Energy Department investigators have recommended that crude oil trading practices of some of the largest oil companies be investigated by a grand jury for possible criminal prosecution.
But the case, which represents the first official allegation that the largest oil companies have recently been engaged in criminal conduct, faces major obstacles in the form of budget cutbacks in the Reagan administration and criticism from an outgoing special counsel in the department.
The call for a grand jury comes from a team of professional field investigators in the Houston office of the Energy Department. It follows a two-year investigation of alleged fraudulent practices on the nation's vast system of crude oil pipelines, where an entire industry of crude oil middleman companies sprang up during the decade of oil price regulation.
The results of the investigation call into question hundreds of transactions in which large quantities of West Texas and other domestic crudes have been sold to middlemen and then repurchased by the major refiners. The major oil companies, including Exxon, Mobil, Shell, Gulf, Arco, Tenneco and American Petrofina, reaped various benefits from these transactions under the complex federal regulations.
All of the companies have denied any suggestion of wrongdoing and defended the transactions in the pipeline system as legal and efficient practices that save money for consumers.
The investigators' conclusion in the case against the major oil companies has surfaced at a time when President Reagan's budget cutters propose to reduce the Energy Department's investigative effort by 80 percent. Also, if the case is eventually referred to Justice Department prosecutors, it will be greeted by a law enforcement philosophy that Attorney General William French Smith has said will place greater emphasis on violent-crime investigations than so-called white-collar investigations.
In addition, the departing Carter administration special counsel, Paul L. Bloom, has criticized the investigative methods used in the pipeline inquiry. Bloom was in charge of auditing the pricing practices of the 35 major oil companies but did not direct the pipeline investigation.
"There are people who are no friends of the major oil companies who have told them [the DOE criminal investigators] that this is a sloppy, emotional way to go after the majors who have some of the best lawyers in the country on their side," Bloom said in an interview. He said his objections were based on the investigators' failure to perform some auditing steps he believes are crucial to make a criminal case.
A 27-page document summarizing the Energy Department's case, however, concludes that consumers might have been paying an additional $500 million a year for gasoline and other petroleum products as a result of the practices on a single pipeline.
For a single month in 1978, transactions that involved Mobil Oil Corp. raised the price of crude oil $44 million, according to the investigation. During the same month, American Petrofina transactions added $1.7 million to the cost of its crude and Tesoro Petroleum Co. transactions added $2.4 million, the investigators said.
The call for a grand jury probe has been in draft form since last fall awaiting formal referral to the Justice Department. The draft is addressed to John Keeney, acting head of the criminal division and a career Justice Department employe.
Senior career Energy Department officials, who supervise the investigators, are said to be holding up the referral on the basis that more interviews need to be conducted with oil company officials and more documentation obtained before a referral should be made.
At hearings today before a House Energy and Commerce subcommittee, Rep. Albert Gore Jr. (D-Tenn.) will seek an explanation of why Energy Department officials continue to hold up the referral to the Justice Department. "In my opinion, the lawyers have enough to proceed against the companies and individuals involved," Gore said.
Oil company executives from virtually every major firm, many of them interviewed more than a year ago by Washington Post reporters looking into allegations of fraud on the pipeline system, have vigorously denied any improper conduct.
"There is no rational incentive for most major refiners to participate in any illegal . . . scheme or even to deal with a disreputable reseller," Mel Pine, public relations coordinator for Mobil, said in a late 1979 statement. Yesterday, a Mobile spokesman said the company would have no additional comment before today's hearing.
In hundreds of pages of summary documents Energy Department auditors and investigators say they found a pattern of trading in crude oil that they believe to be part of a criminal conspiracy to reclassify inexpensive "old" oil as highly priced foreign oil for the financial benefit of major refiners and hundreds of small trading firms that have grown up in recent years to serve them.
Investigators found that despite the growth of this new trading industry, "the oil continues to be delivered according to patterns established by the major oil companies prior to regulation," one document asserts.
In other words, the documents assert that domestic oil continues to flow in pipelines from wells in the South and Southwest straight to refineries owned by major refiners. But instead of keeping control of the crude from its point of origin to the refinery, the major companies have increasingly sold off this cheap domestic crude to small trading firms, who trade, buy and sell the oil back and forth as it moves toward the refinery. In most instances, the oil is sold back to the major refiner at the end of the line.
By this time, according to the investigators, the price has increased dramatically and the onetime "old" oil selling for less than $6 a barrel approaches the level of costly foreign oil.
"There appears to be a high degree of probability that a considerable number, if not all, of these transactions were prearranged or in some fashion orchestrated . . .," said an accompanying DOE report.