Foreign Relations of the United States, 1946, The American Republics, Volume XI

812.6363/8–2746

The Acting Secretary of State to the Ambassador in Mexico (Thurston)

secret
No. 209

Washington, August 27, 1946.

Sir: Reference is made to the Department’s instruction no. 100 of July 24, 1946 forwarding a copy of a letter dated July 8, 1946 from Mr. Leonard F. McCollum, of the Producing Department, Standard Oil Company of New Jersey,⁶⁷ outlining his company’s position with respect to the possibility of its re-entry into Mexico as an oil producer.

This instruction made further reference to the Department’s interest concerning the re-opening of informal negotiations with the Mexican Government in the matter of petroleum and stated that the Department would prepare, for the Ambassador’s information and guidance, a comprehensive memorandum covering the salient points of the United States Government’s policy regarding petroleum in Mexico. This memorandum, entitled “United States Government’s Policy Regarding Mexican Petroleum”, is enclosed herewith.

Very truly yours,

Dean Acheson

[Enclosure]

United States Government’s Policy Regarding Mexican Petroleum

secret

Washington, August 23, 1946.

On March 18, 1938 the Mexican Government, by decree of expropriation, took over the properties of certain foreign owned petroleum companies.⁶⁸ Subsequently after an exchange of notes, a basic agreement was reached on November 19, 1941 between the United States and Mexican Governments⁶⁹ involving the question of just compensation to be paid to American nationals whose properties, rights or interests were affected to their detriment by acts of the Government of Mexico subsequent to March 17, 1938.

The initial step in the implementation of the agreement of November 19, 1941 was the preparation and submission of the joint report of April 17, 1942⁷⁰ by two experts—Morris L. Cooke, for the United States, and Manuel J. Zevada, representing the Republic of Mexico. This joint report placed an evaluation of $23,995,991.00 on the losses sustained by American nationals, including all elements of tangible and intangible value, and provided further for interest at three per cent per annum from March 18, 1938 to the date of final settlement, on all balances due.

After deducting the $9,000,000.00 deposited in cash by the Government of Mexico at the time of the signing of the agreement of November 19, 1941, the balance due was $20,137,700.84. Thus on September 30, 1943 the Ambassador of Mexico⁷¹ presented to the Acting Secretary of State⁷² the Mexican Government’s check for $3,796,391.04 representing the amount due at that time under the exchange of notes on September 29, 1943,⁷³ implementing the agreement of November 19, 1941. The Mexican Government is paying the balance due in four equal annual installments, each of $4,085,327.45, and it is expected that final payment will be made on September 30, 1947.

Under instructions from this Government the American Ambassador at Mexico City has been carrying on informal conversations with the President of Mexico,⁷⁴ the Foreign Minister,⁷⁵ and other officials, looking to an arrangement whereby foreign petroleum companies may again participate in the development of Mexico’s oil resources.

These conversations have been carried on at a high level, with complete frankness and in the most friendly spirit, and during this period the Ambassador has kept in close touch, on a consultative basis, with the petroleum experts and other interested officials of the Department as well as with some of the representatives of the American oil companies in Mexico City.

In his talks with the President and Foreign Minister of Mexico Ambassador Messersmith has, on frequent occasions, stressed the following points:

(a) Petróleos Mexicanos (the government oil monopoly) has shown that it is incapable of developing the country’s oil resources either efficiently or profitably.

(b) In the event that the Mexican Government sees fit to invite foreign capital to return to Mexico to assist again in the development of Mexico’s oil industry, it is important that all American or other foreign companies or other legitimate responsible private interests have equal opportunity.

(c) Mexico would soon face a decline of revenue from other industries as a result of the termination of the war. Mexico was also undergoing a severe drain on its financial resources as a result of the inefficient and unprofitable development of its oil industry by Pemex. Mexico could, if assisted substantially by foreign capital, recoup these losses through a more efficient and profitable development of that industry.

(d) When the Mexican Government has made a statement of oil policy, after a full and frank exchange of views between the two Governments, it is contemplated that it will then implement its policy by appropriate legislation. The United States Government does not contemplate taking any part in any agreements which would subsequently be entered into between the Mexican Government and through Petróleos Mexicanos with the United States oil companies and United States private capital.

About 10 months ago Ambassador Messersmith recommended, and the Department concurred, that it was inopportune to carry on these conversations, owing to the confused Mexican political situation.

Following the inauguration of the new President of Mexico on December 1, 1946, it is very possible that the important question of petroleum may be one of the matters brought up for early consideration by the new administration. Consequently the Department deems it advisable that the Ambassador receive a clear exposition of its views well in advance of this date.

First, it would be desirable that the initiative come from the Mexican Government, and that special emphasis be placed on the fact that the United States Government has never entertained any desire to interfere in any way with the freedom of the Mexican Government to determine its own oil policy, and has always been fully cognizant of the sovereign right of Mexico in this respect.

Second, it should be pointed out that the United States Government is naturally anxious to see the potential petroleum resources of Mexico developed and utilized to the furtherance of the financial and industrial well being of Mexico, as well as in the interests of hemisphere security in which both countries are mutually interested.

Third, it should be made clear that the Government of the United States does not take the initiative in recommending, on an intergovernmental basis, any change in the basic Mexican Constitution as it affects the subsoil rights of the Mexican Nation, nor any change in existing petroleum legislation related to those rights. The Government of the United States recognizes the sovereign right of the Mexican Government to determine its own oil policy and legislation. However, the Government of the United States draws the attention of the Mexican Government to the fact that by its present nationalization of its oil industry, it is not carrying out the spirit of Articles 2 and 6 of the Economic Charter of the Americas signed at Chapultepec on March 7, 1945.⁷⁷

Fourth, special emphasis should be placed on the fact that, in the event foreign capital is re-admitted, the door would be open to nationals of all countries, not merely to American companies.

Fifth, any future informal discussions by the United States Government with the Mexican Government shall, with the same intentions expressed in the past, be held for the purpose of assisting the Mexican Government to work out a solution of its petroleum problems.

Sixth, it should also be made clear that the United States Government’s interest in the solution of Mexico’s petroleum problems is partly that of a friendly neighbor, offering advice based on experience and knowledge, and partly that of a country holding an important place in world oil affairs with a direct responsibility for the efficient and orderly utilization of world petroleum resources.

Seventh, in the light of very attractive opportunities for development operations in other parts of Latin America, as well as in the Middle East (where American interests are known to be very large), it is questionable whether there is much enthusiasm on the part of American oil companies to return to Mexico or to enter there for the first time. Therefore, if the Mexican Government wants to secure the benefit of American or other foreign oil capital and technical skill, it is incumbent on the Mexican Government to make clear-cut, well-defined proposals that hold some reasonable prospect of being attractive to the American or other companies.

Eighth, it is apparent that Mexico’s position and prestige in the Western Hemisphere as a world petroleum producing country have declined relative to other Latin American producing countries, such as Venezuela, Colombia and Peru. Consequently a desire on the part of Mexico to improve its national economy, recoup its losses from other industries coinciding with the termination of the war, and increase its known and potential reserves of petroleum, might suggest to the Mexican Government the wisdom of a change in its attitude towards inviting foreign capital back to Mexico to assist in developing its petroleum resources.

In studying a plan of action for re-opening the negotiations on petroleum with the Mexican Government, and reviewing the various methods of approach to the problem, it might be advisable to outline briefly here the basic requirements of the three principal entities interested, namely, (1) the Mexican Government, (2) the United States Government, and (3) the foreign oil companies.

(1) Basic Requirements of Mexican Government:—

(a) the subsoil rights and titles to petroleum must remain perpetually in Mexican hands.

(b) the domestic distribution and marketing should also remain Mexican, and domestic demands for petroleum must be fully satisfied at reasonably low prices, before any petroleum is exported.

(c) Mexico must receive an equitable share in all benefits derived from the development of its petroleum industry.

(d) the development and production must proceed in an orderly fashion with no avoidable waste of Mexico’s natural resources.

(e) Mexico must receive technical, financial and commercial assistance in the development of its petroleum industry, and its nationals must receive the maximum of training and employment at fair rates of compensation.

(f) any plan adopted must be face-saving to former President Lázaro Cárdenas, Labor Leader Vicente Lombardo Toledano, and at the same time palatable to the Mexican public.

(2) Basic Requirements of the United States Government:—

(a) United States private industry should be permitted to contribute to the development of crude production and reserves in Mexico and to the distribution of exportable Mexican surplus production to foreign markets, at least to the extent of United States capital, capabilities, and technical skill.

(b) in case of an emergency and in connection with hemisphere defense, in which both the United States and Mexico are mutually interested, the United States should have first call on all surplus production (over and above Mexico’s needs) so that the utilization of this oil may be mutually beneficial to the defense of both countries.

(c) any plan adopted, and all contracts under such a plan, must be in harmony with the political and economic policies of the United States Government.

(3) Basic Requirements of the American Oil Companies:—

(a) the companies must have security of title to any rights acquired whether by concession or by operating contract, and a corresponding security for their investment over a long period of time.

(b) the companies must have the opportunity to earn profits commensurate with their investment and with the risks involved; and they must be free to remit such profits to their home offices.

(c) the companies must have reasonable time, during the exploration and exploitation periods, to develop any oil they may discover, along economic and efficient lines, as required by the best modern practice.

(d) the company would, under its contract, employ the maximum amount of Mexican labor consistent with efficient operation, and would train and advance its Mexican personnel in all phases of its operations. However, the relationship between the company and labor must be satisfactory and mutually beneficial both to the company and to labor, and regulations covering this relationship must be such that the petroleum industry may rapidly reach a goal of high productivity beneficial to both the Mexican Nation and to foreign capital.

Several plans for the re-admission of foreign oil companies into the Mexican petroleum industry have been discussed informally during the past three years between the Ambassador and Mexican officials on the one hand, and between the Ambassador and representatives of the oil companies on the other. There has been considerable exchange of correspondence between the Embassy and the Department covering these various plans or methods; however, it might be advisable to review them briefly here at this time pointing out their advantages and disadvantages.

[Here follows a review of three plans, their advantages and disadvantages: (1) the Wiechers Plan, (2) The Townsend 25-Year Plan and (3) the Thornburg Contracting Proposal.]

It will be seen from the foregoing that none of these plans has fitted satisfactorily into the framework of the Mexican petroleum situation.

There is one method, however, which has not been discussed and which would involve a type of operating management and participation contract between the foreign oil company and the Mexican Government.

This would not be a concession type of contract, and consequently would not in any way involve the question of subsoil rights. The highlights of this contract would be as follows:

(1) In accordance with a Presidential Decree, confirmed by the local congress, a prospecting zone of suitable size would be set aside, and the government would thereupon be authorized to enter into contracts for operations of petroleum prospecting for a term of years subject to the condition that the foreign contractor would periodically surrender, and free from the contract in say five, ten, fifteen or twenty years, etc., substantial portions of the zone which apparently did not give evidence of oil-bearing possibilities.

(2) The contract would provide for certain drilling obligations on the part of the foreign contractor within stipulated times governed by regulation.

(3) Two separate contracts would be used, one for the investigation or prospecting period and the other for the exploitation period.

The executive authority of the Mexican Government would be empowered to grant, under the investigation contract, exclusive rights for the foreign contractor to select individual prospecting zones, divided into claims of 10,000 hectares each. There would be no limitation on the total number of the claims constituting the zones of investigation.

Subsequently the contractor would be permitted to select individual exploitation areas of specified size, not to exceed a particular number of hectares per discovery well.

(4) The period of duration of the investigating contracts would be four years extendible for an additional four years, with the condition that at least one well shall have been started during the first four years.

(5) The period of duration for the exploitation contracts would be fifty years.

(6) Under the contract the executive authority would be empowered to credit to the account of the foreign contractor all investments made by him, which investments would either be reimbursed out of the product obtained or be cancelled in the event that the contractor should avail himself of the right granted to him to terminate his contract.

(7) The executive authority would be further empowered to establish in contracts, the apportionment that is to be made of the proceeds obtained so as to reimburse the investments made, cover the costs and expenses of exploitation, and leave a satisfactory compensation for the contractor, assuring for the Mexican Government a return of 35 per cent of the net profits of the exploitation, which return is approximately equivalent to the amount the Mexican Government would expect to receive from royalties and taxes.

(7a) As an alternative to the arrangement under (7) above, the following royalties could be used:

The contractor would deliver to the Mexican Government as royalty, during the first 15 years of exploitation, the following percentages of crude oil extracted, on the basis of the daily average of each month; from one barrel to five thousand barrels as the daily average in the month, 12 per cent; from five thousand and one to ten thousand barrels as the daily average in the month, 13½ per cent; and ten thousand and one barrels and upwards as the daily average in the month, 15 per cent.

Further, the contracts covering petroleum prospecting, investigation and exploitation would authorize the contractor to operate in the name and representation of the Mexican Government, as contractor of said operations, and to receive as compensation, after deduction of the royalty to be paid to the Mexican Government by said contractor the remainder of the gross petroleum extracted. (Note:—For the Embassy’s information this section (7a) is taken, in toto, from the contract of October 1944 between the Union Oil Company of California and the Paraguayan Government.

(8) The foreign contractor would be exempt from all fiscal and municipal taxes.

(9) He would further receive exclusive control in the installation and exploitation of refineries and pipelines for the entirety of the petroleum products obtained by him, with the understanding that a percentage of the net profits from the operations of these facilities would go to the Mexican Government in lieu of any and all other charges, royalties, imposts or taxes.

(10) The foreign contractor would also enjoy absolute control of the administration of the enterprise.

(11) He would further be permitted to import, free of customs duties, such machinery and equipment that he deemed necessary for the operation, and simultaneously be permitted to export, free of duty, petroleum and its derivatives over and above the internal requirements of the country.

(12) The executive authority would permit, upon request of the contractor, the immigration into Mexico of the foreign personnel necessary to carry on an efficient and economical enterprise.

The above stipulations represent the salient features of such a contract, which would, of course, also include a number of other general provisions usually found in contracts of this type, including arbitration clauses, rights of termination, surface taxes per hectare of land paid annually under both the investigation and exploitation contracts, force majeure clauses, etc., etc.

In this connection it is interesting to note that this general type of operation-management-participation contract is now being satisfactorily used by one of the American oil companies in the development of the petroleum resources in the Paraguayan Chaco.

It is quite evident that the word “concession” has become anathema to certain Mexican officials and to the Mexican public, and that probably the only way for foreign capital to return and participate in the Mexican petroleum industry will be under some form of contract similar to the one just described above.

The rights of a foreign company under this type of contract may not seem as secure, to the legal minds representing that company, as those usually granted in the past under the concession type of contract. However, the history of the expropriation of American capital by foreign governments during the past ten years indicates clearly that no rights, not even concessional ones involving an interest in the subsoil, are necessarily safe. Consequently it can be argued realistically now that the right to develop the petroleum resources of another country under a contract comprising operation, management and participation, as described above, will probably be just as safe for foreign capital as the concessional rights used in the past.

the question of a possible loan by this government to the mexican government for the development of mexican oil resources

Reference is made to the Department’s secret instruction no. 8098 of November 8, 1945⁷⁸ with which was enclosed a memorandum for the President from the Secretary of State, dated October 11, 1945.⁷⁹

That memorandum, which was approved and signed by the President on October 13, 1945, confirms the decision that no government loan can be considered by the United States Government for the commercial development of Mexican petroleum resources.

In conclusion, the salient points covered by this memorandum to clarify the Mexican petroleum problem as it exists today, and to outline the United States Government’s policy regarding Mexican petroleum, may be summarized as follows:

Mexican economy, after nine years of inefficient and unprofitable management of its petroleum resources by Pemex, which exemplifies the heaviest drain on the financial resources of that country yet made, is badly in need of a revitalization of its petroleum industry. However, the initiative must come from the Mexican Government; and it is believed that the new Alemán administration will soon wish to open conversations with representatives of this Government for the purpose of working out a solution.

It is quite logical that Mexico should turn to the United States for assistance in the solution of this problem, first because of the geographic location of the two countries and the vital importance of hemisphere defense to both, and secondly because the United States has a real contribution to make due to the high degree of experience and skill developed in the United States and abroad in exploring for and producing oil. A further important factor is the supreme position of American manufacturers of oil well machinery and refining equipment.

Next, it is evident that no matter what move is made and decisions reached by Mexico, the United States Government and the foreign oil companies in reaching a solution to this problem, a minimum amount of political face-saving on the part of certain Mexican officials must be accounted for and appropriately provided.

It will have been seen from pages 5 and 6 of this memorandum that there exist certain basic requirements on the part of the Mexican and United States Governments and the foreign oil companies which are essential and vital to the interests of each. However, these requirements are not so far apart that they cannot be reconciled to the mutual benefit of each.

Finally, in the light of the above, it appears to the Department that a successful solution of this Mexican petroleum problem may eventually have to be based on the utilization of some form of operation-management-participation contract similar in general character to the one described previously.

67. Neither printed.
68. For documentation on this subject, see Foreign Relations, 1938, vol. v, pp. 720 ff.
69. For text, see Department of State Executive Agreement Series No. 234, or 55 Stat. (pt. 2) 1554; for documentation on this subject, see Foreign Relations, 1941, vol. vii, pp. 371 ff. passim.
70. Department of State Bulletin, April 18, 1942, p. 351.
71. Francisco Castillo Nájera.
72. Dean Acheson.
73. For text of agreement between the United States and Mexico on payment for expropriated petroleum properties, effected by exchange of notes signed at Washington, September 25 and 29, 1943, see Department of State Executive Agreement Series No. 419, or 58 Stat. (pt. 2) 1408.
74. Manuel Avila Camacho, President of Mexico December 1, 1940–December 1, 1946.
75. Foreign Ministers Ezequiel Padilla (1940–July 12, 1945), and Francisco Castillo Nájera (September 21, 1945–December 1, 1946).
77. For text, see Report of the Delegation of the United States of America to the Inter-American Conference on Problems of War and Peace, Mexico City, Mexico, February 21–March 8, 1945 (Washington, Government Printing Office, 1946) p. 120.
78. Foreign Relations, 1945, vol. ix, p. 1161.
79. Not printed.