Cities Service Named in Oil Pricing Suit : $509 Million Sought by Energy Dept. for Alleged Overcharging

The U.S. Department of Energy said Wednesday that it is seeking $509 million in fines and interest from Cities Service Oil & Gas Corp. for allegedly overcharging for oil between 1979 and 1981 in violation of federal pricing regulations.

Cities Service immediately denied any wrongdoing and said it would “vigorously” appeal the case.

The action, one of the largest overcharging claims ever, could pose a significant financial liability for Occidental Petroleum Corp., the Los Angeles-based oil company that acquired Tulsa, Okla.-based Cities Service in 1982.

To finance the $4-billion acquisition, Occidental borrowed heavily. It has since repaid that debt by selling assets, but it still has total debt of about $4 billion, analysts estimate, making it one of the nation’s most highly leveraged oil firms.

Usually Settle for Less

However, oil industry analysts said it is highly unlikely that Occidental will be liable for the entire amount. In many previous cases of alleged oil pricing violations, one analyst said, the offending oil companies have settled out of court, paying as little as 10% of the sum sought by the government.

A 10% pay-out would result in a fine of about $50 million for Cities Service, “which is not a heck of a lot,” said the analyst, who asked not to be identified. “They (Occidental) have a number of projects going where they could lose much more than $50 million.”

“Obviously, if they have to pay $509 million, that’s significant,” said analyst John Curti of the San Francisco-based investment firm of Birr, Wilson & Co. But, he said, it could take years before the issue is settled. Such oil pricing fines are subject to a series of appeals to departmental officials and to the courts.

An Occidental spokesman said the company had no comment.

13 Million Barrels

The Department of Energy contends that Cities Service violated rules of the now-abandoned entitlements program, which required refiners with access to less expensive crude oil under government price controls to make payments to refiners who did not have such low-priced supplies.

The government charges that Cities Service sold 13 million barrels of oil from wells that, at the time, were subject to government price controls, department lawyer Carl Corrallo said. Typical controlled prices were about $7 a barrel, while oil from uncontrolled wells was selling for more than $30 a barrel by early 1981.

Corrallo contended that each Cities Service sale from controlled wells was tied to the purchase of an equivalent amount of uncontrolled oil at a substantial discount from market prices.

Cities Service used this ploy to refine and sell finished petroleum products such as gasoline and heating oil without making required entitlements payments to other refiners, Corrallo contended.

The alleged violations occurred between October, 1979, and January, 1981, when President Reagan lifted controls. The government is proposing $257.5 million in fines for alleged oil overcharges and another $251.8 million in accumulated interest.

Cities Service called the government’s claims “completely invalid.”

“There were no overcharges involved here,” Cities Service Chairman David A. Hentschel said. “What Cities did was to buy oil at the most favorable price, as was a common practice; it reported such purchases to the DOE and passed on its price advantage to its customers.”