The Reply to Mexico: Standard Oil Puts Forth Its Position

In 1933, newly elected President Franklin Roosevelt announced a “Good Neighbor Policy” that promised a more friendly and less interventionist policy toward Latin America. The policy was prompted as much by Latin American resistance to U.S. intervention as by the U.S. government’s benevolence. In 1937, the policy was put to the test when Bolivia charged that Standard Oil of New Jersey had defrauded the Bolivian government; Bolivia canceled the company’s oil drilling rights and confiscated its facilities. True to its new policy, the United States avoided military intervention and instead pressured Bolivia by withholding loans and technical assistance. The following year, a war of words erupted between the government of Mexico and the Standard Oil Company of New Jersey over who owned the rights to exploit a portion of Mexico’s oil reserves. After U.S. oil companies refused to accept the arbitration terms of the Mexican labor board, Mexican President Lázaro Cárdenas expropriated oil company properties worth an estimated half billion dollars. In The Reply to Mexico, Standard Oil offered a vigorous response to the Mexican expropriation of its property in 1938.

The Real Issue

It will be recalled that the seizure of the American and other foreign oil properties in Mexico in March, 1938, was the culmination of a long series of confiscatory acts depriving foreigners of property and rights acquired in good faith under the laws and Constitution of Mexico; that for years the Mexican Government had been seeking to squeeze out the foreign owners and take over these oil properties; that seven months before the seizure was made the American oil companies wrote to the Department of State in Washington stating that the ultimate aim of Mexico was confiscation; that the seizure was carried out in violation of the Mexican law of expropriation and of the Mexican Constitution itself; that, in addition, the Mexican Government has denied that any compensation is due for the value of the oil in the subsoil of the seized properties—which obviously constitutes the chief value of any oil property—on the specious but unsound ground that the owners of the land had no “property right” in this oil; although they admittedly had the exclusive and irrevocable right to extract it.

Brief Makes Sweeping Challenges, Denials and Assertions

The Mexican Government, in its brief, challenges the companies' contention that the real issue is Mexico’s confiscation of the oil properties. It bases its denial on the fact that Mexico has declared its intention to pay a just compensation, which allegedly it is economically able to pay, and contends that this declaration of intention validates the seizure as a lawful act of expropriation. It then proceeds to set forth the proposition that the real issue is whether the companies shall continue to operate their properties protected by what the author of the brief picturesquely describes as an “illegal and privileged system of spoliation and abuse, not only to the detriment of the working classes and of the sovereignty and dignity of Mexico, but also with injurious effect on the friendly and cordial relations which are maintained and fostered by the governments and peoples of both nations.” (p. 20).

The brief goes on to assert that the companies have obstructed the payment of just compensation by their opposition to an impartial valuation. It charges them with not desiring compensation but wanting, rather, to continue operating their properties under a “privileged and illegal” regime. Finally, the brief presents a series of charges against the companies to the effect that they are endeavoring to deceive public opinion, and that they have threatened American manufacturers so that these will not sell their products to the Government of Mexico. In conclusion, the first chapter states that the negative and destructive effort of the companies in sowing mistrust contrasts with the cooperation and friendship of two great nations.

These charges, if true, would be serious, but it needs only a cursory review of the facts in the case to demonstrate that the charges are as unfounded as they are misleading.

Mexico Has Failed to Make Payments

Mexico not only has failed to make any cash payments but has maintained as the central point of its entire position its refusal to make any payments whatever for the “expropriated” exclusive right of the companies to extract oil from their properties. Although the concessions are listed among the properties expropriated no value has been assigned to them. The elimination of the subsoil rights makes plain the fact that the Cárdenas Administration has no intention to make a fair or adequate compensation for the property which it has seized. In other words, the Government’s declaration of its “intention to pay” is grossly misleading, as it expressly refuses intended payment for the major value of the properties. The protection and safeguard of these subsoil rights was the crux and goal of all the discussions, negotiations, international agreements, statutes and decisions from 1917 on. Nothing could have been more solemnly assured and guaranteed. Mexico now repudiates the whole legal structure thus consecrated in the most formal documents.

What the companies have sought and still seek is that Mexico’s solemn commitments, recorded in agreements, the Constitution and the laws of the country, shall be applied properly and impartially. They deny Mexico’s right to repudiate them. They have stated that if the laws of Mexico were fairly and justly applied, the Government would be unable to carry out the expropriation inasmuch as it lacks the economic capacity to provide the necessary indemnity, not only for the surface installations but also for the subsoil rights which alone give an oil property value and for which alone it is sought. In spite of this fact, the Mexican brief makes the statement that the companies desire to continue operating their properties protected by an illegal and privileged regime of spoliation to the detriment of the working classes. Were this just another manifestation of Mexican demagoguery designed to justify a high-handed confiscation, it would be unworthy of attention. To show how far it is from the truth it is sufficient to recall the statement of the President of Mexico, Lazaro Cárdenas, published in the press in Mexico on February 29, 1940, wherein he said that the oil workers enjoy an especially privileged situation in comparison with other organized workers of the country. It is a matter of record that the oil workers in the service of the expropriated companies enjoyed wages and working conditions superior to those of the workmen of any other industry in Mexico. To call this spoliation to the detriment of the working classes is manifestly absurd. As will be shown hereafter, the Mexican Government has recently imposed working conditions far less favorable to labor than those enjoyed under company management.

Companies Seek Friendly Relations with Mexico

The companies at all times have sought to maintain the friendliest possible relations with the Mexican Government. It goes without saying that they are better off when relations between the two countries are friendly than when, as in recent years, they have been strained. It follows, therefore, that the Government’s statement that the companies wish to continue under a regime that would be detrimental to the dignity and the sovereignty of Mexico and to the good and loyal relations of friendship which are maintained and developed by the Governments and peoples of both nations, lacks any substantiation. The so-called “expropriation” does not tend to develop friendly relations between the peoples and the Governments. It is difficult to see how the reparation of an injury could endanger the friendly relations between two nations.

Conclusion

The issues between the United States and Mexico may be summarized as follows:

The Companies' Position

The companies contend that the uncompensated seizure of their property in Mexico is a bald confiscation.

Mexico’s Contentions

Mexico contends that it is not a confiscation because it promises to pay for the property hereafter.

The companies contend that Mexico’s promise to pay is disingenuous because even the promise covers only the surface properties and installations and not at all the subsoil petroleum rights which were guaranteed to the companies (a) by the five “Texas Company” decisions of 1921 holding that the Constitution of 1917 nationalizing petroleum could not be given a retroactive effect so as to impair rights then vested, and constituting established jurisprudence, (b) by the Bucareli Agreements of 1923, and (c) by the Mexican Petroleum Law of 1927, and by the Morrow-Calles Agreement of 1927—all constituting an impregnable legal structure which Mexico would now repudiate.

Mexico contends that the subsoil petroleum has always belonged to Mexico, that the companies' rights to explore and exploit for oil under the laws of 1884, 1892 and 1909 were concessions only and not rights to property in the oil, which accrue only after the oil has been lifted and reduced to possession, that the concessions may be withdrawn at any time and that they need not be paid for.

The companies contend that the laws of 1884, 1892 and 1909 gave the surface-owner a property right in the subsoil petroleum and the exclusive right to exploit it. The confirmatory concessions issued under the Petroleum Law in accordance with Mexican Supreme Court decisions and the Morrow-Calles Agreement constitute a recognition of rights legitimately acquired before 1917; they are the very essence of the oil properties. The suggestion that such guaranteed titles now have suddenly become revocable licenses without tangible value is preposterous and a repudiation of every understanding reached between the United States and Mexico in a voluminous correspondence between 1917 and 1927.

Mexico contends that both the “confirmatory concessions” of preconstitutional titles and the post-1917 ordinary concessions for a term of years, are like franchises granted in the United States to street railways to lay tracks upon the streets or to public utilities to install service pipes or poles along the streets, and that inasmuch as such franchises have been held by some Judges of the United States Supreme Court not to be justifiably taken into consideration in establishing a rate base for rate-making purposes, therefore even under United States law a concession is regarded as of no value.

The companies contend that the attempt to draw an analogy between a public utility franchise and a mining title, called in Mexico a “concession,” has no foundation and that there is no analogy between the two; but that even if there were, the expropriation in eminent domain of a franchise in the United States does require a definite compensation.

Mexico contends that even if under American law franchise value is paid for in eminent domain, the distinction between rate-making and eminent domain is not justified and that the companies' repudiation of any analogy between a Mexican mining concession and an American utility franchise is not warranted.

The companies contend that the obvious intention of Mexico to pay nothing whatever for the bulk of the oil values involved, whether called property rights or perpetual or long-term rights to extract and sell oil, is an evidence and confession of Mexico’s intention to confiscate, since the value of the wells, buildings and surface installations is but a small part of the whole.

Mexico contends that in offering to pay for the surface property and installations it is complying with its obligation to compensate under Mexican law.

The companies contend that Mexico’s arbitrary valuations of the surface properties, tax values for land and depreciated cost value for wells, pipe lines and buildings, with nothing whatever to allow for the immense sums spent in exploration and discovery, and its further creation of counter-claims and workmen’s claims against the companies, make of the Mexican promise a self-confessed confiscatory scheme.

Mexico contends that it may establish such system of compensation as it sees fit, and that the Mexican scheme is an appropriate method of compensation.

The companies contend that Mexico is so deeply insolvent on practically every form of its obligations, external and internal, that it is hopeless to expect Mexico to make any large payments abroad, and that the other creditors of Mexico would hardly stand by to permit such payment, even if it were conceivable.

Mexico contends that this is a case purely for Mexico and the companies to settle privately and that it has not an international character warranting the interposition of the United States and other foreign countries the properties of whose nationals have been expropriated.

The companies contend that even though some of the expropriated companies had incorporated in Mexico, the bulk of their stockholders were foreigners, that the established rules of international law warrant the interposition of foreign governments on behalf of the foreign majority of the stockholders; and that in any event the Calvo Clause forfeiting diplomatic protection is not deemed valid by the bulk of the authorities in international law and has been consistently contested by the United States Government.

Mexico contends that Mexican corporations or foreign stockholders in such corporations have no right to invoke foreign diplomatic protection and that the Calvo Clause bars foreign governments from interposing in the case to demand diplomatic settlement or arbitration.

The Government’s brief has been analyzed to demonstrate the speciousness and unsoundness of Mexico’s case. Mexico’s attempt to justify and rationalize its confiscatory acts merely proves, out of Mexico’s own arguments, how flagrant and unsustainable this confiscation is. Far from refuting the charge of confiscation, the Mexico brief confirms it, and the explanations in confession and avoidance are self-condemnatory. In undertaking this costly experiment, Mexico has violated Mexican constitutional law, Mexican legislation, its agreements with the United States and elementary rules of international law. Common conceptions of justice require that Mexico make reparation for its wrong, and the only reparation now feasible is a restoration of the properties to the management of their owners. Coincidental therewith, the companies have expressed their willingness to compromise their legal rights by entering into an operating agreement with Mexico along the lines of the Objectives of January 26, 1939.

Source: The Reply To Mexico (New York: Standard Oil Co., 1940).