812.6363/2968b: Telegram
The Secretary of State to the Chargé in Mexico (Boal)
160. Your confidential letter to Welles of July 23.58 The Department fully appreciates the desire and need of the Mexican Government [Page 658] for additional funds and has approached the subject of the proposed petroleum decree with that understanding and with a desire to be as helpful as possible.
As the Mexican Government will recall, the petroleum question provoked a bitter controversy which at one stage even endangered the friendly relations between the two countries. After years of fruitless wrangling the two Governments made a new approach to the matter, and with good will on both sides and a desire to settle the matter for all time, arrived at a settlement reasonably satisfactory to the oil companies and in conformity with the Mexican Constitution of 1917 as interpreted by the Supreme Court of Mexico. This longstanding dispute having been interred, the Department earnestly hopes that the Mexican Government will take no action that would reopen it.
Although handicapped in considering the proposed petroleum decree because it is not informed of its exact provisions, nevertheless a very careful study has been made of the history that led up to the Morrow arrangement and of the terms of that settlement. It appears to the Department, in all frankness, that a requirement that the holders of confirmatory concessions perform the regular work provided in Article 69 of the petroleum regulations,59 would unquestionably result in a reopening of the Morrow arrangement. The 1928 settlement included the modification of Article 156 of the petroleum regulations so as to relieve the holders of confirmatory concessions from the requirement of producing the minimum amount of oil mentioned in Article 69. Accordingly, it would appear that, so far as concerns confirmatory concessions they are not covered by the provisions of Article 17 of the petroleum law that “failure to perform regular work in the manner prescribed by this law” shall be a cause for forfeiture of a concession.
Therefore, with respect to increasing production the Mexican Government may wish frankly to lay before the petroleum companies holding confirmatory concessions its reasons for desiring an expansion of production and to request their cooperation. If the companies approach the Department regarding this matter the Department will do all it appropriately can to urge them to adopt a cooperative attitude and to endeavor to work out an arrangement which will permit expansion of production on an efficient basis.
If the proposed decree will compel the oil companies to pay a royalty upon the oil produced, it would seem that there is good ground, so far as properties held under confirmatory concessions or entitled to such concessions are concerned, to maintain that it would [Page 659] impair valuable vested property rights held by them under pre-existing laws of Mexico and decisions of the Supreme Court of that country, as well as under the so-called Morrow arrangement. This impairment and violation would arise from the imposition of a condition attached to the rights of the oil companies which was non-existent before they were issued, or became entitled to, confirmatory concessions and thus would result in restricting their previous rights which were confirmed or should be confirmed.
On the other hand, should the decree take the form of imposing a reasonable tax on the production of oil the matter might assume a different aspect. The purpose of Article 20 of the petroleum law seems clearly intended to include the owners of confirmatory concessions among those covered by the requirement of the article for the payment of taxes “in coin or in cash” as the executive may choose. There is a general reference to the “taxes levied on the petroleum industry,” and discretion is apparently left to the taxing power as regards the nature and extent of such taxes.
It is suggested that you have a full and frank talk with Beteta, or with such other Mexican officials as you believe desirable along the lines of the foregoing. You should not, of course, present these views as the considered judgment of the Department, in as much as the Department has not had the opportunity of studying the precise terms of the proposed decree. However, you may say that the Department has been thinking along the lines above-mentioned and would be inclined to adhere to these views unless the provisions of the proposed decree are divergent from those which the Department understands it now contains.