Memorandum of Conversation, by the Chief of the Petroleum Division (Eakens)

Participants: Mr. Mark E. Andrews, Assistant Secretary of the Navy
Commander R. H. North wood, Aide to Mr. Andrews
Mr. Nitze—E1
Mr. Brown—ITP2
Mr. Reveley—MA3
Mr. Eakens—PED

This meeting was arranged at the instance of Mr. Andrews who wished to discuss further with the Department the Mexican petroleum situation. Mr. Andrews was asked by Mr. Forrestal4 in September to ascertain what had developed with respect to Mexican oil since the meeting at the National Security Resources Board on February 17, 1948, at which Ambassador Thurston reported on discussions he had had with Senator Bermudez, Director General of Petroleos Mexicanos (Pemex), and other Mexican officials regarding the re-entry of the private oil companies into Mexico. Mr. Andrews talked with Mr. Eakens about this problem on October 5 and thereafter he discussed the problem with officials of The Texas Company, Standard Oil Company (New Jersey) and Gulf.

According to Mr. Andrews, Jersey was not so much concerned about the terms of a contract with Pemex as with the petroleum laws that would be applicable to such a contract. Jersey stated that the petroleum laws in force were enacted for the specific purpose of excluding foreigners from petroleum operations in Mexico and that the company would not be interested in any contract until the necessary amendments were made in the petroleum laws. Gulf, on the other hand, emphasized the question of division of the production or return between the company and the Mexican Government. Gulf wishes to go into Mexico only on the basis of paying a specific royalty and having the remainder of the oil accrue to the company. Gulf does not wish to [Page 613] become involved in an arrangement under which profits are split with the Mexican Government as this would involve the complicated questions of costs, profits, etc. The Texas Company had hoped that the $30,000,000 loan, which the company had negotiated with Mexico but which was never finally agreed to by Pemex, would lead to production operation contracts. Although the loan arrangement was not consummated, The Texas Company made a proposal to Pemex regarding an exploration and production contract, which was also rejected. The Texas Company is therefore of the opinion that the bases which Pemex developed for contracts with American companies were consciously written so as to be unacceptable to the companies. If the private companies did not accept the contract Bermudez could then say that he had tried to reach agreements with the private companies and, having failed, there was no alternative but to seek a loan from the United States Government. The Texas Company believes that the presidential ambitions of Senator Bermudez probably has been an important factor in his approach to the problem. All of these companies considered a Government loan to Pemex undesirable and Mr. Andrews stated that he was of the same opinion. These views of the companies are based upon Mr. Andrews’ discussions with Mr. Suman of Jersey, Messrs. Rogers and Ogarrio of Texas, and Mr. Belt of Gulf.

Department representatives brought into the discussion the negotiations which Gordon Duke, of Southeastern de Mexico, now has in progress with Senator Bermudez. Mr. Duke has transmitted to Senator Bermudez a three-point program for cooperation between Mexico and the United States with regard to development of Mexican oil. Mr. Duke has proposed that (1) the United States Government make a loan to Pemex for use in construction of pipe lines, refineries and distribution facilities, (2) Mexico amend its laws and make it possible for American companies to engage in oil exploration and development operations, and (3) the United States Government finance the drilling of oil wells by American companies for Pemex in proven locations on a cost plus basis. Mr. Duke considers that small companies such as his will not be able to contract for the development of large areas but could enter Mexico on a drilling contract basis as envisioned by point (3) of his program. In transmitting his program to Senator Bermudez, Mr. Duke stated that he had discussed it with a number of oil companies and Government officials in Washington.

The interest of the Wolverton Committee in the Mexican oil problem was discussed at some length. It was pointed out that prior to the acceptance by the Wolverton Committee of Pemex’ invitation to visit Mexico, Senator Bermudez had been conducting negotiations with the private oil companies and that the acceptance of the Wolverton Committee [Page 614] apparently brought such negotiations to a standstill. Since that time little if any progress seems to have been made by the private oil companies in their negotiations for oil exploration and development contracts. Until the results of the Wolverton Committee’s trip are known it seems doubtful that any progress will be made in regard to such contracts since the Committee’s visit undoubtedly led to high hopes on the part of Senator Bermudez and other Mexican officials that Pemex might be successful in obtaining a Government loan of substantial size. Pemex apparently desires a loan of some $475,000,000 for oil purposes. It was mentioned that Mr. Wolverton and one or two other members of the Committee and two members of the Committee’s professional staff are now on a trip in the Caribbean and will shortly visit Mexico for further petroleum discussions with Senator Bermudez. It was also mentioned that Mr. Wolverton has called a meeting of the Committee for December 29 to decide what action is to be taken on the Committee’s Mexican oil report. Some question seems to exist at this time (1) as to whether a report will be made and (2) if a report is made whether it will include any recommendations as to what should be done with respect to Mexican oil. It was generally agreed that the most desirable action that the Committee could take would be to recommend that no loan be granted to Pemex, that the second best would be for the Committee not to make a report and, third, that if the Committee makes a report the report be purely factual and not include any recommendations. The possibility that something desirable might be accomplished in regard to the Committee’s report through discussions by Mr. Andrews with Congressman Heselton was discussed, and Mr. Andrews said that he would consider taking the matter up with Congressman Heselton. The Navy seems to be in a favorable position for doing this in view of its assistance to Mr. Heselton’s district last winter in making loans of heating oil available for his constituents.

Another factor complicating the involvement of the Wolverton Committee in the Mexican oil problem is the change in chairmanship that takes place in the new Congress. The new chairman of the Committee will be Congressman Robert Crosser (D., Ohio). Mr. Crosser visited Mexico with the Committee in August and September, but he does not seem to consider a loan to Mexico for oil necessary. He thinks that Mexico should be willing to make and the private companies to accept a fair basis for oil development operations. Having certain views regarding the validity of the single tax, Mr. Crosser considers that a fair basis for such operations would be one under which the economic rent of lands utilized in oil operations would accrue to the Mexican Government. The foregoing was brought out in a meeting Mr. Eakens had with Mr. Crosser on Tuesday, December [Page 615] 7. As the application of Mr. Crosser’s ideas to the problem appeared to him to be extremely involved if not unworkable, Mr. Eakens suggested that the most practicable way for the Mexican Government to secure the maximum return from any particular tract of land would be by competitive bidding. Mr. Grosser has been invited by Pemex to visit Mexico again and it is likely that he will accept. If he does accept, his visit will overlap the last two or three days of the visit of the Wolverton group but will extend on beyond.

Regarding the extent of a program required to develop a significant amount of production, Mr. Andrews expressed as his view that the efforts of ten to fifteen companies would be required and an expenditure by each of some $20,000,000 in a five-year exploration program. The total expenditure required is therefore $200,000,000 to $300,000,000 in the exploration phase. In the following five years, he stated that another $200,000,000 expenditure would be required to develop the fields discovered. He thinks that such a $400,000,000 to $500,000,000 program by ten to fifteen companies in a ten-year period should discover a billion barrels of oil. As Mexico’s presently proved reserves are approximately the same figure, such a program, if it worked out us Mr. Andrews indicated, would double the reserves of Mexico and should make possible a doubling of the present production of approximately 160,000 barrels daily.

A factor of importance in considering the Mexican oil problem in relation to the security needs of the Western Hemisphere is that Mexico’s possible contribution be kept in proper perspective. All agreed that any action being considered in respect to Mexico should be fully weighed as to the effect such action probably would have in Venezuela and other areas. The possible increase of 160,000 barrels daily production in Mexico compares with current production in Venezuela of 1,350,000 barrels, and a probable increase in this figure, based upon present development plans of the companies and assuming no new concessions are granted, by some 500,000 barrels daily over the next five years.

In response to a direct question by Mr. Nitze, Mr. Andrews stated that NME would not press the Department for any action in Mexico that might risk adverse repercussions on production in Venezuela. Such risk might be run by government loans or by our support of contracts for private companies substantially less favorable to them than those enjoyed by them in Venezuela.

Mr. Andrews was asked whether he would consider a loan for above ground facilities objectionable if such a loan were made in connection with an agreement on the part of Mexico to open up its lands for development by private American companies. He said that he did not [Page 616] think it would necessarily be objectionable. Mr. Nitze stated the Department’s view at this time as being that (1) it has not been concluded that any loan is necessary because it is considered that Mexican oil resources can most efficiently and effectively be developed by private companies, (2) if a basis for private company operations in Mexico cannot be worked out without other concurrent arrangements, the Department might be willing to consider a loan for above-ground facilities tied in with an agreement on the part of Mexico to develop the production phase of the industry on a private company basis, (3) in no case should a loan be made to Pemex for exploration and wildcatting operations, and (4) it is undesirable at this time for it to be known that the Department might be willing to consider a loan even for above-ground facilities. Mr. Andrews seemed to be in general agreement with this statement of the Department’s position and he said that he would convey these views to Mr. Forrestal.

Two recent favorable developments with respect to oil where also mentioned. First, the new Venezuelan Government has indicated that it is favorable toward the granting of new oil concessions although none have been granted since 1945. Second, according to a New York Times report from Lima dated December 7, the new government in Peru considers the competitive development of the country’s oil resources on a private enterprise basis desirable and is taking action to bring about such development.

  1. Paul H. Nitze, Deputy to Assistant Secretary for Economic Affairs (Thorp).
  2. Winthrop G. Brown, Director, Office of International Trade Policy.
  3. Paul J. Reveley, Chief, Division of Mexican Affairs.
  4. James Forrestal, Secretary of Defense.