Canceling the Oil Concession

Reform was the fiery charger that carried Architect Fernando Belaunde Terry into the presidency of Peru last June, and now he cannot dismount. Belaunde promised to redistribute land, conjured up visions of public housing to replace the slums of Lima, talked of a vast road system to open up the rich lowlands beyond the Andes. But the most emotional pledge of all--and one echoed by all his opponents--was a promise to do something drastic about International Petroleum Co., the Standard Oil of New Jersey affiliate that owns one of Peru's richest oilfields: the La Brea y Farinas basin, 600 miles northwest of Lima on the Pacific Coast.

Last week, at the end of the 90 days Belaunde had promised himself to renegotiate the oil contract, Peru's Congress unanimously--right, left and center--shouted through a law canceling I.P.C.'s concession. "This," cried one conservative Congressman, "is an act of national liberation." Still in Congress is a second bill setting the terms for I.P.C. to remain in Peru. Along with other taxes, the bill calls for a 60% income tax without a depletion allowance. Although no specific sum is mentioned in the bill, the company may also have to pay a $50 million settlement. Altogether, claims the company, the government's maneuver could force I.P.C. to fork over 102% of its profits each year. The alternative: transferal of the concession to the government for a "fair" price after unpaid "debts" are deducted.

Spreading Asphalt. I.P.C. is not the original villain in the piece. The U.S. company simply controls a piece of land under terms that have infuriated Peruvians for generations. In the early 1800s, the La Brea area was known only for its tar pits, which were leased by the government to private contractors for limited periods. In 1826 the tar pits, with 100 surrounding acres, were sold to private investors--and there the trouble began.

Over the years, the tar property became an oil property, and the original 100 acres grew to cover 416,140 acres of the La Brea basin. By World War I, the area was a major oil producer. A British company, the London & Pacific Petroleum Co., was now the owner, pumping millions of dollars worth of oil, but only paying taxes on 100 acres of land.

Peruvians demanded a new deal. As the argument raged on, the Peruvians finally agreed to put the matter to international arbitration before a Swiss judge. But the case never got to court. In 1922, after considerable pressure from Britain, the Peruvian government agreed that London & Pacific actually owned both surface and subsoil rights to the entire 416,140 acres; in return Peru got a company promise to pay at least nominal taxes. Crying duress, Peru's outraged Congress refused to ratify the agreement.

Enter I.P.C. At that point, London & Pacific sold out to I.P.C. The U.S. company did much to make itself welcome. The company oil town of Talara (pop. 35,000) on the Pacific Coast became a model of its kind, with neat houses, abundantly stocked supermarkets, modern schools, a fully equipped hospital. I.P.C. paid some of the highest wages in Peru--about 40% higher than the Lima average--and provided fat fringe and pension benefits for its workers. Employee turnover was almost nonexistent; the average blue-collar worker at Talara has been with the company 20 years. Under government prodding, I.P.C. held gasoline prices in Peru to a cut-rate 14-c- per gal.

Nevertheless, Peruvians of every political stripe clamored for action against the I.P.C. contract as a living insult to their national dignity. In last June's national elections every major--and minor--party denounced the oil company. The army had already called the agreement "injurious to national sovereignty." Major newspapers were against I.P.C.--even La Prensa, Lima's prestigious daily owned by former Premier Pedro Beltran, who is probably the best friend U.S. businessmen ever had in Peru. The end of I.P.C.'s privileged position, said La Prensa, was "an aspiration of all Peruvians."

No Agreement. Once in office, Belaunde opened negotiations for a new contract with I.P.C. President Milo M. Brisco. But the talks quickly turned sour. The company argued that Belaunde's demand for $50 million plus a future 60% income tax amounted to "economic confiscation," took ads in Lima papers to show that I.P.C. would be losing money. I.P.C. wanted a 50% income tax; it agreed to pay the $50 million but insisted that these payments be considered deductible expenses against future taxes. All of this, the Peruvians refused.

As Belaunde prepared to take the matter to Congress, the U.S. State Department expressed hope of an amicable settlement "before the Peruvian Congress passes a law that the government of the U.S. does not consider satisfactory." But in the present Peruvian mood, chances are that Peru's Congress, having already revoked the I.P.C. concession, will now pass the second bill, putting it squarely up to I.P.C. to come to terms or get out.

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