Contracts in Very Poor Condition
One of the principal reasons contributing to the creation of an unregulated Anglo-American business world was the growth of international demand for oil and the decline of domestic Mexican demand in the second decade of the twentieth century. Heretofore used principally for illumination, crude petroleum was gaining additional versatility and demand. Oil's use in fueling railways, ships, and industries gained momentum, and oilmen pioneered the conversion of rail-
way locomotives to fuel oil, substituting for wood and coal. This conversion occurred as early as 1889 in Russia. In the 1890s, Doheny introduced petroleum to the locomotives of California.
Railway men in Mexico too converted their locomotives to fuel oils, dispensed in 10,000-gallon tanks along the rail lines, effecting savings and improving performance. With oil, the railways saved approximately 40 percent on their fuel bills. Doheny estimated that three and one-half barrels of oil, costing $2.60, accomplished the work of one ton of coal, which cost between $3.45 and $4.00.[2] Fuel oil weighed less and was more efficient. Mexico's locomotives consumed only sixty-two pounds of domestic fuel oil per kilometer compared to ninety-one pounds of imported and domestic coal. Fuel oil performed better over flat terrain. On the 189-mile Tehuantepec railway, stretching from the Atlantic port of Puerto México to the Pacific terminal of Salina Cruz, oil fuel improved the speed of the locomotive by 16 percent over coal.
Other sectors of the Mexican economy were also in the process of increasing their usage of domestically produced petroleum. El Aguila produced inexpensive fuel oil with a low flash point of 80 degrees Fahrenheit through preliminary distillation at its "topping" plants. It sold the oil for use in sugar mills, electrical light and power stations, breweries, steel works, cement works, and brick factories. Moreover, the Mexican government refitted its coastal vessels with boilers that burned petroleum.[3] However, Mexican fuel oil gained greater usage outside of the country in the second decade of the twentieth century.
Owing to its abundance and low price between 1911 and the First World War, Mexican petroleum lent itself to expanded uses in the United States and throughout Latin America. Railways and dredgers used in building the Panama Canal were equipped with oil-burning boilers. Once the interoceanic canal was opened to shipping in 1915, Doheny's tankers delivered petroleum to the Chilean nitrate and copper industries.[4] In England and the United States, industries adapted fuel oil to annealing furnaces, making nuts, and distilling zinc. Even biscuits came to be baked in petroleum-fueled ovens. The manufacturers of oil burners and furnaces multiplied, and at the end of the war, apartment buildings and homes converted their heating systems from coal to oil. Business was brisk. "We have been literally swamped with requests for our [oil-burning] installations in buildings here," reported the president of the Petroleum Heat and Power Company of New York. "Our ability to meet this demand depends upon an uninterrupted Oil supply from Mexico."[5] Markets for asphalt, for which
heavy Mexican crude petroleum was particularly appropriate, also expanded. United States refineries increased their production of Mexican asphalt from 114,000 tons in 1914 to more than 674,000 tons in 1919. In the same year, Mexican crude yielded more asphalt than did domestic American crude oil. Great Britain and Europe had few asphalt roads before World War I. But following the war, Shell's refineries in the Netherlands produced bitumen from Mexico's heavy crude oils for that purpose.[6]
The second decade of the twentieth century was one in which the world's fighting ships began to be converted from coal to fuel oil. As First Lord of the Admiralty, young Winston Churchill laid plans to provide twelve super Dreadnoughts, twelve cruisers, and forty destroyers of the British navy with oil-burning equipment. However, the British Admiralty used little Mexican oil. Its sulfur content was too high, its flash point too low, and it smoked excessively. In January of 1914, the Admiralty attempted to purchase some two hundred thousand tons per year of Mexican fuel oil. Cowdray used his very best oil to fulfill this contract, but it was not good enough. British warships ran mostly on the lighter, sulfur-free, American fuel oil.[7] Doheny too suffered from the British Admiralty's exclusion of Mexican oil. He once told a Senate hearing on the matter that he believed there existed a conspiracy between Shell and the Russian companies (before the Bolshevik Revolution) to provide for the British navy. "I went over there [to England] two years ago, at the solicitation of English capitalists, to talk about selling oil from Mexico," Doheny testified. "I found that their specifications were very ingeniously contrived by people who were selling oil from other places. The arrangement was such as to exclude Mexican oil." Doheny also harbored hostility toward the U.S. Department of the Navy for not buying Mexican fuel oil.[8] But the product was just not good enough.
Not only were navies of Europe and the United States converting their ships to fuel oil but so too were the merchant marine and well-known steamship lines. Overseas transport and passenger firms like White Star Line and Cunard Company completed the conversion before the war. Many smaller steamship lines put off converting from coal to oil-burning engines during the time of high oil prices — during World War I — but began conversion again when prices began to decline in 1919.[9] In any case, fuel oil was rapidly replacing coal.
That Mexican oil did not serve the needs of British warships did not bode ill for exports. After the war broke out in August 1914, Mexican
oil poured into U.S. markets. It formed the oil stocks for industrial usage and replaced the finer U.S. fuels being diverted to American and British warships. The New York office of Anglo-Mexican negotiated a number of sales contracts with the larger American companies such as The Texas Company, Standard Oil of New Jersey, and Gulf, which were selling their U.S. production to the British Admiralty.[10] Attempting to produce a nonodorous kerosene, chemists of El Aguila in 1920 had tried various methods of removing the sulfur from the oil. They ran the crude through lead salts and heated the product in order to decompose the sulfuretted hydrogen. It was no use. "The remaining kerosene still contained sulphur," they reported. The same was true of the fuel oil. The United States provided a total of 85.2 percent of British petroleum supplies in 1917; Mexico contributed a mere 6.3 percent.[11]
Given the expansion of markets, exports of Mexican production to the United States and other foreign destinations increased dramatically throughout the second decade of the twentieth century. Mexico provided the United States market with a mere 1 percent of its petroleum in 1911. But by 1919, Mexican oil satisfied 14 percent of a vastly expanded American consumption of petroleum products. Mexico's petroleum was shipped to refineries on the Gulf Coast and in the North Atlantic states. By the end of the decade, well over 80 percent of Mexican crude oil headed for U.S. ports. The remaining 20 percent or less of exported Mexican petroleum was destined for Latin America and Great Britain.[12]
Mexican production expanded up to 1916 because of the flush production of its major wells — only half of the story of the great Mexican oil boom. Price trends made up the other half. The heavier weight and location of Mexican production made it a part of the Gulf Coast market, where it competed and mixed with Texas, Louisiana, and (later) Oklahoma crude oils. It was priced consistently lower than the lighter Appalachian crude of Pennsylvania. The heavier Mexican crude oils were classed similarly to the heavy California crude oils. The former served Atlantic Coast markets and the latter served Pacific Coast demand. Between the discovery of Spindletop in 1901 and Potrero del Llano in 1910, oil prices in the gulf hovered around forty cents and seventy cents per barrel. Those prices rose above one dollar per barrel during the First World War, as demand rose and U.S. exploration declined. By 1919, prices stood at nearly twice their prewar levels. (See graph 1.) High prices meant that Mexico, or more precisely the foreign oil companies there, reaped profits in greater ratio than their expanded
output. Domestically, prices for bunker fuel also rose.[13] Few oil-producing nations in the twentieth century ever again would benefit, as Mexico did from 1917 to 1920, from the simultaneous rise of production and prices.
For the most part, Mexican governments permitted the export-led oil development. During the Revolution, it was the only economic bright spot and contributed to scarce public revenues. Mexico's peculiar petroleum geology, however, imposed some of its own limits on how it yielded up its treasures. Never before had oilmen encountered oil deposits in limestone formations. The gulf plain of northern Veracruz averages a width of thirty miles inland from the coast. It is bounded on the west by terraces, valleys, and the irregular foothills of the Eastern Sierras. "Scattered over the plain are characteristic cone-shaped hills which seldom rise over one hundred feet," Ralph Arnold, a Stanford geologist, reported in 1911. "These hills are made up chiefly of basalt, and play a very important role in the oil accumulation of the region, most of the oil seepages occurring at or near their bases."[14]
The Tamasopo limestone, a stratum some 3,000 to 7,000 feet thick, held the principal petroleum deposits in its uppermost reaches. The limestone began anywhere between 1,000 to 2,500 feet below the surface. It was both porous and cavernous. Located well below sea level, the limestone formations permitted relatively free circulation of both oil and water. Usually, water underlies the oil because it is denser. The mixture remained under great pressure from gas and thus both the oil and the water were quite hot. The oil pouring forth from the well head, however, reached very high temperatures, up to 149 degrees F., not because it was that temperature underground but because of the heat created by the friction of being rapidly forced through the well casing by gas pressures. Wells pinched back, purposely slowing the rate of natural flow, sufficed to lower temperatures of the crude.[15] The thicker oil would have been difficult to force through the casing had not the gas pressure heated the oil, rendering it less viscous. Once on the surface, the heavier oil cooled to the consistency of cold honey. It had to be heated artificially in order to force it through pipelines and terminal lines.
Once the oil boom was on, the lease-takers and speculators arrived in number. The East Texas boom was about over and the Mexican border provided no barrier to the speculative oilmen. To them, a boom was the same anywhere. Or at least, they would attempt to make it so. Some, like Michael A. Spellacy, were veterans of the Alaska gold rush. Others might have participated in the brief Spanish-American War;
still others had experience in the U.S. oil booms of Texas and Kansas. Spellacy arrived in Mexico in 1908 as a driller. Then he enlisted his brokers and some American financial backers in securing leases near Tuxpan and Tampico. Aided by the changes in Mexican mining laws dating from the 1880s, these pioneer lessors made oil leases with the fee-simple private-property owners. As in the United States, no government concession was necessary to start drilling. They usually paid the landowner an up-front fee, an annual rental fee, and perhaps a percentage of future production. By law, no royalties were due the government. None were offered. Mexican attorneys and U.S. lawyers who knew Spanish (William Buckley is a good example) established themselves in Tampico and specialized in perfecting oil leases. These leases usually obligated the lessee to drill within a certain amount of time and offered the lessor or landowner an annual rental, say six pesos per hectare, and a royalty, say ten centavos per barrel of oil produced.[16]
Then, the lease-makers would sell their leases to a drilling or producing company for development. The mestizo and mulatto small-holders and squatters and the Spanish hacendados of the coastal plain north of Tuxpan willingly cooperated. They operated within the American private-property system. But the Indian villagers south of Tuxpan were very suspicious of these first lease-takers. They had deep memories of being exploited by Mexicans and believed the Americans equally nefarious. Besides, they operated under corporate, village ownership of land, not individual. Therefore, lease-takers who did succeed in making a number of oil leases with these villagers had to specify that all village residents, collectively, were to receive royalties of any oil production.[17] This was not the only Mexican wrinkle in an otherwise American fabric.
The peculiarly Mexican conditions of private-property ownership in the Huasteca also created some problems to the lease-takers. Possession of isolated land was often quite informal; family lineages and inheritance records were not well maintained; and legal marriages were not generally practiced among the humble folk of the rural Huasteca. The lease "pioneers" who passed through the monte looking for prospects had to go to Tuxpan and other towns to check the civil records for proper titles. This was called "perfecting the title." Still, the possibility of competing leases and lease jumping was quite real. As one not-so-broad-minded lease-taker from Oklahoma put it: "There is no title down there that is any good because there are so many illegitimate children."[18] El Aguila attorneys, when they acquired the Horcones
hacienda, discovered that numerous branches of the Suara family had divided up ownership of the property into 1,200 shares. Between 1912 and 1920, the company's lands department acquired 1,109 and 1/36 of the shares and were still pursuing the purchase of the 90 and 35/36 remaining shares from six family members. Their information on the remaining owners was as follows: "Refugia Sanchez is the concubine of Felicitos Suara and Maria Margarita, Sinforlana, and Adela are his sisters. The heirs of Cirila are minors (6) who live with Maria Margarita, their aunt and with Donato Marquez. These shares will be very difficult to procure. The remaining 5 5/9 shares are owned by Sara Carballo y Suara whose whereabouts are unknown."[19]
Mexican landowners did not take much time in learning that they could manipulate the leasing system to their advantage. All one needed was a Mexican attorney. Soon oilmen had to tighten up the legal clauses of the leases so as to reduce the opportunities of landowners to find them in default of the lease contract. "Lic. Rodríguez [of the El Aguila legal staff] stated he has had in mind for some time recommending that all of our subsoil contracts stipulate a period within which exploration work should be commenced, in order that the land owner could not allege the contract was null and void due to our not having undertaken any exploration work during a given period."[20] Of course, El Aguila was complaining that landowners were eager to find any breach in old leases so that they could make new leases at higher rentals and royalties. They were catching on to the American system of oil boom.
These leases were to give the oilmen trouble. The complicated leases and multiple claims served as a source of conflict which the government could resolve by imposing its own regulations. Some Mexicans were motivated to "jump" a lease held by a company whose wells had already proven the property. Thus, the claimant and his backers, whether Mexicans or Americans, could drill a risk-free well.[21] Huasteca, one of the earliest entrants into the oil-leasing business, ultimately had to revise its initial nonchalance toward its leases. A competitor described their problems:
[T]he Huasteca Company, who had formerly never taken any steps to perfect their subsoil contracts but had left them in their original state and expected everybody else to respect them no matter what their legal situation might be, had lately changed their tactics and started a campaign of curing the defects. [T]hey have considerably increased their activities in that direction, having taken new and larger quarters for their legal and lands departments and having
engaged a very capable young attorney from Mexico City, who is working together with their American lawyer. Some of their contracts are in very poor condition legally, but they are working energetically and apparently now fully realize that their old policy . . . will not be sufficient to protect their interests.[22]
As the oil boom got started, leasing of oil lands became more common than buying them outright. Land in the Huasteca had been relatively inexpensive before the Dos Bocas blowout. The first oil entrants like Percy Furber, Doheny, and the Pearson interests could buy large tracts of land. Once the oil boom got under way, land prices shot skyward. Consequently, the early comers like Huasteca and El Aguila owned most of the land held in fee-simple status in the oil zones, and the perhaps four hundred other companies and individuals who arrived later leased most of the remaining hectares held by the oil interests. In 1919, the total amount of leased and owned oil lands amounted to nearly 2.7 million hectares. Seventy-five percent of the prospective oil lands were leased. A latecomer like the Tal Vez Oil Company, a name that certainly expresses the speculative character of the industry, held rights to thirty thousand acres of oil land in 1919 but owned only five thousand acres outright.[23]
Companies that arrived late to a particular oil district, however, discovered the best prospects were gone and the remaining lands cost a great deal. This was the case when El Aguila attempted to expand into the northern zone. In 1917, its agent reported that the rental and commission charges on leases around Pánuco had skyrocketed after several big wells had come in. "Practically all the land in the area . . . has been leased," they reported, "and any acquisitions we make will have to be sub-leases or transfers, and hence will cost us more than if we had gone into the field years ago."[24] Lease prices rose and fell according to the success of drilling activity nearby. "The average rental paid by the companies amounts to $1.92 per hectare [1 hectare = 2.47 acres]," one report stated, "but the rentals paid by the different companies vary greatly. One company pays as much as $4,166 per hectare, three companies pay about $2,000 per hectare, and many pay from $500 to $1,000 per hectare, while other companies pay only a nominal rental or none at all."[25] Not more than 10 percent of all these properties would ever yield any oil at all. But this was how the lease-takers made money. They effected leases with landowners and sold them for a windfall to producers. Naturally, some leases never got bought. Others went for a fortune. It was the same in Mexico as it had been in East Texas and Ohio before that and western Pennsylvania before that.