(3) Country Eligibility-Downstream energy investments cannot be insured in upper income countries, i.e., those with a per capita income exceeding $1,000 in 1974 dollars. However, downstream investments can be insured in OPEC countries. The reverse is true for primary energy investments, that is, we can insure primary energy investments in upper income countries, but cannot insure them in OPEC countries.

There will be projects that will be difficult to classify, as primary or downstream investments. For instance, how should a pipeline or LNG [liquified natural gas] liquification project be classified? We would probably consider an LNG project to be a primary project since it would directly contribute to the production of energy from a specific area. A pipeline built to service a specific oil field would also be a primary project, while a pipeline built for the general transportation of petroleum, for example, across the isthmus of Panama. would be considered a downstream project.

Let us now examine the mechanics of the new insurance contract for primary energy investments. Unlike our usual insurance contract. in primary energy projects we do not insure the book value of the insured's interest in the venture. Neither do we insure costs incurred by the insured, or more particularly, the net unrecovered costs of the insured in carrying out the venture.

Net unrecovered costs are computed by adding

(1) The value of tangible property as to which the insured bears the risk of loss,

(2) Direct costs other than those spent for covered tangible property, and

(3) A 6% allowance for U.S. overhead and subtracting from that amount the sum of (1) the value of recoveries (i.e., cost oil received under a production sharing contract or a portion of receipts attributable for such purposes under the terms of the OPIC insurance contract) and (2) any Return of Capital.

The underlying concept is to provide insurance that will enable an insured investor to at least recover its costs. For a productionsharing contract with a cost oil provision, OPIC will probably use that contract's cost oil formula to determine the insured's recoveries. For insuring investments under agreements that do not include a cost oil concept, such as traditional concession agreements, we essentially create a cost oil concept by providing that the original costs we have insured are reduced by the value of 70% of the insured's net receipts, i.e., 70% of receipts after payment of royalties, taxes and any overrides.

Intangible costs incurred by the insured are covered as well as the cost for tangible assets. However, intangible exploration costs are treated in different ways depending on whether a claim arises before or after the date of initial discovery of commercial quantities of petroleum. Prior to such discovery, intangible costs are covered only if they are not specifically related to the drilling of a dry hole. After such discovery, all intangible drilling costs, including those related to dry holes, are included in covered costs, subject to the

limitation that the covered costs may not exceed the value of the insured's interest in the proven reserves of oil and/or gas.

Let me give an example to illustrate this. Let us take an insured who has coverage of $25 million, has spent $500,000 in seismic work, $20 million drilling a series of dry holes, $1 million in drilling a well which is still in the process of being drilled, and has $3 million worth of drilling rig and supplies on hand. If that insured's investment is expropriated prior to discovery of a commercial quantity of petroleum, OPIC would be liable for 90% of $4.5 million, which is the amount of all of the costs except for the $20 million spent in drilling dry holes. We have excluded liability for dry holes costs on the theory that prior to discovery of a commercially exploitable field such costs represent commercial losses, not political losses. If the investment was expropriated after the discovery of a $30 million reservoir, in which the insured has a 50% interest, OPIC's liability would be $16.2 million. Since the intangible costs exceed the insured's $15 million share of the reservoir, only $15 million of intangible costs will be recognized. OPIC's $16.2 million liability is computed as 90% of $18 million, which is the sum of the insured's share of the value of the reservoir plus the $3 million value of the insured's tangible property, i.e., the drilling rig and supplies.

OPIC's insurance for petroleum exploration, development and production is offered as a package of 3 political risk coverages; inconvertibility of currency, expropriation, and war/resolution/ insurrection. Unlike our other insurance programs, we have not offered primary energy project investors the option of covering just one or two of these political risks. Our present thinking is to offer a package of three coverages. We might decide to do otherwise if asked and if we find an overriding reason to do so. . . .

OPIC doc.

On February 18, 1977, the U.S. Board of Governors of the Federal Reserve System and the Federal Open Market Committee released the record of policy actions taken by the Federal Open Market Committee at its meeting on January 17-18, 1977, when the Committee approved on behalf of the United States an agreement reached in Basle, Switzerland, for a medium term standby credit facility relating to official sterling balances for the Bank of England. An excerpt from the record released by the Federal Open Market Committee follows:

For some time prior to this meeting [January 17-18, 1977] discussions had been under way among representatives of central banks of the Group of Ten countries and Switzerland in regard to a medium term standby credit facility relating to official sterling balances for the Bank of England. Concurrently, officials of the U.S. Treasury Department and the Federal Reserve System had been considering arrangements for U.S. participation in such a facility. As announced on January 10, an agreement in principle for a $3 billion facility was reached at a meeting in Basle, Switzerland, by representatives of the Bank for International Settlements (BIS), the Bank of England, and a number of other central banks, including the Federal Reserve. The U.S. share was $1 billion, to be provided through the Federal Reserve System and the U.S. Treasury's Exchange Stabilization Fund (ESF). At this meeting the Committee ratified the agreement reached in Basle and arrangements made with the Treasury Department for Federal Reserve-Treasury participation.

The objective of the Basle agreement was to help the United Kingdom achieve an orderly reduction in the reserve currency role of sterling and thus to avoid the kind of disturbances to the international monetary system that had occurred at times in the past as a result of fluctuations in official sterling balances. In general, the agreement provided for the extension of a $3 billion facility to the Bank of England by the BIS, with backing, as necessary, by the other participants, for a period of 2 years-and for a third year if mutually agreed upon by the participants. For its part, the United Kingdom agreed to reduce official sterling balances to working levels over the "drawdown" period. In exchange for official holdings of sterling, it would offer negotiable bonds denominated in currencies

other than sterling and having maturities of 5 to 10 years. The Bank of England would be entitled to draw on the credit facility to the extent necessary to finance reductions in official sterling balances other than those associated with sales of foreign currency bonds. Repayments would begin at the end of the "drawdown" period and would be completed within the succeeding 4 years.

It was understood that eligibility to draw on the standby credit facility would be conditional on continuing eligibility of the United Kingdom to draw on the $3.9 billion credit recently negotiated with the International Monetary Fund (IMF). The facility could also be suspended if the United Kingdom were not making reasonable efforts to achieve reductions in official sterling balances; the Managing Director of the IMF was being asked to assist in making a determination on this score.

With respect to U.S. participation, the Federal Reserve and the Treasury had agreed that if the United States were required to provide financing to the BIS in support of the standby facility, the funds would be provided initially by the Federal Reserve through its existing swap arrangement with the BIS, taking the form of a usual 3-month swap, subject to three renewals. Should such financing be required continuously for more than one year, however, it would subsequently be provided by the Treasury, acting through the Exchange Stabilization Fund. Řisk associated with such financing, whether provided by the Federal Reserve or the ESF, was to be borne equally by the two.

Federal Reserve Press Release, Feb. 18, 1977.

The Group of Ten includes Belgium, Canada, France, the Federal Republic of Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States. A Federal Reserve Press Release of Jan. 10, 1977, indicated that the participating countries in the Basle agreement were Belgium, Canada, the Federal Republic of Germany, Japan, the Netherlands, Sweden, Switzerland, and the United States.

On May 8, 1977, President Carter and the leaders of six other industrialized countries concluded an economic summit meeting in London and issued a Downing Street Summit Conference Declaration (London communique) and Appendix. Participating in the meeting were President Carter, Prime Minister Pierre Elliott Trudeau of Canada, President Valery Giscard d'Estaing of France, Chancellor Helmut Schmidt of the Federal Republic of Germany, Prime Minister Giulio Andreotti of Italy, Prime Minister Takeo Fukuda of Japan, and Prime Minister James Callaghan of the United Kingdom.

An excerpt from the Declaration, dealing with imbalances in international payments and the role of the International Monetary Fund, follows:

-We commit our governments to stated economic growth targets or to stabilization policies which, taken as a whole, should provide a basis for sustained non-inflationary growth, in our own countries

and worldwide and for reduction of imbalances in international payments.

-Improved financing facilities are needed. The International Monetary Fund must play a prominent role. We commit ourselves to seek additional resources for the IMF and support the linkage of its lending practices to the adoption of appropriate stabilization policies.

76 Dept. of State Bulletin 583 (1977).

An excerpt from the Appendix under the heading of Balance of Payments Financing follows:

For some years to come oil-importing nations, as a group, will be facing substantial payments deficits and importing capital from OPEC [Organization of Petroleum Exporting Countries] nations to finance them. The deficit for the current year could run as high as $45 billion. .

The International Monetary Fund must play a prominent role in balance of payments financing and adjustment. We therefore strongly endorse the recent agreement of the Interim Committee of the IMF to seek additional resources for that organization and to link IMF lending to the adoption of appropriate stabilization policies. These added resources will strengthen the ability of the IMF to encourage and assist member countries in adopting policies which will limit payments deficits and warrant their financing through the private markets. These resources should be used with the conditionality and flexibility required to encourage an appropriate pace of adjustment.

This IMF proposal should facilitate the maintenance of reasonable levels of economic activity and reduce the danger of resort to trade and payments restrictions. It demonstrates cooperation between oil-exporting nations, industrial nations in stronger financial positions, and the IMF. It will contribute materially to the health and progress of the world economy. In pursuit of this objec tive, we also reaffirm our intention to strive to increase monetary stability.

We agreed that the international monetary and financial system, in its new and agreed legal framework, should be strengthened by the early implementation of the increase in quotas. We will work towards an early agreement within the IMF on another increase in the quotas of that organization.

76 Dept. of State Bulletin 584-585 (1977).

International Monetary Reform

Conference on International Economic Cooperation (CIEC)

On June 16, 1977, Anthony M. Solomon, Under Secretary of the Treasury for Monetary Affairs, testified before the Subcommittee on Foreign Economic Policy of the Senate Committee on Foreign Relations to report on the results of the Conference on International Economic Cooperation (CIEC), concluded in Paris on June 3, 1977. On that date the participants from 27 countries adopted by consensus a ministerial communique dealing with issues in the fields of energy, raw materials, investment, development, and finance.

In his testimony concerning work of CIEC in the financial area. Under Secretary Solomon described the efforts by the participants