File No. 812.512/1894
The Secretary of State to the Ambassador in Mexico ( Fletcher)
895. Your mail despatch 815, March 1, and prior communications regarding petroleum decree of February 19, 1918. Department has given careful consideration to this decree and will set forth at length its attitude thereon so far as present circumstances permit. This decree provides for the imposition of certain taxes on the surface of oil lands as well as on the rents, royalties, and production derived from the exploitation thereof. Among the provisions for the collection of such taxes is one requiring that payments in kind shall be delivered to the Government at the storage stations of the operator. There are, moreover, indications in the decree, particularly in Articles 4, 13, and 14, of an intention to separate the ownership of the surface from that of the mineral deposits of the subsurface, and to allow the owners of the surface merely a preference in so far as concerns the right to work the deposits upon compliance with conditions specified. It is presumed, therefore, that the decree is issued in pursuance of Article 27 of the Constitution of May 1, 1917, which provides in paragraph 4 that:
In the Nation is vested direct ownership of all minerals or substances which in veins, layers, masses or beds constitute deposits whose nature is different from components of the land, such as solid mineral fuels; petroleum and all hydrocarbons—solid, liquid, or gaseous.
While the United States is not disposed to request for its citizens exemption from the payment of their ordinary and just share of the general burdens of taxation so long as the tax is uniform and not discriminatory in its operation, and can fairly be considered a tax and not a confiscation or unfair imposition; and while the United States is not inclined to interpose in behalf of its citizens in case of the expropriation of private property for sound reasons of public welfare and upon just compensation and by legal proceedings before tribunals allowing fair and equal opportunity to be heard and giving due consideration to American rights; nevertheless the United States can not acquiesce in any procedure ostensibly or nominally in the form of taxation or the exercise of eminent domain, but really resulting in confiscation of private property and arbitrary deprivation of vested rights. This is not, as you will understand, an assertion of any new principle of international law, but merely a reiteration of those recognized principles which I am convinced form the basis of international respect and good neighborhood. The seizure or spoliation of property at the mere will of the sovereign and without due legal process fairly and equitably administered, has always been regarded as a denial of justice and as affording a basis, internationally, of interposition. Certain features of the petroleum decree will be considered in the light of these views.
As much depends upon the operation of the decree in question as to whether the imposition of the taxes therein provided for shall amount virtually to confiscation of American-owned oil properties in Mexico, this Government is not in a position to state definitely that the operation of the decree will, in effect, amount to a confiscation of American interests; nevertheless it is deemed important that the Government of the United States should state the real apprehensions which it entertains as to the possible effect of this decree upon the vested rights of American citizens in oil properties in Mexico. The amount of taxes to be levied under this decree are in themselves a very great burden on the oil industry, and if they are not confiscatory in effect, as to which I reserve opinion, they at least indicate a trend in that direction. It is claimed by certain owners that the taxation borne by the oil fields of Mexico very greatly exceeds that imposed upon the industry anywhere else in the world. Moreover, it is quite possible under the decree and in the absence of storage facilities owned by the Mexican Government for taxes or royalties paid in kind and stored in the tanks of operators to monopolize such storage facilities to the point of practical confiscation thereof until emptied by order of the Mexican Government or by the forced sale of the stored petroleum to the operators at extravagant rates.
It is, however, to the principle involved in the apparent attempt at separation of surface and subsurface rights under this decree that I desire to direct special attention. It would appear that the decree in question is an effort to put into effect as to petroleum lands the clause of the Constitution quoted above, by severing at one stroke the ownership of the petroleum deposits from the ownership of the surface, notwithstanding that the Constitution provides that “private property shall not be expropriated except by reasons of public utility and by means of indemnification.” So far as I am aware, no provision has been made for just compensation for such arbitrary divestment [Page 707] of rights, nor for the establishment of any tribunal invested with the functions of determining justly and fairly what indemnification is due to American interests concerned. Moreover there appears not the slightest indication that the separation of mineral rights from surface rights is a matter of public utility upon which the right of expropriation depends, according to the terms of the Constitution itself.
In the absence of the establishment of any procedure looking to the prevention of spoliation of American citizens, and in the absence of any assurance, were such procedure established, that it would not uphold in defiance of international law and justice the arbitrary confiscations of Mexican authorities, it becomes the function of the Government of the United States most earnestly and respectfully to call the attention of the Mexican Government to the necessity which may arise to impel it to protect the property of its citizens in Mexico divested or injuriously affected under the petroleum decree.
The investments of American citizens in the oil properties in Mexico have been made in reliance upon the good faith and justice of the Mexican Government and Mexican laws. I cannot believe, therefore, that the enlightened Government of a neighboring Republic in time of peace and at a stage in its progress when the development of its resources so greatly depends on its maintaining good faith with investors and operators whom it has virtually invited to spend their wealth and energy within its borders, will disregard its clear and just obligations toward them.
I have set forth these views of the United States in respect to this matter for your general information and guidance. Since the actual effect of the operation of the decree is not now in all respects clearly apparent, and since the persons affected may have some recourse to test the legality, including constitutionality, of the decree (which of course they should exhaust), you are instructed to make such use of the communication in the protection of American citizens and their properties as the developing circumstances may cause you to deem prudent and necessary, even to laying it before President Carranza as the formal protest of the Government of the United States. Report action taken.