Memorandum by the Director of the Office of American Republic Affairs (Duggan) to the Secretary of State

The Secretary: 1. Mexico expropriated the principal properties of foreign companies in Mexico in March 1938.55 By an agreement of November 194156 a joint commission was established to determine the value of the American properties. This commission rendered its report in April 1942,57 and on the basis of this report the two Governments concluded a further agreement in September 194358 finally settling the matter. The major American interests concerned have now accepted the amounts awarded—one company, Seaboard,59 having so far declined to accept, and one other company, Sabalo,60 having so far taken no action.

2. Until the expropriation issue had been settled the Mexican Government was unwilling to discuss a proposal for new arrangements under which American companies could participate in the development of Mexico’s petroleum resources. Almost a year prior to the final settlement with Mexico we began to work on the outline of such [Page 1340] a proposal to be made to Mexico, and a proposal was actually delivered in 1943,61 several months before the announcement of the final expropriation settlement in September 1943.

3. At the suggestion of President Avila Camacho conversations regarding this proposal have taken place between Ambassador Messer-smith and Dr. Padilla, Minister of Foreign Affairs of Mexico. The President of Mexico did not want his Minister of Finance62 to be a participant in the negotiations.

4. Our proposal to Mexico was based upon the following premises:

Mexico could not again agree to give foreign petroleum companies concessions to the subsoil.
The Mexican Government should receive a greater return from the Mexican petroleum industry than heretofore.
Mexican operations since expropriation had been neither scientifically progressive nor economically profitable.
The proposal advanced provided that the Mexican petroleum monopoly contract with American companies to undertake development and production activities over a long period, say thirty years. The companies would pay back their outlays out of oil produced and thereafter the companies and the government petroleum monopoly would share oil produced on some agreed-upon basis.

5. When Ambassador Messersmith was here in January of this year63 he was very hopeful that the Mexican Government would accept this proposal. The President of Mexico had told him that in general it looked like a satisfactory procedure. Ambassador Messersmith informed President Roosevelt of the nature of our proposal. The President expressed unqualified approval of it. He specifically requested Ambassador Messersmith not to inform Secretary Ickes regarding it, although he did request Mr. Messersmith to convey to Mr. Ickes his thought that the two Governments should collaborate in the discovery of reserves of oil-bearing properties which should be held as war reserves in the joint interests of the two countries. Ambassador Messersmith saw Mr. Ickes and explained to him the President’s proposition.

6. Unfortunately, when Ambassador Messersmith returned to Mexico, instead of being informed of the acceptance by the Mexican Government of the proposal advanced he was given a counterproposal. It was insinuated to him that it had not been possible to accept our proposition on account of the attitude of General Cárdenas, who favors development of Mexican petroleum resources through the Government monopoly without turning over to foreign interests any important [Page 1341] responsibility. The Mexican Government proposal in essence was that the Mexican petroleum monopoly would provide the property and the companies, the financing, labor, and skill. The Mexican monopoly would be given legal personality under Mexican law and would issue bearer documents (not bonds or shares) representing a right to a determined percentage of the profits but no share of ownership nor evidence of creditorship. While this plan might not have required changes in the Mexican petroleum laws, it did not, in our opinion nor in the companies’, provide an adequate instrument, particularly as it had an element of subterfuge.

7. At Ambassador Messersmith’s suggestion Mr. Townsend of the Petroleum Division went to Mexico and helped Ambassador Messersmith to study the counterproposal. Ambassador Messersmith told Dr. Padilla the Mexican Government proposal seemed unacceptable and that we would prepare a new proposal. This new proposal was drafted and provided that, without any change in existing Mexican petroleum laws, American capital could contract directly with the Ministry of National Economy, on a basis of 51% operational control and profits to the Mexican Government and 49% to the companies, title to the subsoil remaining in Mexico, and the petroleum monopoly not directly participating. The general features of our basic premises as outlined in paragraph 4 above remain unchanged. This proposal was not entirely satisfactory to the companies and consequently its presentation to Dr. Padilla has been deferred pending further study and revision. It had become probable that some change in the petroleum laws might be necessary, and Ambassador Messersmith’s discussions on this delicate point had reached a preliminary stage in which Dr. Padilla’s attitude was encouraging.

8. At the request of President Avila Camacho, Dr. Padilla informed Ambassador Messersmith that the Mexican Government had been advised through responsible sources that the United States Government would be prepared to make a loan to the Mexican petroleum monopoly to enable it to carry on singlehandedly the entire job of petroleum development and operation. Dr. Padilla said that until Ambassador Messersmith could ascertain the accuracy of this report there could be no further discussions.

9. At a meeting of the Executive Committee on Foreign Economic Policy attended by Mr. Ralph Davies of the Department of the Interior there was unanimous agreement that the Mexican Government should be advised that this Government had no such credit operation before it and none under contemplation. Ambassador Messersmith was instructed in the premises,64 and he so informed Dr. Padilla on [Page 1342] the eve of his departure.65 A memorandum embodying this same information was sent to the President for his information.66

10. It will be seen, therefore, that on this very difficult and complicated situation the negotiations were moving forward with a fair prospect of agreement when the idea was interjected of a United States Government credit to finance the Mexican petroleum monopoly.

Laurence Duggan
  1. For correspondence concerning this expropriation, see Foreign Relations, 1938, vol. v, pp. 720 ff.
  2. For text of the agreement concerning expropriation of petroleum properties, see Department of State Executive Agreement Series No. 234, or 55 Stat. (pt. 2) 1554. For correspondence concerning this agreement, see Foreign Relations, 1941, vol. vii, pp. 371 ff.
  3. For text of joint report submitted on April 17, 1942, to President Roosevelt and President Avila Camacho, see Department of State Bulletin, April 18, 1942, pp. 351–353.
  4. Agreement effected by exchange of notes September 25 and 29, 1943, Department of State Executive Agreement Series No. 419, or 58 Stat. (pt. 2) 1408.
  5. Company composed of the International Petroleum Company and the Compañía International de Petróleo y Oleo Ductos, S.A.
  6. Company composed of the Sabalo Transportation Company, the Compañía Petrolera “Claripa” S.A., and the Compañía Petrolera Cacalilao S.A.
  7. For correspondence concerning the development and presentation of this proposal, see Foreign Relations, 1943, vol. vi, pp. 457459 and 469470.
  8. Eduardo Suárez.
  9. January 13 to February 10.
  10. Instruction 5894, June 27, 1944, not printed.
  11. Dr. Padilla departed for Washington July 1, 1944.
  12. Memorandum dated July 4, 1944, not printed.