The oil law in Mexico, which led to expropriation proceedings

The oil industry became more relevant for Mexico in the 20th century; however, the process for the recognition of national authority over such a valuable natural resource took decades. Find out about the first regulatory projects that tried to control the oil industry and how hard it was to follow them.

The oil law in Mexico: the antecedent to the expropriation processes

The development of the oil industry in Mexico began in 1862 with the first drilling for crude oil in the vicinity of Mexico City. From that moment on, the first foreign oil companies were formed, which began working in areas such as Veracruz, Tabasco, and the Huasteca region—territories that provided thousands of barrels per day.

To strengthen foreign production, the government of Porfirio Diaz established a national policy widely favorable to investors at the cost of alienating national territory. This was enough to bring back the Mining Law of the United Mexican States of 1892. In the fourth number, it says:

"The owner of the land shall freely exploit without the need for special concession, and in no case, the following substances: mineral fuels." "Oils and mineral waters [...] and, in general, all those not specified in the same article of the law."

As you can see, oil was first seen as a byproduct of mining, so if it was found, it belonged to the mine's owner.

To separate the mining industry from the oil industry, in 1901 the first Petroleum Law was formulated, which established the power of the Executive Branch to grant exploration permits in the subsoil of uncultivated or national lands as well as federal lakes, lagoons, and estuaries to discover petroleum or gaseous hydrogen carbide. Through this law, people and businesses were given the right to use these oil resources for almost ten years without paying any taxes.

This Porfirian policy was widely questioned during the Mexican Revolution, especially by Venustiano Carranza, First Chief of the Constitutionalist Army, who began to implement the regularization and control of the oil industry through the Ministry of Development, later the Ministry of Industry, Commerce, and Labor (SICT). With this, all contracts entered into for leasing the subsoil of oil lands were terminated because their exploitation belonged solely to the nation. It also led to the formation of the Technical Petroleum Commission, which is in charge of overseeing and regulating the petroleum industry.

This consideration was taken up again in Article 27 of the 1917 Constitution, which stipulated the regulation of the ownership of land and waters under the nation's domain and, indirectly, the power over all minerals and fuels. So, only the country could give this domain to private people in exchange for money and the public good.

Another consideration added to Article 27 was the exercise of expropriation by the state, which had the power to take private property in cases of public utility. The distribution of ejido land, national defense, general communication routes, and other conflicts in which individual interests had to give way to the good of the group were some of the things that led to expropriation.

This new constitutional principle included oil, which the state could declare a public utility to help improve the public treasury and help the country become more industrialized. It's important to remember that by that time, oil had become one of the most valuable resources in the world.

Given this situation, it was necessary to create a new legal body to regulate the oil industry and to make it clear that oil would become the direct domain of the nation. In 1917, the Technical Petroleum Commission of the Petroleum Department of the SICT came up with a rough draft of rules for the Mexican oil industry so that Article 27 of the Constitution could be put into effect.

It is important to note that this early draft was made based on the field experience of the members of the Technical Petroleum Commission during its first years of work. For example, between 1916 and 1917, inspections were done at different oil fields in Mexico to check the production and state of the oil companies.

The main goal of this legal initiative was to end the old Porfirian practices that were rooted in the oil industry, especially those that only helped foreign pockets because it was "necessary to issue" a law that would fit with the new rules of our Magna Carta, which was meant to recover the economic sovereignty of Mexico's natural and energy resources.

Another goal was to silence the voices that wanted to see Article 27 of the Constitution repealed to continue maintaining the economic privileges that the dictatorship of Porfirio Díaz had granted, so having a transparent and clear law would make it possible to resolve: "[...] The legal position of national and foreign individuals and that of the companies concerning oil exploitation, pointing out the rights and the way to acquire them, the obligations and the penalties in case of fault, and how the Nation, without immoderately taxing the industry, will be able to get the greatest fruits from it".

Based on what has been said so far, the Technical Commission of Petroleum came up with four normative axes for the preliminary draft of the Petroleum Law: first, those related to the subject matter of the law itself; second, those related to the administrative procedure of processing; third, those related to the way to exercise the rights related to the exploitation; and fourth, everything that could come up in lawsuits about oil wells.

When reading the first articles of this draft, one finds the line that reaffirms sovereignty over subsoil resources, such as oil beds, natural oil sources and deposits, gaseous hydrocarbons, deposits of ozokerite and asphalt, and all hydrocarbon mixtures of different types. Any right granted to individuals for the exploitation of the country's oil resources was not absolute and conclusive because this domain belonged to the nation directly and was inalienable and imprescriptible. Instead, the state could alienate, mortgage, and transfer it.

The final draft of the Petroleum Bill of the United Mexican States was presented in 1918 after being studied by engineers José Vazquez Schiaffiano, Raúl Landáruzi, Alberto Langarica, and Joaquín Santaella, who was also the author of the foundations of the aforementioned law based on the opinions of Mr. González Roa and Mr. Langarica. The engineers Alberto J. Pani, director of the SICT, and León Salina, senior officer, also participated, together with the SICT agents in the Department of Petroleum.

One of the crucial points of the law was number 4, which established in its content that the oil industry was of public utility and was a precedent for the right of expropriation by Article 27 of the 1917 Constitution. The fact that the Legislative Power had to put off talking about its approval shows that this was one of its main problems with it.

The division of opinions and the consideration of the negative effects that the retroactive application of Article 27 would have on the Mexican nation also slowed down the approval of the bill presented by the SICT. Likewise, between May 14 and August 15, 1923, the Mexican government entered into negotiations with the U.S. government to reach a satisfactory understanding of all the claims presented by U.S. settlers during the Mexican Revolution. As a result of these meetings, the Bucareli Treaties were signed, in which the government of Álvaro Obregón accepted the non-retroactivity of Article 27 regarding the oil industry.

Undoubtedly, this decision stopped the economic independence that the Mexican nation was trying to achieve under the new constitutionalist principles, while foreign companies continued to show great benefits and abuse Mexican workers, a situation that did not go unnoticed by the government of Lázaro Cárdenas del Río, who on March 18, 1938, completely ended the plundering of the Mexican nation's oil after the issuance of the oil expropriation decree.

Sources: AGN and Colegio de México