Papers Relating to the Foreign Relations of the United States, 1918

File No. 812.512/2004

The Ambassador in Mexico ( Fletcher) to the Secretary of State

No. 1121

Mexico, June 12, 1918.

Sir: In continuation of my despatch No. 1092, of June 5, 1918, on the subject of the negotiations of Messrs. Garfield and Rhoades, representing the foreign oil interests in Mexico, with Messrs. Pani and Nieto, members of the Cabinet, on the subject of the petroleum decree of February 19 last, I have the honor to enclose, first, copy of the memorandum of Messrs. Garfield and Rhoades, dated May 28, 1918; second, translation of the reply of Mr. Pani; and, third, the rejoinder of Messrs. Garfield and Rhoades, dated June 3.

I invite the particular attention of the Solicitor’s Office to the reply of Mr. Pani (enclosure No. 2), as it undoubtedly embodies the arguments which the Mexican Government will advance to meet our protest of April 2, 1918 (see my despatch No. 890, of April 3, 1918).

I have [etc.]

Henry P. Fletcher

[Enclosure 1]

Messrs. Garfield and Rhoades to the Mexican Secretary of Industry, Commerce and Labor ( Pani) and the Undersecretary of the Treasury ( Nieto)

Mexico, May 28, 1918.

Gentlemen: James R. Garfield and Nelson O. Rhoades, in representation of the various enterprises embracing the oil industry, credentials for which representation have been presented and accepted by your Government, appear before you and respectfully submit for your consideration the following memorandum in relation to the decree of February 19, 1918, applying to the oil industry.

The producers and distributers of oil, during the years preceding the said decree and in conformity with the then existing laws, either purchased or leased lands which were supposed to contain oil or were so located as to give reason for exploring for oil. Realizing the uncertainty and hazard of such explorations each company or individual, with sound business judgment, legally acquired holdings large enough to cover the expenditure of capital for wells both productive and unproductive and to assure, if possible, future developments.

Based upon the integrity of their contracts of sale or lease the companies and individuals have invested many millions of dollars.

At the time of such investments the investors realized that as production was developed the industry would and should be subjected to taxation and they relied upon the wisdom and faith of the Federal and State authorities to so adjust taxes that the industry would pay only its fair share of the necessary tax burden and at the same time be able to meet competitive conditions in the world markets, and return the investment with a fair profit thereon.

In this connection it is to be remembered that in considering the oil industry we are dealing with a product which is destroyed when developed and cannot be replaced; hence the entire investment must be returned with a profit. To the capital invested for the purpose of production and refining must be added the large amount necessary for transportation to either the home consumer or foreign trade.

With these conditions in mind the producers approach the interpretation of the decree of February 19. They find the following provisions which, if enforced, would not only destroy invested capital, but would prevent the wise and profitable continuance, and increase of production:

I

The decree imposes taxes too great for the industry to bear and out of proportion to taxes imposed on other industries. The aggregate of annual taxes proposed added to those now imposed would result in practical confiscation. The decree ignores entirely the investment of capital for non-productive wells, productive wells, transportation and equipment, and the greatly increased cost of operation and construction.

In the case of a producer, who is a landowner, the decree imposes a flat tax of $5 per hectare, which is ten times the tax imposed on similar lands under lease at $5 per hectare and fails to take into consideration the capital invested in the original purchase of the land.

It is thus apparent that there would be created a serious discrimination against the landowner who produces in comparison with the producer who leases.

The problematical nature of oil development differentiates the industry from all others. It is of course impossible to judge the industry by a few large wells—the general average of known fields and their uncertainty of sustained flow must be considered.

II

The decree requires the producer to deduct the total of taxes imposed therein from the rental and royalty which the producer is obligated to pay the lessee under existing contracts of lease. Such deduction, amounting to a large percentage of the fixed rentals and 50 per cent of the royalties, would immediately subject the producer to action on the part of the lessee, either for cancelation of the lease or for large money damages because of failure to perform the conditions of the lease. This would mean endless litigation between lessors and lessees to the great injury of both.

III

The decree, by reason of the provisions for denouncement, in Article 14, and those for deduction of rental and royalty due the lessors heretofore mentioned, is retroactive in that it reads into the contracts of sale and lease conditions that were not in the minds of the contracting parties and were not provided for under the laws in force at the time those contracts were made.

This being true, the effect of the decree is confiscation of property without compensation. When the outstanding contracts of both sale and lease were made, the right of the owner of the surface to dispose of the oil if any existed, was admitted. There was no reservation on the part of the Government. The acts of both Federal and State Governments were in recognition of that right.

We present these three points as outlined in our conference of yesterday believing that they afford with the questions that logically arise under them, a basis for the consideration of the entire problem.

With assurances [etc.]

• G [James R. Garfield]
• R [Nelson O. Rhoades]

[Enclosure 2—Translation]

The Mexican Secretary of Industry, Commerce and Labor ( Pani) to Messrs. Garfield and Rhoades

Mexico, May 30, 1918.

Gentlemen: In reply to the memorandum which you sent to us last Tuesday, we have the honor to transcribe below the result of a study in the premises made by the technical committee of the bureau of petroleum of the Department of Industry, Commerce, and Labor:

In the preamble of the memorandum mentioned you state that, in accordance with existing laws, operators acquired lands in ownership or by lease for the purpose of oil exploration; that they acquired extensive zones to guarantee their investment, and that they have invested several millions of dollars in various lines of the industry. That they understand the necessity and expediency of paying a just tax which will allow them to participate in the world’s competition and at the same time derive a profit on the investment.

In view of the circumstances stated, you point out the following inexpediences in the law of February 19:

1. The tax is excessive and disproportionate as compared with taxes assessed on other industries.

2. The obligation imposed on the lessee to pay the lessor’s taxes is inexpedient and will give rise to many litigations, prejudicial to both parties.

3. The law of February 19 is retroactive since it modifies the conditions of some leases made in accordance with the law.

From this last point you deduce that the effect of the decree mentioned will be the confiscation of property.

It is an aphorism of law that the accuser must prove his case. Based on this principle, it might be expected that a full, precise, and rational exposition would be submitted of the conditions under which the oil industry is carried on in Mexico and in other countries, demonstrating that the conditions imposed by the decree of February 19 absorb the legitimate profit which the capitalists interested in that industry should secure; but you limit yourselves to giving an exposition of the general conditions of the industry and of the defects which, in your opinion, are contained in the decree of February 19. Therefore, a defense of the decree is required, together with a study of its influence on the development of the industry. For the purpose, the memorandum submitted will be considered solely as a private opinion, which, while incorrect, is to be respected since it comes from those who are interested in the matter, and because the Government of the Republic has always shown that its intention is to encourage the proper development of natural resources and the investment of capital in all industries beneficial to the country, among which the oil industry should be included.

Industrial capital, that is, capital used principally for oil exploration and exploitation, deserves especial consideration, leaving for secondary consideration that which is used for the purpose of monopolizing oil lands, even though the latter should be parallel with the industrial investment. It is to the interest of the Nation to give every aid and guarantee possible to industrial capital, and to obstruct or prevent monopolies to the extent it can be done, for the reason that the latter, in the final analysis, do no more than obstruct industrial development, and can reach such proportions as to endanger the very life of the oil industry. It is difficult to stipulate the amount of surface land necessary to guarantee the strength of an oil business, and to fix the maximum thereof. For this reason no Mexican law has adopted such a system. The desire, however, has been to create a system which will automatically stop monopoly by fixing a tax on petroleum claims such as will permit each operator to acquire the area necessary for exploitation purposes and leave free for the investment of other capital such area as would otherwise be held unused indefinitely for the sole purpose of avoiding competition.

The millions of dollars of industrial capital are not taxed by the law of February 19; therefore, if you represent only truly industrial companies, a careful study of the circumstances in which the operators are placed by reason of the said decree, will convince you of the injustice of your demand. These operators may be lessees of the lands exploited by them. In this case they are not affected by the new tax, since they will simply continue to pay the rental and royalty to which they are now subject if both are stipulated in the contract. Only in cases where one of these stipulations is lacking will they be affected. Should they own the land—an extreme case in which they are obligated to pay both the Federal rental and seigmory tax—they are in a better condition than are operators who are obliged to acquire the right of exploitation through contracts with surface owners or with intermediaries who devote themselves to that class of speculation.

The average royalty under contracts made with surface owners is 10 per cent of the production and in some cases it is equivalent to 25 per cent. An operator who owns the land pays to the Treasury 5 per cent only of said production, crediting himself, so to say, with the other 5 per cent in his capacity of owner, this being equivalent to the average seigniory tax which in future will be charged by the owners of leased lands.

The rental of five pesos per hectare, fixed by the decree of February 19, is lower than the rental paid on mining claims, which latter is progressive and rises from a minimum of six pesos yearly per hectare on small claims. The tax on petroleum claims is proportional and not progressive, the desire being to permit the operator to acquire a considerable area which will allow of a full and scientific exploitation of the subsoil. At the same time, attention should be called to the fact that the law of February 19 taxes only the exploited claims and that exploitation begins when a deposit is discovered. Therefore, the statement cannot be accepted that the rate of five pesos per hectare is equivalent to ten times the tax assessed owners of lands rented at the rate of five pesos per year per hectare; these latter pay on all their lots, while the owner pays only on the exploited claim. But even supposing that the new petroleum law should nullify all contracts, in accordance with the Constitution of 1917, thereby facilitating the assessment of a uniform tax of five pesos per hectare on all oil lands, this tax would be perfectly legal, since it is based on the principle of the Nation’s direct dominion over all hydrocarbons.

The tax law of February 19 simply facilitates for owners and lessees of oil lands the procedure to be followed for revalidating rights acquired by them under a law which has been annulled.

For your information, we beg to give below the principles of the mining law of Mexico and its transformations to the time of Article 27 of the Constitution at present in effect:

The mining law of Mexico had its origin in Spanish legislation of the time of the viceroyalty, and underwent various modifications until it took the form of a body of laws and principles condensed into the mining ordinances issued at Aranjuez and which have been in effect in New Spain since 1784. In Article 1 of Title V it is stated that the owner of the mines is the King of Spain, this being confirmed in Article 2 of the same title, which says:

Without separating them from my Royal Patrimony, I grant them to my vassals to have and to hold, in such manner that they can sell, transfer, rent, give, or leave them under testament as an inheritance, or in any other manner transmit the rights to them which they possess to persons who can acquire the same, under the same terms as those under which they are held.

Article 3 of the same title establishes the indispensable conditions for retaining the mines in usufruct, which consist in the payment of a tax to the Royal Treasury and in the obligation to work the mines in accordance with the provisions of the same ordinances.

In order to ascertain what the royal patrimony before mentioned consists of, Article 22 of Title VI of the said ordinances may be read, as in it are specified the substances covered. It reads:

I also grant that there may be discovered, solicited, registered, and denounced in the manner stated, not only mines of gold and silver, but also those of precious stones, copper, lead, tin, quicksilver, zinc, bismuth, salt rock and other fossils, be they perfect metals or semimetals, bitumen, or earth juice, granting for the purpose thereof, their refining and working, when required, the provisions of which correspond …

The royal patrimony of the Spanish Grown became the national patrimony of the United Mexican States, historically, through the war of independence which began in 1810 and ended in 1821, and legally, through the treaty of peace and friendship entered into between Mexico and Spain and signed at Madrid on December 28, 1836. Article 1 thereof concludes as follows:

… and his Majesty renounces for himself, his heirs and successors, all pretension at Government, ownership and territorial right with respect to the said States and Countries.

In the same article the Mexican Republic is recognized as a free, sovereign, and independent nation, and the limits of its territory are fixed, in such manner that the Mexican nation substituted the Spanish Crown in its sovereignty and patrimony, as well as in all rights inherent thereto, which it preserves at the present time in so far as concerns the national territory.

The mining ordinances continued to be in effect in independent Mexico, there being only a substitution of sovereigns and the consequent substitution of rights mentioned. The Constitution of Mexico up to the year 1916 did not mention the question of mining rights, so that on this point they left in existence the ancient rights, as is confirmed by the official statement of the Minister of Justice, Encouragement and Public Instruction, transcribed below:

The President, having acquainted himself with your communication of the 28th ultimo, with which you attach one from citizen Francisco Ferrel on the subject of a coal mine denounced by him, has seen fit to declare that fossil coal deposits bear the same status as mines, over which the nation exercises (apparent omission) the dominium utile to citizens, the same being given in ownership in accordance with the provisions of the mining ordinances; that, therefore, coal deposits are subject to the same procedure as is established for the denouncement, adjudication, and possession of mines. Which, by superior order, I communicate to you for your information and appropriate action. God and Liberty, San Luis Potosí, August 22, 1863. Ramón I. Alcáeaz.

At the same time that the legal Government issued this statement, which proves that the mining ordinances of 1783 were still in existence and that the effect thereof was the same as when issued, the same opinion prevailed, with greater reason, in the Government of the Archduke Maximilian, so-called Emperor of Mexico.

On July 6, 1865, the latter issued a decree which opens as follows:

We, Maximilian, Emperor of Mexico, having considered that Article 22 of Title VI of the mining ordinances does not provide regulations governing the production of such substances as are not precious metals, and that such regulations should be established for the continued development of these important branches, and having heard the counsels of our Ministers of State, do decree:

general regulations

Article 1. No one may exploit mines of salt, spring or well and lakes of salt water, coal, asphalt, petroleum, alum, kaolin, and precious stones, without first obtaining express concession from the competent authorities, approved by the Ministry of Fomento. …

On December 14, 1883, Paragraph X of Article 72 of the Constitution of 1857 was amended as follows:

X. To promulgate laws obligatory throughout the Republic, relative to mining and commerce, the latter embracing banking institutions.

Based on this amendment, the mining code was promulgated in 1884, in which dominion with respect to coal and petroleum was established in favor of the surface owners, but the authors of the code had no authority for doing this, since such an amendment would require a prior constitutional amendment abrogating the principle that the direct ownership of the Nation may not be alienated nor laid aside, or, in the terminology of the ordinances, “Without separating them from my royal patrimony, I grant them to my vassals to have and to hold. …”

The Constitution of 1917 proclaims the existence of this general principle, thereby annulling the arbitrary exception which refers to coal and petroleum.

To realize the effects of the constitutional principle proclaimed in Article 27, it is necessary to analyze the right granted to the surface owners in 1884; this right is not in any way the right of ownership of the deposits contained in the subsoil, nor can it be, since this right can be obtained only by actual possession of the petroleum, and this would necessitate the discovery and development of the mineral.

In 1905, Lic. Isidro Rojas presented to the Academy of Jurisprudence a brief on this subject, and in it he stated, very clearly, the reasons which exist for not considering the concession of 1884 as a right of ownership, but only as a faculty of appropriation granted to the surface owner to the exclusion of others. His words are given below:

It is unnecessary to repeat that the owner of the surface who has not as yet discovered the deposits or springs, and cannot dispose of the same nor hold them in possession, may not transfer them, since they have no place in commerce as yet; in a word, he has not any right of ownership to them in the legal sense of the word, since they are but hypothetical in character. There should be no confusion as regards faculties and rights, and much less as regards the faculty of appropriation with the rights of ownership, that is, with ownership itself. I have the faculty of appropriating oxygenated air to myself, but this does not mean to say that all oxygenated air is my property in all its distinctive forms.

In the United States it is considered that the acquisition of the right of ownership over petroleum and natural gas is a natural result of its development, the owner being permitted to take from a well all that he desires, even though he should exhaust a deposit common to various operators, and he is allowed even to use an explosive to increase superficially the production of his well, as may be seen from Chapters 40, 41, and 42 of Archer’s Law and Practice in Oil and Gas Cases, and in the Law of Oil and Natural Gas by Wilkinson and Richardson, the relevant part of which is enclosed (Exhibit No. 1).¹

It being, therefore, not a right of ownership, but only a faculty for the carrying on of exploration and exploitation work, which was granted in 1884, a faculty granted gratuitously, even though the concession were legal, the same power which made it effective can remove it, and this can be said with greater force with respect to a Constitutional Congress which possesses all inherent sovereign rights, for as could be said with Merlin: Les droits que la societé crée, elle peut aussi l’abolir.² Therefore, the revindication of a right which the Nation has always held over petroleum and hard coal cannot be considered as confiscation, neither is it retroactive, since it does not demand of the surface owners the return of utilities obtained through the operation of the Code of 1884 and subsequent regulations.

With regard to the inexpediency of having the operator deduct the federal tax and royalty in making his payments, this cannot result in litigations for the reason that he is only complying with the law, since Mexican legislation authorizes such a procedure as may be seen from Article 2957 of the civil code, which says:

When the law assesses taxes on the lessor demanding payment by the lessee, the latter shall make the payment, deducting the amount thereof from the rental.

The rental of five pesos per hectare was based on data taken from contracts registered in the Cantón of Tuxpan, during the years 1913, 1914, 1915, and 1916, according to which the rental averages 5 pesos 60 centavos (Exhibit No. 2).¹ This basis was taken for the reason that such data is absolutely worthy of confidence, having been taken directly from the property registry by Mr. Villalba, the Department’s agent. The Federal rental is lower than the said average rental, and furthermore, other onerous conditions imposed by surface owners are not exacted. Therefore, the operator, assessed with the Federal rental and royalty taxes, is in a position to develop his business properly, since under less advantageous conditions the oil industry in Mexico has had such a notable development, as may be seen from the attached production chart (Exhibit No. 3),¹ covering the years 1901 to 1917. From the chart of existing wells in the Republic on March 31, 1918, it will also be seen that the industry has not been wanting in facilities for the development thereof in the interior of the country, but has suffered only from the lack of means of transportation for the export of the oil, since the potential production of the wells is over one and a half millions of barrels daily and exportations during 1917 were only fifty-five millions; that is, one tenth of the potential production.

The petroleum law, when issued, should annul those contracts which are contrary to constitutional precepts; in such case, the operator will be subject only to conditions more advantageous than those which have permitted the industry to flourish.

We are [etc.]

Alberto J. Pani

[Enclosure 3]

Messrs. Garfield mid Rhoades to the Mexican Secretary of Industry, Commerce and Labor ( Pani) and the Undersecretary of the Treasury ( Nieto)

Mexico, June 3, 1918.

Gentlemen: We have examined with interest your memorandum of May 30, 1918, which we discussed in full with Mr. Pani on May 31, and beg to submit the following observations thereon:

I

The question of the total amount of tax which the industry should bear is admittedly difficult. We are obtaining from all the companies we represent exact information from which we will be able to present for your consideration the facts upon which we base our conclusion that the taxes proposed would be confiscatory.

II

As to the provision requiring the lessee to deduct taxes from rent and royalty, despite your interpretation of Article 2957 of the civil code, we fear that serious litigation and damage would inevitably result because of the high rate of the tax and the arbitrary valuation of the product, far in excess of its market value, as fixed by Circular No. 15, issued by the Department of Industry and Commerce, under date of April 28, 1918.

Upon comparison of the statistics contained in the exhibits accompanying your memorandum with material thus far obtained from producers and published reports, regarding the relative effect of the decree of February 19, 1918, upon landowners and lessees engaged in production, we find such differences as to make impossible any useful statement of conclusions until we reconcile the statistics and establish a common ground of accepted facts.

III

Pending our further study of facts we beg to submit for your consideration some general suggestions in reference to your discussion of the character of the right of dominion over or ownership of oil lands existing prior to the Constitution of 1917.

Oil, having become one of the necessities of modern living conditions, is a resource in which the public is vitally interested. Whether owned by the public or by individuals it is of value only when produced and used; and, regardless of ownership, production is controlled by the following principles and methods:

1. It should be produced and sold without unnecessary waste and at fair prices, for the benefit and use of the people of the Nation wherein it is found and for the development of industry and transportation.

2. The surplus, above the amount required under No. 1, should be produced for export and the development of foreign trade.

3. It should bear its fair share of the tax burden for public needs, Federal, state and local.

4. Monopolistic control, whereby principles Nos. 1, 2 and 3 are seriously interfered with, should be prevented.

5. Exploration of probable fields. Because of the uncertainty and cost, exploration can only be successfully made by individuals or corporations of large capital.

6. Development of known fields. Because of the cost of refineries, pipe lines, tankage, and transportation such development likewise requires a very large investment of capital.

7. As oil is a non-replaceable resource, the return of the entire investment, with a reasonable profit, must be possible from the sale of the product before its exhaustion, otherwise capital would not invest.

8. The owner of probable oil land has the choice of three ways to act if exploration of the land is to be made.

(a) He may invest his own capital and assume the risk of loss.

(b) He may sell for a fixed price, letting the purchaser take the entire risk.

(c) He may lease for a minimum land rental and a royalty on production, thus participating in the risk.

In each of the above cases (b) and (c), the price paid or the rental and royalty agreed upon will be determined by the probabilities of success and the experience of operation in other fields.

Whether the land is owned by the Government or by private individuals the same practical business rules govern its development.

Instead of getting into conflict and confusion over the question of the ownership of subsoil rights is it not wiser to devote attention to legislation under which the principles and methods above stated can most readily be applied?

We have studied with care not only the arguments presented in your memorandum but as well many of the discussions of this subject which have been published.

We find that many of the ablest lawyers and economists of Mexico have widely differed in their opinions upon the question, whether the Nation reserved to itself dominion over the deposits of oil, or whether the private owner of the surface is the owner.

It is an axiom of constitutional interpretation that persons are justified in acting and relying upon a construction adopted either directly by the Nation through its duly constituted authorities, or by the tacitly accepted acquiescence in a particular course of action on the part of the Government and its citizens during a long period of time. Only by such construction can stability of government and private rights be attained.

As you have pointed out, the Nation, speaking through its duly constituted legislative and executive authorities, in 1884, directly construed the Constitution as recognizing, in the owner of the surface, the right of private property in or dominion over the oil—the subsoil.

In accordance with that law owners of the surface have sold and leased their lands, and the purchasers and lessees have fulfilled their contract obligations with full faith that the Government which had fostered the industry would maintain the guaranties of property rights which had been the guide and inspiration of the investors’ efforts.

The necessity of dealing in the utmost good faith applies to nations as well as to individuals if society is to make steady and stable progress. Without doubt economic and industrial changes require changes in constitutions and laws, but when such changes are made, they should apply to the future, recognizing that it is not wise to attempt to undo that which has been honestly and legally done even though we question its wisdom.

Let us apply these general principles to the question under discussion.

There is a wide divergence of opinion between able and honest men upon the question of ownership of oil in the subsoil.

The Nation, prior to 1917, for a period of 33 years, recognized the right of private ownership. Relying upon such recognition citizens of this and other countries have purchased and leased lands for the purpose of developing oil and have invested millions in their enterprises.

Quite regardless of the theoretical or philosophical discussion of dominion over oil, the fact is that if the Nation now repudiates such private ownership, will it not follow that the credit and faith of the Nation will be shattered both in the minds of its citizens and of the nations of the world?

Nations like individuals are judged by their acts rather than by their intention or theories.

Is it not wise, even if there were no legal or ethical question involved, to avoid the difficulties and controversies that inevitably arise in attempting to apply to existing property rights a radical change of interpretation of laws affecting such property rights?

Again is it wise, even if your contention regarding the law of 1884 be accepted, to now deny rights which citizens of this and other countries not only believed they acquired under that law, but as well have exercised without objection?

As nations of the world must live together, each nation must measure its acts by the effect produced upon the citizens of other nations. If it were conceivable that a nation might live entirely within itself, only its citizens would be injured or benefited by its acts; but as no nation can so live, its acts, affecting its own citizens, are immediately reflected upon citizens of other nations.

Would not such a course of procedure, in dealing with foreigners who have participated in your national industrial development, create a hazard and uncertainty which would hereafter frighten away foreign investors because of the fear that rights obtained under the new laws might not be respected by succeeding governments?

Mexico, as other nations, has offered opportunities and welcomed foreign capital to invest in and develop its resources. Without doubt there have been instances of abuse of the hospitality thus afforded but the great majority of foreign investors, while of course seeking their own profit, have desired and worked for the true development and progress of Mexico. We must recognize the mutuality of the relations that necessarily exist between the Nation and foreign investors. Neither should seek unfair advantage.

We are in accord with your suggestions regarding monopoly—no industry should be a monopoly, in the hands of either citizens or foreigners, which can be used to the injury or disadvantage of the public.

The Government, acting for all its people, should control and regulate industry and never allow any act of men by monopoly or otherwise to be stronger than the Government. On the other hand, the Government must be as strictly just in its treatment of business enterprises as it requires those enterprises to be just in their actions toward the Government and the public.

By recognizing the right of a private owner, who has acquired the surface prior to the Constitution of 1917, to sell or lease underlying oil, the Government exercises its dominion over oil by taxation, by laws against monopolistic control, and by police regulation laws.

At the same time the Government may exercise dominion over oil underlying national lands by reserving the oil to itself in any future sale of the surface.

It would be found that the same principles governing exploration and production would necessarily apply to lands owned by the Government and those owned by individuals. The taxes upon production would be the same, the laws governing monopoly, etc., would be the same.

The exploring corporation would choose the location most favorable to success. If it were national land the Nation would receive the royalty agreed upon—exactly as would the private owner.

Exploration and development would follow only when the royalty and other conditions were sufficiently reasonable as to attract capital.

Incidentally the system of taxation introduced should respond to the demands of export as Mexico must look to the world’s market for her greatest consumption.

Mexico does not at present consume at home to exceed 20,000 barrels of oil daily, or 7,000,000 barrels per annum. The United States, in its highly developed state, industrially, consumes 335,000,000 barrels annually. But Mexico has the astonishing potential production to-day, with the industry yet in its infancy, of over 400,000,000 barrels annually.

This situation indicates the foreign field as Mexico’s market. The total of 55,000,000 barrels marketed in 1917, against the potential production of 400,000,000, tells the story of Mexico’s weakness in the oil industry.

Shipping facilities are the determining factors. At present there are 48 tank steamers and barges in service, with a total carrying capacity of 175,000 tons. In these times capital is timid; the amount required to increase this export possibility through provision of tank steamers is enormous—and the elements and materials required are very difficult to obtain. Capital for this purpose can only be had if the industry is supported by such equitable laws as will justify confidence against confiscation and guaranties of future stability. Given such guaranties tank steamers could be completed and brought to this service within 18 months, increasing the carrying capacity to 700,000 tons, more than three and one half times the present capacity.

If Mexico fails to provide these guaranties, all transportation facilities must, of necessity, be turned to other fields where conditions conducive to support of capital and development of industry prevail.

In view of the observations contained in your memorandum we beg to ask your opinion regarding the following points.

1. Do you consider contracts of petroleum leases of subsoil rights as “contracts of lease” under Article 2957 of the civil code to which you refer?

2. Would the Government defend for the operator suits at law which may arise from the efforts of lessors to enforce specified performance of contracts as to payment to them of the full amount of rental and royalty provided?

3. Do you interpret the law to mean that, should lessors refuse to allow payment of taxes in the form and manner established by such law, the Government will declare such contracts forfeited and permit the lessee to denounce the land covered by such contract, dealing directly with the Government and at the prices specified in the contract?

4. Section 14, decree of February 19, provides that those manifestations not containing justifiable data shall be rejected by the Department of Commerce and Industry. Will your search reach to the inherent legality of titles to the ownership of properties manifested? Is it the purpose of the law to provide a method of determining the legality of titles?

We very greatly appreciate your courtesy in undertaking this discussion and the spirit in which you have approached the problems. We are confident that when we obtain the detailed facts we are compiling it will be possible to eliminate much, we hope all, of the confusion that prevents us at present from agreeing upon conclusions. The facts we present will be of course subject to such proof as will convince you of their integrity.

Assuring you [etc.]

• J[ames] R. G[arfield]
• N[elson] R[hoades]

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