Spreading Oil Scandals

They could involve billions of dollars

Over lunch in Houston, a prominent lawyer voiced a highly unusual complaint. Business was so good, he said, that his firm was turning away many potential clients, sending them as far away as Washington and New York for counsel. The reason: so many oilmen are involved in the fast-widening scandal of illegally selling low-priced "old" oil as expensive "new" oil that Houston's attorneys cannot take on new clients without becoming involved in conflicts of interest. Says one Houston oil consultant: "It's such an interwoven web that I doubt there is anybody in town who is not going to be touched by it."

The oilmen have reason to worry. After months of slow, top-secret investigations by the Justice Department, the Department of Energy, a congressional subcommittee and several grand juries, a long list of allegations is about to be aired. So far, most of the charges are believed to center not on the big oil majors but on relatively smaller-independents. Criminal indictments are expected to be handed down for prosecution in coming months against both companies and individuals.

Investigators are considering pressing charges under the racketeering statutes that until now have been used largely against organized crime; they provide for a longer statute of limitations, stiff penalties and the recovery of profits illegally gained. These sums, estimates one federal official who has been kept informed of the investigations, could amount to billions of dollars.

There are three broad, often overlapping categories of investigation:

Old oil as new. In mid-1973, the Government set up a two-tier price structure that established a low rate (now $5.34 per bbl.) for old oil already in production and, as an incentive for exploration, a higher price (now $11.87) for new finds. Under near wartime security in Houston, the Justice Department and six FBI agents are looking into charges that oil companies camouflaged the origins of old oil and sold it as new crude.

The Department of Energy has already audited about a dozen companies for violations and has turned over its dossiers on at least three companies to the Justice Department for possible criminal prosecution. The records of 73 more companies in the Houston area are yet to be audited by the Government. In addition, the Justice Department is conducting an investigation, code-named Project X, into possible price manipulations by a major U.S. oil company.

Estimates of the total old-to-new switch range from 100,000 to 500,000 bbl. a day, with illegal profits running at around $6.50 per bbl. The mechanics of the switch are easy: all oil looks the same, and it is just a matter of falsifying paper work to hide its origins. The risks of being caught have been small--up to now. As one federal investigator told TIME Correspondent Rudolph Rauch: "All an oil guy had to do was look at the enforcement procedures and laugh."

"Daisy chains." Justice Department and FBI oil-fraud "strike forces," working with at least one grand jury in Tampa, Fla., are also looking into pricing swindles carried out by fuel brokers and oil companies. Some oilmen and brokers conspired to sell and resell refined oil several times among themselves, each time at a higher price with large kickbacks, before finally passing it on to an end user, who was either part of the conspiracy or especially gullible.

The sales involved only a piece of paper being shuffled between desks; the actual oil never changed location. The most celebrated case to date involved the rip-off of Florida Power for as much as $8.5 million. Since that fraud was made public last August by the St. Petersburg Times, FBI agents have uncovered but not yet publicly identified other daisy chains, some apparently centering in Houston. Grand juries are said to be probing into these operations.

Cover-ups and long delays. Congress has become increasingly unhappy with the glacial pace with which first the DOE and now the Justice Department have pursued their parallel investigations into the new-for-old and the daisy-chain swindles. Investigators for the House Subcommittee on Energy and Power are looking into the possibility that there might have been outright collusion between some of the probers and the probed, even though oilmen argue that the delays were probably caused by DOE understaffing and inefficiency. Says Michael Barrett, a subcommittee counsel: "Some of these cases were ready to go two years ago, and we certainly intend to look at the practices of the Houston DOE office."

The subcommittee is also concerned that two federal energy officials became so frustrated by foot-dragging and the lack of support from their superiors that they complained publicly. A former auditor of the old Federal Energy Administration, Dale Kuehn, went public to describe how his memos suggesting that cases should be "prosecuted with dispatch" were habitually ignored. A DOE investigator, Joe McNeff, went to the subcommittee in June; he said he found in Houston "$1 billion worth of fraud, four auditors, no secretary and no support."

Other federal investigators insist that there has been no foot-dragging and no coverup. "The investigation is just complicated," says J.A. ("Tony") Canales, the U.S. Attorney for Houston. "You're damn right it is being done in unusual secrecy. I don't want to hurt anybody who is innocent. We are conducting an investigation with the FBI into certain business entities involved in the reselling of oil. I am informed that there were some 60 or 70 such businesses created almost overnight. Not all are under investigation, of course, but the investigation is mushrooming."

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