Federal energy and law enforcement officials in Texas are investigating alleged oil pricing violations by a small group of little-known: yet unusually prosperous, companies that could be costing consumers as much as $1.5 million a day.
The investigation centers on suspected criminal violations of the Energy Department's intricate oil pricing regulations. The Department says the suspected violations could be far-ranging.
Since domestic oil price controls were established in 1971, federal regulators have been setting the prices for various types of oil ranging from today's $5.55 a barrel for so-called "old oil" to the $13.50 a barrel uncontrolled world oil price.
Old oil is largely crude oil from domestic wells that were in production before 1972.
A federal grand jury in Houston and other investigators are examining deals made by middlemen in the oil business who are suspected of violating pricing rules by fraudulently reclassifying old oil for sale in higher price categories, thus earning as much as $8 more per 42-gallon barrel.
Over the last years regulators at the POE and its predecessor agency, the Federal Energy Administration, have been unable to account for as much as 200,000 barrels of old oil that inexplicably "disappears" from the government's accounting system each day.
So far Deputy Energy Secretary John F. O'Leary says DOE has "made close to a dozen [criminal] referrals to the Department of Justice" involving crude oil "resellers" suspected of turning illegal profits from disappearing old oil schemes.
Although the major oil companies are the ultimate buyers of much of the allegedly reclassified old oil. O'Leary says the DOE is unsure "whether they are playing some of these games."
Under DOE's complex regulations, it makes little difference to the refiners whether they purchase higherpriced oil because, in theory, all refiners' crude oil costs are equalized under the department's so-called entitlements program.
In some instances, DOE officials say, buying higher-priced oil from crude oil resellers could actually yield higher profits for offenders under the entitlement program's Catch 22 economics.
Focus of the investigation are crude oil resellers, among the small to middle-sized companies that make up "little oil" and account for a large share of the more than 400 oil companies based in Houston.
Originally resellers were companies that were literally engaged in gathering oil from producers and reselling it. As federal oil regulations - which now run to more than 20,000 pages - mushroomed in 1973 and 1974, the number of resellers dramatically increased.
One of the reasons the reseller community "expanded, investigators suspect, is that some of the companies were set up to generate paper transactions that obscured the origins of the old oil.
Dana Caro of the FBI's Houston office said in a telephone interview, "We are absolutely talking about felony offenses," Caro, the assistant special agent in charge in Houston, called the reseller probe a "top-priority white-collar crime investigation" that could lead to indictments under the racketeering statutes for mail and wire fraud for those companies and individuals that willfully falsified oil certification documents.
W.A. (Tony) Canales, the U.S. attorney in Houston who is directing the reseller investigation, says. "It is quite extensive." He added. "The industry has never realized that [civil] violation of regulations could lead to felony violations . . . they are beginning to."
While oilmen across the country are anxiously awaiting the results of the grand jury investigation to see how far the government is going to press the cases, a number of nationally known attorneys have been retained by resellers.
Among them is Seymour Glanzer, a former assistant U.S. attorney and one of the original Watergate prosecutors, who specialized in fraud cases when he was with the government. Another is Robert Montgomery, former Federal Energy Administration general counsel.
DOE's predecessor, the Federal Energy Administration under Frank Zarb, John Sawhill, and William Simon, took few oil men to court - and those only on civil charges despite frequent accusations that some oil companies had violated pricing regulations on a large scale.
Caro and DOE officials say that if indictments are handed down they could lead to forfeitures of companies' assets if the government can prove that illegally derived funds were used to form the reseller companies.
Canales has brought a number of oil executives suspected of reseller violations before a grand jury convened last May, according to informed sources.
In Washington a Justice Department official said. "Certainly there will be cases brought," but the official also noted "These are new kinds of prosecutions: any cases that involve crimes dealing with new regulations are a little more difficult."
Documents obtained by The Washington Post and informed sources say that the companies that are among the major targets of the DOE reseller investigations turned over to the Justice Department include:
Summit Gas Co., a Houston-based crude oil reseller that was 50 percent owned by Denver multimillionaire Marvin K. Davis.Summit has since been absorbed by another of Davis' companies. Davis, through a maze of oil firms under his controls, is one of the nation's leading independent oil drillers.
Coral Petroleum Inc., a Houston reseller that also operates a small refinery.
Uni Oil Inc., a crude oil reseller operating in Houston that also runs a small refinery in Ingleside, Tex. Uni Oil was established in December 1975.
Westland Oil Development Corp., a Delaware company that has been operating in Texas since the 1950s, and Armada Petroleum Corp. of Houston. Both companies were at various times tied in oil sales to Summit and to one another in alleged schemes to turn higher profits from selling old oil at higher prices.
Despite repeated calls, all companies have failed to respond to queries.
One well-known Washington attorney specializing in oil regulatory cases said, "There are people down there in a whole boatload of trouble."
DOE's O'Leary stops short of making a firm estimate of how much money is involved in the reseller schemes, saying. "When we have done another year's work we will be able to tell - at this point it would be way premature to say that it is worth 5 cents or $5 billions."
In a letter to DOE, however, Rep. John D. Dingell (D-Mich.) wrote, "At issue are a number of cases involving curde oil resellers where the department has found evidence of apparent willful violations of federal regulations that could total over $1 billion in consumer overcharges."
Dingell's estimate is based on assumptions by some DOE officials that most of the 200,000 barrels of "old" oil disappearing daily from the department's reporting system resurfaces the higher world oil price, thus bringing the illegal overcharges up to $1.5 million daily.
Dingell, who chairs the House subcommittee on energy and power, is heading legislative oversight investigation of the DOE's enforcement activities and, in particular, suggestions from within the department that DOE has either mismanaged the cases or engaged in administrative footdragging.
Dingell's query sprung from criticism lodged by a young attorney in DOE's Houston office Joseph D. McNeff, who was transferred off the reseller about a lack of personnel.
"I was complaining about DOE not having any support for these cases," McNeff says, adding, "We had four auditors and no secretary from September till June."
DOE officials offer another explanation for McNeff's transfer, saying that he had lost objectivity and was not prepared to deal directly with Canales and others in the U.S. attorney's office.
In either event, McNeff met with Dingell's staff last June and has since been transferred to DOE's Dallas office.
Deputy Energy Secretary O'Leary says that he has since spoken with Dingell's staff and that DOE has "allocated the resources for that office, and is interviewing to fill the vacancies."
O'Leary also says that DOE analysts have found what they believe could be a statistical aberration in the department's accounting for old oil which could explain some of the disappearing old oil.
In the meantime, Doug McIver, a DOE regulatory official says the data shows. "Fundamentally it [missing oil] is the same situation today, though it looks like more old oil is missing than in 1977."
The most recent reporting period for the month of June indicates that 3.159 million barrels of old oil a day entered DOE's reporting system. At the next reporting step provided by refiners, 205,000 barrels of old oil vanished from the DOE system during the same period.