
agreement. It would not be in the long-term interests of either country
to rush into a gas sales agreement that contains inappropriately high
Domestic Gas Market:
With the Natural Gas Act now in place, there
has been a major shift in the U.S. domestic gas market. Up to 1.0 trillion
Sent August 18; attached but not printed.
See Document 164.
Carter wrote “I agree” next to the last sentence of this paragraph and underlined
558 Foreign Relations, 1969–1976, Volume XXXVII
cubic feet annually (2.7 BCFD) of gas which was formerly locked up in
intrastate markets is now available to the interstate system. To attain
the projected savings on imported oil, it is important to ensure that this
gas is used. Those industrial customers who went off gas in the winter
of 1976–77 must come back on over the next several months. A substan-
tial volume of new gas is expected to be produced over the next several
years in response to the price incentives in the Natural Gas Act. But the
U.S. must ensure that potential investors in new gas exploration and
production are confident that there will in fact be a market for that gas.
The U.S. companies would contract for the Mexican gas on a
basis. Therefore, there would be a strong tendency for the
high-cost Mexican gas to be sold first, with new U.S. gas (including
Alaskan gas) taking the role of residual supply. This would be contrary
to both domestic energy objectives—to maximize U.S. gas produc-
tion—and the nation’s balance of payments interests. Under the provi-
sions of the Natural Gas Act, a portion of the Mexican gas price will
have to be paid by industrial customers, but the bulk of it will be paid
by all consumers on a rolled-in price basis. Thus, as long as the price of
Mexican gas is substantially above the average price of U.S. gas, residen-
tial consumers would be, in effect, subsidizing the consumption of high
cost imported gas by industrial users.
In general, the large volumes of old, lower-priced gas in the inter-
state market will be available for many years to subsidize higher cost
gas supplies. To the extent possible, that subsidy should not be used ex-
tensively for imported natural gas. The gas price proposed by Mexico
would absorb a substantial portion of this subsidy.
The U.S. gas companies are willing to pay virtually any price to
Mexico as long as their average price (Mexican gas plus all other gas in
their systems) remains competitive with the cost of alternative fuels
available to their industrial customers. They believe that #2 fuel oil is
the most likely alternative fuel against which they will be competing
and are, therefore, comfortable with the Mexican price formula.
The longer-term view of the U.S. gas market is less clear. Estimates
of domestic gas supply and demand through the 1980’s vary. But it
seems likely that by the mid-1980’s, Mexican gas would displace not
domestically produced gas, but rather alternative fuels—largely oil.
For the foreseeable future, the marginal natural gas supplies in the U.S.
will compete with residual fuel oil rather than higher-priced distillate
oil. In most markets, if the delivered price of the gas exceeds the price of
residual oil there would be a sharp reduction in natural gas demand
Carter underlined “take-or-pay” and wrote a question mark next to it.
February 1977–January 1979 559
and a consequent increase in oil imports. Over the longer-term, and de-
pending on the volumes of gas coming from Mexico, Mexican gas
would be competing for those industrial markets where lower-priced
residual fuel oil is used.
Because residual fuel oil is the most likely substitute fuel in the
U.S. and represents the highest value for use in Mexico, the U.S. should
seek a Mexican gas price no higher than the btu-equivalent of residual
fuel oil. That price would be approximately $.70 per MMBTU less than
the distillate price proposed by Mexico.
In addition to these domestic considerations, the
U.S. must be sensitive to the possible impact of a deal with Mexico on
the price of gas imports from Canada. The Canadian gas price is now
$2.16/mcf for about 1 tcf per year. The Canadians are likely to raise this
price next year, possibly to the $2.35 to $2.45 range. But that price will
still be substantially lower than that sought by Mexico. It is not likely
that the Canadian government could long resist domestic pressures to
bring its export price up to the level obtained by Mexico.
In addition, Canada’s National Energy Board (NEB) is currently
considering a number of proposals for the export of additional gas to
the U.S., including a proposal for delivery of new supplies of Canadian
gas through pre-building the southern legs of the Alcan line—a move
which we favor because it would enhance significantly the financiabili-
ty of the Alcan project.
Agreement in the next few months to the Mexi-
can asking price would impact directly on the price which Canada
might demand for these incremental exports.
Alaskan Gas Project:
Some U.S. gas transmission companies view
Mexican gas as an alternative to Alaskan gas. The Alcan project is al-
ready suffering from uncertainty over the marketability of the Alaskan
gas in the lower-48. One of the keys to the success of the Alcan project
will be the ability of the project sponsors to negotiate firm contracts for
the Alaskan gas with U.S. gas transmission companies. To the extent
that U.S. companies give priority to Mexican gas, the failure of the
Alcan project becomes an increasing possibility.
This is particularly important in view of the fact that it is clearly in
the long-run energy and economic interests of the nation to bring
Alaskan gas to market. While it is true that the cost of the Mexican gas
will be less in the mid-1980’s than the cost of delivered Alaskan gas, the
costs of Alaskan gas will decline significantly over time as the capital
costs of the pipeline are amortized. The Mexican gas, on the other hand,
A pipeline project that would follow the Alcan Highway across Alaska and
Canada to deliver natural gas to the continental United States.
560 Foreign Relations, 1969–1976, Volume XXXVII
will continue to increase in price as the world oil price increases. Since
the incremental cost of producing Alaskan gas is low, the Alaskan gas
will require a lesser expenditure of our real resources and therefore will
have a higher national economic benefit than Mexican gas. These
long-range considerations underscore the undesirability of a Mexican
gas price that would subsidize imported gas at the expense of the
The Mexican position has been based on the premise that the U.S.
is desperate for Mexican gas. That is clearly not the case. Based on our
current domestic supply situation, the U.S. can afford to wait a signifi-
cant period of time before purchasing Mexican gas. In fact, the rising
domestic price for gas coupled with the growing Mexican surplus will
inevitably draw Mexican gas into the U.S. market by the mid-1980’s.
On the other hand, the U.S. should also stand ready to accept Mex-
ican gas at an earlier time if a reasonable price can be negotiated. This
country has a strong interest in rapid Mexican industrialization which
will impact on virtually all areas of our relationship. We also want to
assure that an inability to dispose of associated gas—other than by
flaring—does not become a potential constraint on Mexican oil produc-
tion in the late-1980’s.
There are also substantial economic costs to Mexico in foregoing
gas sales to the U.S., both in terms of lost foreign exchange earnings and
the investment expense of increasing domestic gas consumption. It
would not be economically prudent for the Mexicans to continue
flaring increasing volumes of their natural gas production. Lopez-
Portillo wants to maximize foreign exchange earnings by accelerating
the oil production schedule—and if possible by selling gas—in order to
finance a greatly expanded industrialization effort. His recent initiative
new discussions confirms that the gas transaction is at
least as important to Mexico as to the U.S.
Therefore, I believe that we should try to negotiate an agreement
with Mexico which would:
1. Meet Lopez-Portillo’s political problem;
2. Assure us of the availability of Mexican gas at a price competi-
tive with the btu equivalent of the most realistic long range substitute
fuel—residual fuel oil; and
3. Minimize any adverse impact on our present and future imports
Carter underlined “recent initiative in suggesting” and wrote a question mark
next to it.
February 1977–January 1979 561
With these objectives in mind, I would propose to negotiate with
the Mexican leadership in an effort to see if an acceptable agreement
can now be achieved.
Starting Price of $2.60
In view of the importance of the $2.60 price to the Mexicans, the in-
itial U.S. position could be a $2.60 per MMBTU price when the gas
starts flowing in 1980, escalated by the world price of crude oil, or dis-
tillate, or a combination of one-half the GNP deflator and one-half the
price of oil. In the 1985 timeframe (the longest term the Mexicans are
likely to accept), the difference between these escalators will be insig-
nificant as long as world oil prices do not rise faster than inflation. This
formula would also include a limitation of 15 percent
on the price in-
crease in any given year.
This approach addresses some central Mexican concerns and is ac-
ceptable from the U.S. point of view. It allows the Mexicans to cite a
$2.60 starting point, a number which for them has assumed political
significance. Given his public statements, Lopez-Portillo cannot accept
a lower price and may seek a higher level.
As shown on the attached table,
the $2.60 starting price in 1980 is
$.59 below the current Mexican proposal. It is also at the low end of the
residual fuel oil price range in 1980 ($2.69 compared to $2.60–$2.85) and
$1.55 less than the current Mexican formula in 1985. In 1980, however,
this price would be approximately $.30 higher than the current Cana-
dian price adjusted for a 7 percent inflation rate. If the Canadians raise
their price to $2.45 sometime next year, then the difference declines to
Because this price trajectory is substantially below the initial Mex-
ican proposal and similar to the last offer made to the Mexicans in Sep-
tember of 1977, this proposal may be difficult for the Mexicans to
Modifications to this initial proposal might include adding a pro-
vision that in no event could the Mexican price be lower than the Cana-
dian border price. The Canadian price, however, is not likely to exceed
the $2.60 price. The Canadians are having difficulties in finding
markets for existing export commitments at the current price of $2.16
per mcf. Since they are currently reluctant to press for still higher
Carter underlined “15 percent” and wrote “Too high?” next to this sentence.
Entitled “Projected Mexican Gas Prices”; attached but not printed.
562 Foreign Relations, 1969–1976, Volume XXXVII
prices, it is more likely that the Canadian price will follow the Mexican
Another modification might include offering the Mexicans the
highest of the $2.60 price, the Canadian border price, or a third option
such as the onshore production well price under the Natural Gas Policy
Act (today $1.98 per MMBTU; in 1980, $2.19 per MMBTU) at the well-
head in Mexico, plus transportation charges to the border. At constant
world oil prices, this price trajectory is very close to the $2.60 option.
Under this approach, an expected negotiation point would be the
appropriateness of the transportation charge used in this formula. The
Mexicans can be expected to claim the transportation charge is in the
range of $.80, while our estimates, depending on rate of return and
other variables, might range as low as $.30. For purposes of this calcula-
tion, a declining rate starting at $.50 per mcf was used.
The U.S. onshore production well price plus transportation option
offers added flexibility in minimizing potential Canadian price in-
creases. Allowing for a $.30 or more transportation charge for Canadian
gas from Alberta to the border compared to the estimated $.50 Mexican
charge reduces the differential between the Mexican gas price and the
Canadian price to less than $.20.
Residual Oil Price
If any or all of these options prove unsatisfactory, tying the gas
price to the btu equivalent of residual fuel oil would meet a large por-
tion of the U.S. and Mexican objectives.
Because of continuing surpluses brought on by increasing use of
heavier crude oils and growing demand for lighter products, the re-
sidual oil market over the course of the next few years will in all likeli-
hood rise at a slower rate than that of distillate.
Because the best estimates of residual oil prices in 1980 are above
both the $2.60 starting point and the onshore production formula, this
price closes about 40 percent of the gap between the proposed U.S.
starting position and the original Mexican position, as indicated on the
attached chart. This option brings the gas purchase price up to the btu
equivalent of the appropriate substitute and may provide the Mexicans
with a politically feasible starting point. However, it leaves a gap of ap-
proximately $.30 to $.40 per mcf between the 1980 inflation-adjusted
Canadian price and the Mexican price.
—The Ex-Im Bank credit to finance U.S. sales of additional pipe
and other equipment needed to complete the line to the U.S. could pos-
sibly be re-established.
February 1977–January 1979 563
Mexico has not had difficulty obtaining financing elsewhere, but
Ex-Im Bank credit could be politically useful to Lopez-Portillo. I will
consult with Senator Stevenson on this.
—Front-End Payments for future gas deliveries.
Front-end Payments maximize Mexican earnings in the short-term
when they are of greatest interest to Lopez-Portillo. The Japanese have
obtained access to the Mexican oil market through such front-end pay-
officials have indicated in confidential discussions
with me that they would be willing to enter into a $1 billion advance
payment arrangement. Regulatory and contractual mechanisms for
completing such arrangements on both sides of the border would have
to be explored.
—An offer could be made to transport Mexican gas on a reimburs-
able basis through the U.S. pipeline system from Eastern to Western
This transportation option would permit the delivery of gas to the
Mexican cities along the border at a substantially lower cost of service
than through the construction of a new line through Mexico and could
be presented to Lopez-Portillo as a significant side benefit to Mexico of
the overall deal with the U.S.
Mexican gas at an appropriate price can be a desirable source of
U.S. energy supply. Since there is a great likelihood that this gas will in
any event flow into U.S. markets by the mid-1980’s, it is important that
contracts for earlier purchase of this gas not be at disadvantageous
This proposed mix of negotiating options offers the opportunity to
conclude an agreement that would be beneficial for both countries
while meeting a major portion of our negotiating objectives. The most
difficult objective to meet satisfactorily will continue to be minimizing
the effect of any final Mexican settlement on Canadian gas prices.
During any preliminary discussions, it will be important to remain
flexible within the framework of this negotiating strategy, since it will
be difficult to make a more specific assessment of the best approach
until actual discussions have progressed. I would try to reach agree-
ment in principle with Mexican leaders based on this proposed
strategy. You could then conclude the matter during your visit in Feb-
ruary with a public announcement either then or later in the year.
A U.S. oil company (taking its name from Tennessee Gas) that in 1978 converted
its Louisiana refinery to process the lower grades of crude oil that were exported from
Venezuela and Mexico.
564 Foreign Relations, 1969–1976, Volume XXXVII
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