The opinion of the court was delivered by: WEINFELD
OPINION, FINDINGS OF FACT AND CONCLUSIONS OF LAW
This antitrust suit, involving claims and counterclaims for hundreds of millions of dollars among some of the world's largest oil companies, arises out of events in the Middle East, particularly Libya, in the early 1970's. Plaintiffs are three brothers: Nelson Bunker Hunt, W. Herbert Hunt and Lamar Hunt, who as partners owned a concession in Libya for the exploration, development and production of crude oil.
The defendants are: Mobil Oil Corporation ("Mobil"); Texaco, Inc. ("Texaco"); Standard Oil Company of California ("Socal"); The British Petroleum Company, Ltd. ("BP"); Shell Petroleum Company, Ltd. ("Shell"); Exxon Corporation ("Exxon"); and Gulf Oil Corporation ("Gulf").
All the defendants, save Gulf, had production in Libya, and each also owned concessions with substantial production in the Persian Gulf nations. The defendants are herein referred to as the "major oil companies," the "majors" or "Persian Gulf producers." Other companies that owned and operated oil concessions in Libya included Occidental Petroleum Corporation ("Occidental"), Grace Petroleum Corporation ("Grace"), Gelsenberg A.G. ("Gelsenberg"), Amerada Hess ("Amerada Hess" or "Hess"), Atlantic Richfield Company ("ARCO"), Continental Oil Company ("Continental") and Marathon Oil Company ("Marathon"). These companies and Hunt are generally referred to as the "independents," "the Libyan independents," or "the non-Persian Gulf producers."
This action centers about efforts of the majors and independents to resist the demands of oil-producing nations in the Middle East. In January 1971, Hunt, the other independents and the major oil companies entered into an agreement, the Libyan Producers' Agreement ("LPA"),
designed to present a united industry front to withstand increasingly aggressive actions by the Libyan government. In brief, under one provision of the LPA, the parties agreed to share the burden of production cutbacks imposed by the Libyans by providing the cutback party with replacement crude oil at producers' tax-paid cost.
Plaintiffs claim that defendants imposed an illegal customer and territorial restriction on resale of crude oil transferred to them under the LPA and that this restriction deprived them of access to the competitive market and forced them to sell the crude at distress prices. They assert an additional claim that the defendants conspired to withhold many millions of barrels of crude oil to which plaintiffs were entitled under the agreement. Both the alleged restriction and the alleged boycott are challenged as violations of section 1 of the Sherman Antitrust Act
and section 73 of the Wilson Tariff Act.
Defendants deny the antitrust charges; they assert counterclaims for rescission of an extension of the agreement and for restitution based upon allegations that plaintiffs committed fraud by concealment of material facts.
The case came to trial after extensive pretrial discovery, which included oral depositions of parties and witnesses taken here and in various foreign countries, answers to interrogatories, document production and answers to requests for admissions. The discovery process resulted in a pretrial record of thousands upon thousands of pages of testimony and documents. The trial itself took thirty-eight days, with a record of more than 7000 pages. At the trial, twenty-four witnesses testified. Since the trial was to the Court, some testimony and a number of exhibits which include obvious hearsay were nonetheless received in evidence in an effort to expedite the trial. The Court repeatedly observed that its determination would be based only upon relevant and material evidence.
To put matters in proper perspective, it is desirable to set forth events preceding, contemporaneous with and subsequent to the signing of the agreement that is at the center of the controversy. In 1957, Hunt acquired from the Libyan government an oil concession known as the Sarir field. Three years later, Hunt assigned an undivided one-half interest in the concession to the British Petroleum Exploration Company (Libya). The Sarir field came "on stream" in 1967 and by 1970 was producing approximately 400,000 barrels of crude oil per day, with reserves estimated at half a billion barrels. In 1970, all the majors, except Gulf, were engaged in oil production in Libya, either on their own or in joint ventures with one or more other companies.
The majors also had extensive oil-producing holdings in the Persian Gulf nations: Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
On September 1, 1969, Colonel Moamer Qaddafi and his Revolutionary Command Council ("RCC") overthrew King Idris and seized control of the reins of state. The new regime soon confronted the oil companies operating in Libya with demands for substantial increases in the "posted price" used by the host government to compute taxes and royalties of crude oil. Early in 1970, after the companies failed to yield in the first round of negotiations, the Libyans adopted a strategy which they continued to use in exacting concessions from the oil companies: they would single out a vulnerable company, threaten or impose production cutbacks to force it to yield to a demand, and upon its capitulation use the compelled terms as the basis of its bargaining position with the other companies. Occidental was the first to fall prey to this tactic, acceding to increases in the posted price and the tax rate on September 4, 1970, after the government had imposed production cutbacks. By October the Libyans had forced the other companies to yield.
The ever-escalating demands and hostile attitude of the RCC led the executives of the oil companies to consider means of effectively resisting further demands. Both the independents and the majors recognized the desirability of a united negotiating front and a mutual help program whereby production losses sustained by one company would be shared by all. One idea which surfaced during this period, in several contexts, was that a company would be in a stronger position to resist the new Libyan demands if the intended victim had an alternative source of crude oil in the event of a government-imposed restriction on production. The suggestion of mutual aid, however, did not advance beyond the discussion stage at that time.
The surrender by the majors and independents to the Libyan demands in the fall of 1970 did not bring peace in their time. Hardly had the compelled increases been in effect when the Organization of Petroleum Exporting Countries ("OPEC") met in Caracas, Venezuela in December 1970 and decided to demand even further increases in "government take," including posted price and tax rates. The Conference passed, Inter alia, Resolution XXI.120 which provided that joint negotiations between the Persian Gulf nations and the companies operating in those countries begin on January 12, 1971 in Teheran.
Libya quickly moved into action. On January 3, the Libyan government summoned local representatives of the oil companies and outlined plans for implementation of the Caracas Resolutions. The demands for increases in posted price and tax rates beyond those agreed to in September and October were backed by the then familiar tactic of threats of cutbacks, "shut-ins" (prohibitions on crude liftings) and nationalization. on January 9, the Libyan government singled out Hunt and Occidental, giving each until January 16, 1971 to accept its "non-negotiable terms."
The new policies of OPEC presented the prospect of dire consequences to the oil companies. Demands won by one oil-producing nation from a company could be the starting position for the other countries. Under this practice of "leapfrogging," the oil companies could thus be whipsawed into yielding to the seemingly endless demands of their host countries. The recent actions brought home in dramatic fashion to the majors and the independents the urgency of a united front if effective resistance were to be made. Discussions were started in several forums in response to the OPEC meeting in December and were accelerated by the Libyan demands in early January.
One group that gave consideration to the problem was the "McCloy Group," named for its chairman, John J. McCloy, and comprised of the chief executives of the seven major companies. The Group had been meeting semiannually since the early 1960's. Formed initially to discuss penetration of Soviet oil into European markets and later concerned with the actions of OPEC, the McCloy Group was a discussion group which kept the Departments of State and Justice informed of its proceedings. An agenda-drafting committee of the McCloy Group convened on December 15, 1970, three days after the close of the OPEC Conference, to prepare an agenda for a full meeting scheduled for the second week in January. The committee was aware of the recent OPEC meeting but not of any formal demands. Subsequently another agenda-drafting meeting was set for January 6, 1971.
In late December 1970, Shell began to consider and develop a proposal for a united negotiating front for the industry. A senior Shell executive discussed the proposal with G.H.M. Schuler, Manager of Hunt's London office. On January 6, Brian Carlisle, a Shell official, presented Shell's proposal in London to members of the Iranian Oil Consortium, which included the seven majors, a French national oil company and Iricon, a group of American independent companies including Continental. Also on January 6, the McCloy Group agenda-drafting committee reconvened in New York City in preparation for a meeting scheduled for January 11. The committee began consideration of responses to the now public OPEC Caracas Resolutions of mid-December and the Libyan demands of January 3, 1971.
In the meetings prior to January 11, two distinct, yet related, plans took shape: (1) an industry-wide negotiating front in response to the demands sparked by the OPEC Resolutions and (2) a sharing proposal designed to help companies in Libya resist further demands. Although the record is not precise as to when and by whom the sharing proposal was first drafted, it is clear that when the McCloy Group agenda-drafting session convened in New York it had before it a draft containing the substance of such a proposal. The initial idea of a sharing agreement, which had been adumbrated several months earlier by several independents and majors, was that oil companies would share the burdens of cutbacks imposed by the Libyans. This proposal was linked early in the January meetings with a requirement that a participant not reach agreements with the Libyan government without the consent of the other companies.
From the outset, the majors sought to include in the deliberations Shell's partners in the Libyan Oasis group (Marathon, Continental and Amerada Hess), Occidental, and Hunt. Schuler and Norman Rooney of Hunt's London office were advised in late December of Shell's plan for united action. Nelson Bunker Hunt was sounded out on January 6 and indicated he thought the sharing agreement proposal was reasonable; and William Greenwald, Executive Vice President of Esso Middle East, telephoned Hunt a day or so later, urging him to attend meetings scheduled for the next week. Similarly, on January 8, David Barran, Chairman of Shell's Committee of Managing Directors ("CMD"), reassured Armand Hammer, Chairman of Occidental, that Shell would support a sharing agreement, as Hammer had requested in order to resist Libyan demands. Over the weekend of January 9 and 10, Shell representatives contacted Shell's Oasis group partners, and Schuler arrived in New York as a Hunt representative.
Beginning January 11 and continuing for the next four days, the majors, now joined by representatives of the independents and officials from the Departments of Justice and State, engaged in a series of nonstop and overlapping meetings. At times all the parties met together; at other times the majors and independents met separately.
The first order of business was establishment of a united negotiating front Vis-a-vis the OPEC nations. After extensive drafting and redrafting, which engaged the attention of all parties, their representatives and advisors, a Message to OPEC was finally agreed upon. The statement called upon OPEC to conduct an "all-embracing negotiation" with a team of representatives of the oil companies.
With agreement upon the joint message, the companies turned their attention to a sharing agreement and the specific problem of Libya. By this time Nelson Bunker Hunt and his chief attorney and advisor Ed Guinn were participating in the meetings. The parties worked under pressure to reach agreement prior to January 16, when Hunt and Occidental were scheduled to meet with the Libyan government to respond to the January 3 and 9 demands.
The sharing proposal underwent revision after revision as representatives of the various participating companies offered and amended drafts. Throughout the drafting and negotiating process the basic idea was constant: in order to solidify a united negotiating front, the parties were not to accept terms concerning increases in "government take" without prior approval of the signatories, and the signatories were to share the burden of any cutback in production imposed by the Libyan government on a basis proportionate to their share of total Libyan production. Parties who, in the exercise of their "vital interests," made offers to or agreements with the Libyans without the assent of the other parties would forfeit the benefits but would be held to the obligations of the agreement. Companies would provide crude oil under the agreement at tax-paid cost.
While the principle of a united front together with a sharing of the burdens in Libya was readily agreed to, its effectuation presented problems which were resolved only after extensive negotiation. Early drafts provided that signatories would supply cutback parties with Libyan oil. This provision was deemed unsatisfactory because of the possibility that the Libyan government would not permit companies to transfer Libyan crude oil to cutback or shut-in companies. Thus later drafts of the agreement proposed to permit parties to substitute other crudes if Libyan crude oil was not available for sharing by reason of Libyan government action.
In addition to this "substitute crude," the concept of "back-up crude" arose: Persian Gulf producers (the majors) agreed to supply Middle East crude to the independents to replace Libyan crude of which they were deprived either because of cutbacks or a sharing program. Back-up crude was intended to establish parity between the majors who could draw on vast alternative sources of crude oil in the Persian Gulf and the independents, who had no such resources.
Two additional provisions included in the agreement are at the heart of this litigation: (1) the "pre-existing customer clause" (discussed in detail under the First Claim) and (2) the "dimes clause" or "cash option," which gave a Persian Gulf producer the option of paying ten cents in lieu of each barrel of Persian Gulf back-up crude it was obligated to supply.
The dimes clause was the product of the majors' uncertainty as to their ability to provide back-up crude oil for an extended period of time. Early drafts of the sharing agreement provided for a six-month or one-year term. At some point in the discussions on January 13 or 14, representatives of the independent oil companies requested that the agreement be lengthened to three years in order to secure greater assurance of protection against Libyan tactics and demands, a proposal that troubled some of the majors because of the extended time factor.
As a result of this concern, it was proposed that the sharing agreement include an option under which the Persian Gulf producers could pay ten cents in lieu of each barrel of Persian Gulf crude owed. Initially, the concept of a cash option was not acceptable to the independents for several reasons. It was thought that ten cents might not equal the per-barrel profit margin. Furthermore, Marathon and Continental were interested in receiving oil and not dimes which they could run through their refining systems. The prospect of receiving dimes instead of oil also concerned Hunt and Occidental who were scheduled to meet with the Libyan colonels in two days and faced threats of immediate cutbacks. A final objection was raised by Occidental that the majors might invoke the dimes option in a discriminatory manner, giving oil to some of the independents and dimes to others.
Under time pressure and the stress of constant meetings with the majors and the independents at times caucusing separately the dimes clause took final shape. The majors agreed to state that it was their "present intention" to supply Persian Gulf back-up oil; and to satisfy Occidental, they included a provision that if a party elected the cash option, it must provide dimes proportionately to all independents to whom it was obligated to supply Persian Gulf crude.
Agreement was finally reached. On January 15, the LPA was signed by fifteen oil companies, including plaintiffs and defendants, in the State Department in Washington. The agreement provided that it would not take effect until advice had been received from the State Department that it supported the agreement and from the Justice Department that it had "no present intention of instituting any proceeding under the antitrust laws with respect to the making or performance of this agreement." Such advice was subsequently received. On January 16, the Message to OPEC was published and a copy was delivered to the Libyans. On the same day, Schuler, who had left for Libya before the LPA was signed, advised Libyan officials that Hunt would not accept their demands and requested that joint negotiations with other Libyan producers be undertaken.
In sum, the sharing agreement was conceived of as a mutual self-help pact;
the parties agreed to act as a united front in dealing with the Libyan government, and any loss of crude oil production suffered by a company for resisting government demands would be shared by all. The LPA sought to end the Libyan strategy of singling out a vulnerable company, exacting concessions from it and forcing those new terms on other companies terms which might become the predicate for further demands by Persian Gulf countries. Viewed optimistically, the agreement was a means to foster collective resistance to Libyan threats and demands. Viewed pessimistically, the agreement was a way to "share in the misery"
of operating an oil company in Libya.
The LPA Administrative Machinery
Following the execution of the LPA, the signatories established a London Policy Group ("LPG") and a New York Group ("NYG"). Each signatory had representatives on both groups. The LPG's function was to coordinate implementation of the LPA and the Message to OPEC. The NYG was to serve as a communications link between the LPG and American oil companies and to provide technical services and information to the London organization. Also established was the Libyan Emergency Supply Subcommittee ("LESSCOM"), a subcommittee of the NYG. Its purpose was to develop procedures for supplying crude oil or cash in lieu thereof under the LPA in the event that the sharing provisions of the agreement were triggered. LESSCOM included a representative from each signatory to the LPA, and each signatory received copies of the minutes of LESSCOM meetings.
In April 1971, the companies achieved some sense of stability when the Libyan government entered into separate five-year agreements with each company concerning crude oil production. That stability was short-lived. On September 22, 1971, the OPEC nations passed Resolutions XXV.139 and 140 concerning, respectively, "participation" (I. e., government acquisition of an equity interest in an oil concession) and "currency parity."
The Resolutions required OPEC members to undertake negotiations with the oil companies on these issues.
The signatories to the LPA met in October 1971 to consider the Resolutions. They determined that coordination of strategies and positions on these issues was a necessary part of a united front. Accordingly, they entered into a Memorandum of Confirmation that the LPA encompassed the subjects of participation and parity and a Memorandum of Intent, which declared the parties' intention to consider collectively responses to the new Resolutions.
BP Is Nationalized and LESSCOM Is Activated
On December 7, 1971, the Libyans, in an act of political reprisal against the British,
enacted legislation nationalizing BP's undivided one-half interest in the Sarir field. The action triggered the sharing agreement for the first time and thrust the Libyans and Hunt, who retained its half-interest, into partnership in operation of the field.
On December 16, 1971, the parties to the LPA executed a Further Memorandum of Confirmation, confirming that total or partial nationalization of a concession by Libya, including the nationalization of BP, and any demand or action related to such nationalization were within the purview of the LPA. Thus BP became entitled to Libyan crude oil from the other signatories, and the independents who transferred Libyan crude to BP became entitled to Persian Gulf back-up crude from the majors.
LESSCOM was activated and by January 1972 had established procedures for implementing the sharing provisions of the LPA. It devised form cables to be used by parties for nominating
crude oil, for confirming nominations and for sailing arrangements; LESSCOM was to receive a copy of each cable. LESSCOM also requested periodic information upon which it could calculate entitlements and obligations to Libyan and Persian Gulf crude under the LPA.
Such information was provided to LESSCOM at least once a quarter and included actual figures for the prior quarter and expected production for the next quarter.
Hunt, pursuant to the LPA, supplied Libyan crude to BP and began accruing entitlements to Persian Gulf back-up crude early in 1972. Hunt submitted its first nomination for back-up crude on July 11, 1972.
Hunt's partnership with Libya thrust upon it by the nationalization of BP led to immediate tensions between Hunt and the Libyan operating company, Arabian Gulf Exporting Company ("AGECO"). AGECO demanded that Hunt supply personnel to help operate the Sarir field and that Hunt help market the Libyan share of the oil. These demands were backed up by the usual threats of nationalization or shut-in. Hunt supplied the personnel but refused to market what had been BP's share of the Sarir crude.
Hunt's refusal became a constant source of friction between it and the Libyans. In an effort to enlist Hunt's aid, the Libyans adopted a carrot-and-stick approach, offering "sweeteners" such as increases in production levels if Hunt would market the oil, and threatening nationalization or shut-in if it would not.
Hunt's persistent refusals to market the BP oil led the Libyans to expel Hunt personnel from the Sarir field in early 1972. In April and May, the Libyan government substantially cut back Hunt liftings. The cutback entitled Hunt for the first time to receive Libyan oil under the sharing agreement.
The Deteriorating Oil Supply Situation
The Libyan situation and the operation of the LPA were only a part of the total picture of oil politics and economics in the Middle East in 1972. The majors were also met with demands and restrictions from the Persian Gulf countries. These actions were relevant to the Libyan situation because they affected the availability of Persian Gulf crude oil which served as back-up crude under the LPA. In 1972, actions by Persian Gulf nations created unanticipated and unprecedented supply shortages.
In April 1972, Kuwait suddenly imposed production restrictions on the Kuwait Oil Company, owned equally by Gulf and BP. The restrictions had a severe impact on Gulf, which found itself crude-short
for the first time in its history. Gulf traditionally had been a major supplier of crude on the world market; after the restriction, Gulf was forced to enter the market to purchase crude oil to meet its system and third-party requirements.
A second shock to the international oil world occurred in June 1972 when the Iraqi government nationalized the Iraq Petroleum Company ("IPC")
which produced the Eastern Mediterranean oil fields in Iraq. That action had a substantial impact on the supply situations of Shell and Mobil, both of whom had historically been crude-short. Shell's supply system further suffered from the Kuwait restrictions on Gulf because Shell had a long-term purchase contract with Gulf for Kuwait crude. By August 1972, Shell was in an acute deficit supply position, and the deteriorating supply situation led Mobil to cut back sales to third parties. Given these circumstances, the supply requirements of the LPA became increasingly burdensome. This situation highlighted a number of problems that had surfaced in the administration of the sharing agreement.
The drafting of the LPA in a crisis situation produced a document that was clear in purpose but difficult in implementation. Accompanying increased obligations to provide Persian Gulf back-up crude in a time of restricted supply were a plethora of operational problems that led to disagreements over the implementation of the sharing agreement.
An early problem arose when the independents were slow in lifting Persian Gulf crude made available by the majors, thereby creating substantial backlogs of accumulated entitlements.
In the summer of 1972, in an effort to resolve the problem, a proposal was advanced for a "statute of limitations," which in substance provided for (1) forfeiture of crude oil entitlements not lifted within a certain number of months and (2) a spreading out of the accumulated entitlements over eighteen months. All parties except Hunt were agreeable to the forfeiture provision. Since unanimity was required for such decisions, the proposal was not put into effect.
The LPA's method of calculating crude entitlements created another source of contention, termed the "barrel-for-barrel" problem.
Under paragraph 3 of the LPA, an independent's Persian Gulf crude entitlements were calculated based on its Libyan production level in the month preceding the first cutback that triggered the LPA. Thus the base period was November 1971, the month prior to BP's nationalization. Essentially, an independent was entitled to Persian Gulf back-up crude to the extent its Libyan crude availability after cutbacks and sharing was less than its Libyan crude production in the base period.
Thus if a Libyan oil field's production level dropped after November 1971, due, for example, to a natural decline in productability, a party could accrue entitlements for Persian Gulf back-up crude in excess of the amount of Libyan oil it actually lost due to government cutbacks or sharing. Some majors believed that this went beyond the "sharing of losses" originally contemplated by the LPA. The "barrel-for-barrel" proposal attempted to limit Persian Gulf crude entitlements to the actual amount of net Libyan crude of which each non-Persian Gulf producer was deprived due to Libyan cutbacks or sharing under the agreement. In this instance, Continental, a major beneficiary of the LPA-mandated calculations, refused to agree to the proposal, and it too failed of implementation.
A question was also raised as to whether certain kinds of cutbacks qualified parties for crude oil under the agreement. Specifically, Gulf refused to recognize a "conservation" cutback imposed by the Libyans on Occidental in June 1972. Gulf maintained that only cutbacks resulting from government action taken in response to an oil company's refusal to accede to demands were covered under the LPA. Other problems centered about the pre-existing customer clause discussed in detail hereafter.
After promulgation in September 1971 of OPEC Resolution XXV.139 concerning "participation," the major oil companies were involved in negotiations with the Persian Gulf governments for approximately a year. During this period the Libyan government, aware of the negotiations, made no participation demands on any of the Libyan companies but adopted a policy of watchful waiting; there were indications that it would insist upon more favorable terms than those reached with the Persian Gulf nations. On September 30, 1972, as negotiations with Kuwait were about to be concluded, the Italian state oil company, AGIP, signed a participation agreement with the Libyan government which transferred a 50% Interest in the concession to Libya. AGIP was compensated at the net book value
of its hardware (pipelines, pumps, buildings, equipment and improvements) used in production of the field and received no payment for the oil in the ground. It also accepted a "buy-back" provision which gave Libya the right to "put" oil to it that the Libyans could not market. These terms were significantly more favorable to Libya than the terms then being negotiated with the Persian Gulf nations, for the latter provided for immediate 20% Participation rising to 51% Participation over a number of years and compensation at "updated book value," an amount greater than net book value.
On October 4, four days after the signing of the AGIP agreement, the Libyan government demanded that Hunt accept a participation deal on AGIP-terms as well as pay Libya half of the proceeds from oil Hunt had exported since BP's nationalization. Hunt was given until October 18 to respond. The new demands confronted Hunt and the other signatories to the LPA with still another critical situation; they also served to highlight the unresolved problems, already discussed, that had developed during the course of implementing various provisions of the LPA. The ominous situation galvanized the parties into action.
The latest demands on Hunt were a major subject of discussion at a NYG meeting on October 6, 1972. A week later the Libyan Operators Group ("LOG") was established to coordinate and develop industry responses to the new Libyan participation demands. The LOG was comprised of representatives from all the companies operating in Libya and Gulf (which had no Libyan production). Also established was a Steering Committee of the LOG, with representatives from four majors (Shell, Mobil, Texaco and Exxon) and four independents (Continental, Marathon, Occidental and Hunt).
The mandate of the Steering Committee was to develop strategies and to direct actual negotiations with the Libyans. Laurie Folmar, a senior vice president at Texaco, was elected Chairman of both the LOG and the Steering Committee. With particular reference to Hunt's upcoming October 18 meeting with the Libyans, the Steering Committee developed specific guidelines based on the strategy that Hunt stall the negotiations until the Persian Gulf participation terms assumedly more favorable than the AGIP-terms were consummated and publicized.
On October 18, Hunt representatives, as previously directed, met with Libyan officials to discuss participation. The Libyans insisted on the three principles agreed to by AGIP: 50% Participation, compensation at net book value, and a "put" right. They also persisted in their demand that Hunt market BP's former share of the Sarir field oil as well as pay to Libya half of the proceeds of Hunt's sales of Sarir crude since the BP nationalization. The Hunt representatives stalled, claiming that in order to ensure the competitiveness of Libyan oil they should wait until the Persian Gulf negotiations were completed.
Hunt officials met with the Libyans again on November 1, 2 and 4, at which the Libyans, to the surprise of Schuler, indicated a willingness to negotiate their demands. To make the three AGIP principles more palatable, they offered various "sweeteners," such as increased production in the field and relinquishment of the demands that Hunt yield half its sales proceeds and market BP's oil. Hunt was requested to return on November 23 to resume negotiations.
Hunt's Efforts to Improve the LPA
Following these meetings, Hunt top personnel the Hunts, Guinn, John Goodson (chief financial advisor), Schuler and Rooney gathered in Dallas to discuss the Libyan situation. In deciding how to respond to the Libyan demands, they compared the AGIP-terms plus the "sweeteners" with their prospects under the sharing agreement. In weighing these alternatives, Hunt officials assessed the various operational problems that had arisen under the LPA. Hunt was particularly concerned that in the face of a tightening crude supply some of the majors, particularly Shell and Gulf, would invoke the cash option, paying ten cents in lieu of each barrel of Persian Gulf back-up crude they were obligated to supply. These and other considerations led to the so-called "Four Points" minimum modifications Hunt would insist upon in the LPA before rejecting the Libyan participation demands. These were as follows:
1. . . . a restatement from the majors that it is their intention to provide PG (Persian Gulf) crude rather than 10 /bbl.
2. . . . assurance that our customers will take our PG crude or that we can sell that PG crude to other than pre-existing customers.
3. . . . extension of the "safety net" (LPA) time period by 11 months during which no one collected under the "safety net" (I. e., the period from the signing of the LPA to BP's nationalization).
4. . . . if the other companies are able to negotiate a satisfactory deal, the other companies undertake not to sign the deal with the Libyans unless we are offered the opportunity to obtain similar terms.
Nelson Bunker Hunt and other Hunt officials urged Folmar to lobby with some of the majors in support of the Four Points. Thereafter the senior executives of the Persian Gulf producers met on November 10 to discuss the proposals and to consider recommendations to be made to their chief executives who were already scheduled to meet on November 14 in Chicago. Also discussed at this meeting was the prospect of upsetting the Persian Gulf negotiations in the event Libya should obtain more favorable participation terms from Hunt. Differing positions were expressed on Hunt's proposals. Shell stated that it had decided to exercise the dimes option and would begin supplying cash instead of crude as of January 1, 1973. Folmar urged upon those in attendance support of an extension of the agreement in order to maintain a united negotiating front. After the meeting Folmar informed Nelson Bunker Hunt of the inconclusive discussion.
The November 14 meeting of the chief executives, originally called to discuss tactics to be adopted by the members of the Iranian Oil Consortium (then in negotiations with Iran), also considered at length Hunt's Four Points. The Persian Gulf producers, except Gulf, generally favored Hunt's request for a one-year extension, but could not agree on Hunt's three other points. Gulf agreed to go along with the extension on the following day.
The impending Libyan negotiations and Hunt's Four Points continued to occupy the LOG and the Steering Committee. At a November 16 meeting the Steering Committee developed Terms of Reference to guide the Hunt representatives in the upcoming November 23 Libyan session; these were adopted at a LOG meeting on November 17. The Terms of Reference were written limitations on the authority of negotiators to make proposals and were applicable to all companies negotiating with the Libyans. As drafted, they were compatible with the principles established in the Persian Gulf participation negotiations. Hunt agreed to abide by the Terms of Reference, subject to an extension of the LPA and to Hunt's "vital interests" rights under the LPA.
Also at the meetings of November 16 and 17, Folmar informed the independents of the fact and substance of the majors' meetings on November 10 and 14 and of their approval of the one-year extension. He further reported that no agreement had been reached with respect to the majors' intention to provide oil and not dimes or with respect to Hunt's other proposals. When Occidental and Continental indicated that they were not in favor of an extension of the sharing agreement and there was some dissension as to other Hunt Points, Folmar asked the independents to caucus in order to arrive at a common position which he could present to the Persian Gulf producers. After the caucus, the independents, except for Occidental, announced support for the one-year extension, subject to a satisfactory resolution of the dimes-versus-oil problem.
A full LOG meeting for the chief executives was scheduled for the afternoon of November 20 to consider these matters. Before this meeting the Persian Gulf producers met separately to consider the independents' newly formulated position. Folmar brought the principals up to date on the November 16 and 17 meetings. He stressed the importance Hunt attached to a continued supply of oil and not dimes; some of the majors would not give assurances that they would provide oil in the future. Hunt was aware of this meeting.
At the full LOG meeting that afternoon, the majors and independents were represented by senior executive officers. Schuler requested that the majors state their intentions with respect to Hunt's First Point (that they supply oil and not dimes) for the remainder of the agreement. While the witnesses who testified on this subject are not in accord as to precisely what was said, the Court finds that in substance the following responses were given:
BP : Not sure what its position would be in 1973, but probably would be paying cash in 1974.
Exxon : Would supply oil if most of the other companies did so.
Gulf : Would provide dimes unless the Kuwait restriction were lifted.
Mobil : Had not yet made up its mind whether it would supply oil or dimes.
Shell : Would honor its obligation and pay dimes in 1973.
Socal : Had been supplying oil and its intention was to continue to supply oil, but reserved its rights under the agreement.
Texaco : Intended to continue to supply oil as long as available, but recognized the right to provide dimes if it could not provide oil.
Following the poll, the majors, after announcing their willingness to extend the LPA for another year (Hunt's Third Point), requested the independents, now aware of the majors' intentions as expressed during the poll, to decide whether they would accept the extension. The independents caucused among themselves, the majors having left the room. During the caucus, Hunt sought to gain further assurances from the majors concerning the provision of oil instead of dimes. Rawleigh Warner, Chairman of Mobil, responded emphatically that Mobil had not yet made up its mind and could give no assurances. Hunt countered with a request for an increase in the dimes clause to twenty-five cents. When the majors, after a caucus of their own, agreed to increase the cash option to fifteen cents, the independents, except for Occidental, agreed to the extension. Occidental concurred the following day.
On November 21, 1972, the parties executed a Supplement to the LPA, which included the agreed-to extension, an increase to fifteen cents in the option clause and changes relating to some of the operational problems. The LPA in other respects remained substantially the same. With the signing of the Supplement, Hunt was prepared to resist the Libyan demands in the upcoming negotiations.
The Participation Negotiations
On November 23, 1972, Hunt representatives Guinn, Al Reed (Manager of Hunt's Libyan operations) and Rooney met with Petroleum Minister Mabrouk in Libya to discuss the government's demands for an AGIP-type participation arrangement. The Hunt personnel held firm to their rejection of the demands in the face of threats of nationalization; Mabrouk then indicated that the principles were negotiable and requested Hunt to make counterproposals. It was agreed that Hunt would return on December 6 with "a proposition."
When Guinn and Goodson returned on December 6, they discussed a proposal to sell Hunt's entire interest in the Sarir concession for 236,000 barrels of oil per day for two years, free of any cost of operation, royalties and taxes. The Libyans refused to consider the matter and ended the meeting abruptly. Since the proposal, referred to by defendants as the "secret offer," is the basis of defendants' counterclaims, other events related thereto are set forth in considering the counterclaims.
In mid-December 1972, the Libyans stopped all Hunt liftings of Sarir oil; liftings were restored in January 1973, but at an amount below Hunt's previous take. On December 30, 1972, Hunt filed a formal arbitration demand pursuant to a provision in the concession agreement. The arbitration was never conducted.
In January 1973, the Libyans turned their attention to the Oasis independents Continental, Marathon and Amerada Hess. Four months of extensive negotiations, in which the Libyans insisted upon AGIP-type terms, yielded no result. On April 30, 1973, the Libyans adopted a new negotiating position. Major Jallud announced to the Oasis companies Five Points: (1) 100% Participation, (2) compensation at net book value, (3) a buy-back obligation, (4) company investment in exploration, and (5) technical assistance. On the same day the Libyans again directed their attention to Hunt, requesting Hunt's appearance in Libya to negotiate the proposal presented by Goodson and Guinn on December 6. On May 7, Hunt declined the invitation, asserting that negotiations could prejudice the arbitration proceedings that Hunt had instituted.
On May 25, the Libyans ended all Hunt liftings. Hunt responded on May 30 by withholding tax and royalty payments. On June 10, the Libyans nationalized the Hunt interest in the Sarir field. In August 1973, Marathon, Continental and Amerada Hess signed participation agreements with the Libyan government. On August 11, 1973, Occidental was 51% Nationalized; it immediately acquiesced in the action. On September 1, the Libyans issued a decree nationalizing 51% Of the interests in concessions held by Exxon, Mobil, Shell, Socal, Texaco, ARCO, Grace and Gelsenberg.
New Problems in the Sharing Agreement
These sudden changes in the positions of the oil companies significantly altered calculations of entitlements and obligations under the sharing agreement. Questions were raised as to whether the Oasis independents and Occidental had forfeited their entitlements by signing participation agreements with the Libyans. Mobil, Socal and Texaco asserted that they had. Libyan actions against the majors created further problems, apparently casting some of the majors in the role of entitlees to Libyan oil as well as obligors of Persian Gulf back-up oil under the sharing agreement. The situation was one of contention and counter-contention as to the obligations and rights of the parties. From the perspective of hindsight, it was indeed "confusion worse confounded."
In an effort to bring order out of chaos, a meeting of the NYG was convened on October 17, 1973, at which it was decided to instruct LESSCOM to calculate "Four Cases"
based upon alternative assumptions of entitlement and forfeiture of entitlement. The Four Cases were issued on November 20, 1973. It was understood that the cases were only a sample of the many possible permutations of entitlements and obligations. Because of the possibility that companies would want to adopt alternative variations, it was decided that LESSCOM would make available to each company all its raw data "so that each company can scramble its own eggs."
At the same time, supply problems worsened with the outbreak of the Yom Kippur War in October 1973. Libya and other OPEC nations imposed destination restrictions on oil companies and embargoes on oil deliveries to western nations, including the United States. Also in October, Iraqi nationalizations reduced Mobil's Persian Gulf crude supply by over 2 million barrels per month and also affected Shell's supply. Gulf liftings in Kuwait were cut in half in January 1974 and remained at the lower level throughout the year. The production cutbacks, embargoes and destination restrictions resulted in a curtailment of available world supply of oil and had a substantial impact upon the companies, forcing one to go on an allocation system in order to meet supply commitments and another to rely upon force majeure provisions in its contracts.
By 1974 the machinery of the LPA was in disarray. On January 9, 1974, McCloy, as counsel to all parties to the LPA, suggested that the industry's interests might best be served if conflicting claims could be resolved and the agreement liquidated by mutual consent. However, agreement was not reached and the liquidation did not occur.
Libyan actions continued to plague the companies. Effective February 11, 1974, the Libyan government nationalized the remaining 49% Of Socal's and Texaco's interests in Libyan concessions. And on March 30, 1974, Shell's remaining interest in the Oasis concession was nationalized.
According to LESSCOM figures released in 1974, Hunt was a major net entitlee to Persian Gulf and Libyan crude oil. Throughout the first half of 1974, Hunt attempted to obtain Persian Gulf crude from the defendants. Many of Hunt's nominations were rejected by the majors for reasons discussed hereafter under plaintiffs' Second Claim. After July 11, 1974, Hunt stopped nominating crude, although Mobil, Texaco and Exxon indicated that they were prepared to supply crude. In 1974 Hunt made four sales of Persian Gulf back-up crude to Veba-Chemie and Derby Oil Company, who plaintiffs concede were not pre-existing customers.
On April 29, 1974, Hunt filed suit in the District Court of the Eastern District of Virginia. Mobil was named as the defendant; Texaco, Socal, Shell, Gulf, Occidental, Continental, Hess, Grace, ARCO, Marathon, Murphy and Gelsenberg were named as co-conspirators. The complaint alleged breaches of contract and violation of the antitrust laws in the provision of oil under the LPA. Neither Exxon nor BP was named as a defendant or a co-conspirator. The plaintiffs entered a ...