[Enclosure]
Memorandum by the Ambassador to Mexico
(Thurston) to the Under
Secretary of State (Lovett)
[Washington,] September 30,
1947.
I have some misgivings about our current activities with respect to
the development of Mexican petroleum resources.
Background: In 1938 the Mexican Government
expropriated the majority of the foreign owned oil companies
operating in Mexico.91 An
Agreement was subsequently reached between the Mexican and American
Governments92 whereunder the American companies affected by the
expropriation would receive compensation, and the last payment under
this Agreement will be made today.93 A similar Agreement with respect to the British and
other foreign interests affected by the expropriation was concluded
in Mexico City one month ago.
It has been the policy of this Government not to condone the
expropriation proceedings of the Mexican Government by advancing
United States funds, through any agency of this Government, for the
development of the Mexican oil industry in its commercial phases.
This policy has been set down in a Presidential Directive initialled
by President Eoosevelt in 194494 and in
a Presidential Directive approved by President Truman in 1945.95
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The organization (Petróleos Mexicanos or Pemex) created by the Mexican Government to administer
the expropriated petroleum industry soon demonstrated its inability
to operate the industry in such a fashion that adequate quantities
of petroleum might become available to world use. Official
conversations have been held by my predecessor and myself with the
Presidents of Mexico in an effort to ascertain whether foreign oil
companies might again be permitted to collaborate in the development
of Mexico’s oil resources. These conversations have thus far
produced no results—in part because the American oil companies are
reluctant to engage in operations in Mexico until certain provisions
of the Mexican petroleum law shall have been modified, and in part
to the feeling of hostility of some of the Mexican people to the
foreign oil companies and to the idea of their return to Mexico.
Recent Developments: Since the inauguration
of President Alemán, the affairs of Pemex have been administered more efficiently and an
attempt has been made to discover and to bring into production new
oil reserves. This effort has taken the form of the granting of
drilling contracts to American companies and tentative negotiations
with American oil companies—one of which, the Cities Service
Company, may soon conclude an agreement—for participation contracts.
The pattern of the drilling contracts is roughly that of a cost plus
agreement with payment in 6% Government bonds convertible into oil,
if any of the wells are productive, at the election of the
bondholders. The participating contracts call for financing by the
companies of development operations by Pemex, reimbursement to be in the form of Government
bonds and of marketing rights on 50% of any oil produced. It is
generally believed that the effort of Pemex to develop the national petroleum resources
through drilling contracts will fail because of insufficient funds
and the dubious character of some of the contractors involved. The
Cities Service contract, on the other hand, if it is consummated,
may produce satisfactory results.
In the meanwhile, the general economy of Mexico has been seriously
disturbed by the curtailment of its wartime exports, by the great
increase of imports following the reconversion of American industry,
by the closing of the American frontier to exports of cattle
following the out-break of the foot and mouth disease in Mexico, and
by a more or less general economic recession not entirely related to
these factors. At the same time, President Alemán not only has
initiated a large scale and very costly program of national
improvement involving the construction of highways, irrigation
projects, power plants, air fields, and the development of
agriculture and industry, but has repeatedly promised his people
that he would lower the cost of living. Under all these conditions,
the development of the Mexican petroleum industry
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with the resultant inflow of dollar
exchange assumes special importance in Mexican eyes.
Last July, the Technical Petroleum Committee, which I understand is a
body representative of all United States Government departments
interested in petroleum, addressed an inquiry to the American
Embassy in Mexico with respect to the general situation regarding
petroleum and with specific reference to the advisability of
initiating formal discussions with the Government of Mexico looking
to the development of that country’s petroleum resources. The
Embassy’s reply to this instruction stated that such negotiations
could prudently be initiated in the near future and recommended that
they be begun with the Mexican Foreign Minister and President
Alemán, possibly, in the case of the latter, on the basis of a
personal letter from President Truman.
Without apparent reference to the development just described, Mr.
Paul Shields, an American business man residing in New York City,
who has promoted arrangements of considerable importance in Mexico
in the past, has held discussions on behalf of the Navy Department
with the Head of the Bank of Mexico and the Mexican Minister of
Finance, and others. These negotiations also have been participated
in to some extent by the Mexican Ambassador to Washington and seem
to have led the Mexicans to believe that in return for certain
arrangements resulting in the delivery of adequate quantities of
Mexican oil to the United States Navy a cash advance of perhaps as
much as one hundred million dollars may be made to the Mexican
Government by the United States Government or some dependency
thereof. They seem furthermore to have touched upon the formation of
a company which would in some fashion involve itself in the
situation. There is reason to question the motives of the Mexican
officials and others who presumably would constitute this
organization. It appears to be contemplated by Mr. Shields that
these negotiations, which at least for a certain period should be
conducted by himself or by representatives of the Navy Department
with the Mexican Minister of Finance, could be so guided that they
would result in the return to Mexico of private foreign oil
companies. At the present moment, the Mexican Embassy is awaiting a
reply to a letter addressed to Mr. Forrestal proposing that
representatives be sent to Mexico to discuss the suggested
arrangements.
Comment: The willingness of Mr. Shields to
place at the disposal of our Government his knowledge of Mexico and
its present authorities and his desire to contribute to the solution
of our own need for petroleum and of Mexico’s economic and petroleum
difficulties is appreciated. I feel, however, that it is unwise and
dangerous as a general policy to by-pass the recognized and
established channels of intercourse between
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states, and that it is particularly hazardous
to do so in the present instance. There has been no greater source
of misunderstanding between the United States and Mexico than
petroleum and any mishandling of this question might easily and
speedily impair relations between the two countries—which are on a
better basis now than ever. Mr. Shields of course can have no
knowledge of the secret Presidential Directives precluding United
States Government aid in the commercial development of Mexico’s oil
industry (which was seized in part from American ownership), nor is
it to be expected that he should be aware of the danger of
encouraging expropriation of American and other foreign owned
petroleum interests in other countries of this hemisphere, such as
Colombia.
Moreover, … the Mexicans could easily be aroused to active hostility
against us should injudicious action create the impression that the
United States Government itself is seeking domination of Mexico’s
petroleum resources. In the event that we should acquire direct
Government to Government interest in Mexico’s petroleum, we would
thereby set up a target for those hostile to us, with the result
that any minor labor conflict in the petroleum industry could be
exploited to the disadvantage of harmonious relations between the
two countries.
I recommend therefore that high policy within our own Government
regarding Mexican petroleum be immediately and definitely
coordinated and operated through one official channel only. I
further recommend that when this has been done, normal negotiations
be instituted with the Mexican Government designed to ascertain
whether there is any likelihood that American and other foreign
petroleum companies may be permitted to operate in Mexico legally,
normally, and on a competitive basis.
If it should be ascertained that there is no possibility of the
establishment of conditions under which bona fide American and other
foreign companies may return to Mexico, then our policy should be
re-examined with a view to decision whether our need for petroleum
for defense or other purposes is sufficiently great to warrant the
risks involved in United States Government support of the Mexican
Government’s administration of the expropriated Mexican petroleum
industry.
