The Ambassador in Venezuela (Donnelly) to the Secretary of State

No. 580

Sir: I have the honor to report on two conversations with Doctor Pérez Alfonzo, the Venezuelan Minister of Fomento, during the recent official visit to the United States. He was a member of President Gallegos’ official committee.

Dr. Pérez Alfonzo said that the 50/50 net profit arrangement (i.e., Government’s take in taxes should always equal the net profits of companies) will apply to all extractive industries in Venezuela. He specified oil, iron ore and gold. He indicated that the Bethlehem Steel Company and the United States Steel Corporation had accepted the principle as it applies to their new iron ore operations in Venezuela. He recognized the request of new and small operators for an opportunity to amortize their investments before applying the principle and indicated he would do something about it. I concluded from this remark that the iron ore producing companies had made this a condition to acceptance of the profit plan.

Dr. Pérez Alfonzo said that he does not envisage changes in the existing petroleum law but added that it might be necessary to modify the tax law so as to clarify the 50/50 plan.

He confirmed the agreement with the Texas Railway Commission and said that a representative would arrive in Caracas shortly to initiate studies for the efficient production of petroleum. He added that the Venezuelan Government will send about twelve engineers to study under the Commission.

Dr. Pérez Alfonzo said he was favorably impressed with the request of the Phillips Petroleum Company for additional concessions and indicated he would do something about it.

He stated that he had told officials of the Creole Company that they should consider the advisability of restricting their annual dividends and instead increase their reserves. He remarked that the Company’s [Page 764]dividend in 1947 approximated 20 per cent and that it had created an unfavorable impression in Venezuela. He said that Creole’s net profits in 1947 exceeded the net profits of the United States Steel Corporation.

Dr. Pérez Alfonzo said he would continue to permit a natural increase in the production of petroleum but made it very clear that his Government is concerned about the waste of gas and hopes to harness some of it for power and industrial uses. In this connection, Mr. E. Holley Poe of Texas and a number of American experts are presently visiting the oil fields at the invitation of the Venezuelan Government and it is expected that they will make specific recommendations to the Government for the practical use of the waste gas. Mr. Poe is regarded as one of the foremost authorities on gas in the United States, and the Department will recall that he negotiated the purchase of the famous 24 inch gas pipeline from Texas to the East Coast.

Dr. Pérez Alfonzo stated on several occasions that he was most favorably impressed with the success of free enterprise in the United States and indicated that Venezuela’s future should be based upon this principle as well as the law of supply and demand.

Dr. Pérez Alfonzo said that several American manufacturers had inquired of him as to the possibilities for new industries in Venezuela and that President Gallegos and he had assured them that they would be welcome and would receive adequate protection.

Respectfully yours,

Walter J. Donnelly