812.6363/10–647

The Under Secretary of State ( Lovett ) to the Under Secretary of the Navy ( Kenney )

confidential

Dear Mr. Kenney: Prior to his departure for Mexico City, Ambassador Thurston89 discussed with me certain aspects of the Mexican oil [Page 792] matters which Secretary Forrestal90 had previously talked to me about on a personal basis. In the course of conversation, Mr. Thurston told me that he did not feel it was proper to disclose in a large meeting which he attended in the Navy Department certain matters which have a direct bearing on the Government-to-Government transactions with Mexico. Accordingly, I asked him for a memorandum, a copy of which I enclose for your confidential information in the hope that it may be of some value to you.

With kind regards, I am

Very sincerely yours,

Robert A. Lovett
[Enclosure]

Memorandum by the Ambassador to Mexico ( Thurston ) to the Under Secretary of State ( Lovett )

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

[Page 793]

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 [Page 794] 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 [Page 795] 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.

Walter Thurston
  1. Ambassador Thurston had visited the United States for consultation on the Mexican oil situation.
  2. James V. Forrestal, Secretary of the Navy until September 17, 1947 when he became Secretary of Defense.
  3. For documentation on this subject, see Foreign Relations, 1938, vol. v, pp. 720 ff.
  4. For United States-Mexican exchange of notes on expropriated petroleum properties, September 25 and 29, 1943, see Department of State Executive Agreement Series No. 419, or 58 Stat. (pt. 2) 1408.
  5. See press release entitled “Final Compensation for Petroleum Properties Expropriated in Mexico”, Department of State Bulletin, October 12, 1947, p. 747.
  6. For memorandum by President Roosevelt to the Secretary of State, July 19, 1944, see Foreign Relations, 1944, vol. vii, p. 1346.
  7. See instruction 8098 to Mexico City, November 8, 1945, in ibid., 1945, vol. ix, p. 1161.