Certain American Oil Companies to the Secretary of State

Memorandum Concerning the Presidential Decree To Amend the Oil Law

The undersigned American oil companies operating in Mexico come to submit the following state of affairs to the consideration of the Honorable Secretary of State in connection with the above-mentioned proposed presidential decree.

If the decree becomes a law, the oil companies will be compelled to pay a royalty upon the oil produced, based on a sliding scale of 10% for the first thousand cubic meters, 12.5% on the next thousand cubic meters, and 15% upon all oil produced over 2,000 meters. This royalty will be collected upon oil produced under confirmatory concessions issued and to be issued under pre-existing laws, as well as upon ordinary concessions issued and to be issued. The oil industry in Mexico is already heavily burdened with taxation, and the additional load of these royalties will make the continuance of operations extremely problematical, especially as the industry is now operating under a price-fixing governmental system.

The decree would also authorize the government to force the development of areas held in reserve by private landowners under confirmatory concessions.

The presidential decree, if enacted, will not only impair valuable, vested property rights held by the undersigned American companies [Page 650] under pre-existing laws of Mexico and decisions of the Supreme Court of that country, but will do violence to the understanding entered into between Ambassador Morrow, on behalf of the United States, and President Plutarco Elias Calles, then President of Mexico, as well.

The legal aspect of the case is without difficulties, and it cannot be contended with any show of reason that the decree would not impair vested property rights of American citizens in Mexico.

The subsoil rights of American citizens in lands in the Republic of Mexico were the subject of diplomatic correspondence between our government and that of the Mexican republic over a number of years, which led to the Payne–Warren agreement,52 wherein President Obregon, acting through his representatives, recognized those property rights which were acquired prior to May 1st, 1917, the date upon which the present Constitution of Mexico was promulgated. The Payne–Warren agreement was based upon repeated decisions of the Supreme Court of Mexico, in The Texas Company case53 and others,54 upholding the subsoil rights of American citizens and others,—rights which were declared by the Court to be equal to other property rights and could freely pass by inheritance or conveyance. The Supreme Court held that Article 27 of the Mexican Constitution,55 which relates to public lands and subsoil rights therein, was not retroactive; and that the landowners who had performed a positive act, manifesting an intention to exploit the oil in the subsoil of the lands, prior to May 1, 1917, held vested subsoil rights under Mexican laws, and were entitled to the protection accorded by Article 14 of the Mexican Constitution. Article 14 declares that no law shall be given retroactive effect to the prejudice of anyone, and, in effect, that no one shall be deprived of his life, liberty, properties, possessions, or rights without due process.

Notwithstanding the agreement with the Obregon government, the Congress of Mexico enacted an oil law on December 29, 1925,56 which would have compelled those holding subsoil property rights acquired prior to May 1st, 1917, to surrender those rights and take in lieu thereof a concession under the oil law for a limited number of years, not to exceed fifty, and subject to the provisions of that law. The issue thus presented was finally adjusted by the intervention of our government, through Ambassador Morrow, who arrived at an understanding [Page 651] with President Calles, in which the principle of the Supreme Court in the Mexican Petroleum Company case was accepted. The decision of the Court in this case was to the effect that the Congress could not limit the landowner’s right in the subsoil to a term of years, nor impose the conditions of the oil law upon him if he had performed the “positive act” mentioned in The Texas Company case prior to May 1st, 1917.

Pursuant to the agreement entered into with Ambassador Morrow, President Calles obtained from the Congress of Mexico amendments to the oil law of December 29, 1925, by which subsoil rights of surface owners in combustible minerals, acquired prior to May 1st, 1917, through the performance of “positive acts”, were expressly recognized without limit as to time, and the recognition of these rights was to be made through confirmatory concessions issued without cost to the concessionary; and confirmatory concessions to the lessees of the surface owners were to be issued under the law for the full term provided in the leases and extensions thereof, this also without cost to the concessionarys.

Many confirmatory concessions have already been issued, but a considerable number of applications have not yet been acted upon. The vested rights acquired in conformity with pre-existing laws and the decisions of the Mexican courts are as valid and binding in the cases in which confirmatory concessions have not yet been issued as they are in those in which they have already been issued. To disregard these rights would not only do violence to the constitutional precepts already referred to, but would constitute a breach of faith upon the part of the Mexican government, which faith was pledged by President Calles in his understanding with Ambassador Morrow. And this goes to that part of the decree which would authorize the government to compel the landowner to exploit the lands held by him in reserve, as an unreasonable interference with property rights.

The oil law of 1925 provides for the issuance of ordinary concessions to those who have made application therefor within the time prescribed in the law. No royalty is required to be paid to the government under these concessions, though a royalty of not less than 5% must be paid to the surface owner, as well as such damage as may be caused to his surface rights. Many such concessions have been issued, and a number of applications are still pending. It may be conceded that insofar as ordinary concessions yet to be issued are concerned, the Congress is free to withhold them or to impose new conditions upon them, but the case is not the same when we come to ordinary concessions already issued. In these cases the concessionary has a vested right to the subsoil under the terms and conditions of the law [Page 652] in force when the right was obtained, which cannot now be impaired without doing violence to the provisions of the Mexican Constitution against retroactive laws and against the denial of due process.

We respectfully call the attention of the Honorable Secretary of State to the important fact that the companies we represent, relying on the plighted good faith of the Mexican government, manifested in the understanding between Ambassador Morrow and President Calles, have invested many millions of dollars in the development of their oil properties, and to require them now to accept the additional burden of royalties and other provisions of the decree would not only deprive them of their property rights but would impose upon them heavy financial losses and irreparable injury. We earnestly ask that the Honorable Secretary of State use his good offices with the Mexican government to prevent this act of manifest injustice.

Respectfully submitted,

Mexican Gulf Oil Company
Wm. T. Wallace

Its Vice-President
Mexican Sinclair Petroleum Corporation
A. E. Watts

Penn Mex Fuel Company
J. Lucas

Huasteca Petroleum Company
Fred H. Kay

Its Vice-President
Standard Oil Company of California
Frank Feuille

  1. See Foreign Relations, 1923, vol. ii, pp. 522 ff.
  2. For the text of this decision, see ibid., 1921, vol. ii, p. 464.
  3. For four amparo cases instituted by the International Petroleum Company and the Tamiahua Petroleum Company, see Estados Unidos Mexicanos, Semanario Judicial de la Federación (Mexico, Antigua Imprenta de Murguía, 1922), quinta época, tomo x, p. 1308.
  4. Constitution of the United Mexican States, 1917; for text, see Foreign Relations, 1917, pp. 951, 955.
  5. Mexico, Diario Oficial, December 31, 1925.