CITGO Petroleum Corporation

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CITGO Petroleum Corporation

Box 3758
Tulsa, Oklahoma 74102
U.S.A.
(918) 495-4000
Fax: (918) 495-4511

Wholly Owned Subsidiary of Petroleos de Venezuela, S.A. through Propernyn, B. V.
Incorporated: 1910 as Cities Service Company
Employees: 3,342
Sales: $7.64 billion

CITGO Petroleum Corporation is one of the largest petroleum refining, marketing, and transportation companies in the United States. As of January 31, 1990, CITGO became a wholly owned indirect subsidiary of Petröleos de Venezuela, S.A., the national oil company of Venezuela.

The historical origins of CITGO can be traced back to the urbanization of America in the early 20th century and to a company known as Cities Service Company. A young entrepreneur, Henry L. Doherty, saw the business potential of providing adequate utility services to the expanding cities of the Midwest. Doherty was from a poor background but had taught himself engineering science and had amassed a large fortune from his own company, Henry L. Doherty & Son. This company had various activities but specialized in real estate, investments, and engineering, as well as the provision of utility services. Doherty envisioned a gigantic company wholly devoted to the provision of utility services such as gas, electricity, and transport.

In 1910, Doherty founded Cities Service Company, a holding company that earned its living from the companies whose stock it held. The company had an address in New York but its main operations were in the West. The new company was composed of three very large subsidiaries, Denver Gas and Electric, Spokane Gas and Fuel, and Empire District Electric. Each of these companies in turn possessed subsidiaries of its own. Doherty was especially interested in the supply of gas. In the following years, Cities Service expanded by buying out smaller gas utility companies throughout the nation. In 1913 alone, Doherty purchased 53 utility companies which brought together a total of 170 companies under the umbrella of Cities Service.

Because of a gas shortage experienced by its utility companies, Cities also engaged in gas exploration. In 1915, one of Cities Service’s subsidiaries, Empire Companies, began exploring in Kansas. Geologist Charles N. Gould discovered vast quantities of oil in the town of El Dorado. Doherty was not slow to realize the growing importance of oil to the U.S. economy. He immediately organized a new Cities Service subsidiary, Empire Gas & Fuel, to take over El Dorado operations. By 1917 Empire had over 1,000 wells in production and had produced over 36 million barrels for that year alone.

The discovery and expansion of the El Dorado oil fields could not have come at a better time for Cities Service. America’s entry into World War I on the Allied side increased demand for the precious liquid. Warfare had become increasingly mechanized. U.S. battleships and the recently invented tanks and aircraft required large quantities of oil to operate. The German defeat of Russia in 1918 and their capture of the Galician and Romanian oil fields also led to an Allied shortage of oil in Europe.

Under government pressure to increase production, Cities Service developed many innovations. These included the world’s largest dehydrator at that time, the Empire, which extracted water from oil. By 1918 El Dorado produced more than the combined Galician and Romanian oil fields under German control, more than enough to supply the hard-pressed British convoys. By the end of the war Cities Service also operated seven refineries. Oil refining and production had become a central feature of Cities Service’s operations.

Despite its increasing concentration on oil production, Cities Service also maintained its utility and service operations. By 1918 Cities Service’s gas utility companies serviced 464,000 people in 20 states, mainly in the Midwest and Northeast. Its electric utilities served 144,000 people and its transport, or so-called traction companies, carried 116 million passengers every year.

The postwar prosperity of the 1920s increased demand for petroleum. The introduction of mass assembly methods in automobile production reduced the price of cars to within the reach of the average U.S. family. The growth in automobile ownership led to increased demand for gasoline. Also in the 1920s, Doherty played a key role in the foundation of the American Petroleum Institute, in 1924. This institute attempted to coordinate prices and sought to improve efficiency in the oil production business.

Cities Service did not escape the effects of the Depression of the 1930s. In 1930, oil prices fell as low as 21C per barrel. Cities Service, however, was more fortunate than other oil companies since the company’s revenues from its utility services stabilized income. Already, as the 1930s began, Cities Service supplied almost 3,000 towns with both gas and electricity. The company also began retail marketing of petroleum products throughout the country. By 1932 the company listed 22 pages of service stations. This enabled the company to engage in direct sales to the U.S. consumer.

During the 1930s, the U.S. government of President Franklin D. Roosevelt sought to coordinate utility services in U.S. cities. Unbridled competition and company failures often led to poor services and wild price fluctuations. In 1935 the Public Utility Act was enacted. This measure enabled the U.S. government to regulate all holding companies involved in the provision of electric light, power, and gas. As part of a corporate simplification plan, holding companies had to dispose of all public utilities except one. All utility holding companies had to begin dissolution in 1938 and complete it by 1940. Ultimately, Cities Service retained its oil and natural gas business but had to dispose of all of its utility assets.

In December 1939, Cities Service suffered a further blow to its morale, as a result of the death of Henry Doherty. His place was taken by the equally able W. Alton Jones who had previously served Cities Service as vice president. This transition in company leadership soon was overshadowed by U.S. entry into World War II. The vital role that oil played in the conflict eased government pressure on Cities Service to sell its utilities. It took 60,000 gallons of gasoline per day for an armored division to fight. During the war itself, Cities Service operated its own tanker fleet, 13 of its own ships, and 18 government oil tankers.

Cities Service shipped oil from Texas, through the Gulf of Mexico, to New York. A number of Cities Service’s ships were lost owing to German U-boat activity. They included the S.S. Cities Service Empire, torpedoed off the coast of Florida in February 1942. During the course of the war, U-boats attacked three other Cities Service ships within sight of the U.S. coast. Jones pressed the government to construct a pipeline, arguing, “nobody ever sank a pipeline.”

In June 1942, the government decided to adopt Jones’s plan. Roosevelt appointed none other than W. Alton Jones as president of the War Emergency Pipelines (WEP). Work began on the so-called Big Inch in the summer of 1942. By August 1943, oil could be pumped all the way from Texas through to Philadelphia, Pennsylvania, thus avoiding the U-boat-infested waters of the Atlantic coast.

During the war, Cities Service also began construction of what was to be one of the world’s largest oil refineries, at Lake Charles, Louisiana. The plant produced high-octane fuel for the U.S. air force as well as general petroleum products.

After the war, Cities Service continued to dispose of its utility assets. Postwar prosperity and a booming U.S. economy ensured a good return on these sales. By 1958 all utility assets had been sold and Cities Service was now a fully integrated oil company. With the loss of its utility business, Cities Service concentrated on its oil and gas activities. Throughout the 1950s, the company engaged in oil exploration in Louisiana and Texas. The Lake Charles refinery also played an important role in Cities Service’s operations in the postwar period. Modernization of its huge Lake Charles refinery continued throughout the 1950s.

On March 1, 1962, W. Alton Jones was killed in an air crash close to New York. Jones was on his way to meet former President Dwight D. Eisenhower, a long-time friend. A succession of company leaders succeeded him: Burl Watson in 1962, John Burns in 1966, and Charles Mitchell in 1968. All played an important role in streamlining the company’s organizational structure.

Throughout the 1960s, increasing consumer sophistication and stiff competition provided an impetus for a more creative approach to retail marketing. Marketing manager Stanley Breitweiser was instrumental in devising a new brand name for Cities Service’s retail products. In the age of brand names such as Esso and BP, the brand name Cities Service was considered too much of a mouthful. After 80,000 names had been put forward, a choice was finally made. The new brand name was CITGO. Along with the new name came the new gasoline, CITGO Premium.

Charles J. Waidelich, who became company president in 1971, and Robert V. Seller, who became chairman and CEO in 1972, guided the company through the turbulent 1970s. War in the Middle East between Israel and her Arab neighbors led to severe oil shortages and steep price increases. This created an impetus for oil exploration in offshore areas such as the Gulf of Mexico. The cost of offshore exploration was no longer prohibitive, owing to increased oil prices.

By 1982 Cities Service had become the 19th-largest oil company in the United States. Yet its outlook was not entirely promising. The early 1980s witnessed an upheaval in the petroleum industry. High exploration costs and a worldwide economic slump led to a rash of mergers and acquisitions. In 1981 and 1982 the business press was full of rumors concerning the fate of Cities Service. A hostile takeover threat by Mesa Petroleum was rebuffed. Negotiations for a friendly merger with Gulf Oil Corporation came to nothing. Finally, Armand Hammer, chairman of Occidental Petroleum Corporation, bought Cities Service Company for about $4.3 billion. Cities Service became a wholly owned subsidiary of Occidental Petroleum as of December 1982.

Cities Service’s oil-refining and -marketing divisions were merged into one subsidiary, known as CITGO Petroleum Corporation, and sold by Occidental to The Southland Corporation in 1983. The sale included the famous Lake Charles refinery and the CITGO gasoline retailing business. By this time CITGO’s wholesale business supplied gasoline to 4,000 outlets.

Southland had pioneered the development of convenience stores with its 7-Eleven stores. In 1982, the company operated 7,300 7-Eleven stores in the United States and Canada. To Southland hoped to combine gasoline sales and groceries through its 7-Eleven chain. The CITGO refinery seemed the best way to ensure a free-flowing supply of gasoline for its numerous outlets.

CITGO did not live up to Southland’s expectations. A nationwide overcapacity in the refining business led to increased refining costs and falling profits. In 1984, CITGO posted a pretax loss of $50 million. In 1985 Southland cut CITGO’s output by half. CITGO president Sam J. Susser was replaced by former Shell Oil Company and Gulf Oil Corporation executive Ronald E. Hall.

In 1985 Hall orchestrated an internal study of CITGO’s strengths and weaknesses. Two results of this study were the decisions to acquire a stable source of crude oil for CITGO’s refinery and to work to enhance the CITGO brand name. The former goal was net in 1986 when Southland sold 50% of CITGO to Propernyn, B.V., a subsidiary of Petröleos de Venezuela, S.A. (PDVSA), the Venezuelan state-owned oil company, for about $300 million. In 1986 Southland badly needed the money to ease its own financial problems. When Southland experienced further financial losses, CITGO purchased the remaining 50% of its own stock, making PDVSA sole owner in January 1990, for $661 million.

Both CITGO and PDVSA benefited from the sale. Venezuela, a member of the Organization of Petroleum Exporting Countries (OPEC), is one of the world’s largest oil producers. PDVSA, through its CITGO connection, found a secure market for Venezuelan crude oil, as well as access to the U.S. consumer. Ron E. Hall, CITGO’s president and CEO, also welcomed the deal, since it secured a steady supply of crude oil and other feedstocks for its Lake Charles refinery.

From the more stable supply position CITGO embarked on an aggressive expansion program to enhance the value of the CITGO brand. In 1985, 3,500 gasoline outlets were branded CITGO. At the end of 1990 this number had grown to about 10,000. Sales of gasoline to branded distributors increased 16% during 1990.

CITGO remained a highly successful company into the 1990s. The Lake Charles refinery, founded by W. Alton Jones during World War u, has a rated capacity of 320,000 barrels a day making the facility the one of the largest in the United States. Marketing to the consumer through independent distributors continues to be CITGO’s strength.

In January 1991 PDVSA merged its other wholly owned U.S. subsidiary, Champlin Refining and Chemicals, Inc., into CITGO. Champlin is a refiner of heavy crude oil. Champlin’s Corpus Christi, Texas, refinery produces high-grade gasolines, petrochemicals, and other petroleum products; it also owns eight refined-products terminals, bringing CITGO’s total to 51.

In November 1990 CITGO purchased 50% of Seaview Oil Company, a Pennsylvania-based refiner and marketer. CITGO bought the remaining 50% of Seaview in February 1991. Seaview’s New Jersey refinery produces asphalt, naphtha, and other oils. PDVSA provides its own very-heavy Venezuelan crude oil to Seaview’s refinery. The Seaview and Champlin mergers, along with continued internal growth, are expected to continue to fuel expansion.

Principal Subsidiaries

CITGO International Supply Company; CITGO Venezuela Supply Company; CITGO Pipeline Company; Petro-Chemical Transport, Inc.; Cit-Con Oil Corporation (65%); Champlin Refining and Chemicals, Inc.; Seaview Oil Company.