The Ambassador in Mexico (Sheffield) to the Secretary of State

No. 3954

Sir: Referring to my despatch No. 3924 of April 6 last,9 I have the honor to inform the Department, that the continued insistence of the Mexican Government upon at least formal compliance by foreign interests with the Petroleum Law and Regulations,10 including their retro-active and confiscatory features, is apparently about to produce another and what may prove to be a decisive crisis for these interests.

It will be recalled that in January last the Mexican Government cancelled a number of drilling permits previously issued to certain foreign oil companies, and that, since then, it has consistently declined to grant such permits to these companies, all on the ground that the companies in question had failed to comply with the petroleum law and regulations in respect of their pre-constitutionally acquired [Page 182]leaseholds or fee title lands, or both. Until recently the companies affected have carried on no drilling for which the permits cancelled or refused were required.

It is thought by the companies that a suspension of drilling operations can not continue if the industry is to exist in this country. Hence the companies are faced with one of three alternatives: (1) to satisfy the pre-requisite of complying with the law and regulations including their retroactive and confiscatory features, in order to obtain drilling permits; (2) to drill wells without such permits; or (3) to shut down production entirely.

As to the first of these alternatives, the principal companies involved are bound by a mutual agreement, of which the Department is informed, not to solicit or (as the British El Aguila, the Dutch Corona, and the American Transcontinental Companies did) if they have solicited, not to accept, the so-called confirmatory concessions; or (in the case of the Aguila Company) not to operate under such concessions if issued until due notice shall have been given the other companies. With the exceptions indicated, I am informed that the companies do not propose to seek drilling permits upon the condition precedent laid down by the Mexican Government. It should be noted, however, that the Corona Company last week received the Government’s confirmatory concessions for which the Company had applied about the middle of 1926. The Aguila Company, which had also applied for such concessions last year, expects in the very near future to be presented with confirmatory concession. These concessions, parenthetically, are stated to be of the “unilateral” type referred to in my despatch No. 3405, of December 21, 1926.11 They are said not to require the counter-signature of the concessionaire since the Mexican Government contends—and Mexican counsel for the Aguila and Corona Companies so advised—that the fact of having made application for confirmatory concessions implied recognition by these companies of the petroleum law and regulations in toto. The American owned Transcontinental Company formally withdrew its applications and considers them null and of no effect, a position which is not concurred in by the Mexican Government.

Meanwhile, as above indicated, drilling permits have been cancelled or refused. The refusal of the companies to accept or to apply for confirmatory concessions on pre-constitutional rights is being made the pretext for denial of drilling permits. The drilling permit is in the nature of a police regulation pure and simple. Hence the Mexican Government in effect is saying to these companies: “Unless you recognize our right to convert your pre-constitutional leaseholds and fee titles into a Government concession granting you a beneficial use of the oil lands acquired by you before 1917, we will deny you the [Page 183]right to use these lands at all for the purpose for which you acquired them, and to that end we will decline to sanction the issuance of the permit contemplated by the police regulations affecting the industry.” In other words, a substantive right is to be nullified by means of the application of an adjective rule.

But, I am informed, if these foreign interests are to meet their contractual obligations for the delivery of petroleum and its products, they must continue to produce, and the indications are they will drill wells without permits on lands lawfully theirs by lease or purchase and acquired before 1917, until action is taken by the Mexican Government involving their right to invoke force majeure in derogation of their contracts. In fact some of the companies are now doing this. I learn that the Mexican Gulf Company is drilling without permits but under an amparo decree granted by a Federal District Court against the enforcement of the petroleum law and regulations. The Huasteca Company under a similar court decree is doing or will shortly do likewise. The Cortez Aguada Company, a subsidiary of the Atlantic Refining Company, is about to undertake drilling operations on pre-constitutional lands without a permit, though not under the doubtful aegis of an amparo.

I am informed that all the affected companies are now awaiting the decision of their New York executives as to whether they should not frankly adopt this policy as proper in law and equity. The second alternative above mentioned is thereby forced into the foreground.

As for the third alternative, namely the complete suspension of all operations, I am informed that for the first time in recent years such a course is a distinct possibility and is being seriously considered since the larger producing companies are stated to recognize their common interest in a basic settlement which will enable them to pursue their business without unjustifiable obstacles placed in their path by methods of indirection or arbitrary interference.

In these circumstances the Department may expect soon to be called upon to face an acute situation involving precisely the “concrete cases” of violation of international law through confiscation, which were ostensibly alluded to in the Mexican Government’s note of November 17, 1926,12 and which that Government then stated its disposition to “repair”. Such concrete cases, it may be remarked in passing, are already so numerous in other fields as to warrant grave doubts of the sincerity of the Mexican Government’s alleged disposition to grant reparation or, indeed, of its capacity to do so. It therefore remains for us to determine how numerous such cases must become, before the almost unique career of innovation in international practice thus far pursued by the Mexican Government shall be checked.

I have [etc.]

James R. Sheffield
  1. Not printed.
  2. For text of petroleum law, see Diario Oficial, Dec. 31, 1925. For text of the regulations, see ibid., Apr. 8, 1926.
  3. Not printed.
  4. Foreign Relations, 1926, vol. ii, p. 671.